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DOD's counterdrug mission focuses on supporting local, state, federal, and foreign government agencies in addressing the illegal drug trade and narcotics-related terrorism. DOD conducts its mission in three primary areas: detecting and monitoring drug trafficking into the United States, sharing information on illegal drugs with U.S. and foreign government agencies, and building the counterdrug capacity of U.S. and foreign partners. The National Guard identifies three state-specific projects as comprising its counterdrug program--state plans, counterdrug schools, and counterthreat finance. The authority to provide funding for the first state project--state plans--began in 1989 when DOD was authorized by Congress under section 112 of Title 32 of the United States Code to fund the National Guard's drug interdiction and counterdrug activities. Each participating state counterdrug program must develop an annual plan of activities, in coordination with the state's Governor and Attorney General. In developing their plans, states use annual guidance issued by DOD outlining the department's domestic counterdrug program priorities. Once the state plans have been developed, they are reviewed by National Guard counterdrug program officials, and are then sent to DOD for approval. National Guard policy states that state counterdrug programs can provide assistance to interagency partners in 5 mission areas: reconnaissance, technical support, general support, civil operations, and counterdrug training. In 2006, Congress provided authority to the Chief of the National Guard Bureau (NGB) to operate up to five counterdrug schools. These five schools, located in Florida, Iowa, Mississippi, Pennsylvania, and Washington, provide training in drug interdiction and counterdrug activities to personnel from federal agencies; state, local, and tribal law enforcement agencies; community-based organizations; and other non-federal governmental and private organizations. In 2011 the program added a third state project--counterthreat finance--to assist interagency partners with investigations of drug trafficking and transnational criminal organizations' money laundering schemes. Appendix II provides funding information by project and appendix III provides details on the state plans' activities and supported organizations. The National Guard counterdrug program is part of DOD's larger counterdrug effort. Congress appropriates funds to DOD's Drug Interdiction and Counterdrug Activities, Defense account, and DOD is authorized to transfer Drug Interdiction account funds to other armed services' and defense agencies' appropriation accounts. It is from this account that DOD funds the National Guard's participation in domestic interdiction and counterdrug activities. In his fiscal year 2016 budget the President requested approximately $850.6 million for this account to support DOD-wide drug interdiction efforts. Budget data provided by DOD identify $87.9 million intended for the National Guard counterdrug program's state-specific projects--a little more than 10 percent of the overall fiscal year 2016 Drug Interdiction account request. The National Guard counterdrug program budget data provided by DOD show that for fiscal years 2004 through 2014 the program's total directed funding ranged between $219.3 million and $242.1 million-with a peak of $247 million in fiscal year 2013-but in fiscal year 2015 was reduced substantially. Congress appropriates funds into DOD's Drug Interdiction account but through its committee reports provides direction to DOD on the specific amounts to allocate for the counterdrug program. Based on DOD data, in every year since fiscal year 2004, Congress has directed funding above DOD's requested amount, keeping program amounts generally steady through 2014. In fiscal year 2013, when DOD began to reduce the amount of funding within the budget request for this program in order to prioritize funding for other DOD counterdrug programs, Congress directed program amounts generally comparable to those of prior years. Specifically, in fiscal year 2013, DOD requested $117 million for the National Guard counterdrug program, about a 40 percent decrease from the prior year's request. From fiscal years 2013 to 2016, DOD reduced its budget request for counterdrug intelligence and technology support, as well as domestic efforts such as those supported by the National Guard more than international interdiction support activities. DOD officials stated that by decreasing requested funding for the counterdrug program they planned to address spending limits required by the Budget Control Act of 2011 and to fund counternarcotics programs in locations deemed a priority, such as Central and South America. According to DOD's data, Congress directed $130 million more than requested in fiscal years 2013 and 2014. These additions offset DOD's reduced request and kept overall counterdrug program funding generally steady. DOD's data show that DOD's budget request for the counterdrug program continued to decline from $112.1 million in fiscal year 2014 to $89.5 million in fiscal year 2015.In fiscal year 2015 Congress directed $86 million more than DOD requested for the program, ultimately leaving the program with a lower total funding of $175.5 million. Figure 1 details DOD's budget data on the counterdrug program's congressionally directed funding, including the DOD's request and the increases above DOD's request. According to DOD's data, in recent years the program has not obligated all of the funding allocated to it from the Drug Interdiction account. In fiscal years 2004 through 2010 the program obligated at least 95 percent of its allocation. However, from fiscal years 2011 through 2014 the program's obligations fluctuated between 83 percent and 96 percent of DOD's allocations, partly due to the timing and amount of allocations received by the program. Funds transferred or allocated from the Drug Interdiction account to various other DOD drug interdiction accounts or programs, including the National Guard program, can be transferred back to the account upon a determination that all or part of the funds are not necessary and remain unobligated. Once funds are returned to the Drug Interdiction account, they are available for reallocation to other DOD counterdrug programs for obligation. Figure 2 details the counterdrug program's obligations from fiscal years 2004 through 2014. NGB and state counterdrug programs officials stated that DOD's internal transfer process for the Drug Interdiction account causes delays when funds become available for the program, thereby impacting the program's ability to obligate funds for planned activities. For example, state program officials stated that in many cases the program cannot provide long-term analytical support, such as investigative and counterthreat finance analysts, throughout the year, and must wait for additional funding before assigning personnel. In some instances, the program can offer partial-year support, but some interagency partners may not accept support for only part of the year because it is difficult for them to provide the necessary training and access to appropriate databases necessary for investigative case work to be assigned before the fiscal year ends and the funding for the position is no longer available. DOD is examining whether it can improve upon the transfer process in order to reduce delays. According to DOD's data, DOD has reallocated some of the National Guard counterdrug program's unobligated funds that were returned to the Drug Interdiction account to other DOD counterdrug programs. Specifically, in fiscal years 2013 and 2014, DOD reallocated a total of $51.8 million of amounts returned to the Drug Interdiction account from the National Guard's counterdrug program to counternarcotic capacity building efforts in the U.S. Africa Command and U.S. Southern Command areas of responsibility. The NGB has developed performance measures to report on its counterdrug program; however, we found that the information collected is not used to evaluate and inform funding for state-level programs or oversee the counterdrug schools' training. Without performance information to inform funding decisions for state-level programs and oversee the counterdrug schools, DOD and Congress cannot ensure that the counterdrug program achieves its desired results and uses its resources most efficiently. In 2012 the Deputy Assistant Secretary of Defense for Counternarcotics and Global Threats issued the Counternarcotics and Global Threats Performance Metrics System Standard Operating Procedures to be used in the development and documentation of performance metrics for all DOD counternarcotics activities. In response to the guidance, National Guard counterdrug program officials stated that they developed a set of performance measures for use by their program. In fiscal year 2015 the counterdrug program included 26 performance measures that officials stated they used to evaluate the counterdrug program and report on its aggregate performance. These measures include indicators such as the number of cases supported, analytic products produced, students trained, mobile training courses delivered, and reconnaissance hours flown. Appendix V provides details on each of the 26 measures. Our review of the counterdrug program's fiscal year 2015 performance measures against key attributes of successful performance measures identified by GAO found that the set of measures provided information across the program's broad goals, measured three of the program's five core activities, and had limited overlap with each other. We also found that the individual performance measures were linked to the overall objectives of the program and were focused on measurable goals. Some key attributes, such as a clarity, reliability, and objectivity, were reflected to varying degrees, but we found that the National Guard had actions underway to better define and document the program's individual performance measures to improve the clarity and reliability of those individual measures. In February 2015 the National Guard officials completed the Fiscal Year 2015-2016 Counterdrug Analyst Performance Metrics Guide and stated that they were drafting guides for other program activities. We found that the NGB does not use the performance information it collects to help evaluate and inform funding for state-level programs and oversee the type of training offered by counterdrug schools. We have previously reported that setting useful performance measures can assist oversight; with them, program managers can monitor and evaluate the performance of the program's activities, track how the activities contribute to attaining the program's goals, or identify potential problems and the need for corrective measures.According to leading practices for results- oriented management, to ensure that performance information will be both useful and used in decision making throughout the organization, agencies need to consider users' differing policy and management information needs. Performance measures should be selected specifically on the basis of their ability to inform the decisions made at each organizational level, and they should be appropriate to the responsibilities and control at each level. NGB officials stated that they are using performance information to report on the program's aggregate performance to DOD and to respond to other requests for information, such as regarding whom the program supports. DOD officials further stated that they use performance information on an ad hoc basis to inform the funding request for the Drug Interdiction transfer account, but that they do not collect information that could be used to evaluate the effectiveness of individual state-level programs or could be used in decision making about funding distributions to states. Such information could include a measure of the quality of the support provided by the National Guard to interagency partners, among other things. Instead, NBG officials were making funding distribution decisions for individual state programs based solely on assessments of threat. According to NGB officials, in 2012 they began using a model to determine the severity of the drug threat in each state and using the assessments of threat to determine funding levels for state counterdrug programs to implement their plans. NGB officials stated that to employ the threat-based resourcing model, NGB uses statistics from national- level databases to develop a distribution percentage for each state that reflects its relative drug threat. This percentage is then applied to the funding provided to the National Guard's counterdrug program. In fiscal year 2015 the amount distributed to the states was $146.1 million. Table 1 shows the distribution percentage to the states and territories, and table 8 in appendix VI provides a detailed breakout by state. Moreover, during the course of our review, we found that the performance information collected did not assist the DOD Counternarcotic Program to oversee the type of training offered by the counterdrug schools. Specifically, the performance measures employed by the NGB focused on the number of students trained and the number of courses available, among other aspects. The officials stated these measures were not useful in the evaluation of the counterdrug school's training activities because they did not provide information on the type of training being offered, such as whether it had a counterdrug focus. In addition, DOD Counternarcotics Program officials acknowledged that they did not have a full understanding of the counterdrug schools' activities. To improve their oversight of the schools, DOD Counternarcotics Program officials began a review in December 2014 of the counterdrug schools' activities to assess their training efforts. In May 2015, based on the preliminary findings of the review, the DOD Counternarcotics Program included guidance in its memorandum, Preparation of the Fiscal Year 2016 National Guard State Drug Interdiction and Counterdrug Activities Plan, that clarified the mission of the counterdrug schools and the department's priorities for their training, including that all training offered be explicitly linked to counterdrug efforts. As a result, the counterdrug schools are required to submit annual training plans that detail course offerings for review by the NGB and DOD to ensure that the training is focused on DOD's priorities. However, the guidance did not include any changes to the performance information that would be collected by the NGB on the counterdrug schools. We continue to believe that collecting additional performance information, such as on the type of training offered, could help inform evaluations and identify any need for corrective actions in the future for the counterdrug schools. According to NGB officials, their current performance measures were developed in response to DOD guidance to report on the program's aggregate performance to support DOD's annual performance summary report to ONDCP. NGB officials stated that the guidance did not specifically require them to assess the performance of state-level programs; therefore, they did not fully consider the types of measures or information that would be useful to evaluate the effectiveness of individual state-level programs and oversee the counterdrug schools. NGB officials stated that their performance measures were evolving and they believed incorporating performance information in future funding distribution decisions for state programs would be helpful. Officials stated that they were working to develop an approach that uses performance information to inform future funding decisions. Without performance information to evaluate state-level programs and oversee the counterdrug schools, DOD and Congress cannot ensure that the counterdrug program achieves its desired results and uses its resources most efficiently. The National Guard's counterdrug program was established more than 25 years ago to assist efforts of the Governors of 50 states, the District of Columbia, and three U.S. territories in addressing illicit drug production, trade, and consumption. In recent years DOD has sought to focus its counterdrug efforts on international interdiction support activities with less emphasis on other activities including supporting domestic efforts like the National Guard's counterdrug program. Congress has resisted the reductions to domestic efforts, and has directed increased funding to the program. Given the resources that the program offers to individual states and the interagency partners it supports, it is important to ensure that the program uses these resources efficiently and effectively. While threat is an important factor to consider in funding distributions, performance information can also be used to better inform such decisions. DOD and NGB have taken steps to develop performance measures, but DOD has used performance information only in an ad hoc basis to inform the funding request for the Drug Interdiction transfer account, and has not used performance information to evaluate the effectiveness of individual state programs or to oversee training offered by the counterdrug schools. Therefore, the effectiveness of state efforts is not being considered in DOD's funding distribution decisions, and useful information is not being collected to support oversight of the counterdrug schools' training. Without an approach that enables decision makers to objectively judge the performance of all elements of the program, neither DOD nor Congress will have assurance that the counterdrug program is achieving its goals in an effective manner. To ensure that resources are being efficiently applied to meet the National Guard counterdrug program's objectives, we recommend that the Secretary of Defense direct the National Guard Bureau in consultation with the Deputy Assistant Secretary of Defense for Counternarcotics and Global Threats to take the following two actions: Identify additional information needed to evaluate the performance of the state programs and oversee counterdrug schools' training; and Subsequently collect and use performance information to help inform funding distribution decisions to state programs and to conduct oversight of the training offered by the counterdrug schools. In the written comments on a draft of this report, DOD concurred with our two recommendations and identified specific steps it planned to take to address them. With respect to the first recommendation to identify additional information needed to evaluate the performance of state programs and to oversee the counterdrug schools' training, DOD stated that it will hold discussions with the counterdrug program's stakeholders to reassess the current performance criteria and to identify new performance criteria to allow it to assess the support the program provides. DOD then will evaluate the criteria to ensure it is reflective of the current information needs of the program both internally and externally and meets national objectives. These steps, once implemented, should help DOD obtain useful information to better inform decision making and to conduct oversight of the program and would satisfy the intent of our recommendation. With respect to the second recommendation to collect and use performance information to help inform funding-distribution decisions to state programs and to conduct oversight of the training offered by the counterdrug schools, DOD stated that it will apply the criteria it identifies to evaluate the effectiveness of each state program to provide support and to meet its objectives. Furthermore, DOD stated that it would take steps to assist states with any needed corrective- action plans. These steps, once implemented, should help to ensure that the program uses resources efficiently and effectively and would satisfy the intent of our recommendation. DOD's comments are printed in their entirety in appendix VII. DOD also provided technical comments, which we incorporated into the report as appropriate. We also provided a draft of this report to DOJ, DHS, and ONDCP for review and comment. DOJ, DHS, and ONDCP officials provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Secretary of Homeland Security, the Attorney General of the United States, and the Director of National Drug Control Policy. 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) 512-3489 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 VIII. To address our objectives, we reviewed documentation and interviewed officials from the Department of Defense (DOD) who oversee and manage the National Guard's counterdrug program, select state counterdrug programs, and select interagency partners that receive support from state counterdrug programs. Our analysis focused on the state-level operations of the National Guard's counterdrug program, which includes three state-specific projects: 1) state plans, 2) counterdrug schools, and 3) counterthreat finance. We excluded any counterdrug program projects that were specific to federal operations. Also, we used a nongeneralizable case study approach to obtain the perspectives of state counterdrug program officials and interagency partners receiving support from the program. Specifically, we selected 8 of the 53 participating states and territories identifying 2 states within each of the four counterdrug program regions (selecting 1 state with high and 1 state with low drug threat assessments) that also had a counterdrug school or an international boundary. The 8 states that we included in our review were: Connecticut, Florida, Iowa, Mississippi, Pennsylvania, Texas, Utah, and Washington. In the states selected for case study, we interviewed state counterdrug program officials and officials from the following interagency partners, where applicable: High Intensity Drug Trafficking Areas (HIDTA), Drug Enforcement Administration, Customs and Border Protection, and U.S. Immigration and Customs Enforcement's Homeland Security Investigations. We selected interagency partners based on their receiving support from the counterdrug program and on logistics associated with travel. In addition, we obtained and analyzed information fiscal years 2011 through 2014 from a National Guard counterdrug program database that included descriptive statistics of the number of staff days by mission category, support activities, and supported organization. To ensure the accuracy and reliability of the information from the database, we took steps to review the data fields for consistency and missing data; we found that these data were sufficiently reliable for the purposes of the audit. To identify the changes in funding for the National Guard counterdrug program, we conducted an analysis of relevant appropriations and program budget-related documents provided by DOD for fiscal years 2004 through 2015. We began our analysis with fiscal year 2004 data to ensure that our review included data covering at least a 10-year period. To ensure the reliability of our data, we reviewed documentation on funding distributions and financial management policy and interviewed knowledgeable officials about DOD's Drug Interdiction and Counterdrug Activities account, and about how counterdrug program funds are transferred from the account. We also reviewed financial documentation and interviewed DOD, counterdrug program, and interagency partner officials to obtain information on obligations of available funding. We determined that the data were sufficiently reliable for the purposes of this audit. To assess the extent to which the performance information is used to evaluate the counterdrug program's activities, we reviewed documentation and interviewed counterdrug officials about program activities, types of performance information collected, and funding levels for individual state counterdrug programs. First, we evaluated the counterdrug program's 26 fiscal year 2015 performance measures against nine key attributes of successful performance established by GAO. Next, we evaluated the counterdrug program's use of performance information against leading practices for results-oriented management that help agencies develop useful performance measures and use performance information for management decision making as identified by GAO through a review of literature and interviews with experts and staff from five U.S. agencies. Specifically, we interviewed officials from: National Guard Bureau Counterdrug Program o Connecticut Counterdrug Program o Florida Counterdrug Program Multijurisdictional Task Force Training Center Midwest Counterdrug Training Center Regional Counterdrug Training Academy Northeast Counterdrug Training Center o Texas Counterdrug Program o Utah Counterdrug Program o Washington Counterdrug Program Western Region Counterdrug Training Center National Guard Bureau Budget Execution Office Deputy Assistant Secretary of Defense for Counternarcotics and Office of the Undersecretary of Defense, Comptroller Drug Enforcement Administration (DEA) o DEA Miami Division o DEA Houston Division o DEA Philadelphia Division o DEA Denver Division o DEA New Orleans Division o DEA Seattle Division o DEA St. Louis Division o DEA New England Division o DEA Office of Training Federal Bureau of Investigation United States Marshals Service Executive Office for United States Attorneys Department of Homeland Security: Federal Law Enforcement Training Centers Homeland Security Investigations (HSI) o HSI Special Agent in Charge, Miami, Florida o HSI Special Agent in Charge, Seattle, Washington o HSI Special Agent in Charge, Houston, Texas Customs and Border Protection (CBP) o CBP, Miami, Florida - Sector Intelligence Unit o CBP, Spokane, Washington - Oroville Station o CBP, Spokane, Washington - Sector Intelligence Unit o CBP, Laredo, Texas - Special Operation Detachment United States Coast Guard High Intensity Drug Trafficking Areas: North Florida HIDTA South Florida HIDTA Rocky Mountain HIDTA Houston HIDTA Philadelphia/Camden HIDTA New England HIDTA Gulf Coast HIDTA Northwest HIDTA Midwest HIDTA Office of National Drug Control Policy We conducted this performance audit from August 2014 to October 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The National Guard identifies three state-specific projects as comprising its counterdrug program--state plans, counterdrug schools, and counterthreat finance. Table 2 provides the obligations by each state project. The National Guard's state plans include 15 support activities, which are grouped into five broad mission categories, as shown in table 3. The National Guard counterdrug program collects information on the activities and supported organizations and uses staff days to measure its resource investment. Our analysis of this information found that from fiscal years 2011 through 2014 the state plans invested most of their staff days in the mission categories of technical support and reconnaissance. During this period, the number of staff days invested in civil operations decreased, as shown in figure 3. Of the 15 support activities, investigative case and analyst support was the support activity most frequently provided from fiscal years 2011 through 2014, as shown in table 4. Among the various categories of supported organizations, law enforcement received the most support from the state plans, as shown in table 5. Lastly, the federal agencies to which state plans provided the most support were the Department of Justice and Department of Homeland Security. The specific components that received the most support included the Drug Enforcement Administration, Customs and Border Protection, and Immigration and Customs Enforcement, as shown in table 6. After Congress appropriates amounts to the Drug Interdiction account, there are multiple steps by various organizations before the funds are received by each individual state counterdrug program. To begin each transfer process, DOD Counternarcotic Program officials prepare and submit to the Office of the Under Secretary of Defense (Comptroller) a DD1415-3, which details the allocation of funds by appropriation or budget activity account for each program. If no defense appropriations act has been passed and DOD is operating under a continuing resolution, amounts transferred are based on a rate-per-day formula developed by DOD. Once a defense appropriation act is enacted, the Comptroller is required to submit to Congress the department's intended budget execution based on the appropriation act and congressional directions as expressed in House and Senate Appropriation committee reports. This report, which DOD calls the base for reprogramming and transfer authorities (DD1414), is to be submitted no later than 60 days from the enactment of an appropriation. After this baseline is submitted, Comptroller officials review and approve the DD1415-3 and forward it to the Office of Management and Budget. Once approved by the Office of Management and Budget, the Comptroller issues a funding authorization document to transfer funds to the military services appropriation accounts (such as military personnel or operation and maintenance). The military services then transfer funds to appropriation accounts managed by Army National Guard and Air National Guard, which, in turn, distribute the funds onto each state National Guard participating in the program. Figure 4 outlines the fund transfer process to the counterdrug program. The National Guard Bureau's Counterdrug Program office coordinates the process involving the DOD Counternarcotic Program, the Army and Air National Guard budget and financial management offices, and the individual state counterdrug programs. In fiscal year 2015 the counterdrug program officials used 26 performance measures to report on the program's aggregate performance to DOD and respond to requests for information, as shown in table 7. Each state within the counterdrug program develops an annual plan of activities, in coordination with the state's Governor and Attorney General, that identifies its counterdrug priorities and how it intends to obligate its available funds. To develop these plans, states use annual guidance from DOD that identifies approved activities for the counterdrug program. For instance, investigative case support, ground and aerial reconnaissance, and counterthreat finance analysis are approved activities. The threat-based resource model uses 22 variables to assess the drug threat across the 53 counterdrug programs. Almost half of the variables are based on information from the National Seizure System database. Other variables are based on information from federal agencies such as the Substance Abuse and Mental Health Services Administration and the Federal Bureau of Investigation. To ensure that every state has a viable counterdrug program, the Chief of the National Guard Bureau established $500,000 as the minimum level of funding for each state. According to counterdrug program officials, this amount enables all the states to maintain some capability to address drug threats while limiting the impact on states with higher threats. Table 8 provides details on the state plans distribution percentages by state and territories for fiscal year 2015. The amount of funding each state receives depends on that state's distribution percentage and available funds for the state plans project. Table 9 details the funding distributed to each state and territory in fiscal years 2014 and 2015. In addition to the contact named above, Rich Geiger (Assistant Director), Tom Jessor, Linda S. Keefer, Susan C. Langley, Amie Steele Lesser, Felicia M. Lopez, Tobin J. McMurdie, Carol D. Petersen, Richard Powelson, Caitlin N. Rice, Michael D. Silver, Sabrina C. Streagle, and Cheryl A. Weissman made key contributions to this report. Budget Issues: Effects of Budget Uncertainty From Continuing Resolutions on Agency Operations. GAO-13-464T. Washington D.C.: March 13, 2013. Drug Control: Initial Review of the National Strategy and Drug Abuse Prevention and Treatment Programs. GAO-12-744R. Washington D.C.: July 6, 2012. Office of National Drug Control Policy: Agencies View the Budget Process as Useful for Identifying Priorities, but Challenges Exist. GAO-11-261R. Washington D.C.: May 2, 2011. Drug Control: DOD Needs to Improve Its Performance Measurement System to Better Manage and Oversee Its Counternarcotics Activities. GAO-10-835. Washington D.C.: July 21, 2010. Preliminary Observations on the Department of Defense's Counternarcotics Performance Measurement System. GAO-10-594R. Washington D.C.: April 30, 2010. Continuing Resolutions: Uncertainty Limited Management Options and Increased Workload in Selected Agencies. GAO-09-879. Washington D.C.: September 24, 2009.
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Since 1989 the National Guard has received hundreds of millions of dollars to help enhance the effectiveness of state-level counterdrug efforts by providing military support to assist interagency partners with their counterdrug activities. The program funds the drug interdiction priorities of each state Governor; counterdrug-related training to interagency partners at five counterdrug schools; and state-level counterthreat finance investigations, all of which are part of DOD's broader counterdrug efforts. Senate Report 113-176 included a provision for GAO to conduct an assessment of the state operations of the National Guard's counterdrug program. This report: (1) identifies the changes in funding for the program since fiscal year 2004, and (2) assesses the extent to which performance information is used to evaluate the program's activities. GAO analyzed the program's budgets and obligations data, performance measures, and program guidance, and interviewed knowledgeable officials. The National Guard Bureau (NGB) counterdrug program's budget data show that funding has ranged from about $219.3 million to $242.1 million in fiscal years 2004 through 2014-with a peak of $247 million in fiscal year 2013-but in fiscal year 2015 funding was reduced substantially. Based on Department of Defense (DOD) data, every year since 2004 Congress has directed funding above the requested amount, thus keeping program amounts steady through 2014. In fiscal year 2013, DOD reported requesting $117 million for the program, about a 40 percent decrease from the prior year's request. While DOD reduced its request, however, Congress in fiscal years 2013 and 2014 directed funding at generally comparable amounts from prior years. In fiscal year 2015 Congress directed less of an increase above DOD's request, leaving the program with lower total funding of $175.5 million. The NGB has developed performance measures to report on its counterdrug program; however, the information collected is not used to evaluate and inform funding for state-level programs or oversee the counterdrug schools' training. GAO has previously reported that setting useful measures is important for oversight; without them, managers cannot monitor and evaluate the performance of programs' activities. NGB officials stated that they developed the current measures in response to DOD guidance to report on the program's aggregate performance and did not fully consider the types of measures or information that would be useful to evaluate individual state-level programs and oversee the counterdrug schools. Without collecting and using useful performance information to evaluate state-level programs and oversee the counterdrug schools, DOD and Congress cannot ensure that the counterdrug program is achieving its desired results and is distributing its funding most efficiently. GAO recommends that DOD (1) identify additional information needed to evaluate the performance of state programs and oversee counterdrug schools' training; and (2) subsequently collect and use performance information to help inform funding distribution decisions to state programs and to conduct oversight of the training offered by the counterdrug schools. DOD concurred with GAO's recommendations.
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The National Science Foundation conducts scientific research in the polar regions of Antarctica and Greenland and funds and manages the U.S. Antarctic Program. This program sends nearly 3,000 scientists and support personnel to Antarctica each year to support scientific research in areas such as astrophysics, atmospheric chemistry, biology, earth sciences, ocean and climate systems, and glaciology. The National Science Foundation also chairs an interagency committee to coordinate the scientific research efforts of all federal agencies in the Arctic region, including Greenland. The 109th Airlift Wing is the main provider of air logistic support for National Science Foundation activities in Antarctica. The unit also supports the activities of the National Science Foundation and other agencies in Greenland. Members of the 109th Airlift Wing train on and operate unique LC-130 ski-equipped aircraft that take off and land on snow and ice (see fig. 1). The unit operates 10 LC-130 aircraft. The 109th Airlift Wing supports U.S. Antarctic Program mission requirements from mid-October to the end of February each year. It employs 220 full-time Active Guard and Reserve members whose principal task is to support this program. It receives additional support from "traditional" guardsmen, other Active Guard and Reserve members, and military technicians of the 109th Airlift Wing, as well as members from other military units. Operations are conducted from McMurdo Station, the permanent logistics station for U.S. operations in Antarctica. The 109th Airlift Wing schedules between 450 and 500 flights in Antarctica for the 5-month operational season to meet National Science Foundation requirements. According to the 109th Airlift Wing, personnel typically deploy for a period of 1 to 13 weeks, which includes up to 1 week of travel from New York to Antarctica. These deployments are conducted on a rotational basis. The 109th Airlift Wing maintains a presence of approximately 120 personnel (50 operational, 61 logistic, and 9 support) at McMurdo Station from October to the end of February. In Greenland, the 109th Airlift Wing performs training missions for unit personnel who will deploy to Antarctica. The unit also performs scientific support missions for the National Science Foundation as well as for the National Aeronautics and Space Administration and European research programs. Unit operations in Greenland run from mid-March to September each year and are conducted from staging locations at Thule Air Base and Kangerlussuaq. Missions are flown to all parts of the Greenland Ice Cap, northern Canadian locations, and Arctic Ocean camps. The 109th conducts 10 to 12 1-week deployments to Greenland. Within OSD, the Under Secretary of Defense (Personnel and Readiness) is responsible for DOD personnel policy, including oversight of reserve affairs and military personnel pay and benefits. The Under Secretary of Defense (Personnel and Readiness) leads the Unified Legislation and Budgeting process, which was established in 1994 to develop and review personnel compensation proposals. In addition, the Office of the Under Secretary of Defense (Personnel and Readiness) is conducting the congressionally mandated review of special and incentive pays for reservists performing duty in the polar regions. Hardship duty pay compensates military personnel on duty for more than 30 consecutive days in harsh or difficult living conditions. The Secretary of Defense has the authority to establish implementing regulations for such pay, including the designation of hardship duty locations and rates. Within OSD, the Assistant Secretary of Defense (Force Management Policy) tasked a working group in 1998 to develop hardship duty pay policy. The working group determined that (1) uniformed members who perform duty in designated hardship locations for more than 30 consecutive days are eligible for hardship duty pay and (2) this pay is not intended to compensate for difficult working conditions. According to DOD, personnel assigned to an area for a short period do not endure the same range of physical hardships as those in the area on a long-term basis. According to an OSD official, the working group linked the 30-day hardship duty threshold to family separation allowance, which compensates members who are away from their families for more than 30 consecutive days. We found no basis to disagree with the criteria DOD has established for hardship duty pay. OSD, in its appeal submitted in response to the National Defense Authorization Act for Fiscal Year 2003, opposed the legislation creating an exception to the 30-day hardship duty threshold for missions to the polar regions on the grounds that it "unnecessarily circumvents a process that has proven to be a fair and equitable means of setting hardship duty pay location rates worldwide." The Assistant Secretary of Defense (Force Management Policy) regularly reviews and determines hardship duty locations and rates. In certain instances, the Assistant Secretary of Defense (Force Management Policy) automatically designates hardship duty locations. All installations located on land areas or an ice shelf above 66 degrees 33 minutes north latitude (Arctic region) or below 60 degrees south latitude (Antarctica) are designated as hardship duty locations. For all other locations, unified commanders with regional responsibilities submit a completed Hardship Duty Location Assessment Questionnaire to the Assistant Secretary of Defense (Force Management Policy), who reviews these requests twice a year. Monthly pay rates for hardship duty are $50, $100, and $150 and are based on the severity of living conditions. Living conditions are placed into three categories: (1) physical environment, which includes factors such as climate and physical and social isolation; (2) living conditions, including sanitation, disease, medical facilities, housing, food, and recreational and community facilities; and (3) personal security, including political violence, harassment, and crime. Hardship duty performed for more than 30 consecutive days in Antarctica and Greenland qualifies at the $150 monthly rate. Allowing an exception to the 30-day hardship duty threshold for members of the 109th Airlift Wing who deploy to the polar regions would result in minimal additional costs. The National Science Foundation reimburses DOD for 109th Airlift Wing logistic support in the polar regions and would incur most of these additional costs. However, allowing this exception could set a precedent for DOD personnel performing other missions lasting 30 days or less. The costs of granting an exception for short-term missions conducted at other hardship locations are unknown. The 109th Airlift Wing estimated that granting an exception to the 30-day hardship duty threshold for unit members deployed to the polar regions would cost approximately $125,000 to $130,000 a year based on deployment trends in past years. We did not verify the cost data. In fiscal year 2002, for example, the unit had a total of 1,478 deployments to the polar regions, including 690 to Antarctica and 788 to Greenland. Unit members deployed for a total of 15,846 days, including 11,906 days in Antarctica and 3,940 days in Greenland. According to a unit official, approximately 30 unit members deployed for more than 30 consecutive days. The 109th Airlift Wing estimated that if the exception to the 30-day threshold had been in effect in fiscal year 2002, hardship duty pay costs for that year would have increased by about $127,000, including approximately $95,000 for deployments to Antarctica and approximately $32,000 for deployments to Greenland. The National Science Foundation would incur most of these increased costs. It directly reimburses DOD for 109th Airlift Wing logistic support performed in Antarctica, including personnel and training costs above and beyond the unit's wartime task requirements. The reimbursements from the National Science Foundation include funding for the 220 full-time Active Guard and Reserve members employed for the polar mission and for all flying training hours required for these personnel to maintain their qualifications. The National Science Foundation reported that the total costs in fiscal year 2002 for the unit's support of Antarctic missions were $22.7 million. For operations in Greenland, the 109th Airlift Wing is reimbursed by its customers, including the National Science Foundation, based on a rate structure established by DOD for each particular mission. For example, the National Science Foundation reimbursed the 109th Airlift Wing about $375,000 in fiscal year 2002 for missions in Greenland. Other military personnel performing short-term assignments in the polar regions would also benefit from an exception to the 30-day hardship duty threshold. For example, the Air Force Reserve's 445th Airlift Wing and the 452nd Airlift Mobility Wing conduct passenger and cargo flights on C-141 wheeled aircraft between Christchurch, New Zealand, and McMurdo Station, Antarctica. An OSD official said information was not readily available on the additional estimated costs of granting the exception for these personnel. According to officials within the Office of the Under Secretary of Defense (Personnel and Readiness), allowing an exception to the 30-day hardship duty threshold would set a precedent for other short-term missions that last 30 consecutive days or less. Of the 170 hardship duty locations, 67 locations (39 percent) qualify at the maximum monthly pay rate of $150. In 2002, DOD refused a request by the Navy for an exception to the 30-day threshold for duty on Vieques Island, Puerto Rico. The Navy stated that security personnel who are deployed to the island on a 14-day rotational schedule live in "substandard conditions." DOD, in turning down the request, stated that "members on a short-term duration tour-of-duty do not endure the range of physical hardships experienced by those who are permanently assigned." According to an official within the Office of the Under Secretary of Defense (Personnel and Readiness), granting an exception to the 30-day threshold for other short-term missions would result in additional hardship duty pay costs, but these costs are unknown because DOD has not conducted a cost analysis. The 109th Airlift Wing justified its proposal for hazardous duty pay for military personnel performing duty in the polar regions on the basis of the extreme working conditions they encounter and their exposure to potential medical hazards. Unit officials also expressed concern about the retention of unit personnel, but they did not know what impact hazardous duty pay for polar duty would have on retention. A senior unit official said the unit submitted a proposal in 2000 to the New York Guard seeking modifications to a DOD regulation to designate polar operations as hazardous duty. Hazardous duty pay is a type of incentive pay intended to induce personnel to volunteer for duties that may be hazardous. According to the senior unit official, the New York Guard submitted the proposal to Congress. The proposal was not provided to DOD for consideration in the DOD Unified Legislation and Budgeting process, which reviews personnel compensation proposals. Although the 109th Airlift Wing's proposal addressed hazardous duty pay, Congress developed a legislative provision in 2002 to grant an exception to the 30-day hardship duty pay threshold. The senior 109th Airlift Wing official said the unit's justification for hazardous duty pay for polar operations could also be applied to hardship duty pay. According to information provided by the 109th Airlift Wing, military personnel performing duty in the polar regions encounter extreme working conditions and face exposure to potential medical hazards. Flight crews routinely conduct takeoffs and landings in remote areas on snow and ice. In zero visibility conditions, they must use emergency whiteout landing procedures. Maintenance personnel work in temperatures as low as minus 59 degrees Fahrenheit without the protection of hangars. Operations in these conditions expose personnel to potential medical hazards such as hypothermia, frostbite, carbon monoxide poisoning, and ultraviolet radiation exposure. In addition, the unit indicated that the dry conditions in Antarctica can lead to dehydration and fatigue. A small clinic at McMurdo station is capable of treating minor injuries, but all major injuries and surgeries must be treated in Christchurch, New Zealand. (App. I provides a more detailed description of the conditions in which deployed members operate and their exposure to potential medical hazards.) National Science Foundation officials acknowledged that the operating environment in Antarctica can be harsh and that employees from all participating agencies and organizations - not just 109th Airlift Wing personnel - face difficult working conditions. They said the National Science Foundation has adopted a variety of procedures that mitigate the hazards faced by U.S. Antarctic Program participants, including scientists, support contractor personnel, civilian federal employees, and DOD civilian and military personnel. National Science Foundation officials said operational improvements were implemented to make Antarctic flight operations safer and to mitigate the impact of the harsh environment on personnel. For example, an emergency divert airfield was established in 2002, and navigational aids and more accurate weather forecasting capabilities have been implemented and remain a high priority. While duty performed for more than 30 consecutive days in the polar regions of Antarctica and Greenland qualifies for hardship duty pay, duty in the polar regions has not been designated as a hazardous duty. Section 301 of title 37 of the United States Code designates certain duties entitled to hazardous duty pay. These duties include parachute jumps, demolition of explosives, and participation in flight deck operations on an aircraft carrier. Other hazardous duties include exposure to above-normal levels of toxic fuels or propellants, and the handling of chemical munitions. Personnel handling these materials are compensated for the potential for accidental or inadvertent exposure and not for actual detectable exposure to these materials. A 109th Airlift Wing official expressed concern over the retention of unit personnel who require additional training for polar duty. Flight crews receive training in Greenland and Antarctica on how to land on and take off from snow and ice and in zero visibility conditions. Flight crews are also required to attend arctic survival training in Greenland where they learn how to survive on an ice cap for extended periods with no heat and limited survival gear. Flight crews typically take 3 years to receive their qualification to fly ski-equipped aircraft. Maintenance personnel attend a maintenance recovery school in Greenland, which teaches basic polar survival skills to enable them to cope with the extreme conditions they confront when they repair aircraft with little support equipment. A 109th Airlift Wing official said the unit is experiencing a high turnover of Active Guard and Reserve members who directly support polar missions in aerospace maintenance (pay grades E-5 and E-7) and aircraft hydraulics (pay grades E-5 and E-7). For the entire 109th Airlift Wing, the unit has difficulty retaining "traditional" guardsmen in the following critical skills: aerospace maintenance and ground equipment, avionics, and aircraft fuels. Despite retention difficulties in some critical skills, the unit filled 98 percent of the Active Guard and Reserve positions who directly support operations in Antarctica in 2002. The retention fill rate for the entire unit was 97 percent during the same year. A unit official said it is unknown what impact hazardous duty pay for polar duty would have on retention of unit personnel. Exit surveys conducted with separating personnel show that dissatisfaction with pay is one of several reasons for leaving, but is not the primary separation factor. Between 2001-2003, 165 members left the unit. The most frequently cited separation factors were family conflict, civilian job conflict, and weekend drills (see fig. 2). The unit cannot track specific mission concerns such as deployments to the polar regions as separation factors. The exit surveys used by the 109th Airlift Wing do not indicate whether an individual's reason for leaving is connected specifically with polar duty. A unit official stated that, based on responses for reasons for leaving, it is possible to "subjectively deduce that length of deployments and distance from home, as in polar deployments, are key factors influencing retention decisions." The exit surveys also do not track separation factors based on personnel categories such as military technicians, Active Guard and Reserve, Active Guard and Reserve who support the U.S. Antarctic Program, and drilling reservists. Based on our discussions with the 109th Airlift Wing concerning the exit surveys, the unit has modified the exit survey to track deployments to the polar regions as a separation factor. The hardship duty pay legislation introduced in 2002 -- directed at the 109th Airlift Wing -- would have created an exception to (1) the 30-day hardship duty pay threshold and (2) the monthly hardship duty rate established by DOD for the polar regions. We believe that granting such an exception for hardship duty pay is not justified under current DOD policy. First, DOD intends for hardship duty pay to compensate military personnel who endure a range of hardship on a long-term basis -- defined by DOD as more than 30 consecutive days. Granting this exception could set a precedent for DOD personnel performing other missions that do not meet the 30-day threshold, which could increase hardship duty pay costs. Second, under current DOD policy, hardship duty pay is intended to compensate personnel for harsh or difficult living conditions, rather than for difficult working conditions. However, the 109th Airlift Wing cited the extreme working conditions encountered by personnel deployed to the polar regions. According to the 109th Airlift Wing, unit personnel are subjected to extreme conditions and are exposed to potential medical hazards while on duty in the polar regions. These factors warrant consideration as part of DOD's review of special and incentive pays for personnel performing duty in the polar regions. In addition, because one of the purposes of hazardous duty pay is to induce personnel to volunteer for duties that may be hazardous, we believe that retention data should also be considered as part of DOD's review. Officials from the 109th Airlift Wing expressed concerns about current retention rates, but they did not know what impact hazardous duty pay for polar duty would have on retention. Exit surveys conducted with separating personnel show that dissatisfaction with pay was not among the most frequently cited reasons that members of the unit provided for leaving. At the time we conducted our review, the 109th Airlift Wing was not collecting retention data related to members who were deployed to the polar regions. Collecting this data would be helpful to target retention incentives to the personnel categories experiencing the highest turnover rates. According to an official of the 109th Airlift Wing, the unit has modified the exit survey it uses to track deployments to the polar regions as a separation factor. Congress has directed DOD to study special and incentive pays for reservists performing duty in the polar regions. As part of this study, we recommend that the Secretary of Defense direct the Under Secretary of Defense (Personnel and Readiness) to assess certain factors in determining whether personnel performing polar duty should receive hazardous duty pay. These factors are the extreme working conditions that military personnel encounter while performing polar duty, the exposure of military personnel to potential medical hazards related to polar duty, and retention data for military personnel performing polar duty. In written comments on a draft of this report, DOD concurred with our recommendation on assessing certain factors to determine whether personnel performing polar duty should receive hazardous duty pay. DOD's comments are reprinted in appendix II. DOD and the National Science Foundation also provided technical comments that we incorporated as appropriate. Our review focused on special and incentive pay for DOD personnel performing duty in the polar regions. To develop the information in this report, we interviewed DOD officials in the Office of the Assistant Secretary of Defense for Reserve Affairs, the Office of Military Compensation, and the Air National Guard. We also met with officials at the National Science Foundation. We visited Stratton Air Guard Base, where we interviewed officials from the 109th Airlift Wing, New York Air National Guard. In addition, we reviewed DOD Financial Management Regulations related to hardship duty pay and hazardous duty pay. To assess DOD's rationale for hardship duty pay, including the 30-day threshold, we reviewed the legislative history concerning hardship duty pay, analyzed DOD policies implementing this pay, and interviewed OSD officials. To assess the potential implications, including costs, of making an exception to the 30-day threshold, we reviewed cost data from the 109th Airlift Wing and interviewed officials from OSD, the 109th Airlift Wing, and the National Science Foundation. We did not verify cost data provided by the 109th Airlift Wing. To assess the justification for hazardous duty pay for polar duty, we obtained documentation on the 109th Airlift Wing's operational activities and the conditions unit members encounter when deployed to polar regions. We also obtained and analyzed retention data for 109th Airlift Wing personnel performing duty in the polar regions. We conducted our review from December 2002 to March 2003 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of Defense; the Under Secretary of Defense (Personnel and Readiness); the Director, National Science Foundation; and the Director, Office of Management and Budget. In addition, the report will be available at no charge on GAO's Web site at www.gao.gov. If you or your staff have any questions regarding this report, please call me at (202) 512-5140 or Brenda S. Farrell at (202) 512-3604. Major contributors to this report were Kelly Baumgartner, Thomas W. Gosling, and Timothy Wilson. The 109th Airlift Wing submitted a proposal in 2000 to the New York Guard seeking to modify the Department of Defense's (DOD) current hazardous duty pay regulation by designating as hazardous duty (1) duty involving frequent and regular participation in flight operations in ski- equipped LC-130 aircraft conducting ski landings and takeoffs on snow in polar locations and (2) duty involving maintenance of LC-130 ski-equipped aircraft as a primary duty in polar locations. The 109th Airlift Wing justified its proposal to designate polar operations as hazardous duty on the basis of two primary factors -- difficult working conditions, including cold temperatures, and exposure to potential medical hazards. According to the 109th Airlift Wing, flight crews and maintenance personnel operate and maintain LC-130 ski-equipped aircraft in difficult working conditions. Specific hazards and risks include the following: Ski takeoffs include steering with asymmetrical use of the throttles and the rudder only, since use of the nose wheel will cause aircraft damage. The aircraft is highly susceptible to sliding off ski ways in high winds, particularly at low speeds (below 60 knots), when the rudder is not effective. Ski landings are performed in extreme, remote areas of Antarctica and Greenland, hundreds of miles from any station or site; on glaciers and open snow locations in areas not surveyed and never before visited by humans; on crevasses that are hidden under snow bridges; and in katabatic winds that often make landing and taxiing on skis extremely difficult. Whiteout procedures require flight crews to perform an approach and landing in a designated area in zero visibility weather conditions. Ski approaches in bad weather include a lack of external navigation aids to orient the aircraft on approach, flying in weather conditions down to 300 feet above ground and 1 mile visibility, and flying in conditions that can induce extreme vertigo when there is no contrast between the white snow and white clouds. Many missions are flown to high altitude elevations. Each year over 250 missions are flown to the South Pole at an elevation of over 9,300 feet. Many missions are flown to camps in Antarctica and Greenland at field elevations greater than 10,000 feet and some as high as 12,000 feet. Assisted take-off rockets are routinely used for getting an aircraft airborne on a takeoff from high altitude sites. Aircraft must achieve a higher than normal ground speed to reach the proper indicated airspeed to get enough lift for takeoff due to thin air. The snow at high altitude locations is often unprepared, which creates additional drag and makes it more difficult to build up speed during the takeoff slide. Unit personnel fly missions to locations where there is no camp, no personnel, and no equipment, which creates the risk of being stranded. There is no rescue capability at these locations other than another LC-130 aircraft. Personnel are exposed to extremely cold temperatures as low as minus 59 degrees Fahrenheit. Wind chills can be as high as minus 100 degrees Fahrenheit. All fueling and cargo operations are conducted with engines running, which requires a flight engineer to operate the refueling panel outside for 30 to 40 minutes directly behind running engines. Loadmasters are also outside of the aircraft for periods of 1 to 3 hours off-loading and on-loading cargo from the snow with engines running. Cargo loading and unloading are extremely difficult, often with little or no material handling equipment. Two to three hours of manual labor are often required by the flight crews to load and unload cargo in the snow. This activity is extremely hazardous due to the extreme physical exertions required with little oxygen in the atmosphere and exhaust fumes from the aircraft engines. According to the 109th Airlift Wing, polar operations expose 109th Airlift Wing personnel to a variety of potential medical hazards. Potential medical hazards include the following: Frostbite and hypothermia -- Brief exposure to polar temperatures can have a severe impact. For example, exposed flesh freezes at minus 59 degrees Fahrenheit within 1 minute, with no wind. Carbon monoxide poisoning -- Aircraft maintenance and unloading activities expose flight crews over a prolonged period to potentially hazardous exhaust fumes. Continuous exposure to intense sunlight -- Operations during the 5 months in Antarctica are conducted in 24-hour direct sunlight. Exposure to ultraviolet radiation is greatly increased due to the hazard of the "ozone hole" over the Antarctic continent.
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The 109th Airlift Wing, New York Air National Guard, conducts supply missions for scientific research in the polar regions. Most unit members do not spend more than 30 consecutive days in the polar regions. Therefore, they are not eligible for hardship duty pay, which requires more than 30 consecutive days of duty in a designated hardship location. Congress considered legislation in 2002 to make an exception to the 30-day hardship duty pay threshold for polar duty. This legislation was not approved. In addition, the 109th Airlift Wing proposed designating polar duty as a hazardous duty. The Conference Report accompanying the National Defense Authorization Act for Fiscal Year 2003 directed GAO and DOD to conduct separate reviews of special and incentive pays for polar duty. GAO assessed DOD's rationale for hardship duty pay and the implications of making an exception to hardship duty pay. In addition, GAO assessed the 109th Airlift Wing's justification for hazardous duty pay for polar duty. Hardship duty pay is intended to compensate military personnel assigned to areas for more than 30 consecutive days where quality-of-life conditions are substantially below those in the continental United States. DOD did not support the hardship duty pay legislation on the basis that this pay was not intended to compensate stays of short duration and the legislation circumvented a DOD process designating hardship duty locations and rates. Granting an exception to the 30-day hardship duty pay threshold for 109th Airlift Wing personnel deployed to the polar regions would result in minimal costs, but this exception could set a precedent for DOD personnel performing other short-term missions and could further increase costs. Had this exception been in effect in 2001-2002, the 109th Airlift Wing estimated the costs would have totaled about $127,000. The National Science Foundation would incur most of these costs because it reimburses DOD for logistic support in the polar regions. The costs of granting an exception for short-term missions conducted by DOD personnel at other hardship locations are unknown. Based on its review of the intent of hardship duty pay and the implications of granting an exception, GAO believes that an exception to the 30-day threshold is not justified under current DOD policy. The 109th Airlift Wing justified its proposal for hazardous pay on the basis of extreme working conditions and exposure to medical hazards. For example, maintenance personnel work in temperatures as cold as minus 59 degrees Fahrenheit without the protection of hangars and are exposed to potential medical hazards such as frostbite, hypothermia, and carbon monoxide poisoning. Unit officials expressed concern about the retention of personnel who require additional training for polar operations, but they did not know what impact hazardous duty pay would have on retention. Recent data from exit surveys show that dissatisfaction with pay was not among the most frequently cited reasons for leaving.
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In July 2012, we reported on changes Interior made to its oversight of offshore oil and gas activities in the Gulf of Mexico in the aftermath of the Deepwater Horizon incident. Specifically, we reported that On October 1, 2011, Interior officially established two new bureaus, separating offshore resource management oversight activities, such as reviewing oil and gas exploration and development plans, from safety and environmental oversight activities, such as reviewing drilling permits and inspecting drilling rigs. Because the responsibilities of these new bureaus are closely interconnected, and carrying them out will depend on effective coordination, Interior developed memoranda and standard operating procedures to define roles and responsibilities and facilitate and formalize coordination. New safety and environmental requirements and policy changes designed to mitigate the risk of a well blowout or spill initially required Interior to devote additional resources and time to reviewing certain oil and gas exploration and development plans and drilling permits for oil and gas activities in the Gulf of Mexico. Specifically, these policy changes affected Interior's (1) environmental analyses, (2) reviews of oil and gas exploration and development plans, and (3) reviews of oil and gas drilling permits. Our analysis of drilling permit approval time frames found that approval times initially increased after the new requirements went into effect, but as both Interior staff and oil and gas companies became more familiar with these requirements, the review times decreased. Interior's inspections of offshore Gulf of Mexico oil and gas drilling rigs and production platforms from January 1, 2000, through September 30, 2011, routinely identified violations. However, Interior's database was missing data on when violations were identified, as well as when they were corrected for about half of the violations issued. As a result, Interior did not know on a real-time basis whether or when all violations were identified and corrected, potentially allowing unsafe conditions to continue for extended periods. During this same period, Interior issued approximately $18 million in civil penalty assessments. At the time of our report, Interior had begun implementing a number of policy changes to improve both its inspection and civil penalty programs--but had not assessed how these changes would affect its ability to conduct monthly drilling rig inspections. Interior continued to face challenges following its reorganization that may affect its ability to oversee oil and gas activities in the Gulf of Mexico. Specifically, Interior's capacity to identify and evaluate risks associated with drilling remained limited, raising questions about the effectiveness with which it allocated its oversight resources. Interior also experienced difficulties in implementing effective information technology systems, such as those that aid its reviews of oil and gas companies' exploration and development plans. It also continued to face workforce planning challenges, including hiring, retaining, and training staff. Moreover, Interior did not have current strategic plans to guide its information technology or workforce planning efforts. Our July 2012 report resulted in 11 recommendations for specific improvements to Interior's oversight of offshore oil and gas activities, including those intended to improve its drilling inspection program and human capital planning. Interior generally agreed with our recommendations and has committed to implementing them. Federal oil and gas resources generate billions of dollars annually in revenues that are shared among federal, state, and tribal governments; however, in several reviews over the past 5 years we found Interior may not be properly assessing and collecting these revenues. In September 2008, we reported that Interior collected lower levels of revenues for oil and gas production in the deepwater of the U.S. Gulf of Mexico than all but 11 of 104 oil and gas resource owners in other countries, as well as in some states whose revenue collection systems were evaluated in a comprehensive industry study.significant changes in the oil and gas industry over the past several decades, we found that Interior had not systematically reexamined how the U.S. government is compensated for extraction of oil and gas in over 25 years. We recommended Interior conduct a comprehensive review of In addition, despite the federal oil and gas fiscal system using an independent panel. After Interior initially disagreed with our recommendations, we recommended that Congress consider directing the Secretary of the Interior to convene an independent panel to perform a comprehensive review of the federal oil and gas fiscal system and establish procedures to periodically evaluate the state of the fiscal system. In response to that recommendation, Interior commissioned a study that compared the U.S. government's fiscal system with that of other resource owners. We are currently conducting work to assess how Interior plans to use the results of this study to inform decisions about its fiscal system. Furthermore, we reported, in July 2009, on numerous problems with Interior's efforts to collect data on oil and gas produced on federal lands and waters, including missing data, errors in company-reported data on oil and gas production, and sales data that did not reflect prevailing market prices for oil and gas. As a result of its lack of consistent and reliable data on the production and sale of oil and gas from federal lands and waters, Interior could not provide reasonable assurance that it was assessing and collecting the appropriate amount of royalties on this production. We made a number of recommendations to Interior to improve controls on the accuracy and reliability of royalty data. Interior generally agreed with our recommendations and has implemented the majority of them. We also reported, in March 2010, that Interior was not taking the steps needed to ensure that oil and gas produced from federal lands and For example, we found that neither waters was accurately measured. BLM nor MMS had consistently met their agency goals for oil and gas production verification inspections, intended to examine, among other things, whether lessees were taking steps to ensure that the amount of oil and gas produced from federal lands and waters was being accurately measured. Without such verification, Interior cannot provide reasonable assurance that the public is collecting its share of revenue from oil and gas development. We also raised concerns over Interior's efforts to develop software to allow inspection staff to remotely monitor gas production. Specifically, we found that BLM's Remote Data Acquisition for Well Production program--a program designed to provide industry and government with common tools to validate production and to view production data in near real-time--had shown few results, despite 10 years of development and costs of over $1.5 million. Our March 2010 report identified 19 recommendations for specific improvements to oversight of production verification activities, including recommendations intended to strengthen BLM's production inspection program and its ability to obtain near real-time gas production data. Interior generally agreed with our recommendations; it has already implemented many of them and continues to work on the remainder. Additionally, we reported, in October 2010, that Interior's data likely understated the amount of natural gas produced on federal leases, because the data did not quantify the amount of gas released directly to the atmosphere (vented) or burned (flared) during the production process. This vented and flared gas represents lost royalties to the government and contributes to greenhouse gases. We recommended that Interior improve its data and address limitations in its regulations and guidance to reduce this lost gas. Interior generally agreed with our recommendations and is taking steps to implement them. In February 2011, we added Interior's management of federal oil and gas resources to our list of federal programs and operations at high risk for waste, fraud, abuse, and mismanagement or needing broad-based transformation. We added Interior to the list because the department: (1) did not have reasonable assurance that it was collecting its share of revenue from oil and gas produced on federal lands; (2) continued to experience problems in hiring, training, and retaining sufficient staff to provide oversight and management of oil and gas operations on federal lands and waters; and (3) was engaged in a broad reorganization of both its offshore oil and gas management and revenue collection functions, leading to concerns about whether Interior could provide effective program oversight while undergoing such a broad reorganization. In the February 2013 update to our High Risk list,federal oil and gas management high-risk area to focus on revenue collection and human capital challenges because Interior had completed its reorganization. In order for GAO to remove the high-risk designation, Interior must successfully address the challenges we have identified, implement open recommendations, and meet its responsibilities to manage federal oil and gas resources in the public interest. While Interior recently began implementing a number of GAO recommendations, including those intended to improve the reliability of data necessary for determining royalties, the agency has yet to implement a number of other recommendations, including those intended to help the agency (1) provide reasonable assurance that oil and gas produced from federal leases is accurately measured and that the public is getting an appropriate share of oil and gas revenues and (2) address its long- standing human capital issues. We are currently engaged in two reviews examining the remaining two high-risk issues. First, we are conducting a follow up review of Interior's collection of revenues from the production of oil and gas on federal lands and waters. As part of this review, we will examine Interior's progress, if any, in (1) ensuring the government is getting a fair return for federal oil and gas resources, (2) meeting agency targets for conducting oil and gas production verification inspections, and (3) providing greater assurance that oil and gas production and royalty data are consistent and reliable. Second, we are reviewing the extent to which Interior continues to face problems hiring, training, and retaining staff, and how any remaining problems affect Interior's ability to oversee oil and gas activities on federal lands and waters. As part of this effort, we will focus on the causes of Interior's human capital challenges, actions taken, and Interior's plans for measuring the effectiveness of corrective actions. In addition, while we have narrowed the focus of the high-risk area to revenue collection and human capital issues, we will, in the course of ongoing work on these issues, continue to consider Interior's reorganization and its affect on the agency's ability to oversee federal lands and waters. In conclusion, Interior's management of federal oil and gas resources is in transition. Our past work has found a wide range of weaknesses in Interior's oversight of federal oil and gas resources, ultimately resulting in its inclusion on our High Risk List in 2011. Since then, Interior has successfully implemented many recommendations and resolved one of the three concerns that led to its inclusion on the high risk list--the challenges associated with its reorganization. We remain hopeful that Interior will continue to implement the many remaining recommendations we have made, thereby providing greater assurance of effective oversight of federal oil and gas resources. Chairman Lankford, Ranking Member Speier and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. If you have any questions concerning this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals who made key contributions include Jon Ludwigson, Assistant Director; Christine Kehr, Assistant Director; Janice Ceperich; Glenn Fischer; Cindy Gilbert; Alison O'Neill; and Barbara Timmerman. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Interior issues permits for the development of new oil and gas wells on federal lands and waters; inspects wells to ensure compliance with environmental, safety, and other regulations; and collects royalties from companies that sell the oil and gas produced from those wells. In recent years, onshore and offshore federal leases produced a substantial portion of the oil and gas produced in the United States. In fiscal year 2012, Interior collected almost $12 billion in mineral revenues including those from oil and gas development, making it one of the largest nontax sources of federal government funds. Previous GAO work has raised concerns about Interior's management and oversight of federal oil and gas resources. This testimony focuses on (1) Interior's oversight of offshore oil and gas resources, (2) Interior's collection of oil and gas revenues, and (3) Interior's progress to address concerns that resulted in its inclusion on GAO's High Risk List in 2011. This statement is based on prior GAO reports issued from September 2008 through February 2013. GAO is making no new recommendations. Interior continues to act on the recommendations that GAO has made to improve the management of oil and gas resources. GAO continues to monitor Interior's implementation of these recommendations. Interior's oversight of offshore resources . In July 2012, GAO reported on changes to the Department of the Interior's oversight of offshore oil and gas activities in the Gulf of Mexico following the Deepwater Horizon incident. Specifically, GAO reported that Interior had established two new bureaus, separating resource management oversight activities from safety and environmental oversight activities. GAO also reported that new requirements and policy changes designed to mitigate risk of a well blowout or spill had initially required additional resources and increased permit approval times, but that approval times decreased as Interior staff and oil and gas companies became more familiar with the new requirements. GAO also found that Interior's inspections of offshore Gulf of Mexico drilling rigs and production platforms routinely identified violations, but that Interior's database was missing data on when violations were identified and corrected. GAO made 11 recommendations aimed at improving Interior's oversight activities. Interior generally agreed with the recommendations and plans to implement them. Interior's collection of oil and gas revenues. In September 2008, GAO reported that Interior collected lower levels of revenues for oil and gas production in the deep water of the U.S. Gulf of Mexico than all but 11 of 104 oil and gas resource owners in other countries and some states. In July 2009, GAO reported on problems with Interior's efforts to collect data on oil and gas produced on federal lands, including missing and erroneous data. In March 2010, GAO reported that Interior was not taking needed steps to ensure that oil and gas produced from federal lands was accurately measured and was not consistently meeting its goals for oil and gas production verification inspections. GAO made numerous recommendations aimed at improving Interior's revenue collection policies, including oversight of production verification activities and controls on the accuracy and reliability of royalty data. Interior generally agreed with these recommendations and has implemented many of them. Interior's oil and gas management on GAO's high risk list . In February 2011, GAO added Interior's management of federal oil and gas resources to its list of federal programs and operations at high risk for waste, fraud, abuse, and mismanagement or needing broad-based transformation. GAO added this high risk area because Interior (1) did not have reasonable assurance that it was collecting its share of revenues; (2) continued to experience problems hiring, training, and retaining sufficient staff to provide oversight and management of oil and gas operations; and (3) was engaged in a broad agency reorganization that could adversely impact its ability to effectively manage oil and gas during the crisis following the Deepwater Horizon incident. In February 2013, after Interior completed its reorganization, GAO narrowed the oil and gas high-risk area to focus on revenue collection and human capital challenges and is currently examining these issues. While Interior has begun to implement many of GAO's recommendations, it has yet to fully implement a number of others, including recommendations intended to (1) provide reasonable assurance that oil and gas is accurately measured, and that the public is getting an appropriate share of revenues, and (2) address its long-standing human capital issues.
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The influence of USDA on millions of Americans makes it essential that the department plan and manage its information technology wisely. USDA's size and complexity, however, make this far from simple. It has a diverse portfolio of over 200 federal programs throughout the nation and the world. The department delivers about $80 billion in programs, at a cost in federal outlays of an estimated $54 billion. The fourth largest federal agency, USDA employs over 100,000 individuals in 31 agencies and departmental offices having multiple and sometimes disparate missions. Its responsibilities range from forests and timber to food assistance for the needy and the safety of meat and poultry products for human consumption. In fiscal year 1998 alone, USDA plans to spend about $1.2 billion on information technology and related information resources management (IRM) activities. It has reported spending more than $8 billion on IT over the past decade. During this time, USDA has seen its annual IT expenditures nearly double. As we testified before this Subcommittee last spring, USDA has a long history of problems in managing its substantial investments in IT. We chronicled many cases dating back to 1981 in which the department had not effectively planned major computer modernization activities or managed IT resources. Such ineffective IT planning and management have resulted in USDA's wasting millions of dollars. While many factors have contributed to these problems, a major cause was the lack of strong IRM leadership, accountability, and oversight of the acquisition and use of departmental IT investments. Over the years USDA's component agencies were allowed to independently acquire and manage IT investments solely on the basis of their own parochial needs or interests. Because of this, USDA agencies have continued to independently plan, acquire, and develop separate systems, without considering opportunities to integrate systems and share data. Consequently, over time, the department has invested hundreds of millions of dollars in hundreds of systems that are not interoperable with others in the agency and that actually inhibit the use and sharing of information. In fact, data are often inaccessible and underutilized outside of and even within USDA's individual agencies for identifying problems, analyzing trends, or assessing crosscutting programmatic and policy issues. Unfortunately, USDA's experiences with information technology management are not atypical among government agencies. After more than a decade of poor IT planning and program management by federal agencies, as just described for USDA, the Congress enacted the Clinger-Cohen Act of 1996, which, in part, seeks to strengthen executive leadership in information management and institute sound capital investment decision-making to maximize the return on information systems investments. It is important to note that just as technology is most effective when it supports defined business needs and objectives, the Clinger-Cohen Act is at its most powerful when integrated with the objectives of other, broader, governmentwide management reform legislation that USDA is also required to implement. One such reform is the Paperwork Reduction Act of 1995, which emphasizes the need for an overall IRM strategic planning framework, with IT decisions linked directly to mission needs and practices. Another is the Chief Financial Officers Act of 1990, which requires that sound financial management practices and systems essential for tracking program costs and expenditures be in place. Still another is the 1993 Government Performance and Results Act, which focuses on defining mission goals and objectives, measuring and evaluating performance, and reporting results. Together, Clinger-Cohen and these other laws provide a powerful framework under which federal agencies such as USDA have the best opportunity to improve their management and acquisition of IT. A central element of Clinger-Cohen was the requirement that the head of each executive agency designate a CIO. Much more than a senior technology manager, this top-level executive--reporting directly to the agency head--is to be responsible for mission results through technology by working with senior managers to achieve the agency's strategic performance goals. Moreover, the CIO is to promote improvements in work processes and develop and implement an integrated, agencywide technology architecture. The CIO is also required to monitor and evaluate the performance of IT programs, and advise the head of the agency whether to continue, modify, or terminate a program or project. Further, the CIO is responsible for strengthening the agency's knowledge, skills, and capabilities to effectively manage information resources. H.R. 3280 presents requirements to clarify and enhance the authorities of the department's CIO; these requirements are discussed in five major sections. The first addresses the CIO's relationship to the Secretary and the department's Executive Information Technology Investment Review Board. The next three present requirements as they relate to developing an information technology architecture, providing funding for the CIO's office, and establishing control over IT staff across the department. The last provision discusses an annual Comptroller General report on compliance. More specifically, the sections and some information about them include the following. This section requires that the CIO report directly to the Secretary, and that the CIO shall not be under the direction or control of the Deputy Secretary or other official or employee of the department. This section also requires the CIO to serve as vice chair of the department's Executive Information Technology Investment Review Board--or any other entity established for this purpose--and to review and approve IT acquisitions by USDA offices and agencies. The Secretary of Agriculture established the CIO position on August 8, 1996. That same day, he announced the designation of the department's then-Deputy Assistant Secretary for Administration to serve as acting CIO, and has since appointed this individual as USDA's first departmental CIO. However, we were advised that the Secretary has not yet issued a formal delegation of authority describing the CIO's authority and responsibilities. USDA established the Executive Information Technology Investment Review Board on July 1, 1996, to coordinate and prioritize the department's IT investments, and to provide a critical link between IT and agency missions. Comprising senior-level managers, the board is also supposed to ensure that USDA technology investments are managed as strategic business resources supporting efficient and effective program delivery. Moreover, USDA's Fiscal Year 1998 Appropriations Act provides that all IT acquisitions for new systems or significant upgrades must be approved by the CIO, with the concurrence of USDA's Executive Information Technology Investment Review Board. The CIO told us that she had reviewed and approved the department's fiscal year 1998 and fiscal year 1999 IT investment package and submitted it to the board in September 1997, which then concurred with the investment package as submitted. This section requires the CIO to be responsible for designing and implementing an information technology architecture for the department. It also requires the CIO to ensure that development, acquisition, procurement, and implementation of IT by any USDA office or agency complies with the resulting architecture and results in the best use of resources. In February 1997 USDA published an initial draft version of a high-level information technology architecture. However, the CIO said that little has been done since then and that much work remains to refine that version. This section requires each USDA office and agency to annually transfer to the control of the CIO an amount equal to 4 percent of the estimated expenditures to be made by that office or agency for equipment and software. The funds transferred are to remain available until expended by the CIO for carrying out responsibilities of the CIO, as outlined in this bill, Clinger-Cohen, and the Paperwork Reduction Act. Additionally, funds may be used when developing, acquiring, procuring, or implementing departmentwide information systems or to make all mission-critical systems Year 2000 compliant. Mr. Chairman, it is a policy call whether to transfer no-year funds to the CIO annually and what amount is required in addition to other sources of funding available to the CIO. In this regard, the CIO already obtains appropriated funds to carry out responsibilities under Clinger-Cohen and other legislative mandates. In addition, the CIO's office uses working capital funds to support departmentwide IT-related activities, such as operating its Kansas City data center and carrying out telecommunications activities. This section creates the position of Deputy Information Officer within the CIO's office, while abolishing the separate CIO positions within the department's agencies and offices. It also requires that managers of major IT programs and projects within USDA shall be subject to the CIO's approval and that the CIO shall provide his or her perspective as a factor in the performance reviews of such persons. Also covered under this section are the temporary detail and assignment of personnel to the CIO's office and the transfer to the CIO of the direction and control of officials responsible for procurement of IT across the department. As we testified last October on the importance of having strong CIO leadership at federal agencies, we support the establishment of a CIO structure at major agency component and bureau levels because it may be difficult for the CIO at a large department to adequately oversee and manage the specific information needs of a department's major components. Such a management structure is particularly important in situations, such as at USDA, where the departmental components have large information technology budgets or are engaged in major modernization efforts that require substantial CIO attention and oversight. In the Conference Report on the Clinger-Cohen Act, the conferees recognized that agencies may wish to establish CIOs for major components and bureaus. We believe that where utilized, such component-level CIOs should have responsibilities, authority, and management structures that mirror those of the departmental CIO. However, USDA could not readily provide information to identify the current organizational structures across USDA, where each of its component agency CIOs was positioned, or a description of their roles and responsibilities. We were told by the department's CIO that the role of the CIO at the component level has not been defined consistently across USDA agencies. According to the CIO's office, USDA agencies and departmental offices have a total of 16 positions that are either CIOs or senior IT officials with equivalent leadership roles. We were told that the roles and responsibilities of these officials differ from one agency to the next; some control all IT staff resources and others do not. Additionally, we were told that in most cases these officials report to their component management; USDA's CIO then works with these individuals through the department's Information Resources Management Council. The council has responsibility for planning, approving, and overseeing departmentwide IT projects. The bill would consolidate these agency CIO positions under the departmental CIO. This section requires that, not later than January 15 of each year, the Comptroller General shall submit to the Congress a report evaluating compliance by USDA's CIO and the department with this proposed legislation. The bill provides that the report should include a review and compilation of spending by the department on information resources necessary to assess compliance with the annual transfer of funds to the CIO and use of these funds, as well as the CIO's performance under this proposed legislation. It also provides that the report should include an evaluation of the department's success in creating a departmentwide information system and ensuring that all mission-critical systems are Year 2000 compliant. In addition, this section provides for the Comptroller General to include other recommendations and evaluations considered appropriate. We are prepared to assist the Subcommittee in its efforts to ensure USDA's compliance with any new legislative requirements. It is worth noting, however, that because USDA's Inspector General is responsible for auditing the department's annual financial statements, it may be more efficient to have that office review and compile spending data on information resources pertaining to the annual transfer and use of funds. Mr. Chairman, we support your effort and that of the Subcommittee and Mr. Latham to ensure strong and effective CIO leadership at USDA by providing for more accountability and responsibility over the substantial investments the department makes in information technology. We see the thrust of this bill as, for the most part, consistent with the goals of Clinger-Cohen and other legislation designed to strengthen executive leadership in information management. We testified last October on the importance of strong CIO leadership at federal agencies. At that time we said that various approaches exist as to how the CIO position can best be utilized to implement legislative requirements under Clinger-Cohen and other federal laws. These laws, along with guidance from the Office of Management and Budget and our best practices experience with leading organizations, define common tenets for the CIO position. What is important is that the approach be consistent with these tenets. Specifically, agencies should appoint a CIO with expertise and practical experience in technology position the CIO as a senior partner reporting directly to the agency head; ensure that the CIO's primary responsibilities are for information have the CIO serve as a bridge between top management, line management, and information management support professionals, working with them to ensure the effective acquisition and management of information resources needed to support agency programs and missions; task the CIO with developing strategies and specific plans for the hiring, training, and professional development of staff in order to build the agency's capability to develop and manage its information resources; and support the CIO position with an effective CIO organization and management framework for implementing agencywide information technology initiatives. Having an effective CIO with the institutional capacity and structure needed to implement the management practices embodied in the broad set of reforms set out in Clinger-Cohen and other legislation is crucial for improved planning and management of IT investments. Success at USDA will depend on how well the department implements such legislation, and how well the CIO exercises whatever authority she possesses to make positive change--and the degree to which this individual is held accountable for doing so. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions you or other members of the Subcommittee may have at this time. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO discussed the problems and challenges the Department of Agriculture (USDA) has faced in managing the more than $1 billion it spends annually on information technology (IT) investments, as well as recent IT reform legislation that established the Chief Information Officer (CIO) position in federal agencies. GAO noted that: (1) in fiscal year 1998 alone, USDA plans to spend about $1.2 billion on information technology and related information resources management (IRM) activities; (2) USDA has a long history of problems in managing its substantial investments in IT; (3) while many factors have contributed to these problems, a major cause was the lack of strong IRM leadership, accountability, and oversight of the acquisition and use of departmental IT investments; (4) consequently, over time, the department has invested hundreds of millions of dollars in hundreds of systems that are not interoperable with others in the agency and that actually inhibit the use and sharing of information; (5) after more than a decade of poor IT planning and program management by federal agencies, Congress enacted the Clinger-Cohen Act of 1996 which, in part, seeks to strengthen executive leadership in information management and institute sound capital investment decision-making to maximize the return on information systems investments; (6) other reform legislation includes the Paperwork Reduction Act of 1995, the Chief Financial Officers Act of 1990, and the 1993 Government Performance and Results Act; (7) together, Clinger-Cohen and these other laws provide a powerful framework under which federal agencies such as USDA have the best opportunity to improve their management and acquisition of IT; (8) a central element of Clinger-Cohen was the requirement that the head of each executive agency designate a CIO; (9) H.R. 3280 presents requirements to clarify and enhance the authorities of the department's CIO; (10) these requirements are discussed in five major sections; (11) the first addresses the CIO's relationship to the Secretary and the department's Executive Information Technology Investment Review Board; (12) the next three present requirements as they relate to developing and information technology architecture, providing funding for the CIO's office, and establishing control over IT staff across the department; (13) the last provision discusses an annual Comptroller General report on compliance; and (14) GAO sees the thrust of H.R. 3280 as, for the most part, consistent with the goals of Clinger-Cohen and other legislation designed to strengthen executive leadership in information management.
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NIH conducts and sponsors biomedical research through its institutes and centers (IC), each of which is charged with a specific mission. ICs' missions generally focus on a given disease; a particular organ; or a stage in development, such as childhood or old age. ICs accomplish their missions chiefly through intramural and extramural research. Intramural research entails government scientists working in the ICs' own laboratories and clinics, whereas extramural research is conducted at outside research institutions, primarily universities, by scientists who have been awarded extramural research grants from an IC through NIH's competitive process.$30 billion in fiscal year 2012 was used to support extramural research. Of this $25.2 billion in extramural research grant funding, NIH provided about $16.1 billion to universities. Extramural research grants reimburse universities for the direct costs of each research project covered by the grants and a portion of the indirect costs of maintaining their facilities for research use and covering the administrative expenses of the university. Direct costs can be specifically identified with or directly assigned to individual research projects and are relatively easy to define and measure. They include, for example, the researcher's salary, subawards, equipment, and travel. Indirect costs represent a university's general support expenses and cannot be specifically identified with individual research projects or institutional activities. They include, for example, building utilities, administrative staff salaries, and library operations. OMB Circular No. A-21 establishes the principles for determining the types of direct and indirect costs that are allowed to be claimed and the methods for allocating such costs to federally funded research at educational institutions, including the establishment and use of indirect cost rates. Indirect costs are divided into two main components, facilities costs and administrative costs. Facilities costs include operations and maintenance expenses, such as for utilities; allowances for depreciation and use of buildings and equipment; interest on debt associated with building and equipment; and library expenses, such as for the use of the library and library materials purchased for research use. general administration expenses, such as the costs associated with executive functions like financial management; departmental administration expenses, including clerical staff and supplies for academic departments; sponsored projects' administration expenses, which are the costs associated with the office responsible for administering projects and awards funded by external sources; and student administration and services expenses, such as the administration of the student health clinic. Because indirect costs cannot be specifically attributed to a particular research grant, they are charged via an indirect cost rate that serves as the mechanism for determining the proportion of indirect costs that may be charged to federally funded research awards. OMB Circular No. A-21 outlines the process for establishing an indirect cost rate for universities performing federally funded research. Each university develops a proposed indirect cost rate that is based on university cost data from prior years, which is subsequently negotiated with the federal government to arrive at a final indirect cost rate, in compliance with the principles of OMB Circular A-21. To calculate a university's indirect cost rate, a percentage of each indirect cost component is allocated to the university's research function on the basis of benefits received from that component by the research function. For example, a university can measure the square footage of floor space used for research and use this measure to allocate the amount of costs it claims for operating and using the space as a component in its indirect cost rate proposal. Each indirect cost component allocated to research is applied to a modified set of direct costs referred to as "modified total direct costs" (MTDC) to obtain an individual rate for each component. MTDC includes the salaries and wages of those conducting the research, fringe benefits (e.g., pensions), materials and supplies, travel, and the first $25,000 of each subaward. MTDC excludes costs such as equipment costs, capital expenditures, tuition remission, equipment or space rental costs, and the portion of each subaward in excess of $25,000. (See fig. 1.) Universities use a standard format, also known as the long form, for submitting their indirect cost rate proposals to their cognizant rate-setting agency. However, universities whose total direct costs on federal awards do not exceed $10 million in a fiscal year may use a simplified method for determining the indirect cost rate applicable to all federal awards. Whereas universities above the $10 million threshold must use an MTDC base, universities using the simplified method may use either salaries and wages as their base, or MTDC. As already noted, this report focuses on those universities that used the standard format for proposal submission. In February 2013, OMB issued proposed guidance that includes revisions to cost principles of OMB Circular No. A-21. The proposed guidance reflects input from the federal and nonfederal financial community, including the Interagency Council on Financial Assistance Reform. The proposed guidance would, among other things, allow more items to be directly charged rather than included as a component of the indirect cost rate. As of September 2013, OMB had not issued final guidance. From fiscal year 2002 to fiscal year 2012, NIH reimbursements to universities for indirect costs associated with NIH-funded extramural research increased at a slightly faster rate than those for direct costs, and during some portions of this period indirect cost growth increased notably faster than direct cost growth. In fiscal year 2012, the 50 universities with the largest research programs received over two thirds of total indirect cost reimbursement. Higher indirect cost rates tended to be associated with universities located in high-cost-of-living areas and privately owned universities. Reimbursements for indirect costs from fiscal year 2002 through fiscal year 2012 increased slightly faster than reimbursements for direct costs, but increased notably faster during some periods. Over this period, NIH reimbursements for indirect costs grew by about 28.1 percent, from $3.6 billion to $4.6 billion. Over the same period, NIH reimbursement for direct costs grew by about 27.0 percent, from $9 billion to $11.5 billion. However, because there were large differences between indirect and direct growth in some years, indirect cost reimbursements increased notably faster than direct cost reimbursements during some periods. For example, from fiscal year 2002 to 2003, the first year of this period, there was a large increase in direct costs that compensated for greater growth in indirect costs during other years. As a result, from fiscal year 2003 to 2012 indirect costs increased 16.9 percent, from about $3.9 billion to $4.6 billion, while direct costs increased 11.7 percent, from about $10.3 billion to $11.5 billion. Furthermore, in 6 of the 10 years, reimbursements for indirect costs increased relative to those for direct costs, by either increasing at a faster rate or declining at a slower rate. After fiscal year 2005, annual changes in reimbursements were generally small but consistent, with reimbursements for indirect costs increasing relative to direct costs in 5 of 7 years. (See fig. 2 for more details on the annual change in costs.) NIH officials noted that, historically, NIH's reimbursements for indirect costs have remained a stable percentage of NIH's total funding for all NIH awards overall. Our analysis specifically for university research, which accounted for almost two-thirds of NIH's funding for extramural research in fiscal year 2012, indicates that in 2003 about 27.7 percent of NIH reimbursement for university research was for indirect costs, and in 2012 this percentage increased slightly to 28.6 percent. This occurred while NIH's budget for extramural research conducted at universities--which needs to cover both the direct and the indirect costs of research--slowed in the last few years. For example, during the most recent 5 years (fiscal year 2008 to fiscal year 2012), NIH's total funding for extramural research conducted at universities increased about 5 percent, whereas it had increased about 21 percent in the 5 previous years (fiscal year 2002 to fiscal year 2007). In fiscal year 2012, almost 70 percent of NIH indirect cost reimbursement to universities was provided to about 10 percent of the universities (50 of a total of about 500) receiving NIH funding for extramural research.(See app. I for the indirect cost reimbursements for these top 50 universities.) These top 50 universities had the largest research programs, as defined by the largest amount of reimbursement for direct costs and a relatively large number of research grants. Indirect cost rates for 5 universities out of the top 50 were not available from DCA. adjustment.the highest indirect cost rates among the 50 universities receiving the highest amounts of indirect cost reimbursement in fiscal year 2012. Among the 10 universities in the table, those with the highest indirect cost rates were Mount Sinai Medical School and New York University School of Medicine; Johns Hopkins University and Yale University had the largest research programs as measured by the number of NIH grants awarded. Stakeholders--university officials, DCA officials, and others--whom we interviewed identified several key factors that may lead to increases in reimbursements for indirect costs provided to universities. Some factors are related to the facilities costs, and others are related to administrative costs. NIH has not assessed the potential impact of future increases in indirect costs on its research mission, including planning for how to deal with these potential increases. Some stakeholders underscored the importance to the research effort of providing funding for the costs of facilities. They explained that reimbursements for the facilities component of indirect costs--such as the amount of reimbursable square footage, operations and maintenance, building depreciation, and interest costs--help to support research innovation by providing funding for the development and maintenance of state-of-the-art research facilities. Some university officials we interviewed noted that these research facilities are necessary for conducting innovative biomedical research, such as research devoted to the role of genetic mutation for breast cancer that uses advanced lab space and equipment. They also noted that costs for these facilities have increased over time as biomedical research has become increasingly sophisticated. For example, a university's officials stated that from fiscal year 2002 to fiscal year 2009, the cost of its facilities to support research--including those used to support advancement in data and computing--has grown from about $88 million to about $145 million. DCA officials stated that the uncapped facilities component of the indirect cost rate provides universities few, if any, incentives for controlling these potentially increasing costs. For example, DCA officials noted that there is no limit on reimbursement for interest costs under the facilities component. DCA officials stated that while reimbursements for interest costs may allow universities to support needed renovations or construction of new facilities, the fact that these reimbursements are not capped may also encourage universities to borrow money to build new facilities, which could lead to the building of more new space than is necessary for research needs. Officials also noted that these interest costs are out of DCA's control and may vary. For example, at the time of our work, interest rates--which are used to determine interest costs-- were very low, but they could increase over time, which could increase costs for ongoing building projects or buildings that have already been completed, regardless of future building decisions by universities. Because of this factor, the indirect cost rate could be expected to increase, resulting in a potential increase in the amount of indirect cost reimbursements provided by NIH. In addition, some stakeholders noted that, at the time of our work, 65 of about 500 universities receiving reimbursement for indirect costs in fiscal year 2012 were eligible for a rate increase of 1.3 percent to account for the higher cost of utilities. DCA officials added that OMB's proposed revisions to Circular No. A-21 would allow all universities to receive some reimbursement for utility costs based on a revised formula. As a result, NIH reimbursements for indirect costs could be expected to increase as more universities would be eligible to include this cost in their indirect cost rates. Some stakeholders noted that while the cap on the reimbursement rate for administrative costs--26 percent--helps to control reimbursements for indirect costs, it does not account for the recent increases in administrative costs reportedly incurred by universities. For example, university officials explained that their administrative costs have increased in order to comply with recent changes in regulatory reporting requirements, such as those related to reporting conflicts of interest. Some university officials explained that they have hired additional full-time staff to review and manage various reporting requirements as well as invested in additional information technology (IT) to support new software related to regulatory requirements. Additionally, some stakeholders noted that administrative costs also have increased due to trends in the way biomedical research is conducted, such as an increase in collaboration between universities in research studies and an increased use of IT for biomedical research. For example, some university officials explained that many biomedical research projects now use advanced technology--such as high-sequencing technology or imaging--that requires greater investment in computing resources by the university. Additionally, one university's officials noted that the advancements in IT provide support for interconnectivity, complex data security and data privacy requirements, and requirements for long-term storage and maintenance of electronic data. According to university officials at another university, in some instances they may charge some advanced computing equipment as a direct cost because it is specifically related to research; however, in most instances these computing resources are included in the administrative component of the indirect cost rate. According to DCA officials, if costs that are part of the capped administrative component increase significantly, indirect cost reimbursements overall could increase if universities begin to categorize some of the costs as part of the uncapped facilities component. Specifically, DCA officials explained that currently there is a provision in Circular No. A-21 that advises certain limits on changing the categorization of certain costs--such as those costs incurred by a university that are associated with increased use of information technology--from the administrative to the facilities component. However, they noted that the proposed revisions to Circular No. A-21 did not include such a provision. DCA officials stated that they may be limited in their ability to control increases in reimbursements associated with these categorization changes if this provision is removed and if university administrative costs continue to increase. NIH has not assessed the potential impact of future increases in indirect costs on its research mission, including planning for how to deal with potential future increases of these costs. As we previously reported, NIH has a program to periodically identify, analyze, and manage significant risks to its objectives, strategy and mission. NIH officials noted that they assess risks related to all extramural research funding as part of this program, and that this assessment does not specifically focus on indirect costs for universities. According to NIH officials, NIH has not conducted such planning because overall indirect costs have remained around 27 percent of NIH's total budget for all extramural research, and, in their opinion, future cost increases are unlikely to change this figure significantly in spite of factors that may contribute to increased indirect costs. Therefore, NIH officials stated that they do not anticipate the need to consider adjusting reimbursements for indirect costs for most grants below the amount determined by a university's negotiated indirect cost rate, which would require a change in law or regulation. However, NIH officials told us that should indirect costs rise significantly, they may need to reduce the number of research projects, which have already been reduced in part because of budget limitations and increases in the direct costs of research. NIH noted that the reduced budget in fiscal year 2013 resulted in 700 fewer individual research grants. Even at current levels, indirect costs constitute a significant portion of NIH's budget at about 20 percent. Therefore, over time, increases in indirect costs could cause further reductions in the number of research projects that NIH could support. NIH has indicated that NIH funding for both the indirect and the direct costs of university research provides critical support for biomedical research, covering the indirect costs of operating a research institution and the direct costs of specific research projects. NIH faces uncertainty related to the potential impact of increasing indirect costs on its funding of future research. Among research grants to universities specifically, NIH's indirect costs are increasing at a faster rate than direct costs. While changes in recent years have generally been small, annual changes in reimbursement for indirect costs have consistently increased relative to those for direct costs, by either increasing at a faster rate or declining at a slower rate. Further, this has occurred while the growth in NIH's budget for extramural research has slowed in recent years, putting pressure on NIH to find ways to continue to maximize its support of innovative biomedical research. Several factors are expected to contribute to future growth in indirect costs for NIH. These factors include that NIH's current system of reimbursing indirect costs--through indirect cost rates for each university calculated according to OMB guidance--provides few, if any, incentives for universities to control facilities costs. At the same time, the cost of university facilities to support biomedical research is increasing over time, as cutting-edge research requires more advanced labs and equipment. NIH has not made plans for options that might address these trends--in part because it views increases in indirect costs as having been modest. However, indirect costs already represent one-fifth of NIH's overall budget and about one-quarter of NIH's budget for extramural research. NIH has experienced small but consistent increases in indirect costs, and factors suggest that indirect costs could increase more quickly over time in the future. If so, such increases could have an effect over the long term on the number and size of research grants that could be funded, thus posing a risk to scientific discoveries and knowledge. To help address the uncertainty NIH faces related to the potential impact of increasing indirect costs on its funding of future research, we recommend that the Director of NIH assess the impact of growth in indirect costs on its research mission, including, as necessary, planning for how to deal with potential future increases in indirect costs that could limit the amount of funding available for total research, including the direct costs of research projects. We provided a draft of this report to HHS, and HHS provided written comments (reprinted in app. II). HHS also provided technical comments, which we incorporated as appropriate. HHS indicated that it agreed with our recommendation and that NIH had already taken steps to implement it, but HHS disagreed with a number of our conclusions. Specifically, HHS stated that NIH assesses the impact of indirect costs through its annual budget projections, through planning and congressional justifications, and as part of its risk management program. The draft report acknowledged NIH's efforts in assessing risk facing its extramural research program. However, NIH has not indicated how these actions would address our recommendation by assessing the potential ongoing impact of indirect costs for universities on its funding of future research. Moreover, NIH has not developed a plan for how to deal with potential continuing increases in indirect costs for universities. Instead, HHS indicated that, in past years, increases in indirect costs have been proportionally consistent with increases in direct costs, and therefore, there is not an immediate risk to NIH's research portfolio. While the draft report acknowledged that indirect costs have remained a stable percentage of NIH's overall research costs, it also noted that, for universities--which received almost two-thirds of NIH's funding for extramural research--indirect costs increased notably faster than direct costs during some recent periods. Further, as indicated in the draft report, there are multiple indications that, for universities, indirect costs are likely to increase at a faster rate in the future, so past stability may not be sustained in future years. We remain convinced that increases in indirect costs could have an effect over the long term on the number and size of research grants that could be funded, thus posing a risk to scientific discoveries and knowledge. In addition, in its comments, HHS included an analysis of indirect costs over the past decade for its overall extramural research portfolio. This analysis was different from our analysis because it focused generally on extramural research rather than specifically on university research. As noted in the draft report, our research questions were focused specifically on universities. Moreover, as institutions of higher education, universities generally have a broader focus on education than research institutions. Further, as noted in the draft report, universities are subject to OMB Circular No. A-21 and their administrative costs are capped, unlike other research institutions. Because of the unique issues that universities face, our analysis of indirect costs excluded nonuniversity research institutions to avoid the possibility of data from these other NIH grantees masking trends for universities, which are the recipients of the largest portion of NIH's grant funding. Finally, HHS stated that we did not provide an opportunity for the department to provide input on our review of NIH's assessment of the potential impact of indirect costs on NIH's research mission. We disagree with this characterization. NIH provided input on this issue to us during three separate meetings. For all three meetings, we provided discussion questions in advance. During one of the meetings, we and NIH officials discussed the key facts that were to be included in the draft report, including this issue. In addition, we offered NIH officials the opportunity to provide additional information in writing, as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of the Department of Health and Human Services, the Director of the National Institutes of Health, and other interested parties. In addition, the report will be available at no charge on GAO's 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 Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. Other major contributors to this report are listed in appendix III. Weill Medical College of Cornell University Indiana University--Purdue University at Indianapolis n/a = not available: this institution does not negotiate its indirect cost rate with DCA. In addition to the contact named above, Will Simerl, Assistant Director; N. Rotimi Adebonojo; George Bogart; Amy Leone; and Roseanne Price made key contributions to this report.
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NIH reimburses universities for both the direct and indirect costs of conducting research. Indirect costs cover general facility and administrative expenses, and are paid as a percentage, or rate, of certain direct costs of awarded grants. GAO was asked to look at the indirect costs of NIH-funded research. This report (1) identifies changes in reimbursements by NIH to universities for indirect costs of NIH-funded research; and (2) examines key factors affecting NIH reimbursement to universities for indirect costs and what assessment NIH has done to address any impact of these costs on NIH's research mission. GAO analyzed NIH data and interviewed officials at NIH, six universities, and other stakeholders. Universities were selected based on the number of grants and amount of funding received from NIH and their negotiated indirect cost rates. From fiscal year 2002 to fiscal year 2012, indirect cost reimbursements from the National Institutes of Health (NIH) to universities increased slightly faster than those for direct costs, but increased notably faster during some periods. Specifically, from fiscal years 2002 to 2012, indirect costs increased 28.1 percent while direct costs increased 27.0 percent. However, for the fiscal years 2003 to 2012, indirect costs increased notably faster than direct costs, at 16.9 percent and 11.7 percent, respectively. In more recent years, annual changes were generally small but consistent. This increase occurred during a time when growth in NIH's budget for extramural research slowed to 5 percent from fiscal years 2008 to 2012, compared to about 21 percent from fiscal years 2002 to 2007. In fiscal year 2012, about 10 percent of the universities (50 out of about 500) receiving NIH extramural research funding received almost 70 percent of all indirect cost reimbursement provided to universities. Higher indirect cost rates tended to be associated with universities located in high-cost-of-living areas and privately owned universities. Stakeholders--university officials, Department of Health and Human Services (HHS) officials, and others--whom GAO interviewed identified several key factors that may lead to increases in reimbursements for indirect costs provided to universities. Some stakeholders reported that reimbursements for one part of indirect costs--the facilities component--help to support research innovation by providing funding for the development and maintenance of state-of-the-art research facilities. However, officials in HHS's Division of Cost Allocation, which is responsible for determining indirect cost rates, stated that the uncapped facilities component of the indirect cost rate provides universities with few, if any, incentives for controlling these costs. For example, these officials noted that there is no limit on reimbursement for interest costs under the facilities component. This may encourage universities to borrow money to build new facilities, which could lead to building more new space than is necessary for research. Some stakeholders also noted that a 26 percent cap on the reimbursement rate for administrative costs--a second component of indirect costs--helps to control reimbursements for those costs; however, they reported it does not account for the recent increases in costs, such as those for regulatory reporting requirements and changing research needs that require advanced medical and information technologies that are considered administrative. The combination of these trends and factors results in indirect costs growing at a faster rate than direct costs. Indirect costs are one-fifth of NIH's total budget--or $6.2 billion in fiscal year 2012--but NIH officials reported that they have not taken steps to assess the significance of future indirect cost growth for universities, or planned for options that might address these trends or factors--in part because they view increases in indirect costs as having been modest. However, factors suggest that indirect costs could increase more quickly in the future. Over the long term, they could lead to a reduction in the number of research grants that could be funded, thus potentially affecting scientific discoveries and knowledge. GAO recommends that NIH assess the impact of growth in indirect costs on its mission, including, as necessary, planning for how to deal with potential future increases in indirect costs that could limit the amount of funding available for total research. HHS agreed with GAO's recommendation but disagreed with a number of GAO's conclusions, stating that risk to NIH's mission is low because indirect costs remain a stable percentage of NIH's budget. Due to indications that indirect costs for universities may increase in the future, GAO believes that continually assessing and planning for the impact of growth over the long term is important.
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DOD's portfolio of major acquisition programs has grown at a pace that far exceeds available resources. From 1992 to 2007, the estimated acquisition costs needed to complete the major acquisition programs in DOD's portfolio increased almost 120 percent, while the funding provided for these programs only increased 57 percent, creating a fiscal bow wave that may be unsustainable (see fig. 1). The total acquisition cost of DOD's 2007 portfolio of major programs under development or in production has grown by nearly $300 billion over initial estimates. While DOD is committing substantially more investment dollars to develop and procure new weapon systems, our analysis shows that the 2007 portfolio is experiencing greater cost growth and schedule delays than the fiscal years 2000 and 2005 portfolios (see table 1). For example, total acquisition costs for programs in DOD's fiscal year 2007 portfolio have increased 26 percent from first estimates--compared to a 6-percent increase for programs in its fiscal year 2000 portfolio. We found a similar trend for total RDT&E costs and unit costs. Continued cost growth results in less funding being available for other DOD priorities and programs, while continued failure to deliver weapon systems on time delays providing critical capabilities to the warfighter. Put simply, cost growth reduces DOD's buying power. As program costs increase, DOD must request more funding to cover the overruns, make trade-offs with existing programs, delay the start of new programs, or take funds from other accounts. Delays in providing capabilities to the warfighter result in the need to operate costly legacy systems longer than expected, find alternatives to fill capability gaps, or go without the capability. The warfighter's urgent need for the new weapon system is often cited when the case is first made for developing and producing the system. However, DOD has already missed fielding dates for many programs and many others are behind schedule. On average, the current portfolio of programs has experienced a 21-month delay in delivering initial operational capability to the warfighter, and 14 percent are more than 4 years late. Poor program execution contributes to and flows from shortfalls in DOD's requirements and resource allocation processes. Over the past several years our work has highlighted a number of underlying systemic causes for cost growth and schedule delays both at the strategic and at the program level. At the strategic level, DOD's processes for identifying warfighter needs, allocating resources, and developing and procuring weapon systems--which together define DOD's overall weapon system investment strategy--are fragmented and broken. At the program level, the military services propose and DOD approves programs without adequate knowledge about requirements and the resources needed to successfully execute the program within cost, schedule, and performance targets. In addition, DOD officials are rarely held accountable for poor decisions or poor program outcomes. DOD largely continues to define war fighting needs and make investment decisions on a service-by-service basis, and assess these requirements and their funding implications under separate decision-making processes. While DOD's requirements process provides a framework for reviewing and validating needs, it does not adequately prioritize those needs and is not agile enough to meet changing warfighter demands. A senior Army acquisition official recently testified before Congress that because the process can take more than a year, it is not suitable for meeting urgent needs related to ongoing operations; and a recent study by the Center for Strategic and International Studies indicates that the process is unwieldy and officials are now trying to find ways to work around it. Ultimately, the process produces more demand for new programs than available resources can support. This imbalance promotes an unhealthy competition for funds that encourages programs to pursue overly ambitious capabilities, develop unrealistically low cost estimates and optimistic schedules, and to suppress bad news. Similarly, DOD's funding process does not produce an accurate picture of the department's future resource needs for individual programs--in large part because it allows programs to go forward with unreliable cost estimates and lengthy development cycles--not a sound basis for allocating resources and ensuring program stability. Invariably, DOD and the Congress end up continually shifting funds to and from programs--undermining well-performing programs to pay for poorly performing ones. At the program level, the key cause of poor outcomes is the consistent lack of disciplined analysis that would provide an understanding of what it would take to field a weapon system before system development. Our body of work in best practices has found that an executable business case is one that provides demonstrated evidence that (1) the identified needs are real and necessary and that they can best be met with the chosen concept and (2) the chosen concept can be developed and produced within existing resources--including technologies, funding, time, and management capacity. Although DOD has taken steps to revise its acquisition policies and guidance to reflect the benefits of a knowledge- based approach, we have found no evidence of widespread adoption of such an approach in the department. Our most recent assessment of major weapon systems found that the vast majority of programs began development with unexecutable business cases, and did not attain, or plan to achieve, adequate levels of knowledge before reaching design review and production start--the two key junctures in the process following development start (see figure 2). Knowledge gaps are largely the result of a lack of disciplined systems engineering analysis prior to beginning system development. Systems engineering translates customer needs into specific product requirements for which requisite technological, software, engineering, and production capabilities can be identified through requirements analysis, design, and testing. Early systems engineering provides knowledge that enables a developer to identify and resolve gaps before product development begins. Because the government often does not perform the proper up-front analysis to determine whether its needs can be met, significant contract cost increases can occur as the scope of the requirements change or become better understood by the government and contractor. Not only does DOD not typically conduct disciplined systems engineering prior to beginning system development, it has allowed new requirements to be added well into the acquisition cycle. The acquisition environment encourages launching ambitious product developments that embody more technical unknowns and less knowledge about the performance and production risks they entail. A new weapon system is not likely to be approved unless it promises the best capability and appears affordable within forecasted available funding levels. We have recently reported on the negative impact that poor systems engineering practices have had on several programs such as the Global Hawk Unmanned Aircraft System, F-22A, Expeditionary Fighting Vehicle, Joint Air-to-Surface Standoff Missile and others. With high levels of uncertainty about technologies, design, and requirements, program cost estimates and related funding needs are often understated, effectively setting programs up for failure. We recently assessed the service and independent cost estimates for 20 major weapon system programs and found that the independent estimate was higher in nearly every case, but the difference between the estimates was typically not significant. We also found that both estimates were too low in most cases, and the knowledge needed to develop realistic cost estimates was often lacking. For example, program Cost Analysis Requirements Description documents--used to build the program cost estimate--are not typically based on demonstrated knowledge and therefore provide a shaky foundation for estimating costs. Cost estimates have proven to be off by billions of dollars in some of the programs we reviewed. For example, the initial Cost Analysis Improvement Group estimate for the Expeditionary Fighting Vehicle program was about $1.4 billion compared to a service estimate of about $1.1 billion, but development costs for the system are now expected to be close to $3.6 billion. Estimates this far off the mark do not provide the necessary foundation for sufficient funding commitments and realistic long-term planning. Constraining development cycles would make it easier to more accurately estimate costs, and as a result, predict the future funding needs and effectively allocate resources. We have consistently emphasized the need for DOD's weapon programs to establish shorter development cycles. DOD's conventional acquisition process often requires as many as 10 or 15 years to get from program start to production. Such lengthy cycle times promote program funding instability--especially when considering DOD's tendency to change requirements and funding as well as frequent changes in leadership. Constraining cycle times to 5 or 6 years would force programs to conduct more detailed systems engineering analyses, lend itself to fully funding programs to completion, and thereby increase the likelihood that their requirements can be met within established time frames and available resources. An assessment of DOD's acquisition system commissioned by the Deputy Secretary of Defense in 2006 similarly found that programs should be time-constrained to reduce pressure on investment accounts and increase funding stability for all programs. When DOD consistently allows unsound, unexecutable programs to pass through the requirements, funding, and acquisition processes, accountability suffers. Program managers cannot be held accountable when the programs they are handed already have a low probability of success. In addition, program managers are not empowered to make go or no-go decisions, have little control over funding, cannot veto new requirements, and have little authority over staffing. At the same time, program managers frequently change during a program's development. Our analysis indicates that the average tenure for managers on 39 major acquisition programs started since March 2001 was about 17 months--less than half the length of the average system development cycle time of 37 months. Such frequent turnover makes it difficult to hold program managers accountable for the business cases that they are entrusted to manage and deliver. The government's control over and accountability for decisions is complicated by DOD's growing reliance on technical, business, and procurement expertise supplied by contractors. This reliance can reach a point where the foundation on which decisions are based may be largely crafted by individuals who are not employed by the government, who are not bound by the same rules governing their conduct, and who are not required to disclose whether they have financial or other personal interests that conflict with the responsibilities they have performing contract tasks for DOD. Further, in systems development, DOD typically uses cost-reimbursement contracts, in which DOD generally pays the allowable costs incurred for the contractor's best efforts, to the extent provided by the contract. This may contribute to an acquisition environment that is not conducive for incentivizing contractors to follow best practices and keep cost and schedule in check. Recognizing the need for more discipline and accountability in the acquisition process, Congress recently enacted legislation that, if followed, could result in a better chance to spend resources wisely. Likewise, DOD has recently begun to develop several initiatives, based in part on congressional direction and GAO recommendations that, if implemented properly, could also provide a foundation for establishing a well balanced investment strategy and sound, knowledge-based business cases for individual acquisition programs. Over the past 3 years, Congress has enacted legislation that requires DOD to take certain actions which, if followed, could instill more discipline into the front-end of the acquisition process when key knowledge is gained and ultimately improve acquisition outcomes. For example, 2006 and 2008 legislation require decision-makers to certify that specific levels of knowledge have been demonstrated at key decision points early in the acquisition process before programs can enter the technology development phase or the system development phase. The 2006 legislation also requires programs to use their original baseline estimates--and not only their most recent estimates--when reporting unit cost threshold breaches. It also requires an additional assessment of the program if certain thresholds are reached. Other key legislation requires DOD to report on the department's strategies for balancing the allocation of funds and other resources among major defense acquisition programs, and to identify strategies for enhancing the role of program managers in carrying out acquisition programs. (For more detailed description of recent legislation, see appendix I). DOD has initiated actions aimed at improving investment decisions and weapon system acquisition outcomes, based in part on congressional direction and GAO recommendations. Each of the initiatives is designed to enable more informed decisions by key department leaders well ahead of a program's start, decisions that provide a closer match between each program's requirements and the department's resources. For example: DOD is experimenting with a new concept decision review, different acquisition approaches according to expected fielding times, and panels to review weapon system configuration changes that could adversely affect program cost and schedule. DOD is also testing portfolio management approaches in selected capability areas to facilitate more strategic choices about how to allocate resources across programs and also testing the use of capital budgeting as a potential means to stabilize program funding. In September 2007, the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics issued a policy memorandum to ensure weapons acquisition programs were able to demonstrate key knowledge elements that could inform future development and budget decisions. This policy directed pending and future programs to include acquisition strategies and funding that provide for contractors to develop technically mature prototypes prior to initiating system development, with the hope of reducing technical risk, validating designs and cost estimates, evaluating manufacturing processes, and refining requirements. DOD also plans to implement new practices that reflect past GAO recommendations intended to provide program managers more incentives, support, and stability. The department acknowledges that any actions taken to improve accountability must be based on a foundation whereby program managers can launch and manage programs toward greater performance, rather than focusing on maintaining support and funding for individual programs. DOD acquisition leaders have told us that any improvements to program managers' performance hinge on the success of these departmental initiatives. In addition, DOD has taken actions to strengthen the link between award and incentive fees with desired program outcomes, which has the potential to increase the accountability of DOD programs for fees paid and of contractors for results achieved. If adopted and implemented properly these actions could provide a foundation for establishing sound, knowledge-based business cases for individual acquisition programs, and the means for executing those programs within established cost, schedule, and performance goals. DOD understands what it needs to do at the strategic and at the program level to improve acquisition outcomes. The strategic vision of the current Under Secretary of Defense for Acquisition, Technology and Logistics acknowledges the need to create a high-performing, boundary-less organization--one that seeks out new ideas and new ways of doing business and is prepared to question requirements and traditional processes. Past efforts have had similar goals, yet we continue to find all too often that DOD's investment decisions are service- and program- centric and that the military services overpromise capabilities and underestimate costs to capture the funding needed to start and sustain development programs. This acquisition environment has been characterized in many different ways. For example, some have described it as a "conspiracy of hope," in which industry is encouraged to propose unrealistic cost estimates, optimistic performance, and understated technical risks during the proposal process and DOD is encouraged to accept these proposals as the foundation for new programs. Either way, it is clear that DOD's implied definition of success is to attract funds for new programs and to keep funds for ongoing programs, no matter what the impact. DOD and the military services cannot continue to view success through this prism. Adding pressure to this environment are changes that have occurred within the defense supplier base. In 2006, a DOD- commissioned study found that the number of fully competent prime contractors competing for programs had been reduced from more than 20 in 1985 to only 6. This limits DOD's ability to maximize competition to reduce costs and encourage innovation. More legislation can be enacted and policies can be written, but until DOD begins making better choices that reflect joint capability needs and matches requirements with resources, the acquisition environment will continue to produce poor outcomes. It should not be necessary to take extraordinary steps to ensure needed capabilities are delivered to the warfighter on time and within costs. Executable programs should be the natural outgrowth of a disciplined, knowledge-based process. While DOD's current policy supports a knowledge-based, evolutionary approach to acquiring new weapons, in practice decisions made on individual programs often sacrifice knowledge and realism in favor of revolutionary solutions. Meaningful and lasting reform will not be achieved until DOD changes the acquisition environment and the incentives that drive the behavior of DOD decision-makers, the military services, program managers, and the defense industry. Finally, no real reform can be achieved without a true partnership among all these players and the Congress. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions you may have at this time. For further information about this statement, please contact Katherine V. Schinasi 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 testimony. Individuals who made key contributions to this statement include Michael J. Sullivan, Director; Ronald E. Schwenn, Assistant Director; Megan Hill; Travis J. Masters; Karen Sloan; and Alyssa B. Weir. 10 U.S.C. SS 2366a (as amended) - Milestone B Certification Before a major defense program can receive approval to start system development, the Milestone Decision Authority (MDA) must certify that, for example-- the program is affordable when considering DOD's ability to accomplish the program's mission using alternative systems and the per unit and total acquisition costs in the context of the Future Year Defense Plan; reasonable cost and schedule estimates have been developed for system development and appropriate market research has been conducted prior to technology development to reduce duplication of existing technology and products; and the technology in the program has been demonstrated in a relevant environment. MDA may waive one or more requirements if the MDA determines that without a waiver, DOD would be unable to meet critical national security objectives. 10 U.S.C. SS 2433 (as amended) - Unit Cost Reports Amended reporting and certification requirements for major defense programs that exceed baseline costs, by: creating two types of growth thresholds--"significant cost growth" and "critical cost growth"; basing new thresholds on the percentage increases in both the original and current baseline estimate incorporating these thresholds into existing unit cost reporting requirements; and requiring that in the event of a breach of the critical cost growth threshold, the Secretary of Defense, in coordination with the Joint Requirements Oversight Council, to (1) assess the reasons for the cost growth, the projected cost to either complete the program with current or reasonably modified requirements, and the rough order of magnitude costs for a reasonable alternative system or capability and (2) certify that the program is essential to national security; no less costly, equally capable alternatives exist; new cost estimates are reasonable; and an adequate management structure is in place to control costs. Program Manager Empowerment and Accountability Required the Secretary of Defense to develop a strategy for enhancing the role of DOD program managers in developing and carrying out defense acquisition programs that addressed matters such as: improved career paths and opportunities; incentives for recruitment and retention of highly qualified individuals; improved resources and support; enhanced monetary and non-monetary awards for successful accomplishment of program objectives; Required that DOD guidance for major defense programs be revised to address program manager qualifications, resources, responsibilities, tenure and accountability. Guidance for taking programs from development to production was to address matters such as: the need for performance agreements between program managers and MDAs that set forth expected parameters for cost, schedule and performance and include commitments by both parties to ensure parameters are met and the extent to which a program manager should continue in the position without interruption until the delivery of the first production units. Investment Strategy for Major Defense Acquisition Programs Required the Secretary of Defense to submit to the congressional defense committees a report on DOD's strategies for balancing the allocation of funds and other resources among major defense acquisition programs. The report was to address topics such as DOD's ability to: establish priorities among needed capabilities and assess resources needed to achieve such balance costs, schedule and requirements of major defense programs to ensure the most efficient use of resources. The report also was to address the role of a Tri-Chair Committee comprised of the Under Secretary of Defense for Acquisition, Technology, and Logistics; the Vice Chairman of the Joint Chiefs of Staff; and the director of Program Analysis and Evaluation, among others; in the resource allocation process. 10 U.S.C. SS 2366b Milestone A Certification Before a major defense program can receive approval to begin technology development, the MDA must, after consulting with the Joint Requirements Oversight Council (JROC) on matters related to program requirements and military needs, certify that, for example: the system fulfills an approved initial capabilities document; the system is necessary and appropriate if it duplicates a capability already provided by an existing system; and the cost estimate for the system has been submitted and the level of resources required to develop and procure the system is consistent with the priority level assigned by the JROC. If a milestone A certified major defense program exceeds the cost estimate for the system submitted at the time of certification by at least 25 percent prior to milestone B approval, the MDA and JROC shall determine whether the level of resources required to develop and procure the system remains consistent with the priority level assigned. The Secretary of Defense was also asked to review guidance and take steps to ensure that DOD does not initiate a technology development program for a major weapon system without milestone A approval. Defense Acquisitions: Assessments of Selected Weapon Programs. GAO-08-467SP. Washington, D.C.: March 31, 2008. Best Practices: Increased Focus on Requirements and Oversight Needed to Improve DOD's Acquisition Environment and Weapon System Quality. GAO-08-294. Washington, D.C.: Feb. 1, 2008. Cost Assessment Guide: Best Practices for Estimating and Managing Program Costs. GAO-07-1134SP, Washington, D.C.: July 2007. Defense Acquisitions: Assessments of Selected Weapon Programs. GAO- 07-406SP. Washington, D.C.: March 30, 2007. Best Practices: An Integrated Portfolio Management Approach to Weapon System Investments Could Improve DOD's Acquisition Outcomes. GAO-07-388, Washington, D.C.: March 30, 2007. Best Practices: Stronger Practices Needed to Improve DOD Technology Transition Processes. GAO-06-883. Washington, D.C.: September 14, 2006. Best Practices: Better Support of Weapon System Program Managers Needed to Improve Outcomes. GAO-06-110. Washington, D.C.: November 1, 2005. Defense Acquisitions: Major Weapon Systems Continue to Experience Cost and Schedule Problems under DOD's Revised Policy. GAO-06-368. Washington, D.C.: April 13, 2006. DOD Acquisition Outcomes: A Case for Change. GAO-06-257T. Washington, D.C.: November 15, 2005. Defense Acquisitions: Stronger Management Practices Are Needed to Improve DOD's Software-Intensive Weapon Acquisitions. GAO-04-393. Washington, D.C.: March 1, 2004. Best Practices: Setting Requirements Differently Could Reduce Weapon Systems' Total Ownership Costs. GAO-03-57. Washington, D.C.: February 11, 2003. Defense Acquisitions: Factors Affecting Outcomes of Advanced Concept Technology Demonstration. GAO-03-52. Washington, D.C.: December 2, 2002. Best Practices: Capturing Design and Manufacturing Knowledge Early Improves Acquisition Outcomes. GAO-02-701. Washington, D.C.: July 15, 2002. Defense Acquisitions: DOD Faces Challenges in Implementing Best Practices. GAO-02-469T. Washington, D.C.: February 27, 2002. Best Practices: Better Matching of Needs and Resources Will Lead to Better Weapon System Outcomes. GAO-01-288. Washington, D.C.: March 8, 2001. Best Practices: A More Constructive Test Approach Is Key to Better Weapon System Outcomes. GAO/NSIAD-00-199. Washington, D.C.: July 31, 2000. Defense Acquisition: Employing Best Practices Can Shape Better Weapon System Decisions. GAO/T-NSIAD-00-137. Washington, D.C.: April 26, 2000. Best Practices: DOD Training Can Do More to Help Weapon System Programs Implement Best Practices. GAO/NSIAD-99-206. Washington, D.C.: August 16, 1999. Best Practices: Better Management of Technology Development Can Improve Weapon System Outcomes. GAO/NSIAD-99-162. Washington, D.C.: July 30, 1999. Defense Acquisitions: Best Commercial Practices Can Improve Program Outcomes. GAO/T-NSIAD-99-116. Washington, D.C.: March 17, 1999. Defense Acquisitions: Improved Program Outcomes Are Possible. GAO/T- NSIAD-98-123. Washington, D.C.: March 17, 1998. Best Practices: Successful Application to Weapon Acquisition Requires Changes in DOD's Environment. GAO/NSIAD-98-56. Washington, D.C.: February 24, 1998. Best Practices: Commercial Quality Assurance Practices Offer Improvements for DOD. GAO/NSIAD-96-162. Washington, D.C.: August 26, 1996. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Since 1990, GAO has designated the Department of Defense's (DOD) management of major weapon system acquisitions a high risk area. DOD has taken some action to improve acquisition outcomes, but its weapon programs continue to take longer, cost more, and deliver fewer capabilities than originally planned. These persistent problems--coupled with current operational demands--have impelled DOD to work outside of its traditional acquisition process to acquire equipment that meet urgent warfighter needs. Poor outcomes in DOD's weapon system programs reverberate across the entire federal government. Over the next 5 years, DOD plans to invest about $900 billion to develop and procure weapon systems--the highest level of investment in two decades. Every dollar wasted on acquiring weapon systems is less money available for other priorities. This testimony describes DOD's current weapon system investment portfolio, the problems that contribute to cost and schedule increases, and the potential impacts of recent legislative initiatives and DOD actions aimed at improving outcomes. It also provides some observations about what is needed for DOD to achieve lasting reform. The testimony is drawn from GAO's body of work on DOD's acquisition, requirements, and funding processes, as well as its most recent annual assessment of selected DOD weapon programs. DOD's portfolio of weapon system programs has grown at a pace that far exceeds available resources. From 1992 to 2007, the estimated acquisition costs remaining for major weapons programs increased almost 120 percent, while the annual funding provided for these programs only increased 57 percent. Current programs are experiencing, on average, a 21-month delay in delivering initial capabilities to the warfighter--often forcing DOD to spend additional funds on maintaining legacy systems. Systemic problems both at the strategic and at the program level underlie cost growth and schedule delays. At the strategic level, DOD's processes for identifying warfighter needs, allocating resources, and developing and procuring weapon systems--which together define DOD's overall weapon system investment strategy--are fragmented and broken. At the program level, weapon system programs are initiated without sufficient knowledge about system requirements, technology, and design maturity. Lacking such knowledge, managers rely on assumptions that are consistently too optimistic, exposing programs to significant and unnecessary risks and ultimately cost growth and schedule delays. At the same time, frequent turnover of program managers and an increased reliance on contractors increases the government's risk of losing accountability. Recognizing the need for more discipline and accountability in the acquisition process, Congress recently enacted legislation part of which requires decision-makers to certify that programs meet specific criteria at key decision points early in the acquisition process. Likewise, DOD has recently begun to develop several initiatives that are based in part on congressional direction and GAO recommendations. If adopted and implemented properly, these measures could provide a foundation for establishing a well balanced investment strategy, sound business cases for major weapon system acquisition programs, and a better chance to spend resources wisely. While legislation and policy revisions can help guide change, DOD must begin making better choices that reflect joint capability needs and match requirements with resources or the department will continue to experience poor acquisition outcomes. DOD investment decisions continue to be dictated by the services who propose programs that overpromise capabilities and underestimate costs to capture the funding needed to start and sustain development programs. The transitory nature of leadership further undermines successful reform. To better ensure warfighter capabilities are delivered when needed and as promised, incentives must encourage a disciplined, knowledge-based approach, and a true partnership with shared goals must be developed among the department, the military services, the Congress, and the defense industry.
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Mr. Chairman and Members of the Subcommittee: We are pleased to be here today to discuss the progress being made in downsizing the federal workforce and agencies' use of buyouts. As agreed with your office, our statement includes information on the results to date of federal downsizing efforts, whether agencies' use of buyouts reflected the administration's workforce restructuring goals as articulated by the National Performance Review (NPR), the demographic results of the buyouts, the extent to which we estimate that the statutorily mandated workforce reduction goals could be met through attrition, and the cost and savings implications of buyouts versus reductions-in-force (RIF). We obtained information on the results of federal downsizing activities by analyzing workforce data contained in the Office of Personnel Management's (OPM) Central Personnel Data File (CPDF) for fiscal year 1992 through November of fiscal year 1996, and by reviewing workforce trends presented in the President's fiscal year 1997 federal budget. Our analysis of whether agencies' use of buyouts reflected NPR's workforce restructuring goals was based on our review of applicable Office of Management and Budget (OMB) guidance to agencies and CPDF workforce data. Our examination of the demographic results of the buyouts was based on CPDF data as well. Our estimate of the extent to which mandated workforce reduction goals can be achieved by attrition was based on workforce trends data contained in the President's fiscal year 1997 federal budget. The costs and savings of buyouts and RIFs were analyzed using past studies by us, the Congressional Budget Office, and other federal agencies; contacts with agency officials; and demographic data from the CPDF. A more detailed analysis of the circumstances under which buyouts or RIFs offer greater potential savings is contained in the report we prepared for this Subcommittee that was released today. The Federal Workforce Restructuring Act of 1994 (P.L. 103-226) placed annual ceilings on executive branch full-time equivalent (FTE) positions from fiscal years 1994 through 1999. If implemented as intended, these ceilings will result in downsizing the federal workforce from 2.08 million FTE positions during fiscal year 1994 to 1.88 million FTE positions during fiscal year 1999. To help accomplish this downsizing, the act allowed non-Department of Defense (DOD) executive branch agencies to pay buyouts to employees who agreed to resign, retire, or take voluntary early retirement by March 31, 1995, unless extended by the head of the agency, but no later than March 31, 1997. DOD, though subject to the act's governmentwide FTE ceilings, has the authority, under earlier legislation, to offer buyouts through September 30, 1999. For both DOD and non-DOD agencies, the buyout payment was the lesser of $25,000 or an employee's severance pay entitlement. According to OPM data, as of September 30, 1995, more than 112,500 buyouts had been paid governmentwide. DOD was responsible for about 71 percent of these buyouts. The federal workforce is being reduced at a faster pace than was called for by the Workforce Restructuring Act. As shown in table 1, the act mandated a ceiling of 2,043,300 FTE positions for fiscal year 1995. This would have resulted in a reduction of 95,500 FTE positions (4.5 percent) from the actual fiscal year 1993 level. In reality, the actual fiscal year 1995 FTE level was 1,970,200, a reduction of 168,600 FTE positions (7.9 percent) from the fiscal year 1993 level. By the end of fiscal year 1997, the administration's budget calls for the federal workforce to be nearly 53,000 FTE positions below the ceiling called for by the act for that period. Although the workforce reductions occurred governmentwide, they were not evenly distributed among agencies. Indeed, most of the downsizing took place at DOD. As shown in table 2, DOD absorbed nearly three-quarters of the FTE reductions in fiscal year 1994 and over half of the governmentwide reductions in fiscal year 1995. In fiscal year 1997, DOD is expected to absorb all of the FTE reductions made that year while the non-DOD workforce is expected to increase by a net total of 0.2 percent, according to the President's fiscal year 1997 budget. Although federal employment levels have declined steadily in recent years, the workforce has been reduced with comparatively few RIFs, in part because of the buyouts. Had it not been for the buyout authority, it is likely that more agencies would have RIFed a larger number of employees to meet federal downsizing goals. From September 30, 1994, through March 1995, the on-board executive branch civilian workforce dropped from 2,164,727 employees to 2,032,440 employees, a reduction of 6 percent. CPDF data show that of the 132,287 reductions in on-board personnel that took place during this time period, 48 percent involved buyouts and 6 percent came from RIFs. The remaining 46 percent involved separations without buyouts or the basis for separation was not identified in the CPDF. The administration, through NPR, recommended that agencies direct their workforce reductions at specific "management control" positions that the administration said added little value to serving taxpayers. Such positions included those held by (1) managers and supervisors and (2) employees in headquarters, personnel, budget, procurement, and accounting occupations. By fiscal year 1999, the administration called on agencies to increase managers' and supervisors' span of control over other employees from a ratio of 1:7 to 1:15, and to cut management control positions by half. In our draft report on agencies' use of buyouts that we are preparing for this Subcommittee, we present preliminary data showing that, as a proportion of the workforce as a whole, the management control positions designated for reduction by NPR were barely reduced since the end of fiscal year 1992 (the year before buyouts began at DOD); in some agencies they have increased. As shown in table 3, although the percentage of supervisors at DOD agencies dipped from 12.7 percent of the workforce to 11.9 percent, (1 supervisor for every 6.9 employees to 1 supervisor for every 7.4 employees), all but one of the other designated management control positions increased somewhat. Acquisition positions showed no change. Non-DOD agencies came only slightly closer to meeting the NPR goals. The percentage of supervisors in the non-DOD workforce went from 12.5 percent to 11.6 percent (1 supervisor for every 7 employees to 1 supervisor for every 7.6 employees). Personnel and headquarters staff also decreased as a proportion of the non-DOD workforce, while the remaining categories showed no proportional reduction or slight increases. some employees delayed their separations so that they could receive a buyout. Although it was not an explicit goal of the buyout legislation, the buyouts appeared to have helped agencies downsize without adversely affecting workforce diversity. Indeed, of the nearly 83,000 employees who were paid buyouts from fiscal year 1993 through March 31, 1995, 52 percent were white males. Consequently, the percentage of women in the workforce increased from 43.4 percent at the end of fiscal year 1992 to 44.6 percent by March 31, 1995. Likewise, during that same time period, the percentage of minorities went from 27.9 percent to 28.9 percent of the workforce. As noted earlier, total governmentwide FTE levels to date are well below the annual ceilings mandated by the Workforce Restructuring Act. Our estimates indicate that the act's final fiscal year 1999 target for FTE ceilings could probably be met in total through an attrition rate as low as 1.5 percent and still allow for some limited hiring. As shown in figure 1, the administration's 1997 budget calls for reducing the federal workforce from 1.97 million FTE positions at the end of fiscal year 1995 to an estimated 1.91 million FTE positions by the end of fiscal year 1997. At that rate of reduction--about 1.5 percent per year--executive branch civilian agencies could meet the fiscal year 1999 FTE ceiling called for by the act while still hiring nearly 28,000 new full-time employees. Although federal attrition varies from year to year because of such factors as the state of the economy, the availability of separation incentives, and employees' personal considerations, federal attrition has typically run considerably higher than 1.5 percent. For example, in fiscal years 1982 through 1992 (the year before buyouts began at DOD), CPDF data shows that the average annual quit rate was about 8 percent. Federal employment levels (FY 1996 - 1997 are budgetary estimates). GAO estimates. Federal Workforce Restructuring Act ceiling. Experience has shown that some agencies may need to pare down their workforces more than others as budgets are reduced, programs are dropped, and/or missions are changed. In such circumstances, some agencies may not be able to meet workforce reduction goals through attrition, and other downsizing strategies, such as buyouts or RIFs, may be necessary. do so 3 years earlier. If it were to reduce at this pace, NASA has said that it would anticipate that RIFs would be necessary. Although this downsizing proposal may or may not be implemented, it illustrates the potential magnitude of workforce reductions being considered at some individual agencies. If an agency is unable to meet its workforce reduction goals through attrition alone, which downsizing strategy--buyouts or RIFs--generates greater savings? Our study of the costs and savings of buyouts versus RIFs concludes that, over a 5-year period, buyouts would generally result in more savings to taxpayers than RIFs. This is because buyouts usually result in the separation of employees with higher salaries and benefits than those who are separated through RIFs. Because of the rights of higher graded employees to "bump" or "retreat" to lower-graded positions during a RIF, employees separated through RIFs are frequently not those who were in the positions originally targeted for elimination. We found that buyouts could generate up to 50 percent more in net savings than RIFs over the 5-year period following separation. However, these results would change if bumping and retreating did not occur in a RIF and the separated employees were eligible for retirement. In these cases, RIFs could generate up to 12 percent more in savings over the 5-year period than buyouts. Finally, if the employees were separated without bumping and retreating and were not retirement-eligible, the cost of severance pay for the RIFed employees would result in buyouts generating up to 10 percent more in net savings than RIFs over the 5-year period. These net savings projections are based on the assumption that positions vacated by separating employees would not be refilled by government or contractor personnel. Projected savings would be reduced if this occurred. their workforces by reducing management control positions. These positions have not been reduced as a proportion of the workforce as called for by NPR. With regard to future workforce reductions, our analysis showed that in terms of absolute numbers--and given historical quit rates--the remaining annual FTE employment ceilings called for by the Workforce Restructuring Act probably could be achieved governmentwide through attrition. Nevertheless, some agencies may be required to downsize more than others. In such situations, buyouts or RIFs may be necessary. In comparing the costs and savings of buyouts and RIFs, our analysis showed that buyouts offered greater savings than RIFs, except when RIFed employees do not bump and retreat and are eligible to retire. This concludes my prepared statement. I would be pleased to answer any questions you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed the government's progress in downsizing its workforce and use of employee buyouts. GAO noted that: (1) executive branch full-time equivalent (FTE) positions could decrease to 1.88 million during fiscal year (FY) 1999 under mandated ceilings; (2) as of September 30, 1995, the Department of Defense (DOD) paid 71 percent of the more than 112,500 governmentwide buyouts; (3) the actual FY 1995 FTE level was 73,100 positions below the FY 1995 ceiling; (4) the FY 1997 budget calls for nearly 53,000 fewer FTE positions; (5) employee buyouts have helped limit reductions-in-force (RIF) to 6 percent of personnel cuts; (6) agencies have used buyouts more to meet required downsizing goals than to meet the administration's restructuring goals; (7) management control positions of DOD agencies have decreased to under 12 percent, but other designated positions have increased; (8) 70 percent of buyouts between FY 1993 and FY 1995 were paid to employees who took regular or early retirement; (9) retirements decreased 20 percent from FY 1991 through FY 1992, but increased 35 percent after buyout authorization; (10) the FY 1999 workforce goal could probably be met through normal attrition, but budget cuts may force some agencies to rely on other strategies to reduce their workforces below their goals; and (11) in general, buyouts generate up to 50 percent more in net savings over 5 years than RIF because higher-graded employees retreat to lower-graded positions during RIF.
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The Workforce Investment Act of 1998 authorized Youth Opportunity Grants (YO), a $1 billion, 5-year program aimed at increasing the educational attainment and long-term employment of youth residing in high poverty areas. The program was designed to assist at-risk, hard-to- serve youth and the communities in which they live by concentrating resources into a targeted geographic area. YO expanded on earlier demonstration programs that were based on a similar design, the most recent of which were known as Kulick grants. The Department of Labor (the Department) announced the 36 YO grantees--24 urban, 6 rural, and 6 Native American--in February 2000 and set a goal for the grantees to have their programs operational by September of that year. Although the Department originally planned to continue to add grantees, funding for the program was eliminated in the budget for fiscal year 2004. Figure 1 shows the 36 grantees by location. The Department of Labor's stated goals for the YO program were to increase educational attainment and promote long-term employment of youth in the target areas, as well as to improve the youth service delivery systems in these communities. Specifically, grantees were expected to effect increases in the rates of high school completion, college enrollment, and employment, both for youth participating in the program and, by extension, the overall target area. Grantees were also expected to facilitate the delivery of services by partnering with other institutions in the community, especially local schools and colleges, the juvenile justice system, and private employers. The program was designed to allow grantees to enhance the local infrastructure of youth services by filling in critical service gaps, coordinating existing services, and, in the case of some rural and tribal areas, developing an infrastructure where services were limited. Many of the YO program components were based on practices that experts have identified as effective for working with at-risk youth, and the design of the program supported flexibility and invention at the local level. Based on a youth development framework that emphasizes a comprehensive approach to meeting a young person's needs, the program required YO grantees to offer a full range of education, employment, and leadership development services as well as provide other supports to the youth. Advocates and experts have also stressed that youth need a place to gather where they feel comfortable and a sense of belonging. In this vein, YO grantees were required to have at least one youth center in the target community that would provide a focal point for services and activities as well as a safe place for the youth to go. In addition, grantees were expected to maintain a core staff of trained youth workers and to provide follow up services to participants for at least 2 years after they completed participation in program activities, which is in keeping with the identified effective practice of providing youth access to a caring, trusted adult for an extended period of time. Additionally, experts have suggested youth benefit from the opportunity to continue a relationship with a program for as long as they need. Similarly, the program had flexible enrollment rules that allowed participants to remain enrolled even through periods of inactivity. However, the program design allowed grantees latitude in deciding many of the particulars of the program. For example, grantees could choose how and by whom services would be delivered, the number and location of the YO centers, and the institutions with which they partnered. Figure 2 displays the key components of Youth Opportunity Grant program. Like some prior demonstration programs that the Department of Labor has administered, eligibility for YO was not based on income, but rather on geographic residence. Youth between the ages of 14 and 21 living in the target area were eligible for the program, regardless of income. In most cases, the target areas were federally designated empowerment zones or enterprise communities, which are, by definition, areas with high rates of poverty. The Department of Labor provided extensive, ongoing technical assistance to grantees. The Department assigned grantees coaches with considerable experience working in youth programs who helped grantees with a range of issues, such as developing services and building partnerships. The Department also collaborated with a private foundation to establish a training institute that provided courses in youth development to more than 2,000 youth workers. In addition, the Department sponsored opportunities for grantees to share best practices and strategies in regular directors' meetings and conference calls and through peer-to-peer training sessions. The Department laid the foundation for collecting performance data on the program by setting up a management information system (MIS). The Department collected performance data on the YO program in a centralized, electronic system. Grantees submitted information to fulfill requirements of the Workforce Investment Act, which mandated that grantees report on seven performance measures related to employment, retention, earnings, attainment of skills, and attainment of credentials. In addition to these, grantees reported on interim measures developed by the Department to gauge the progress of participants as they moved through the program. These measures were designed to document youth participation in activities and other intermediate milestones. The Department had funded several prior programs premised on a geographic and community concept similar to that of the YO, although on a much smaller scale, but little information is available on the impact of these demonstration programs. Although evaluations were conducted of these earlier programs, the impact studies were either incomplete or not released. The first of these demonstrations, Youth Opportunities Unlimited, was evaluated and the results published, but the study did not include a systematic analysis of impact based on comparison groups. The funding for the second demonstration, Youth Fair Chance, was cut 2 years into the program, and although the evaluation study was published, it was based on only 2 of the planned 5 years of the program. As a result, the authors of this study advised that the findings should be interpreted cautiously. The most recent of the demonstration programs was known as the Kulick grants. The Department has prepared an evaluation of the Kulick grants, but has not yet released the results publicly. For the Youth Opportunity Grants, the Department set up an extensive effort in 2000 to collect and analyze information to assess the program's impact. The Department contracted for a $24 million evaluation study that included plans to estimate the impact of the program by comparing key characteristics in the YO communities and comparable areas that did not receive YO grants. It was to begin in 2000, and the final report was originally scheduled to be completed in July 2005. The study was designed to differentiate between those observed changes in participants and the communities that resulted from the program and those that would have occurred even without the program's intervention. Grantees adapted key elements of the program's design to their particular circumstances and used a variety of approaches in providing services and conducting outreach. Grantees set up centers that varied widely in terms of number and other characteristics where youth could receive services and participate in activities. The centers housed a core staff who provided case management and helped plan individualized services for youth. Staff numbers and duties differed between grantees. Most grantees used the management information system (MIS) provided by the Department of Labor to submit program data to the Department, but some used their own systems. Most grantees used a combination of approaches to provide youth services, including collaborating with other organizations and, when they deemed it necessary, developing services of their own. To reach hard- to-serve target population, grantees used a variety of recruiting techniques, ranging from the conventional to the innovative. The centers set up under the terms of the grant varied widely in number and character. Because the target communities varied in size, some grantees had 1 center while other, more geographically dispersed grantees had as many as 40. The centers were intended to serve as the hub of the local programs, and the types of activities offered in them differed considerably. One center we visited in rural Louisiana had a variety of recreational facilities, such as a basketball court and recreation room, in addition to a classroom, computer lab, and staff offices. Youth participating in this program told us nothing like these facilities had existed for them before the YO program. On the other hand, a center we visited in Houston resembled a traditional career center, with computer kiosks set up near staff offices where the youth could undertake job searches and skills assessments. Houston officials said they had formerly offered some recreational activities on site, but found them to be duplicative of other services available in the neighborhood. Some grantees provided still other facilities at their centers. For example, Baltimore had an on-site health clinic and music recording studio. Some grantees also had centers located within schools. The District of Columbia had staff sited in a local high school, where they offered training and support for youth. This in-school center was located in a large classroom, with a staff office off to one side and furnished with a computer lab with equipment purchased by the grantee. Figure 3 depicts photos of two youth opportunity grant centers we visited. The centers housed staff who varied substantially in number and makeup. Houston divided staff duties between as many as 115 people working in 4 centers. In this program, "personal service representatives" provided case management and identified youths' goals and training needs, and "employment counselors" assisted youth with job searches and conducted follow-up services to youth who had been placed in employment. Other grantees, however, had sites with only one person performing all of the major staff duties. At the California Indian Manpower Consortium (CIMC) Manchester Point Arena site, one youth worker handled recruitment, case management, and job placement. Because of the remoteness of the site, this youth worker also frequently drove a van, weekly transporting youth to services as far as 4 hours away. Most grantees used the management information system (MIS) provided by the Department of Labor to record program data, but some used their own systems and then submitted the data to the Department. Those who did not use the Department MIS used a variety of systems. For example, Milwaukee developed its own system with the aim of using it in conjunction with other youth programs offered by its local Workforce Investment Board. Similarly, Hartford developed customized software that enabled it to share information with other provider agencies and the schools in the community. Grantees used a combination of approaches to establish a network of educational, occupational, and other services for youth, but varied the extent to which they relied on other providers. Grantees availed themselves of existing services, either through formal arrangements or by referring participants to other organizations in the community. Kansas City arranged for youth to attend classes at other local agencies to help prepare for the GED exam. Similarly, Baltimore referred young women who needed interview clothing to a local charity organization. Most grantees also collaborated with other institutions to provide some services. San Antonio partnered with a local community college to establish academies in which youth could spend half a day on their home campuses and half a day at the community college, allowing them to earn a certificate or associate degree in areas such as aviation or biotechnology. Houston purchased credit retrieval software for local high schools that students could use to complete their academic requirements for graduation. In addition, grantees originated programs to fill perceived gaps in services. Memphis established its own charter school with an emphasis on the arts in order to provide alternative education opportunities for the youth, one of the emphasized youth activities in the program. To provide leadership development opportunities, one of the CIMC sites sponsored a cemetery care project. In this project, participants worked with the tribal elders to make a map of the local cemetery with the names of the deceased because cemeteries on this reservation did not have headstones. Table 1 shows youth activities and examples of how grantees implemented the activities. Grantees also used an array of strategies to help youth find long-term educational or occupational opportunities and to follow up with participants after they exited the program. Some grantees had staff specifically devoted to finding appropriate employment opportunities and connecting youth with these opportunities. For example, Milwaukee created the position of job developer, who identified potential employers and spoke to them directly about the youth in the program. Grantees also used a number of methods for helping youth enroll in post-secondary institutions, such as conducting college tours, assisting with financial aid forms, and placing support staff on college campuses. The statutory provision authorizing the YO program required grantees to provide follow- up services for 2 years after the youth completed participation in program activities. Grantees recorded on a quarterly basis the employment and education status of the youth who had completed participation in the program, for example, if they were in school or working at the time of contact. Some grantees contacted youth more frequently. Staff in Baltimore told us they varied the frequency depending on the degree to which they regarded the young person to be at some risk. One might be contacted monthly, while another would be checked on nearly every day. Grantees recruited youth, including traditionally difficult to serve populations, by creating connections with other youth-serving agencies. Milwaukee operated a juvenile justice project to help youth coming out of the corrections system to reintegrate into the community. Personnel at a local correctional facility worked with program staff to identify those due for release who were expecting to live within the geographic target area of the program. Program staff traveled to the facility to conduct an orientation session and then worked with the youth, corrections officials, and parents to develop a reintegration plan. The services offered to them were similar to those offered to all of the YO participants. Grantees also used a variety of innovative methods to recruit participants. Since many of the youth were disconnected from both school and work, as one grantee told us, they could be not only hard to serve, but hard to find. Some grantees went beyond conventional outreach activities of mailers and radio advertisements and conducted community walking campaigns using staff to saturate shopping malls and other areas where youth congregate. Others used youth to lead recruitment. In some cases, a grantee used employment as an inducement to link youth to other activities the program offered. For example, Louisiana's work program allowed participants to work more hours in subsidized employment the further they advanced toward their educational goals. We were told many of the youth lived in unstable economic conditions, and these needs had to be addressed before the youth would focus on other areas, such as education. In other cases, grantees used cash or non-monetary rewards to encourage participation. In Houston, youth could attend special events, such as a basketball game, if they participated in the program a minimum number of hours. Grantees were able to address a variety of challenges in setting up the program and delivering services to youth using local discretion, flexible enrollment rules, and other aspects of the program's design, but they and others said a longer start-up period would have been beneficial. Most grantees found it difficult to establish centers and retain participants in their programs. They felt that these challenges were compounded by expectations for a quick start-up, and subsequently they and Department officials felt more planning time would have been beneficial. Grantees also had difficulty establishing an information-reporting system, but once in place, found it was helpful for program management purposes. Conditions in the communities such as violence and lack of jobs presented a challenge to most grantees, but they took advantage of the local discretion built into the program to develop strategies to address them. Grantees also cited as an obstacle the vast service needs of many of the youth the program was intended to serve, but case management, individualized services, and flexible enrollment rules were useful in dealing with them. The majority of grantees reported that finding or renovating centers was a challenge. Many grantees did not have suitable sites in their communities for use as centers, and some put considerable effort into renovating existing structures. In the extreme, the grantee in Alaska renovated 40 centers in remote communities not accessible by road and shipped equipment and material by air. In a few cases, grantees did not have a permanent building until after the first year of the program. In Boston, the program was housed in temporary facilities for a period of time because a permanent center could not be completed for the program's opening. Another challenge identified by most grantees was retaining participants, which grantees linked in part to expectations from the Department to start to enroll youth quickly. The Department set a goal to recruit 3,000 participants nationwide within the first few months of the program, or a little less than 100 youth per grantee. Some grantees said they felt rushed to meet recruitment goals and told us they recruited many youth who were not committed to the program. In addition, several directors mentioned that they felt they were asked to serve participants before their programming was fully developed, a situation that as one expert commented, was akin to asking grantees to "fly the plane before they were finished building it." We were told that, in these situations, some youth became disenchanted with the program and left because of the limited offerings the center presented early on. Grantees, agency officials, and experts said a longer planning period would have been beneficial. Grantees had an 7 month window between the announcement of the grant recipients and the Department's target date for having the programs operational. For example, two grantees with whom we spoke said about three additional months would have been necessary for them to meet the goals set out by the Department. Agency officials also told us that grantees were pushed to start-up too quickly and could have benefited from more time to plan. Agency officials said it would have been appropriate to give grantees more time to meet the Department's initial goals. Most grantees reported that establishing an information reporting system was challenging, and grantees told us it would have been useful for the Department to have had a workable system in place at the outset of the program. The management information system (MIS) initially provided by the Department was fraught with problems. Department officials told us it took about 18 months to iron out the kinks. In addition, the Office of Inspector General identified inconsistencies in the way grantees were recording data early on. Although the Department eventually developed an improved system, grantees said it would have been better had the MIS been in place from the beginning. Not having a system in place created additional burden for the grantees. For example, Louisiana developed its own system to collect information until an updated system was available and then manually transferred 11 months of data into the new MIS. Once in place, grantees additionally used the information system for their own program management purposes such as to improve performance and reinforce accountability. The Hartford grantee was able to integrate its system with the school district, allowing case managers to track attendance and grades to allow better monitoring of participant achievements. The Hartford system also enabled program management to see which case managers were most successful at engaging youth in the activities required for the completion of their goals. Regarding accountability, Portland used its information system to monitor the performance of its contractors on a weekly basis. Some of the major challenges also identified by grantees were problems external to the program, yet affected their ability to deliver services. Twenty-eight of the grantees reported on the survey that a lack of jobs in the community was a challenge. In some areas, jobs were on the decline because of shifts in the local economy or relocation of major employers. For example, the grantee in San Francisco related that due to the dot-com bust, youth in the program were competing with a skilled workforce willing to fill entry level positions that would otherwise be available to youth. In other areas, especially rural ones, there were few employers, let alone large ones. In addition, 29 of 36 grantees reported on the survey that risk factors such as violence, drugs, and gangs were challenges in implementing the program. In some cases, these factors made it difficult for participants to receive services. In one urban community, we were told there were safety concerns with youth participating in evening activities sponsored by the YO because they would have to return home after dark. Local discretion built into the program design helped grantees respond to external challenges. Within the structure of the program, grantees were allowed some amount of latitude to develop responses to circumstances in their communities, such as a scarcity of jobs. For example, the California Indian Manpower Consortium created opportunities for youth to have work experiences, such as subsidizing summer jobs with local business including a campground and senior center or working with the tribe to place youth in clerical positions. Similarly, grantees were able to develop services to address specific risk factors in their communities. Imperial County offered a curriculum series to help address interpersonal violence among adolescents, an issue they had identified as particularly problematic in their area. The series was designed to reduce impulsive and aggressive behavior through empathy training, interpersonal problem solving, behavior skill training, and anger management. In Milwaukee, the grantee addressed safety concerns by renting vans to transport the youth to nighttime events. Grantees identified as a major challenge the obstacles faced by their clients, such as homelessness, lack of family support, mental health problems, and low levels of academic attainment. Staff in Baltimore told us homelessness was a frequent issue faced by youth in their area and finding a place to sleep can preoccupy the youth and disrupt the learning process. YO staff and others said that participants may lack support in other areas of their lives, such as from their families. For example, one grantee told us of a participant who was awarded a full scholarship to college, but the parents would not sign the paperwork to receive the money. Some youth also faced mental health issues, which prevented them from moving forward in their lives. All of these factors, we were told, could mean a slow start for youth who enrolled in the program. The director of an alternative high school in Milwaukee told us that because of the disorder in their lives, many of these youth may take a year just to become comfortable in the program before they can even begin making any forward progress. Grantees found aspects of the program design such as case management, individualized services, and flexible enrollment rules useful in addressing the service challenges of participants. For example, grantees used assessments to help determine the academic needs of clients and provide each client with the appropriate individualized services. Philadelphia designed a program in which each participant had a personalized remediation plan based on the results of an evaluation test and interview with an education coach. This plan was intended to build on clients' strengths and accounted for their particular learning styles. After the initial assessment, participants were reevaluated at regular intervals to monitor their academic progress and goal attainment. The curriculum was designed so that youth could increase at least one grade level after 90 hours of instruction. In addition, both youth and community members told us that YO staff were key in helping youth stay motivated and guiding them through difficult situations. Grantees also found the enrollment rules useful in working toward program goals. The program's enrollment policy allowed most participants to continue to receive services even if they experienced periods of inactivity. Staff in Houston told us that the policy was a benefit to the youth because, unlike other employment programs, YO did not end their relationship with youth who had not been participating for a while. Grantees and others reported that the participants and their communities made advancements in education and employment; however, a formal assessment of the program's impact is still under study. Data reported by the grantees showed that a number of youth advanced their education while they were participating in the program, such as completing high school. Grantees also reported data showing a portion of the participants entered unsubsidized employment after enrolling in the program. Similarly, grantees and others believe their communities made advancements toward the Department's stated education and employment goals of the program. In addition, the majority of grantees reported that they made improvements in the youth service delivery systems in their communities. The Department funded an evaluation to assess the impact of the program, which was designed to shed light on the extent to which observed changes can be attributed to the program. However, the study has not yet been completed. Data reported by the grantees showed that a number of youth advanced their education while they were participating in the program. Two of the Department's primary goals of program were to increase the rates of high school completion and college enrollment for the youth. Data that grantees entered into the management information system (MIS) showed that of the approximately 91,000 youth who signed up for in the program nationwide, about 18,700 either completed high school or attained a GED after enrolling in the program. In addition, about 11,700 youth entered college, 37 percent of whom were reported to be out of school when they initially enrolled in the program. Youth with whom we spoke credited the program with giving them a second chance to increase their education and to better their employment opportunities. One Louisiana youth's comments typified what we heard elsewhere from participants during our site visits, "YO is the best thing that has happened to me. YO has given me a job and put a little money in my pocket." He added, "YO has also been instrumental in keeping me out of jail. Above all, YO has helped me realize that education is important." Figure 4 summarizes enrollment, participation, education, and employment data for youth in the program, as of June 2005. Grantees reported data showing that a portion of the youth entered unsubsidized employment after completing YO activities. Data from the MIS show that about 17,300 youth were placed in employment that was not subsidized by the program, 62 percent of whom were out of school when they initially enrolled in the program. Grantees and others told us the job readiness training that some youth received as part of the program was particularly important in helping them get jobs. Employers we spoke with told us they knew the youth that were sent to them by YO would be well trained and ready to work. A local human resources manager for a national chain of home improvement stores told us that he thought YO participants were better prepared for employment than other residents of the area, adding that they show up with better job skills and "soft" skills. Grantees and others expressed the view that their communities had made advancements in concert with the Department's education and employment goals for the program. Almost all of the grantees reported that high school completion, college enrollment, and youth employment rates improved in their communities as a result of the program. Several grantees also asserted that affecting the youth led to changes in the community. In addition, community members with whom we spoke said the program helped their communities make progress toward greater education and employment. For example, a tribal leader in California told us that YO motivated the youth in his tribe to stay in school. Similarly, one expert pointed to some of the rural grantees who had many youth enroll in college, which she said was especially important because of a lack of jobs in these areas. The majority of grantees reported making improvements in the youth service delivery systems in their communities. Some of the described changes were to the service infrastructure in these communities. For example, San Diego pointed out that it had created a multiservice youth center in a neighborhood where none had existed before. Grantees cited other improvements related to the mode of service delivery. Tucson reported that prior to YO, it had funded three stand-alone youth programs, but now it has a one-stop system with multiple entry points for delivering youth services. Other grantees noted that their efforts to foster better communication and collaboration among service providers had benefited the youth. As the Portland grantee commented, by partnering with their local employment department and community college system, they were able to leverage staff to provide intensive job search and college preparation services to youth. In other cases, local leaders credited the YO as a catalyst for change in their community. For example, a school superintendent in California told us that YO staff had helped to forge an agreement between the school district and five Indian tribes in the area to develop an education curriculum that would be more sensitive to the tribes' cultures. While the Department of Labor funded an evaluation designed to assess the impact of the program, it has not yet been completed. This was planned as a 5-year, $24 million evaluation, which began in 2000. As part of the evaluation, the Department conducted baseline and follow-up surveys of the target areas, and gathered extensive descriptions of the 36 programs and communities. The evaluation also included plans for an impact study that was designed to compare YO participants and communities with other, similar youth and communities that did not participate in YO. This type of comparative analysis would be necessary to determine if the events reported by grantees and others would have occurred in the absence of the program. However, the evaluation is not finished. Moreover, agency officials are unsure if the impact study that was to be part of the evaluation will be completed. Due to departmental allocations being lower than expected, the Department spent $1.9 million less than the full amount of the original contract on the evaluation. Agency officials told us that the impact study was likely to be scaled back because of the lower allocation. The evaluation was originally scheduled to be completed in July 2005. However, agency officials told us they do not expect the study to be finished until June 2006. The Youth Opportunity Grant program was designed to help at-risk youth and their communities by concentrating resources geographically and by incorporating components that experts have suggested are effective in assisting this population. To continue to improve the ability to serve these youth, researchers and practitioners must be able to learn from the most promising and innovative approaches in serving these youth, including those used in the Youth Opportunity Grant program. The Department of Labor has begun an evaluation of the program that includes many pieces of a potentially useful study. Although informative, these pieces will not by themselves answer the question of impact, in other words, whether the described events would have occurred in the absence of the program. In order to understand what effect, if any, the program had on these observed events, it is necessary to have a systematic comparison with other, similar communities that did not receive grants. The Department planned, but has not yet completed, such an analysis as part of the evaluation. The Department has an opportunity to contribute to the research on programs for serving at-risk youth, if the evaluation study is completed and the results made public. However, the Department has not taken full advantage of past opportunities to release information on other programs based on a similar model, such as the Kulick grants. Given the $1 billion investment in this program--including almost $24 million for an evaluation effort--and the need for rigorous data on these types of programs, the study should be completed and the results should be made available. Unless the Department completes the evaluation of the Youth Opportunity Grant program and releases the results, researchers and practitioners will not be able to fully realize the potential to learn from the program. To continue to improve efforts to serve at-risk youth and in order that researchers can evaluate the quality of information and determine possible impact of the program, we recommend that the Secretary of Labor take the actions necessary to complete the impact analysis of the Youth Opportunity Grant program and release the data and all related research reports from the program's evaluation. We provided a draft of this report to the Department of Labor for its review and comment. In its response, the Department agreed with our conclusions and recommendation and indicated that it intends to complete the impact analysis and publish all related reports from the Youth Opportunity Grant program evaluation. A copy of the Department's response is in appendix II. The Department also provided us with technical comments, which we incorporated into the report where appropriate. We will send copies of this report to the Secretary of Labor, relevant congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. Please contact me at (415) 904-2272 if you or your staff have any questions about this report. 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 accomplish our research objectives, we surveyed Youth Opportunity Grant Program directors on the implementation of the Youth Opportunity Grants. To augment information from our survey, we conducted five site visits of programs. We chose sites for our visits to represent proportionately the three grantee types (urban, rural, and Native American) as well as their geographic distribution. The grantees we visited were the District of Columbia, Houston, Milwaukee, rural Louisiana, and the California Indian Manpower Consortium. During our visits we met with program administrators, staff, and participants to learn their perspectives on program implementation, challenges, outcomes, impact, and lessons learned. Also, we interviewed local workforce board members, school officials, community based service providers, private employers, and local government officials to discuss their perspectives on the impact and other aspects of the program. In addition, we toured Youth Opportunity Centers, in-school facilities, and observed program activities. We briefly visited an additional two grantees-- Baltimore and Philadelphia--in the course of pretesting the survey, and while at their sites, toured centers and spoke with program administrators, staff, and participants. We gathered additional information by reviewing agency documents including site assessments and grant applications. We also interviewed agency officials and other relevant experts, including researchers, representatives of advocacy organizations, YO coaches, and former Department of Labor officials. We performed our work from September 2004 to November 2005 in accordance with generally accepted government auditing standards. We also investigated several possible sources of external data to quantitatively measure outcomes and impact, but determined none of them were feasible for our purposes. The data sets we reviewed were: Current Population Survey, Common Core of Data, National Longitudinal Survey of Youth, High School and Beyond, and American Community Survey. To learn about the implementation of the Youth Opportunity Grants, we conducted a Web-based survey of all Youth Opportunity Grant Program Directors. We asked directors about the usefulness of program components, challenges they faced implementing the program and strategies used to deal with them, and their opinion on the program's impact on participants and communities. Additionally, we asked directors about the size and structure of their programs, the manner in which they delivered services, and the types of organizations with which their programs partnered. The survey also included a series of questions about how programs maintained information to help us determine the reliability of data in the Department of Labor's management information system. We pretested the survey with several program directors and modified the survey to take their comments into account. All 36 program directors completed the survey, for a response rate of 100 percent. We administered the survey between March 17 and May 31, 2005. To view selected results of the survey, go to GAO-06-56SP. We used electronic data collected on the program by the Department of Labor in a management information system (MIS) to describe the number of youth in the program who achieved the Department's goals for the program, such as high school completion, college enrollment, and long- term education and employment placements. We have determined the MIS data are sufficiently reliable for the purposes of this study through discussions with officials at the Department of Labor, in-depth interviews with MIS staff during site visits, and responses to a comprehensive array of survey items in which each grantee described their procedures for editing and auditing the data they entered into the MIS. We analyzed the MIS data using guidance provided to us by the Department. David Lehrer, Assistant Director, and Anne Welch, Analyst-in-Charge, managed this assignment and made significant contributions to all aspects of the work. Dan Concepcion and Eleanor Johnson also made significant contributions to this report. In addition, Kevin Jackson assisted in all aspects of the survey of Program Directors and in reviewing external data sources. Jerry Sandau and Cathy Hurley assisted in the analysis of the MIS data and assessment of the MIS data reliability. Jessica Botsford provided legal support, and Susan Bernstein provided writing assistance. Workforce Investment Act: Labor Actions Can Help States Improve Quality of Performance Outcome Data and Delivery of Youth Services. GAO-04-308. Washington, D.C.: February 23, 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. Washington, D.C.: June 18, 2003 Workforce Investment Act: Youth Provisions Promote New Service Strategies, but Additional Guidance Would Enhance Program Development. GAO-02-413. Washington, D.C.: April 5, 2002.
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The Youth Opportunity Grant program (YO) represented an innovative approach to improving education and employment opportunities for at-risk youth by targeting resources in high poverty areas and incorporating strategies that experts have identified as effective for serving this population. The Department of Labor (the Department) awarded 36 grants in 2000, and the program continued for 5 years. The Department had used a similar approach on a smaller scale in previous programs, but little information is available on the impact of these other programs. In order to understand what can be learned from the Youth Opportunity Grant program, GAO examined the grantees' implementation of the program, challenges they faced, and what is known about the program's outcomes and impact. To view selected results from GAO's Web-based survey of the Program Directors, go to GAO-06-56SP (http://www.gao.gov/cgi-bin/getrpt?GAO-06-56SP). Grantees used a variety of approaches to build the infrastructure of the YO program, provide services to at-risk youth, and conduct outreach efforts. While grantees set up centers and trained core staff to deliver services, they differed somewhat in their approaches, depending on circumstances within their communities. In addition, grantees employed a combination of strategies to provide youth services, including collaborating with other providers and inventing unique programming. To recruit this hard-to-serve target population, grantees used a range of techniques, from partnering with juvenile justice agencies, to combing malls for eligible youth. Fast program start up, conditions in their communities, and the characteristics and needs of the youth challenged the grantees;however they used features of the program design to address some of these difficulties. Many grantees struggled to set up the program, especially within the Department's time frame. In addition, grantees felt encumbered by the drugs, violence, and a lack of jobs in their communities as well as the obstacles facing their clients, such as low academic achievement and lack of family support. Grantees used the discretion and other components built into the program design to address many of these challenges. For example, in response to safety concerns, an urban grantee elected to provide transportation for youth attending evening events. However, grantees and others said more planning time would have been beneficial. Grantees and others reported that the youth and their communities made progress toward the YO program goals, but the program's impact is still under study. Grantees reported that they had enrolled about 91,000 youth nationwide, many of whom completed high school, entered college, or found employment after enrolling in the program. In addition, grantees and others said that the grants had benefited their communities. However, without an impact analysis, it is not known whether these events would have occurred in the absence of the program. The Department contracted for a $24 million evaluation of the program that included plans for an impact analysis; however, agency officials are unsure if the analysis will be completed.
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ILOVEYOU is both a "virus" and "worm." Worms propagate themselves through networks; viruses destroy files and replicate themselves by manipulating files. The damage resulting from this particular hybrid-- which includes overwhelmed e-mail systems and lost files-is limited to users of the Microsoft Windows operating system. ILOVEYOU typically comes in the form of an e-mail message from someone the recipient knows with an attachment called LOVE-LETTER- FOR-YOU.TXT.VBS. The attachment is a Visual Basic Script (VBS) file.As long as recipients do not run the attached file, their systems will not be affected and they need only to delete the e-mail and its attachment. When opened and allowed to run, however, ILOVEYOU attempts to send copies of itself using Microsoft Outlook (an electronic mail software program) to all entries in all of the recipient's address books, infect the Internet Relay Chat (IRC) programso that the next time a user starts "chatting" on the Internet, the worm can spread to everyone who connects to the chat server, search for picture, video, and music files and overwrite or replace them with a copy of itself, and install a password-stealing program that will become active when the recipient opens Internet Explorerand reboots the computer. (Internet accounts set up to collect this information were reportedly disabled early Friday). In short, ILOVEYOU looks a lot like Melissa in operation: it comes via e- mail; it attacks Microsoft's Outlook; it's a hybrid between a worm and a virus; and it does some damage-but it mostly excels at using the infected system to e-mail copies of itself to others. The one main difference is that it proliferated much faster than Melissa because it came during the work week, not the weekend. Moreover, ILOVEYOU sent itself to everyone on the recipient's e-mail lists, rather than just the first 50 addressees as Melissa did. In fact, soon after initial reports of the worm/virus surfaced in Asia on May 4, ILOVEYOU spread rapidly throughout the rest of the world. By 6 pm the same day, Carnegie Mellon's CERT Coordination Centerhad received over 400 direct reports involving more than 420,000 Internet hosts. And by the next day, ILOVEYOU appeared in new guises, labeled as "Mother's Day," "Joke," "Very Funny," among others. At least 14 different variants of the virus had been identified by the weekend, according to DOD's Joint Task Force-Computer Network Defense. These variations retriggered disruptions because they allowed the worm/virus to bypass filters set up earlier to block ILOVEYOU. At least one variant--with the subject header "VIRUS ALERT!!!"-was reportedly even more dangerous than the original because it was also able to overwrite system files critical to computing functions. Reports from various media, government agencies, and computer security experts indicate that the impact of ILOVEYOU was extensive. The virus reportedly hit large corporations such as AT&T, TWA, and Ford Motor Company; media outlets such as the Washington Post and ABC news; international organizations such as the International Monetary Fund, the British Parliament, and Belgium's banking system; state governments; school systems; and credit unions, among many others, forcing them to take their networks off-line for hours. The virus/worm also reportedly penetrated at least 14 federal agencies--including the Department of Defense (DOD), the Social Security Administration, the Central Intelligence Agency, the Immigration and Naturalization Service, the Department of Energy, the Department of Agriculture, the Department of Education, the National Aeronautics and Space Administration (NASA), along with the House and Senate. We still do not know the full effect of this virus on the agencies that were penetrated. While many were forced to shut down their e-mail networks for some time, many also reported that mission- critical systems and operations were not affected. Of course, if an agency's business depends on e-mail for decision-making and service delivery, then the virus/worm probably had a significant impact on day- to-day operations in terms of lost productivity. It also appears that major efforts were required to control the virus. Based on a discussion with military CERT representatives, for example, responding to the virus/worm has been a tremendous task that took several days to get under control. Some DOD machines required complete software reloads to overcome the extent of the damage. The virus/worm spread rapidly through the department, penetrating even some classified systems. DOD's operational commands responded in widely varying ways--some made few changes to their daily operational procedures while others cut off all e-mail communications for an extended period of time. Representatives of DOD's Joint Task Force- Computer Network Defense said that they will recommend new procedures to better coordinate the department's response to future incidents, based on experience with the ILOVEYOU virus/worm. While the ILOVEYOU worm/virus resulted in relatively limited damage in terms of systems corrupted, the incident continues to underscore the formidable challenge that the federal government faces in protecting its information systems assets and sensitive data. It again shows, for example, that computer attack tools and techniques are becoming increasingly sophisticated; viruses are spreading faster as a result of the increasing connectivity of today's networks; commercial-off-the-shelf (COTS) products can be easily exploited for attack by all their users; and there is no "silver bullet" solution to protecting systems, such as firewalls or encryption. Moreover, ILOVEYOU illustrates the difficulty of investigating cyber crime. In particular, investigations of computer attacks such as ILOVEYOU must be conducted on an international scale. Moreover, only the computer used to launch the virus can be traced-not the programmer. Lastly, evidence is fleeting-the more time that passes between the first attack and an arrest, the more time the programmer has to destroy all links to the crime. Additionally, ILOVEYOU once again proved that governmentwide reporting mechanisms are ineffective. Like Melissa more than a year ago, little information was available early enough for agencies to take proactive steps to mitigate the damage. The CERT Coordination Center posted its advisory at approximately 9:30 pm May 4, while FBI's National Infrastructure Protection Center (NIPC) issued a brief notice at 11:00 am on May 4 and more information at 10:00 pm. In addition, there is still no complete information readily available on the impact that this virus had across the federal government. More important, like Melissa and other attacks this Subcommittee has focused on, our experience with ILOVEYOU is a symptom of broader information security concerns across government. Over the past several years, our analyses as well as those of the inspectors general have found that virtually all of the largest federal agencies have significant computer security weaknesses that place critical federal operations and assets at risk to computer-based attacks. Our most recent individual agency review, of the Environmental Protection Agency (EPA),identified many security weaknesses associated with the computer operating systems and the agencywide computer network that support most of EPA's mission-related and financial operations. In addition, EPA's own records identified serious computer incidents in the last 2 years. EPA is currently taking significant steps to address these weaknesses, but resolving them on a lasting basis will require substantial ongoing management attention and changes in the way EPA views information security. EPA is not unique. Within the past 12 months, we have identified significant management weaknesses and control deficiencies at a number of agencies, including DOD, NASA, State, and VA. Although the nature of operations and related risks at these and other agencies vary, there are striking similarities in the specific types of weaknesses reported. I would like to briefly highlight six areas of management and general control problems since they are integral to understanding and implementing long-term solutions. First, we continue to find that poor security planning and management is the rule rather than the exception. Most agencies do not develop security plans for major systems based on risk, have not formally documented security policies, and have not implemented programs for testing and evaluating the effectiveness of controls they rely on. These are fundamental activities that allow an organization to manage its information security risks cost-effectively rather than by reacting to individual problems ad hoc. Second, agencies often lack effective access controls to their computer resources (data, equipment, and facilities) and, as a result, are unable to protect these assets against unauthorized modification, loss, and disclosure. These controls would normally include physical protections such as gates and guards and logical controls, which are controls built into software that (1) require users to authenticate themselves through passwords or other identifiers and (2) limit the files and other resources that an authenticated user can access and the actions that he or she can take. Third, in many of our audits we find that application software development and change controls are weak. For example, testing procedures are undisciplined and do not ensure that implemented software operates as intended, and access to software program libraries is inadequately controlled. Fourth, many agencies lack effective policies and procedures governing the segregation of duties. We commonly find that computer programmers and operators are authorized to perform a wide variety of duties, such as independently writing, testing, and approving program changes. This, in turn, provides them with the ability to independently modify, circumvent, and disable system security features. Fifth, our reviews frequently identify systems with insufficiently restricted access to the powerful programs and sensitive files associated with the computer system's operation, e.g., operating systems, system utilities, security software, and database management system. Such free access makes it possible for knowledgeable individuals to disable or circumvent controls. Sixth, we have found that service continuity controls are incomplete and often not fully tested for ensuring that critical operations can continue when unexpected events (such as a temporary power failure, accidental loss of files, major disaster such as a fire, or malicious disruptions) occur. Agencies can act immediately to address the weaknesses I just described and thereby reduce their vulnerability to computer attacks, including the ILOVEYOU worm/virus. Specifically, as explained in figure 1, they can (1) increase awareness, (2) ensure that existing controls are operating effectively, (3) ensure that software patches are up-to-date, (4) use automated scanning and testing tools to quickly identify problems, (5) expand their best practices, and (6) ensure that their most common vulnerabilities are addressed. Ensure that agency personnel at all levels understand the significance of their dependence on computer support and the related risks to mission-related operations. Better understanding of risks allows senior executives to make more informed decisions regarding appropriate levels of financial and personnel resources to protect these assets over the long term. Ensure that policies and controls already implemented are operating as intended. Our audits often find that security is weak, not because agencies have no policies and controls, but because the policies and controls they have implemented are not operating effectively. Ensure that known software vulnerabilities are reduced by promptly implementing software patches. Security weaknesses are frequently discovered in commercial software packages after the software has been sold and implemented. To remedy these problems, vendors issue software "patches" that users can install. In addition, organizations such as the CERT Coordination Center routinely issue alerts on software problems. Use readily available software tools to help ensure that controls are operating as intended and that systems are secure. Examples of such tools are (1) scanners that automatically search for system vulnerabilities, (2) password cracking tools, which test password strength, and (3) network monitoring tools, which can be used to monitor system configuration and network traffic, help identify unauthorized changes, and identify unusual or suspicious network activity. Expand on the good practices that are already in place in the agency. Our audits have shown that even agencies with poor security programs often have good practices in certain areas of their security programs or certain organizational units. In these cases, we recommend that the agency expand or build on these practices throughout the agency. Develop and distribute lists of the most common types of vulnerabilities, accompanied by suggested corrective actions. Such lists enable individual organization units to take advantage of experience gained by others. They can be developed based on in-house experience, or adapted from lists available through professional organizations and other centers of expertise. To combat viruses and worms specifically, agencies could take steps such as ensuring that security personnel are adequately trained to respond to early warnings of attacks and keeping antivirus programs up- to-date. Strengthening intrusion detection capabilities may also help. Clearly, it is difficult to sniff out a single virus attached to an e-mail coming in but if 100 e-mails with the same configuration suddenly arrive, an alert should be sounded. User education is also key. In particular, agencies can teach computer users that e-mail attachments are not always what they seem and that they should be careful when opening them. By no means, should users open attachments whose filenames end in ".exe" unless they are sure they know what they are doing. Users should also know that they should never start a personal computer with an unscanned floppy disk or CD-ROM in the computer drive. I would like to stress, however, that while these actions can jump-start security improvement efforts, they will not result in fully effective and lasting improvements unless they are supported by a strong management framework. Based on our 1998 studyof organizations with superior security programs, this involves managing information security risks through a cycle of risk management activities that include assessing risks and determining protection needs, selecting and implementing cost-effective policies and controls to meet these needs, promoting awareness of policies and controls, and of the risks that prompted their adoption, among those responsible for complying with them, and implementing a program of routine tests and examinations for evaluating the effectiveness of policies and related controls and for reporting the resulting conclusions to those who can take appropriate corrective action. Additionally, a strong central 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. Such coordination is especially important in today's highly networked computer environment. I would also like to emphasize that while individual agencies bear primary responsibility for the information security associated with their own operations and assets, there are several areas where governmentwide criteria and requirements also need to be strengthened. First, there is a need for routine periodic independent audits of agencies to provide (1) a basis for measuring agency performance and (2) information for strengthened oversight. Except for security audits associated with financial statement audits, current information security reviews are performed on an ad hoc basis. Second, agencies need more prescriptive guidance regarding the level of protection that is appropriate for their systems. Currently, guidance provided by the Office of Management and Budget (OMB) and the National Institute of Standards and Technology (NIST) allows agencies wide discretion in deciding what computer security controls to implement and the level of rigor with which they enforce these controls. As a result, existing guidance does not ensure that agencies are making appropriate judgments in this area and that they are protecting the same types of data consistently throughout the federal community. More specific guidance could be developed in two parts: the first being a set of data classifications that could be used by all federal agencies to categorize the criticality and sensitivity of the data they generate and maintain and the second being a set of minimum mandatory control requirements for each classification which would cover such issues as the strength of system user authentication techniques, appropriate types of cryptographic tools, and the frequency and rigor of testing. Third, there is a need for stronger central leadership and coordination of information security related activities across government. Under current law, responsibilities for guidance and oversight of agency information security is divided among a number of agencies, including OMB, NIST, the General Services Administration, and the National Security Agency. Other organizations have become involved through the administration's critical infrastructure protection initiative, including the FBI's National Infrastructure Protection Center and the Critical Infrastructure Assurance Office. The federal Chief Information Officers Council is also supporting these efforts. While all of these organizations have made positive contributions, some roles and responsibilities are not clear, and central coordination is lacking in key areas. In particular, as this latest attack showed, information on vulnerabilities and related solutions is not being adequately shared among agencies, and requirements related to handling and reporting security incidents are not clear. In conclusion, more than 12 months later, not much is different with the ILOVEYOU worm/virus than with Melissa. Many agencies were hit; most were fortunate that the worst damage done was to shut down e-mail systems and temporarily disrupt operations; and early warning systems for incidents like these still need to be improved. Moreover, our audits continue to find that most agencies continue to lack the basic management framework needed to effectively detect, protect against, and recover from these attacks. Lastly, as seen with ILOVEYOU's variations, we can still expect the next virus to propagate faster, do more damage, and be more difficult to encounter. Consequently, it is more critical than ever that federal agencies and the government act as whole to swiftly implement both short- and long-term solutions identified today to protect systems and sensitive data. Madam Chairwoman, this concludes my testimony. I would be happy to answer any questions you or Members of the Subcommittee may have. For information about this testimony, please contact Keith Rhodes at (202) 512-6415. Cristina Chaplain made key contributions to this testimony. (511998)
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Pursuant to a congressional request, GAO discussed the "ILOVEYOU" computer virus, focusing on the need for agency and governmentwide improvements in information security. GAO noted that: (1) ILOVEYOU is both a virus and a worm; (2) the damage resulting from this particular hybrid is limited to users of the Microsoft Windows operating system; (3) ILOVEYOU typically comes in the form of an electronic mail (e-mail) message from someone the recipient knows; (4) as long as recipients do not run the attached file, their systems will not be affected and they need only to delete the e-mail and its attachment; (5) if opened, the ILOVEYOU can spread and infect systems by sending itself to everyone in the recipient's address book; (6) there are areas of management and general control that are integral to improving problems in information security; (7) most agencies do not develop security plans for major systems based on risk, have not formally documented security policies, and have not implemented programs for testing and evaluating the effectiveness of controls they rely on; (8) these are fundamental activities that allow an organization to manage its information security risks cost-effectively rather than by reacting to individual problems ad hoc; (9) agencies often lack effective access controls to their computer resources and, as a result, are unable to protect these assets against unauthorized modification, loss, and disclosure; (10) these controls would normally include physical protections such as gates and guards and logical controls, which are controls built into software that: (a) require users to authenticate themselves through passwords or other identifiers; and (b) limit the files and other resources that an authenticated user can access and the actions that he or she can take; (11) testing procedures are undisciplined and do not ensure that implemented software operates as intended, and access to software program libraries is inadequately controlled; (12) GAO found that computer programmers and operators are authorized to perform a wide variety of duties; (13) this, in turn, provides them with the ability to independently modify, circumvent, and disable system security features; (14) GAO's reviews frequently identify systems with insufficiently restricted access to the powerful programs and sensitive files associated with the computer system's operation; (15) such free access makes it possible for knowledgeable individuals to disable or circumvent controls; (16) service continuity controls are incomplete and often not fully tested for ensuring that critical operations can continue when unexpected events occur; and (17) agencies can act immediately to address computer weaknesses and reduce their vulnerability to computer attacks.
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The end of the Cold War and the evolution of a new security environment have resulted in new operating realities for the U.S. military. Amid significant reductions in the overall size of U.S. forces, defense budgets, and overseas presence, the U.S. military must continue to deploy its forces for traditional combat training and simultaneously manage increased demands to deploy forces for peace operations and other activities. U.S. military forces have participated in peace operations for many years. For example, the United States has committed military personnel to the Multinational Force and Observers since 1982 to ensure that Israel and Egypt abide by the provisions of the Sinai Peace Treaty. However, in recent years, U.S. participation in peace operations has grown. In 1992 alone, the United States began deployments eventually totaling 26,000 personnel to Somalia, 3,000 to Bosnia, and 14,000 to Southwest Asia. The ongoing deployment to Bosnia is expected to involve over 20,000 troops. Congress and others have expressed concern about the overall impact of peace operations on unit and personnel readiness. Deployments for some operations can impair unit and personnel combat training and equipment readiness and divert funds from planned operations and maintenance activities. In other cases, however, deployments can enhance the combat capabilities of units. For example, such deployments provide excellent experience in the tasks essential to wartime proficiency for light infantry, supply, or other support units. All services have experienced increased deployments since the late 1980s, with the Air Force and the Army absorbing the largest percentage of changes. However, a small group of units in each service with unique skills in high demand absorbed most of the impact. Peace operations were the major reason for the increases, with smaller increases for joint activities. DOD cannot precisely measure the increase in deployments because, until 1994, only the Navy had systems to track PERSTEMPO. The Defense Manpower Data Center attempted to reflect the level of PERSTEMPO by matching personnel and pay records with readiness information identifying units in a deployed status. As shown in figure 1, between 1987 and 1995 the percentage of personnel deployed, as measured by the Center's data, increased for all services. This analysis assumed that all members of a unit were deployed if a certain percentage of its personnel were receiving family separation allowances, which are paid to servicemembers away from their families for over 30 days, or imminent danger pay. from bases in the United States or from locations in Europe and elsewhere, where their families were also located, with relatively few deployments. Now, fewer personnel are being asked to respond to more deployments, travel farther in doing so, and leave their families while deployed. The Navy and the Marines experienced much smaller percentage increases, but they were already deploying about two to three times more than the other services. In the late 1980s, about 11 percent of the Navy's force was deployed at any given time. By early 1995 this figure had increased to about 14 percent. Over the same period, the Marine Corps increased the average of its force deployed from about 12 percent to 13 percent. The Navy and the Marine Corps have always had relatively high deployment rates. Personnel in these services have traditionally operated on cyclical deployment schedules on board ships or at forward presence locations across the globe, unaccompanied by their families. Because of their forward-deployed mode of operations, the Navy and the Marines were generally able to respond to increased demands with forces already deployed. Increased deployments have fallen most heavily to a few types of units with unique skills in high demand, such as special forces, electronic warfare squadrons, Patriot air defense units, and military police. Many of these critical units are in short supply in the active force, with much of the capability residing in the reserve component. For example, about 75 percent of the military's psychological operations capability resides in the reserve component. We recently reported that the extended or repeated participation of such units in peace operations could impede their ability to respond to major regional contingencies because of the difficulty in quickly disengaging and redeploying them. DOD officials told us that the services should periodically examine force structure to ensure that frequently used capabilities are not contained primarily in the reserves. DOD is examining the need to increase the number of some high-deploying units. According to the Commander in Chief (CINC) of the European Command, the unified command responsible for operations in Bosnia, the forces needed to fulfill the National Security Strategy--that is, to be prepared to respond to two nearly simultaneous major regional contingencies--and those needed for peace operations like Bosnia are not necessarily the same. The major regional contingency scenario requires traditional combat forces, while peace operations and other non-war activities draw heavily upon the types of unique units that are few in number (those units discussed above). The CINC believed that the PERSTEMPO issue is driven by this dichotomy and that current forces should be reevaluated and realigned to address this problem. The European Commander also believed that better coordination of contingency planning among CINCs could reduce the tasking of high PERSTEMPO units. Such planning is currently focused within each unified command's sphere of operations and may not adequately account for changes in one theater that can increase PERSTEMPO in others. Our analysis of high-deploying units shows that most had at least one element, such as a company or detachment, deployed for over one-half of each year from fiscal year 1992 through June 1995. For example, Air Force electronic warfare squadrons had at least one element deployed an average of 313 days each year. Marine support, ground combat, and aviation units and Army support units had one or more elements deployed, on average, at least 210 days annually during the period. Some individuals were deployed for even longer periods. Even when units return to their home station, individuals may have to spend time away from their homes on other duty. For example, some sailors must provide ship security every fourth night on board ship. The amount of time deployed between 1992 and 1995 was stable or increasing for most types of units we analyzed. For example, the Army military police units averaged about 160 days on deployment in 1992, but this figure had increased to an average of 172 days in 1995 (projected from third quarter figures). The Navy was the only service whose pace of deployments appeared to be abating. For example, deployments of the five nuclear submarines in our sample dropped from an average of 210 days in 1992 to a projected average of 173 days in 1995. According to officials at the submarine units we visited, the number of submarines had not yet been reduced by the drawdown, so the full complement of ships has been available to deal with the demand. However, officials were concerned that once the number of submarines is reduced, which is expected in the next several years, they would encounter the same difficulties as the other services. According to Navy officials, Navy PERSTEMPO has recently been dropping to pre-Gulf War levels. In the high-deploying units we studied, most of the increased deployments were for peace operations, particularly those of Air Force and Army units. However, after declining between 1992 and 1993, joint activities between the United States and other nations' forces also increased during 1994-95. Figure 2 illustrates the Air Force and the Army's steep growth in deployments for peace operations. Navy and Marine officials also noted significant increases in peace operations, but both services generally met increased requirements using units already on scheduled deployments. We were unable to develop detailed statistics on the amount of time these services spent for peace operations because detailed records were not available to isolate time spent on one activity versus another during scheduled deployments. Average percent of time deployed Despite the increases in peace operations, the high-deploying units continued to spend most of their time deployed for training, scheduled forward deployments, or other traditional missions. We found no major reductions in the amount of time deployed for training. Throughout 1992-95, each service stayed within about 12 percentage points of its yearly averages for training deployments. However, as shown in figure 3, after declining between 1992 and 1993, joint activities began to increase somewhat in 1994 for the Air Force, the Army, and the Marine Corps. We were unable to separate joint activities from the Navy Atlantic Fleet data on overall training. Air Force Army Marine Corps According to many of the CINCs, in addition to the increased deployments for peace operations, there have been large increases in joint activities since the end of the Gulf War. In some commands such activities have more than doubled. These deployments involve myriad actions, such as training exercises between U.S. services and those of other countries, computer simulation exercises, intergovernmental and multinational requirements such as the show of U.S. force to promote regional stability, and support required by treaties with other nations. For example, Partnership for Peace is a new type of exercise that emerged after the Gulf War. This initiative seeks to intensify military and political cooperation throughout Europe and includes participation of North Atlantic Treaty Organization countries and countries from eastern Europe and the former Soviet Union. According to DOD officials, no system tracks all of these activities, and no standardized terminology distinguishes them. Consequently, individual contributions to the increases are difficult to analyze precisely. Increased deployments are rooted in the changing national military strategy. According to DOD officials, the increased focus on regional security and stability has been accompanied by increased deployments for peace operations. Many of these operations involve an increasingly complex integration of diverse land, sea, and air assets from U.S. and other nations' military services, making joint training increasingly important and spurring increased deployments for joint activities. However, the need for deployments for training in each service's individual mission also continues unabated. DOD officials acknowledged that better balance and management of these competing demands is needed, and DOD has begun to address this need. The Chairman of the Joint Chiefs of Staff Exercise Program annually administers about 200 activities, over two-thirds of which have been focused on objectives other than joint training. Program officials told us that many joint training exercises involve small groups of servicemembers, and they are attempting to reduce them by combining or canceling some exercises. Moreover, program officials said they are continuing to develop joint mission essential task lists to help integrate joint and service training tasks, which could lead to less redundant training. At the request of the Chairman of the Joint Chiefs of Staff, the CINCs are also examining exercise plans to prevent redundant training by consolidating, synchronizing, reducing participation in, or canceling exercises. Many of the CINCs and Joint Staff personnel told us that the scope and duration of joint exercises, particularly those involving ineffective large-scale exercises, are already being reduced and many exercises are involving fewer people. One CINC reduced the number of scheduled exercises in his area from 112 in fiscal year 1995 to 85 in fiscal year 1996 by combining smaller, single-service exercises into larger, joint training exercises. According to DOD officials, many other deployments are generated by intergovernmental and other demands outside the Chairman's program. These officials are developing definitions for all the various types of activities to provide a better basis for analyzing such demands. Officials from the U.S. Atlantic Command, which is responsible for training, packaging, and deploying forces in response to requirements identified by other CINCs, told us that DOD should have a policy regarding the use of DOD assets and personnel to fulfill tasks generated by other government agencies, such as the Department of State. DOD assistance is currently based on guidance and criteria provided by the Office of the President and the Secretary of Defense, and in response to requirements in support of the national security strategy or decisions by the President or other officials in the National Command Authorities. Atlantic Command officials also believe that DOD needs to establish a policy to improve discipline in the long-term scheduling of exercises. More judicious management of deployments may also require cultural adjustments in the services. Commanders from the unit level through major commands acknowledged that turning down deployment requests was very difficult because they believed that doing so would reflect negatively on the unit and/or on them. The Army Special Forces Commander, for example, recently acknowledged that the command "never met a deployment opportunity that we didn't like" and challenged the command to curb its traditional appetite for deployments. In fact, a number of officials were concerned that commanders in all the services were competing for deployments to underscore the value of their units during the current drawdown. DOD systems are inadequate to assess the full impact of high PERSTEMPO on readiness. Although unit readiness reports indicated a stable level of readiness during the 1990s, the high-deploying units we visited voiced pronounced concern that some personnel have been stressed to their saturation point, with attendant concerns about difficulties in family life and lowered retention rates. The SORTS reports do not capture all the factors that DOD considers critical to a comprehensive readiness analysis, and indicators of personnel readiness--such as retention rates--are generally not available in the form needed to analyze stress on individual units. We and the Defense Science Board recently reported that readiness of the overall force has remained generally stable during the 1990s, despite the high level of deployments. However, these reports raise concerns that the high rate of deployments was reducing readiness in a small number of units. Our analysis of SORTS reports for a sample of high-deploying units yielded similar results. During the past 5 years, deployments--particularly unscheduled ones--were a primary cause of a reduction in readiness below planned levels in 22 of the 78 units (28 percent) analyzed, as seen in table 1. Most of the affected units were in the Army and the Air Force. In the Air Force, about one-half the units analyzed experienced reduced readiness during the 5-year period analyzed. About one-third of the Army units experienced reductions. Many of the declines were of short duration and were caused by shortages of personnel; increased consumption of spare parts, which resulted in shortages; and reduced training opportunities associated with the high pace of deployments. Service officials pointed out that factors other than deployments can have as much, or more, influence on reported readiness levels. For example, Army and Marine Corps officials noted that shortages of noncommissioned officers in certain job skills were affecting many units. During our visits to 29 of the high-deploying units, there was pronounced concern about the impact of high PERSTEMPO on servicemembers and families in all the services except the Navy. Unit officials and personnel told us that while many were experiencing personal and career hardships as a result of the high rate of deployments, they expected to be deployed for some period of the year and most were coping with the stress. Officials said, however, that some had almost reached their saturation point and that further increases could create significant retention, substance abuse, and family problems. Unit personnel described a variety of stresses on individuals and families, such as difficulties in financial management for many young servicemembers and missing the birth of children and their birthdays as well as Christmas and other holidays. Many spoke of retention problems and high divorce rates in high-deploying units. On an Air Force quality-of-life survey conducted in May 1995, more than one-third of Air Force officers and enlisted personnel who responded noted deployment-related impacts on their personal lives and finances. A similar proportion reported career hardships such as difficulty in obtaining professional military education. Army air defense unit officials concluded from a unit-conducted survey that soldiers and spouses were unhappy with frequent deployments. Conducted at the end of a deployment to Southwest Asia, this survey indicated that about 27 percent of the married personnel believed their marriages could be in serious jeopardy if the unit deployed again in the year following its return. About 40 percent of the respondents indicated that they had decided to "get out of the Army" during the deployment. Members of one Air Force electronic warfare squadron we visited were so stressed by deployments that one wrote to Members of Congress and the Chief of Staff of the Air Force asking for relief due to his concerns about the safety of the squadron. Three of its seven aircraft had been deployed to Bosnia nearly continuously since July 1993. With nearly half its aircraft still in Bosnia, the squadron was unexpectedly tasked to send two more aircraft to Haiti for 2 weeks in September 1994 and three to Saudi Arabia in mid-October 1994. At the same time, the squadron was asked to complete a planned move to a new base. Efforts were made to bring back individuals to accompany their families during the move, but spouses were upset when some servicemembers were redeployed within 48 hours of arrival at the new base. These deployments harmed morale and degraded the unit training program and overall readiness. An Air Force investigation of the incident concluded that the squadron would need 8 to 12 months to regain its prior level of training proficiency. Although a portion of the squadron's aircraft continued to be used for missions, the Chief of Staff directed a portion of the squadron's aircraft to be protected from deployments until the unit had recovered. According to Air Force officials, the squadron had largely recovered by November 1995. These concerns, however, generally were not reflected in the personnel readiness statistics that we reviewed. To supplement SORTS data, DOD and the services developed a large number of statistics on personnel readiness, such as retention, spouse and child abuse, drug abuse, divorces, and court-martials. However, many statistics are not collected consistently across the services or are aggregated at major command and/or servicewide levels only, preventing comparisons of conditions in individual units with others. We also found little agreement among the services as to which indicators are the best measures of personnel readiness. We did, however, obtain data comparing retention in our Navy sample of units with those Navy-wide. Personnel retention rates in the sampled units were 6 to 15 percentage points lower than overall Navy levels between 1991 and June 1995. These results are consistent with Center for Naval Analyses reports conducted in 1992 and 1994, which found that more time at sea reduces retention rates for enlisted personnel. The Navy was the only service that maintained this data at the unit level. The other services aggregated their retention data at major commands and above. The Defense Manpower Data Center prepared a special analysis comparing reports of (1) positive drug tests and (2) spouse and child abuse in our sample of units with servicewide rates between 1991 and 1994. In general, rates in both areas were lower in the high-deploying units than in the services as a whole. DOD is developing a central registry for all reports of child and spouse abuse with standardized data elements for collection of case information. The central registry is expected to be fully implemented in 1996. The President, Congress, and DOD have recognized the problems generated by increases in PERSTEMPO and have taken steps to address them. In addition, DOD is considering a number of recommendations intended to mitigate PERSTEMPO problems. However, DOD policy on PERSTEMPO is unclear in many areas. In May and July 1994, the President signed a new Presidential Decision Directive and national security strategy that included policies designed to make U.S. involvement in peace operations more selective. For example, one policy sets forth specific standards of review to help determine when the United States should participate or support peace operations, including whether the role of U.S. forces is tied to clear objectives and an identified end point. It also states that the primary mission of the U.S. armed forces remains to be prepared to fight and win two nearly simultaneous regional contingencies. Legislation has also been introduced in Congress to address the impact of high PERSTEMPO. For example, in the National Defense Authorization Act for Fiscal Year 1996, Congress recognizes that excessively high PERSTEMPO for military personnel degrades unit readiness and morale and can adversely affect unit retention. The act encourages DOD to continue improving techniques for defining and managing PERSTEMPO with a view toward establishing and achieving reasonable PERSTEMPO standards for all military personnel. DOD and the services have also taken actions to better manage high PERSTEMPO. In addition to the actions taken to reduce deployments by better integrating joint and service training requirements, the Joint Staff has drafted the global military force policy. This policy is designed to help guide decisions to use units few in number but high in demand for peace operations and other types of deployments. The policy will outline the impact that successively higher levels of deployment have on unit maintenance, training, and other readiness areas. DOD officials hope to finalize the policy during the spring of 1996. DOD is also developing a new Joint Personnel Asset Visibility System, which uses electromagnetic identification cards to track personnel assigned to Joint Task Force operations. In addition, PERSTEMPO is discussed at the Joint Monthly Readiness Review, which provides a venue for input from both the services and the CINCs on readiness assessments. DOD and the services are using the reserves to relieve active duty units and lower PERSTEMPO. For example, the Air Force used reserves to relieve highly stressed squadrons in Europe, and the Marine Corps used reserve rifle companies to relieve active duty Marines in Guantanamo Bay, Cuba. According to DOD officials, the success of this approach is dependent on (1) better identification of and planning for requirements, (2) flexibility in the training and use of reservists, and (3) programming the funding to meet needs. The services continuously monitor retention levels of individuals and job specialties, and the Army and the Air Force already have or plan to offer bonuses and increase the number of personnel in some high-deploying units, such as air defense artillery or airborne warning and control system units. The Air Force has sought relief from the taskings for airborne warning and control system units to catch up on lost training opportunities. It has also instituted its Palace Tenure System, which helps ensure that support taskings are balanced across their entire force. The Navy has adopted a revised training strategy tailored to the new requirements and expects to reduce the days deployed for training up to 10 percent for ships underway. The Navy has also reorganized the fleets and established a permanent Western Hemisphere Group to more efficiently fulfill Caribbean, counternarcotics, and South American commitments. It is difficult for DOD to determine the actual time that either military personnel or their units are deployed. This information is important to planning and managing contingency operations. Although all services now have systems to measure PERSTEMPO, each service has different (1) definitions of what constitutes a deployment, (2) policies or guidance for the length of time units or personnel should be deployed, and (3) systems for tracking deployments (see table 2). As noted on table 2, the Army defines a deployment as a movement during which a unit spends 7 days (3 days for Special Forces) or more away from its home station. However, deployments to combat training centers, which generally last about 3 weeks, are not counted. In contrast, the Marine Corps defines a deployment as any movement from the home station for 10 days or more, including a deployment for training at its combat training center. DOD is currently considering several recommendations made by its PERSTEMPO Working Group and a Defense Science Board task force. For example, these reports recommend that (1) a Joint Staff readiness and training oversight panel oversee joint exercises and service inspection activities to help reduce deployment demands and (2) the CINCs establish plans for the rotation of units and personnel involved in operations that exceed 6 months. DOD and European Command officials said that they do not plan to rotate the combat units in Bosnia after 6 months. Rather, they will stay as long as needed, up to 364 days. However, they will receive a rest and relaxation break after 179 days. According to these officials, rotating units in and out of Bosnia is costly and could cause operating inefficiencies. The Defense Science Board report also recommends that DOD issue a single formula for counting deployed time among the services: 1 day away equals 1 day deployed. In this regard, the report of the Working Group recommended that the services continue to refine their PERSTEMPO systems but, at a minimum, permit a computation of averages for length of deployment, time between deployments, percent of time deployed, and percent of inventory deployed--at the unit or individual skill level. One key issue in the decision of whether and how much to standardize PERSTEMPO systems is the need for flexibility to accommodate the unique nature of each service's missions and deployment practices. In this regard, officials in the U.S. Special Operations Command told us that they have developed their own PERSTEMPO system because of concerns that the various service systems do not reflect the unique demands placed on Special Forces personnel. U.S. Atlantic Command officials believed that all services should be required to track PERSTEMPO by unit to help them make better decisions concerning unit deployments. Similarly, European Command officials called for DOD to direct a single method to identify which units are tasked, including an objective goal for PERSTEMPO management. The Working Group's June 1995 report noted that the services had a number of concerns in this regard, including concerns that such systems and thresholds could erode traditional service roles and such thresholds may lead to unmanageable restrictions on unit and such systems may require an unnecessary and expensive level of detail. The PERSTEMPO Working Group is finalizing its second study and is due to report in the near future. The report will address whether current deployment measurement systems are appropriate and provide overall conclusions on the status of PERSTEMPO today as well as recommendations for further courses of action. To provide the oversight and guidance needed for long-term management of PERSTEMPO, we recommend that the Secretary of Defense identify key indicators that provide the best measures of deployments' impact on personnel readiness and adjust existing databases to allow research comparing these indicators in high PERSTEMPO units, skill groups, or weapon systems to other such groups and issue DOD regulations that guide service management of PERSTEMPO by (1) establishing a DOD-wide definition of deployment; (2) stating whether each service should have a goal, policy, or regulation stipulating the maximum amount of time units and/or personnel may be deployed; and (3) defining the minimum data on PERSTEMPO each service must collect and maintain. In a meeting to discuss the Department's comments on a draft of this report, DOD officials said they generally agreed with our findings and recommendations. In written comments on the draft report (see app. II), DOD said that it has taken, and will continue to take, numerous initiatives to manage PERSTEMPO. Also, DOD said that it will be considering recommendations made in the PERSTEMPO Working Group's report that is due to be published in the near future. To assess the frequency of deployments and their impact on readiness, we focused our analyses on about 80 high-deploying active duty units in the four services and the Special Operations Command (see app.I). At our request, the Army, the Navy, and the Air Force provided us with a list of 68 combat and support units that were the highest deployers in the 5 types of units most frequently deployed. The Marine Corps did not have the historical data to identify units with particularly high deployment rates. Instead, we used a group of 18 Corps-identified units representing a cross-section of Marine units. We obtained deployment histories for 83 of these units and complete SORTS readiness histories for 78 of the units. For these units, we analyzed available readiness-related statistics and conducted case study visits to 29 judgmentally selected units. The case study units were selected to provide broad coverage of the types of units in each service as well as geographical diversity. To determine the frequency of deployments in recent years, we relied primarily on an analysis performed by the Defense Manpower Data Center, based on a special database approximating the frequency of deployments by measuring family separation and imminent danger pay. We did not verify the Center's data. We supplemented this data with deployment histories collected directly from the high-deploying units and information from a recently created Joint Staff database. We also discussed the status of efforts to measure PERSTEMPO with each service and the Joint Staff. We assessed the impact of high PERSTEMPO on readiness through a two-tiered process. We assessed readiness of the overall force at the unit level by using our recently completed analysis of force readiness. We also compared SORTS ratings for the high-deploying units from 1991 to 1995 with profiles of targeted ratings. We then compared ratings below expected levels with unit explanations of degradations in readiness, supplementing this analysis with discussions at the major command level. To assess the impact of deployments on individual readiness, we reviewed available literature and held discussions with individual service and unit officials. Because there was no agreement regarding the best indicators of the impact of deployments on individuals and because of data limitations, our work in this area was limited to data on spouse and child abuse and positive drug tests from the Defense Manpower Data Center and Navy data on retention. To review DOD actions to mitigate the impact of high PERSTEMPO, we reviewed DOD reports and held discussions with DOD, service, and unit officials. We conducted our review from May 1995 to January 1996 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairmen, Senate and House Committees on Appropriations, Senate Committee on Armed Services, and House Committee on National Security, and to the Secretaries of Defense, the Army, the Navy, and the Air Force. Copies will also be made available to others upon request. The major contributors to this report are listed in appendix III. If you or your staff have questions about this report, please call me on (202) 512-5140. John W. Nelson John H. Pendleton Gerald L. Winterlin The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO examined the United States' military readiness, focusing on the: (1) frequency of deployments in recent years; (2) effects of increased deployment on combat readiness; and (3) Department of Defense's (DOD) efforts to limit personnel temporary (PERSTEMPO) deployment. GAO found that: (1) Army and Air Force deployments have increased among special forces, electronic warfare squadrons, and Patriot air defense, and military police units; (2) the percentage of personnel deployed from 1987 to 1995 has increased from 2 to 6 percent for the Air Force and 5 to 9 percent for the Army; (3) the Navy and Marine Corps traditionally deploy units at twice the rate of the other services and remain active for at least half of the year; (4) peace operations, along with smaller increases in joint activity, are the driving force behind increased deployments; (5) DOD believes that deployments can be reduced by eliminating redundant military training and combining or cancelling some exercises; (6) the Status of Resources and Training System reports less than one-third of frequently deploying units dropping below planned readiness levels; (7) DOD is concerned about the nature of frequently deploying units' personnel problems; (8) DOD statistics on personnel readiness are not useful because they are inconsistent and are only compiled at the major command level; and (9) high PERSTEMPO is likely to continue unless DOD directs the services to set up goals and policies to manage PERSTEMPO.
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Through map modernization, FEMA intends to produce more accurate and accessible flood maps by using advanced technology to gather accurate data and make the resulting information available on the Internet. Many of the flood maps in FEMA's inventory do not accurately reflect the true flood hazard risks because over time, new development and other factors altered watersheds and floodplains faster than the maps could be updated. Prior to fiscal year 2004, the $35 million to $50 million in annual flood insurance policy fees had been the only source of funding for updating flood maps, and according to FEMA, the agency had not been able to keep the maps updated with the funds available. As a result, at the time of our review, nearly 70 percent of the nation's approximately 92,222 flood maps were more than 10 years old and many contain inaccurate data, according to FEMA. Over time, physical conditions in watersheds and floodplains can change, and improvements in the techniques for assessing and displaying flood risks are made. FEMA plans to use the latest technology, such as GIS, to create accurate digital flood maps. GIS technology provides the foundation for achieving FEMA's goals of melding different types and sources of data to create the new digital flood maps and making the new digital flood maps available to a variety of users over the Internet. The primary function of GIS is to link multiple digital databases and graphically display that information as maps with potentially many different types of "layers" of information. When layers of information are formatted using the same standards, users can potentially overlay various layers of information about any number of specific topics to examine how the layers interrelate. Each layer of a GIS map represents a particular "theme" or feature, and one layer could be derived from a data source completely different from the other layers. For example, one theme could represent all the streets in a specified area. Another theme could correspond to the topography or elevation data of an area, and others could show aerial photography and streams in the same area. These themes are all key elements needed to create flood maps that accurately depict floodplains and can be used to identify properties in these areas. In preparing for full-scale implementation of map modernization, FEMA had established standards and graphic specifications for digital flood maps created with GIS. GIS technology also enables the creation of more accurate and accessible maps than would be possible with older mapping methods and technology. The majority of FEMA's flood map inventory was produced using manual techniques that have inherent accuracy and accessibility limitations. For example, in creating traditional paper flood maps, field measurements taken by surveyors would have been transferred by hand to paper base maps. If the paper base map contained any inaccuracies, then the field- survey data could be shown in the wrong place on the final flood map. This would then result in floodplain boundaries being shown in the wrong place. By their nature, paper flood maps have limited accessibility as compared with a digital map that can be made available on the Internet. The expansion of Internet connectivity in recent years has substantially enhanced the potential value of digital maps created with GIS because now it is possible to locate and connect data from many distinct GIS databases to develop analytical information on almost any topic that is associated with physical locations. Digital flood maps created according to FEMA's standards are intended to provide users not only with the ability to determine the flood zone and base flood elevations for a particular location, but also with the ability to access other information like road, stream, and public land survey data. Communities could use this information for a variety of purposes, including decisions on future development and evacuation routes. As part of map modernization, FEMA has promoted the use of a variety of advanced technologies to improve the accuracy of flood maps. In recent years, for example, where it deems it appropriate, FEMA has promoted the use of Light Detection and Ranging (LIDAR) remote sensing technologies to generate highly detailed, digital elevation data. Elevation data are a key component needed to determine flood risk and identify floodplain boundaries. According to FEMA, for very flat areas where small changes in elevation can have a large impact on where flood plain boundaries are drawn, LIDAR can provide the level of detail needed to accurately delineate these boundaries. Communities can also use detailed, digital elevation data for planning and land development purposes. FEMA expects map modernization to increase the likelihood that the more accurate and accessible maps will be used for risk management purposes. Specifically, FEMA expects the new maps to be used to (1) improve flood mitigation, (2) increase flood insurance participation, and (3) improve "multi-hazard" mitigation and risk management capabilities. First, FEMA expects communities to be able to use these new and revised maps to better manage and mitigate flood risk by regulating floodplain development through building codes, ordinances, and regulations. Second, the new maps also have the potential to help increase flood insurance participation because they will more accurately identify those properties that are in the floodplain and whose owners would be required to purchase flood insurance. Third, the data and infrastructure developed by map modernization is also expected to help national, state, and local officials mitigate and manage risk from multiple hazards, both natural and man-made. Accurate digital maps can provide more precise data on such things as the location of hazardous material facilities, power plants, railroads, and airports to state and national officials for planning development as well as to assess internal weaknesses and evacuation routes. The more accurate and updated flood hazard information produced through map modernization is expected to help improve flood mitigation in participating communities. The NFIP requires participating communities to adopt and enforce building standards based on the floodplain boundaries and base flood elevations when maps are updated. For example, the lowest floor of structures in new construction must be elevated to at least the base flood elevations identified on the maps. FEMA's policy is to monitor communities to ensure that they have adopted building standards that meet the minimum NFIP criteria and to ensure that they are effectively enforcing these standards. If communities fail to establish and enforce minimum NFIP flood plain building standards, FEMA can suspend availability of federal flood insurance. Communities also may use updated flood hazard data to take actions to mitigate flooding that go beyond adopting the building standards required by the NFIP. For example, communities may use the data from the maps to identify where to conduct capital improvement projects designed to mitigate flooding of structures in the floodplain. In addition, FEMA has established a Community Rating System that provides discounts on flood insurance premiums for those communities that take mitigation actions beyond those required by the NFIP. Map modernization has the potential to help increase flood insurance participation. The accuracy of the new maps should better identify at-risk property owners who would be best served by obtaining flood insurance whether or not the owners would be required to purchase insurance under the NFIP's mandatory purchase requirement. Moreover, the digital, GIS- based maps should make flood risk information more accessible to a variety of users such as lenders and community officials who could conduct targeted outreach to these property owners. It is important to note, however, that FEMA, states, and communities do not have the authority to ensure that property owners who are subject to the mandatory purchase of flood insurance requirement actually purchase flood insurance. It is the federally regulated lenders' responsibility to ensure that borrowers purchase flood insurance and that the insurance policy is maintained throughout the loan's life as each new lender servicing the loan becomes aware that the affected property is at risk for flooding. Furthermore, owners of properties without mortgages or properties with mortgages held by unregulated lenders are not required to purchase flood insurance, even if the properties are in floodplains. FEMA expects that the data developed, collected, and distributed through map modernization will help national, state, and local emergency managers mitigate and manage risk posed by other natural and man-made hazards. Accurate digital base maps provide more precise data to state and national officials for planning, such as the location of hazardous material facilities, power plants, utility distribution facilities, and other infrastructure (bridges, sewage treatment plants, buildings, and structures). According to FEMA, map modernization will also support DHS's overall goal to reduce the nation's vulnerability to terrorism by providing GIS data and capabilities to other departmental functions. For example, more accurate information on transportation systems such as railroads, airports, harbors, ports, and waterways should be helpful in assessing internal weaknesses and evacuation routes. FEMA's strategy for managing map modernization is intended to support the achievement of the expected program benefits of improved flood mitigation, increased NFIP insurance participation, and improved multi- hazard mitigation and risk management capabilities. However, in reviewing FEMA's approach to implementing the strategy, we identified several challenges that could hamper the agency's efforts. FEMA's approach is based on four objectives. Two objectives FEMA hopes to achieve through map modernization--building and maintaining a premier data collection and delivery system and expanding outreach and better informing the user community--have the potential to improve the use of flood maps for improved flood mitigation and increased NFIP participation, as well as multi-hazard risk management. The other two objectives--building and maintaining mutually beneficial partnerships and achieving effective program management--are intended to facilitate the achievement of the first two objectives and their intended benefits efficiently and effectively. The goal of FEMA's objective to develop a new data system using the latest technology is more efficient production, delivery and, thereby, the use of flood maps. As discussed previously, FEMA hopes to accomplish this by using geographic information systems technology that provides the foundation for the production and delivery of more accurate digital flood maps and multi-hazard data that is more accessible over the Internet. In developing the new data system to update flood maps across the nation, FEMA's intent is to develop and incorporate flood risk data that are of a level of specificity and accuracy commensurate with communities' relative flood risks. According to FEMA, there is a direct relationship between the types, quantity, and detail of the data and analysis used for map development and the costs associated with obtaining and analyzing those data. FEMA believes it needs to strike a balance between the relative flood risk faced by individual communities and the level of analysis and effort needed to develop reliable flood hazard data if it is to update the nation's maps efficiently and effectively. FEMA ranked all 3,146 counties from highest to lowest based on a number of factors, including, among other things, population, growth trends, housing units, flood insurance policies and claims, repetitive loss properties, and flood disasters. On the basis of this ranking, FEMA established mapping priorities. However, at the time of our review, FEMA had not established standards on the appropriate data and level of analysis required to develop maps based on risk level. FEMA had historically applied the same minimum standards for all flood maps and supporting data. FEMA's Guidelines and Specifications for Flood Hazard Mapping Partners provided guidance for selecting the level of analysis and effort to produce flood hazard data and the guidelines had generally been used on a case-by-case basis. We found that the guidelines do not specify standards to be used for all mapping projects within a given risk category and concluded that, without establishing standards for different categories of risk, FEMA could not ensure that it uses the same level of data collection and analysis across all communities within the same risk category. These standards could also provide a consistent basis for estimating the costs of developing maps in each risk category. At the time of our review, FEMA had not yet developed draft standards or incorporated this task into its implementation plan. As a result, we recommended that FEMA develop and implement data standards that would enable FEMA, its contractor, and its state and local partners to identify and use consistent data collection and analysis methods for communities with similar risk. In November 2004, FEMA issued its Multi-Year Flood Hazard Identification Plan. The plan describes FEMA's strategy for updating flood maps used for NFIP purposes and discusses the varying types of data collection and analysis techniques the agency plans to use to develop flood hazard data in order to relate the level of study and level of risk for each county. FEMA's objective to expand the scope and frequency of its outreach efforts is intended to increase community and public acceptance of revised maps and use of those maps. Historically, FEMA has only contacted communities when initiating remapping and again when preliminary maps are completed. These expanded outreach efforts reflect FEMA's understanding that it is dependent on others to achieve the benefits of map modernization. For example, under the structure of the NFIP, FEMA is dependent on communities to adopt and enforce FEMA's minimum building standards and on mortgage lenders to ensure compliance with mandatory flood insurance purchase requirements. To expand the scope of its outreach efforts, FEMA plans to involve a wide variety of community participants--e.g., mayors, emergency managers, lenders, property owners, insurance agents, and developers--in the mapping process. To expand the frequency of outreach, FEMA intends to increase community involvement, awareness, and participation throughout the entire flood mapping process. Through a continual education process, FEMA's goal is to inform property owners and others potentially affected by remapping efforts of steps they can take to mitigate the risk of flooding, the types of damage and costs caused by flooding, and the benefits of flood insurance. According to FEMA, if a community is involved in and understands the map modernization process, the community is more likely to accept and trust the accuracy of the final, revised maps and is more likely to use the maps' hazard data to mitigate natural and man-made disasters. Conversely, if affected property owners do not understand why their communities are being mapped (or remapped) or why their property is now in a flood zone, the unexpected additional expense of new or increased flood insurance premiums can form the basis of significant community opposition to map modernization activities and lead to formal appeals, litigation, and delays in implementing map changes. FEMA's expanded outreach efforts are intended to educate the public of the potential flood risk in communities and to encourage them to take action. Communities that participate in the NFIP are required to establish floodplain management ordinances that require new and substantially improved structures in newly designated floodplains to meet NFIP building standards. However, if a property was not located in the floodplain in the old map but is in the floodplain in the new revised map, NFIP floodplain management regulations do not require those owners to implement mitigation measures unless they make substantial improvements to the structure. FEMA cannot compel affected property owners to take steps to protect their properties against flood risks or to purchase flood insurance. Under current notification requirements, federally regulated lenders, not FEMA, serve as the primary channel for notifying property owners whose mortgaged properties are subject to flood insurance requirements. When property owners seek new financing, through purchase or refinancing, federally regulated mortgage lenders are required to determine if the property is in the floodplain and, if so, require the purchase of flood insurance. Lenders are not required to monitor map changes or to notify property owners with existing mortgages whose properties are identified in a floodplain by remapping if they are not aware of the change in status. Nonetheless, if federally regulated lenders become aware of flood map changes that affect properties for which they hold mortgages through FEMA notifications or flood zone determination companies, then they must notify the property owner and require the purchase of flood insurance. The information that must be provided to property owners is limited to notifying property owners that their structure is in a floodplain, providing a definition of a flood plain, and requiring the purchase of flood insurance if they live in a participating NFIP community. As a result, FEMA's outreach efforts are important for supplementing the formal requirements for notifying communities and property owners of map changes. FEMA's objective for building and maintaining mutually beneficial partnerships is intended to facilitate and support the efficient production and effective use of flood maps. According to FEMA, local, state, and federal partners that have invested resources and assisted in managing mapping activities have the potential to positively affect the detail, accuracy, and quantity of the data collected and improve how these data are used. As part of their strategy for partnering, FEMA provides guidance to the states on how to develop "business plans" that document planned efforts to develop states' and communities' capability and capacity to oversee the collection, analysis, and implementation of flood data in their state and community and to justify funding for these efforts. According to FEMA, 38 states had begun drafting such plans. FEMA intends to use these state business plans to help prioritize its continuing efforts to develop map modernization partners. Through its CTP program, FEMA has developed partnerships with a variety of states and communities that have developed their own data and provided their own funds to help update local flood maps. Since 2000, FEMA has leveraged millions of dollars in funding from 171 partners (states and local communities) for producing maps through its CTP program. For example, from fiscal years 2000 to 2002, FEMA used $70 million of its federal map modernization funding along with state and local funds to develop what FEMA has estimated to be more than $155 million worth of new mapping data. According to FEMA, partnering has other benefits as well. For example, in the long-term, those states and communities with whom FEMA has established partnerships may be more likely to accept final map changes, expand their capabilities, and assume greater responsibility for periodically developing and incorporating updated flood data, resulting in cost savings to FEMA. Some states and communities with few resources and technical capacities or little history of flood mapping activities are likely to pose a challenge to FEMA's ability to fund and implement mapping activities. For example, we talked with flood management officials in several smaller communities in Montgomery County, Texas; Santa Cruz County, Arizona; and Larkspur, Colorado. These officials said that their communities lacked either the funding needed to develop flood data, the technological capability to develop digital flood data and use geospatial information systems, or, in some cases, the community support needed to conduct mapping activities. One approach for obtaining additional resources, capabilities, and community support would be for FEMA to facilitate coordination with other agencies within the state that have a stake in, or could benefit from, mapping activities. For example, state departments of transportation can benefit from information in FEMA's geospatial information system, such as elevation data, in planning and building state roads and bridges. North Carolina was able to get its state transportation department to help fund the development of elevation data used for flood maps. At the time of our review, FEMA had not yet developed a strategy for how to partner with communities that do not have the resources, capabilities, or motivation to initiate and sustain mapping activities. Such a strategy could focus on how to assist these potential partners in garnering community resources and developing technological capabilities, how to coordinate with other agencies in their state, and how to integrate these efforts with FEMA's community outreach efforts to gain community support for mapping activities. As a result, we recommended that FEMA develop and implement strategies for partnering with state and local entities with varying levels of capabilities and resources. FEMA's Plan does not explicitly address such strategies. For fiscal year 2004, the Plan notes that, nationwide, dollars leveraged from local, non-FEMA sources substantially exceeded the target level of 20 percent, with 36 percent of the effort leveraged from other partners. In 4 of the 10 FEMA regions the leverage exceeded 40 percent. However, in 3 of the 10 FEMA regions the leverage was less than 10 percent. This experience, along with a projected 50 percent increase in the total cost of the program, supports the need for strategies to address disparities and maximize map modernization stakeholders' contributions to the program. In March 2004, FEMA awarded a performance-based contract to obtain assistance from a nationwide mapping contractor to manage tasks associated with the significant expansion of the map modernization program. Unlike many traditional government service contracts, which emphasize inputs rather than outcomes, a performance-based contracting approach gives the contractor the flexibility to determine how best to achieve the outcomes and links payment to the contractor's ability to achieve these outcomes--an approach supported by our past work in federal contracting. Overseeing these types of contracts requires agency staff with the knowledge, skills, and abilities to monitor the contractor's efforts using performance measures that accurately measure agreed-upon outcomes. We concluded that FEMA might be limited in its ability to effectively manage the contract, as well as the significant expansion of tasks associated with a five-fold increase in funding and related mapping activities that will continue to be performed by agency staff. These tasks include managing grants for many new mapping partners and administering contracts with independent firms to develop and process a significantly larger quantity of flood data to support local efforts. A staffing needs assessment completed by FEMA in December 2003 identifies a need for an additional 75 staff with additional skills, including contracting and program management capabilities. In appropriating fiscal year 2004 map modernization funds, Congress included a provision that would allow FEMA to use up to 3 percent, or $6 million, for administrative purposes. As of March 2004, FEMA had filled 1 of the 75 positions by reallocating existing resources. At the time of our review FEMA planned to fill another 33 positions using the administrative funding identified in the fiscal year 2004 budget. In addition, FEMA also planned to fill an additional 10 positions by moving staff from other FEMA departments or filling vacancies. However, at the time of our review, FEMA had not yet established a plan for filling the remaining 31 headquarters and regional positions. As a result, we recommended that FEMA ensure that it has the staff capacity to effectively implement the nationwide mapping contract and the overall map modernization program. One element of effective program management is establishing performance measures to determine how well FEMA is achieving its map modernization program objectives. FEMA had established performance measures for all four of its program objectives. However, we concluded that FEMA's measures for two of those objectives that directly support the use of flood maps for risk management--to develop a premier data system and to expand and better inform the user community were not clearly defined or fully developed. FEMA's principal measure for developing and maintaining a premier data collection and delivery system is the percent of the national population with community-adopted, GIS data-based flood maps. However, this measure does not indicate whether the maps themselves meet any FEMA-established standards for accuracy (because FEMA had not yet defined the minimum level of data collection and analysis for communities with similar risk). To measure the progress and success of expanding and better informing the user community, FEMA established performance measures related to the percent increase in communities' awareness and use of new maps. FEMA plans to use surveys as the primary means of measuring increased community awareness and use of the new maps. However, FEMA had not yet fully developed an operational definition of how it plans to measure "awareness" or "use," for example, that reflect mitigation steps taken or the purchase of flood insurance. Because the link between revising maps and the use of maps in terms of increased NFIP participation is not direct, we recognized that it may be a challenge to develop a performance measure that accurately reflects the impact on NFIP participation rates of efforts to expand and improve outreach. Nonetheless, without developing such a measure (or measures), we concluded that FEMA would be less able to ensure that its map modernization program will have resulted in one of FEMA's primary intended benefits. As a result, we recommended that FEMA develop and implement useful performance measures that define FEMA' s progress in increasing stakeholders' awareness and use of the new maps, including improved mitigation efforts and increased participation rates in purchasing flood insurance. In response to our recommendation, FEMA's set goals in its November 2004 Multi-year Flood Hazard Identification Plan to improve public safety through the availability of reliable flood risk data. Specifically, FEMA plans to increase the safety for at least 85 percent of the U.S. population through availability of accurate flood risk data in GIS format. To achieve this goal, FEMA has set targets for key performance indicators (KPI) through fiscal year 2009 (production is scheduled for completion in fiscal year 2010). FEMA's four KPIs are (1) Population with Digital GIS Flood Data Available Online, (2) Population with Adopted Maps that Meet Quality Standards, (3) Percent of Effort Leveraged; that is, state and local resources provided for map modernization as a percentage of FEMA resources provided, and (4) Appropriated Funds Sent to CTPs. To track its progress of map modernization annually, FEMA set target percentages for achieving these performance indicators in fiscal years 2006 through 2009. Mr. Chairman and Members of the Committee, this concludes my prepared statement. I would be pleased to answer any questions you and the Committee Members may have. For further information about this statement, please contact William O. Jenkins, Jr. Director, Homeland Security and Justice Issues on (202) 512- 8777 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributors to this testimony included Grace Coleman, Christopher Keisling, Raul Quintero, and John Vocino. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Floods inflict more damage and economic losses upon the United States than any other natural disaster. During the 10 years from fiscal year 1992 through fiscal year 2001, flooding resulted in approximately $55 billion in damages. The Federal Emergency Management Agency (FEMA) is responsible for managing the National Flood Insurance Program (NFIP). The program uses flood maps to identify the areas at greatest risk of flooding and make insurance available to property owners to protect themselves from flood losses. According to FEMA, many of the nation's flood maps are more than 10 years old and no longer reflect current flood hazard risks because of erosion and changes in drainage patterns. Moreover, because many flood maps were created or last updated, there have been improvements in the techniques for assessing and displaying flood risks. This testimony is based on GAO's findings and recommendations in its March 2004 report related to (1) how map modernization intended to improve the accuracy and accessibility of the nation's flood maps, (2) what the expected benefits of more accurate and accessible flood maps are, and (3) to what extent FEMA's strategy for managing the map modernization program support the achievement of these benefits. Through map modernization, FEMA intends to produce more accurate and accessible flood maps by using advanced technology to gather accurate data and make the flood maps available on the Internet. For example, displaying map data in digital Geographic Information Systems format permits consistent, accurate display, and ready electronic retrieval of a variety of map features, including elevation data and the location of key infrastructure, such as utilities. FEMA expects that by producing more accurate and accessible digital flood maps through map modernization, the nation will benefit in three ways. First, communities can use more accurate digital maps to reduce flood risk within floodplains by more effectively regulating development through zoning and building standards. Second, accurate digital maps available on the Internet will facilitate the identification of property owners who are statutorily required to obtain or who would be best served by obtaining flood insurance. Third, accurate and precise data will help national, state, and local officials to accurately locate infrastructure and transportation systems (e.g., power plants, sewage treatment plants, railroads, bridges, and ports) to help mitigate and manage risk for multiple hazards, both natural and man-made. At the time of GAO's review, FEMA had not yet established clear standards for the types, quantity, and specificity of data collection and analysis associated with different levels of flood risk. We recommended that FEMA develop standards to better ensure that data collection and analysis is consistent for all communities with similar risk and that it is using its resources efficiently while producing maps that are accurate and useful for communities at different levels of flood risk. In November 2004, FEMA issued its Multi-Year Flood Hazard Identification Plan. The plan describes FEMA's strategy for addressing GAO's recommendation by using varying types of data collection and analysis techniques to develop flood hazard data in order to relate the level of study and level of risk for each county. GAO concluded that FEMA's performance measures would not effectively measure the extent to which the agency's map modernization program would result in its primary intended benefits. As a result, GAO recommended that FEMA develop and implement useful performance measures. In response to GAO's recommendation, FEMA has set target percentages in its Multi-Year Flood Hazard Identification Plan for four key performance indicators in fiscal years 2006 through 2009. FEMA's four indicators are (1) Population with Digital GIS Flood Data Available Online, (2) Population with Adopted Maps that Meet Quality Standards, (3) Leveraged Digital GIS Flood Data, and (4) Appropriated Funds Sent to Coordinating Technical Partners.
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The public faces a high risk that critical services provided by the government and the private sector could be severely disrupted by the Year 2000 computing crisis. Financial transactions could be delayed, flights grounded, power lost, and national defense affected. Moreover, America's infrastructures are a complex array of public and private enterprises with many interdependencies at all levels. These many interdependencies among governments and within key economic sectors could cause a single failure to have adverse repercussions. Key economic sectors that could be seriously affected if their systems are not Year 2000 compliant include information and telecommunications; banking and finance; health, safety, and emergency services; transportation; power and water; and manufacturing and small business. The information and telecommunications sector is especially important. In testimony in June, we reported that the Year 2000 readiness of the telecommunications sector is one of the most crucial concerns to our nation because telecommunications are critical to the operations of nearly every public-sector and private-sector organization. For example, the information and telecommunications sector (1) enables the electronic transfer of funds, the distribution of electrical power, and the control of gas and oil pipeline systems, (2) is essential to the service economy, manufacturing, and efficient delivery of raw materials and finished goods, and (3) is basic to responsive emergency services. Reliable telecommunications services are made possible by a complex web of highly interconnected networks supported by national and local carriers and service providers, equipment manufacturers and suppliers, and customers. In addition to the risks associated with the nation's key economic sectors, one of the largest, and largely unknown, risks relates to the global nature of the problem. With the advent of electronic communication and international commerce, the United States and the rest of the world have become critically dependent on computers. However, there are indications of Year 2000 readiness problems in the international arena. For example, a June 1998 informal World Bank survey of foreign readiness found that only 18 of 127 countries (14 percent) had a national Year 2000 program, 28 countries (22 percent) reported working on the problem, and 16 countries (13 percent) reported only awareness of the problem. No conclusive data were received from the remaining 65 countries surveyed (51 percent). In addition, a survey of 15,000 companies in 87 countries by the Gartner Group found that the United States, Canada, the Netherlands, Belgium, Australia, and Sweden were the Year 2000 leaders, while nations including Germany, India, Japan, and Russia were 12 months or more behind the United States. The Gartner Group's survey also found that 23 percent of all companies (80 percent of which were small companies) had not started a Year 2000 effort. Moreover, according to the Gartner Group, the "insurance, investment services and banking are industries furthest ahead. Healthcare, education, semiconductor, chemical processing, agriculture, food processing, medical and law practices, construction and government agencies are furthest behind. Telecom, power, gas and water, software, shipbuilding and transportation are laggards barely ahead of furthest-behind efforts." The following are examples of some of the major disruptions the public and private sectors could experience if the Year 2000 problem is not corrected. Unless the Federal Aviation Administration (FAA) takes much more decisive action, there could be grounded or delayed flights, degraded safety, customer inconvenience, and increased airline costs. Aircraft and other military equipment could be grounded because the computer systems used to schedule maintenance and track supplies may not work. Further, the Department of Defense (DOD) could incur shortages of vital items needed to sustain military operations and readiness. Medical devices and scientific laboratory equipment may experience problems beginning January 1, 2000, if the computer systems, software applications, or embedded chips used in these devices contain two-digit fields for year representation. According to the Basle Committee on Banking Supervision--an international committee of banking supervisory authorities--failure to address the Year 2000 issue would cause banking institutions to experience operational problems or even bankruptcy. Recognizing the seriousness of the Year 2000 problem, on February 4, 1998, the President signed an executive order that established the President's Council on Year 2000 Conversion led by an Assistant to the President and composed of one representative from each of the executive departments and from other federal agencies as may be determined by the Chair. The Chair of the Council was tasked with the following Year 2000 roles: (1) overseeing the activities of agencies, (2) acting as chief spokesperson in national and international forums, (3) providing policy coordination of executive branch activities with state, local, and tribal governments, and (4) promoting appropriate federal roles with respect to private-sector activities. Addressing the Year 2000 problem in time will be a tremendous challenge for the federal government. Many of the federal government's computer systems were originally designed and developed 20 to 25 years ago, are poorly documented, and use a wide variety of computer languages, many of which are obsolete. Some applications include thousands, tens of thousands, or even millions of lines of code, each of which must be examined for date-format problems. The federal government also depends on the telecommunications infrastructure to deliver a wide range of services. For example, the route of an electronic Medicare payment may traverse several networks--those operated by the Department of Health and Human Services, the Department of the Treasury's computer systems and networks, and the Federal Reserve's Fedwire electronic funds transfer system. In addition, the year 2000 could cause problems for the many facilities used by the federal government that were built or renovated within the last 20 years and contain embedded computer systems to control, monitor, or assist in operations. For example, building security systems, elevators, and air conditioning and heating equipment could malfunction or cease to operate. Agencies cannot afford to neglect any of these issues. If they do, the impact of Year 2000 failures could be widespread, costly, and potentially disruptive to vital government operations worldwide. Nevertheless, overall, the government's 24 major departments and agencies are making slow progress in fixing their systems. In May 1997, the Office of Management and Budget (OMB) reported that about 21 percent of the mission-critical systems (1,598 of 7,649) for these departments and agencies were Year 2000 compliant. A year later, in May 1998, these departments and agencies reported that 2,914 of the 7,336 mission-critical systems in their current inventories, or about 40 percent, were compliant. However, unless agency progress improves dramatically, a substantial number of mission-critical systems will not be compliant in time. In addition to slow governmentwide progress in fixing systems, our reviews of federal agency Year 2000 programs have found uneven progress. Some agencies are significantly behind schedule and are at high risk that they will not fix their systems in time. Other agencies have made progress, although risks continue and a great deal of work remains. The following are examples of the results of some of our recent reviews. Last month, we testified about FAA's progress in implementing a series of recommendations we had made earlier this year to assist FAA in completing overdue awareness and assessment activities. These recommendations included assessing how the major FAA components and the aviation industry would be affected if Year 2000 problems were not corrected in time and completing inventories of all information systems, including data interfaces. Officials at both FAA and the Department of Transportation agreed with these recommendations, and the agency has made progress in implementing them. In our August testimony, we reported that FAA had made progress in managing its Year 2000 problem and had completed critical steps in defining which systems needed to be corrected and how to accomplish this. However, with less than 17 months to go, FAA must still correct, test, and implement many of its mission-critical systems. It is doubtful that FAA can adequately do all of this in the time remaining. Accordingly, FAA must determine how to ensure continuity of critical operations in the likely event of some systems' failures. In October 1997, we reported that while the Social Security Administration (SSA) had made significant progress in assessing and renovating mission-critical mainframe software, certain areas of risk in its Year 2000 program remained. Accordingly, we made several recommendations to address these risk areas, which included the Year 2000 compliance of the systems used by the 54 state Disability Determination Services that help administer the disability programs. SSA agreed with these recommendations and, in July 1998, we reported that actions to implement these recommendations had either been taken or were underway.Further, we found that SSA has maintained its place as a federal leader in addressing Year 2000 issues and has made significant progress in achieving systems compliance. However, essential tasks remain. For example, many of the states' Disability Determination Service systems still had to be renovated, tested, and deemed Year 2000 compliant. Our work has shown that much likewise remains to be done in DOD and the military services. For example, our recent report on the Navy found that while positive actions have been taken, remediation progress had been slow and the Navy was behind schedule in completing the early phases of its Year 2000 program. Further, the Navy had not been effectively overseeing and managing its Year 2000 efforts and lacked complete and reliable information on its systems and on the status and cost of its remediation activities. We have recommended improvements to DOD's and the military services' Year 2000 programs with which they have concurred. In addition to these examples, our reviews have shown that many agencies had not adequately acted to establish priorities, solidify data exchange agreements, or develop contingency plans. Likewise, more attention needs to be devoted to (1) ensuring that the government has a complete and accurate picture of Year 2000 progress, (2) setting governmentwide priorities, (3) ensuring that the government's critical core business processes are adequately tested, (4) recruiting and retaining information technology personnel with the appropriate skills for Year 2000-related work, and (5) assessing the nation's Year 2000 risks, including those posed by key economic sectors. I would like to highlight some of these vulnerabilities, and our recommendations made in April 1998 for addressing them. First, governmentwide priorities in fixing systems have not yet been established. These governmentwide priorities need to be based on such criteria as the potential for adverse health and safety effects, adverse financial effects on American citizens, detrimental effects on national security, and adverse economic consequences. Further, while individual agencies have been identifying mission-critical systems, this has not always been done on the basis of a determination of the agency's most critical operations. If priorities are not clearly set, the government may well end up wasting limited time and resources in fixing systems that have little bearing on the most vital government operations. Other entities have recognized the need to set priorities. For example, Canada has established 48 national priorities covering areas such as national defense, food production, safety, and income security. Second, business continuity and contingency planning across the government has been inadequate. In their May 1998 quarterly reports to OMB, only four agencies reported that they had drafted contingency plans for their core business processes. Without such plans, when unpredicted failures occur, agencies will not have well-defined responses and may not have enough time to develop and test alternatives. Federal agencies depend on data provided by their business partners as well as services provided by the public infrastructure (e.g., power, water, transportation, and voice and data telecommunications). One weak link anywhere in the chain of critical dependencies can cause major disruptions to business operations. Given these interdependencies, it is imperative that contingency plans be developed for all critical core business processes and supporting systems, regardless of whether these systems are owned by the agency. Our recently issued guidance aims to help agencies ensure such continuity of operations through contingency planning. Third, OMB's assessment of the current status of federal Year 2000 progress is predominantly based on agency reports that have not been consistently reviewed or verified. Without independent reviews, OMB and the President's Council on Year 2000 Conversion have little assurance that they are receiving accurate information. In fact, we have found cases in which agencies' systems compliance status as reported to OMB has been inaccurate. For example, the DOD Inspector General estimated that almost three quarters of DOD's mission-critical systems reported as compliant in November 1997 had not been certified as compliant by DOD components.In May 1998, the Department of Agriculture (USDA) reported 15 systems as compliant, even though these were replacement systems that were still under development or were planned for development. (The department removed these systems from compliant status in its August 1998 quarterly report.) Fourth, end-to-end testing responsibilities have not yet been defined. To ensure that their mission-critical systems can reliably exchange data with other systems and that they are protected from errors that can be introduced by external systems, agencies must perform end-to-end testing for their critical core business processes. The purpose of end-to-end testing is to verify that a defined set of interrelated systems, which collectively support an organizational core business area or function, will work as intended in an operational environment. In the case of the year 2000, many systems in the end-to-end chain will have been modified or replaced. As a result, the scope and complexity of testing--and its importance--is dramatically increased, as is the difficulty of isolating, identifying, and correcting problems. Consequently, agencies must work early and continually with their data exchange partners to plan and execute effective end-to-end tests. So far, lead agencies have not been designated to take responsibility for ensuring that end-to-end testing of processes and supporting systems is performed across boundaries, and that independent verification and validation of such testing is ensured. We have set forth a structured approach to testing in our recently released exposure draft. In our April 1998 report on governmentwide Year 2000 progress, we made a number of recommendations to the Chair of the President's Council on Year 2000 Conversion aimed at addressing these problems. These included establishing governmentwide priorities and ensuring that agencies set developing a comprehensive picture of the nation's Year 2000 readiness, requiring agencies to develop contingency plans for all critical core requiring agencies to develop an independent verification strategy to involve inspectors general or other independent organizations in reviewing Year 2000 progress, and designating lead agencies responsible for ensuring that end-to-end operational testing of processes and supporting systems is performed. We are encouraged by actions the Council is taking in response to some of our recommendations. For example, OMB and the Chief Information Officers Council adopted our guide providing information on business continuity and contingency planning issues common to most large enterprises as a model for federal agencies. However, as we recently testified before this Subcommittee, some actions have not been fully addressed--principally with respect to setting national priorities and end-to-end testing. State and local governments also face a major risk of Year 2000-induced failures to the many vital services--such as benefits payments, transportation, and public safety--that they provide. For example, food stamps and other types of payments may not be made or could be made for incorrect amounts; date-dependent signal timing patterns could be incorrectly implemented at highway intersections, and safety severely compromised, if traffic signal systems run by state and local governments do not process four-digit years correctly; and criminal records (i.e., prisoner release or parole eligibility determinations) may be adversely affected by the Year 2000 problem. Recent surveys of state Year 2000 efforts have indicated that much remains to be completed. For example, a July 1998 survey of state Year 2000 readiness conducted by the National Association of State Information Resource Executives, Inc., found that only about one-third of the states reported that 50 percent or more of their critical systems had been completely assessed, remediated, and tested. In a June 1998 survey conducted by USDA's Food and Nutrition Service, only 3 and 14 states, respectively, reported that the software, hardware, and telecommunications that support the Food Stamp Program, and the Women, Infants, and Children program, were Year 2000 compliant. Although all but one of the states reported that they would be Year 2000 compliant by January 1, 2000, many of the states reported that their systems are not due to be compliant until after March 1999 (the federal government's Year 2000 implementation goal). Indeed, 4 and 5 states, respectively, reported that the software, hardware, and telecommunications supporting the Food Stamp Program, and the Women, Infants, and Children program would not be Year 2000 compliant until the last quarter of calendar year 1999, which puts them at high risk of failure due to the need for extensive testing. State audit organizations have identified other significant Year 2000 concerns. For example, (1) Illinois' Office of the Auditor General reported that significant future efforts were needed to ensure that the year 2000 would not adversely affect state government operations, (2) Vermont's Office of Auditor of Accounts reported that the state faces the risk that critical portions of its Year 2000 compliance efforts could fail, (3) Texas' Office of the State Auditor reported that many state entities had not finished their embedded systems inventories and, therefore, it is not likely that they will complete their embedded systems repairs before the year 2000, and (4) Florida's Auditor General has issued several reports detailing the need for additional Year 2000 planning at various district school boards and community colleges. State audit offices have also made recommendations, including the need for increased oversight, Year 2000 project plans, contingency plans, and personnel recruitment and retention strategies. In the course of these field hearings, states and municipalities have testified about Year 2000 practices that could be adopted by others. For example: New York established a "top 40" list of priority systems having a direct impact on public health, safety, and welfare, such as systems that support child welfare, state aid to schools, criminal history, inmate population management, and tax processing. According to New York, "the Top 40 systems must be compliant, no matter what." The city of Lubbock, Texas, is planning a Year 2000 "drill" this month. To prepare for the drill, Lubbock is developing scenarios of possible Year 2000-induced failures, as well as more normal problems (such as inclement weather) that could occur at the change of century. Louisiana established a $5 million Year 2000 funding pool to assist agencies experiencing emergency circumstances in mission-critical applications and that are unable to correct the problems with existing resources. To fully address the Year 2000 risks that states and the federal government face, data exchanges must also be confronted--a monumental issue. As computers play an ever-increasing role in our society, exchanging data electronically has become a common method of transferring information among federal, state, and local governments. For example, SSA exchanges data files with the states to determine the eligibility of disabled persons for disability benefits. In another example, the National Highway Traffic Safety Administration provides states with information needed for driver registrations. As computer systems are converted to process Year 2000 dates, the associated data exchanges must also be made Year 2000 compliant. If the data exchanges are not Year 2000 compliant, data will not be exchanged or invalid data could cause the receiving computer systems to malfunction or produce inaccurate computations. Our recent report on actions that have been taken to address Year 2000 issues for electronic data exchanges revealed that federal agencies and the states use thousands of such exchanges to communicate with each other and other entities. For example, federal agencies reported that their mission-critical systems have almost 500,000 data exchanges with other federal agencies, states, local governments, and the private sector. To successfully remediate their data exchanges, federal agencies and the states must (1) assess information systems to identify data exchanges that are not Year 2000 compliant, (2) contact exchange partners and reach agreement on the date format to be used in the exchange, (3) determine if data bridges and filters are needed and, if so, reach agreement on their development, (4) develop and test such bridges and filters, (5) test and implement new exchange formats, and (6) develop contingency plans and procedures for data exchanges. At the time of our review, much work remained to ensure that federal and state data exchanges will be Year 2000 compliant. About half of the federal agencies reported during the first quarter of 1998 that they had not yet finished assessing their data exchanges. Moreover, almost half of the federal agencies reported that they had reached agreements on 10 percent or fewer of their exchanges, few federal agencies reported having installed bridges or filters, and only 38 percent of the agencies reported that they had developed contingency plans for data exchanges. Further, the status of the data exchange efforts of 15 of the 39 state-level organizations that responded to our survey was not discernable because they were not able to provide us with information on their total number of exchanges and the number assessed. Of the 24 state-level organizations that provided actual or estimated data, they reported, on average, that 47 percent of the exchanges had not been assessed. In addition, similar to the federal agencies, state-level organizations reported having made limited progress in reaching agreements with exchange partners, installing bridges and filters, and developing contingency plans. However, we could draw only limited conclusions on the status of the states' actions because data were provided on only a small portion of states' data exchanges. To strengthen efforts to address data exchanges, we made several recommendations to OMB. In response, OMB agreed that it needed to increase its efforts in this area. For example, OMB noted that federal agencies had provided the General Services Administration with a list of their data exchanges with the states. In addition, as a result of an agreement reached at an April 1998 federal/state data exchange meeting,the states were supposed to verify the accuracy of these initial lists by June 1, 1998. OMB also noted that the General Services Administration is planning to collect and post information on its Internet World Wide Web site on the progress of federal agencies and states in implementing Year 2000 compliant data exchanges. In summary, federal, state, and local efforts must increase substantially to ensure that major service disruptions do not occur. Greater leadership and partnerships are essential if government programs are to meet the needs of the public at the turn of the century. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions that you or other members of the Subcommittee may have at this time. FAA Systems: Serious Challenges Remain in Resolving Year 2000 and Computer Security Problems (GAO/T-AIMD-98-251, August 6, 1998). Year 2000 Computing Crisis: Business Continuity and Contingency Planning (GAO/AIMD-10.1.19, August 1998). Internal Revenue Service: Impact of the IRS Restructuring and Reform Act on Year 2000 Efforts (GAO/GGD-98-158R, August 4, 1998). Social Security Administration: Subcommittee Questions Concerning Information Technology Challenges Facing the Commissioner (GAO/AIMD-98-235R, July 10, 1998). Year 2000 Computing Crisis: Actions Needed on Electronic Data Exchanges (GAO/AIMD-98-124, July 1, 1998). Defense Computers: Year 2000 Computer Problems Put Navy Operations at Risk (GAO/AIMD-98-150, June 30, 1998). Year 2000 Computing Crisis: A Testing Guide (GAO/AIMD-10.1.21, Exposure Draft, June 1998). Year 2000 Computing Crisis: Testing and Other Challenges Confronting Federal Agencies (GAO/T-AIMD-98-218, June 22, 1998). Year 2000 Computing Crisis: Telecommunications Readiness Critical, Yet Overall Status Largely Unknown (GAO/T-AIMD-98-212, June 16, 1998). GAO Views on Year 2000 Testing Metrics (GAO/AIMD-98-217R, June 16, 1998). IRS' Year 2000 Efforts: Business Continuity Planning Needed for Potential Year 2000 System Failures (GAO/GGD-98-138, June 15, 1998). Year 2000 Computing Crisis: Actions Must Be Taken Now to Address Slow Pace of Federal Progress (GAO/T-AIMD-98-205, June 10, 1998). Defense Computers: Army Needs to Greatly Strengthen Its Year 2000 Program (GAO/AIMD-98-53, May 29, 1998). Year 2000 Computing Crisis: USDA Faces Tremendous Challenges in Ensuring That Vital Public Services Are Not Disrupted (GAO/T-AIMD-98-167, May 14, 1998). Securities Pricing: Actions Needed for Conversion to Decimals (GAO/T-GGD-98-121, May 8, 1998). Year 2000 Computing Crisis: Continuing Risks of Disruption to Social Security, Medicare, and Treasury Programs (GAO/T-AIMD-98-161, May 7, 1998). IRS' Year 2000 Efforts: Status and Risks (GAO/T-GGD-98-123, May 7, 1998). Air Traffic Control: FAA Plans to Replace Its Host Computer System Because Future Availability Cannot Be Assured (GAO/AIMD-98-138R, May 1, 1998). Year 2000 Computing Crisis: Potential for Widespread Disruption Calls for Strong Leadership and Partnerships (GAO/AIMD-98-85, April 30, 1998). Defense Computers: Year 2000 Computer Problems Threaten DOD Operations (GAO/AIMD-98-72, April 30, 1998). Department of the Interior: Year 2000 Computing Crisis Presents Risk of Disruption to Key Operations (GAO/T-AIMD-98-149, April 22, 1998). Tax Administration: IRS' Fiscal Year 1999 Budget Request and Fiscal Year 1998 Filing Season (GAO/T-GGD/AIMD-98-114, March 31, 1998). Year 2000 Computing Crisis: Strong Leadership Needed to Avoid Disruption of Essential Services (GAO/T-AIMD-98-117, March 24, 1998). Year 2000 Computing Crisis: Federal Regulatory Efforts to Ensure Financial Institution Systems Are Year 2000 Compliant (GAO/T-AIMD-98-116, March 24, 1998). Year 2000 Computing Crisis: Office of Thrift Supervision's Efforts to Ensure Thrift Systems Are Year 2000 Compliant (GAO/T-AIMD-98-102, March 18, 1998). Year 2000 Computing Crisis: Strong Leadership and Effective Public/Private Cooperation Needed to Avoid Major Disruptions (GAO/T-AIMD-98-101, March 18, 1998). Post-Hearing Questions on the Federal Deposit Insurance Corporation's Year 2000 (Y2K) Preparedness (AIMD-98-108R, March 18, 1998). SEC Year 2000 Report: Future Reports Could Provide More Detailed Information (GAO/GGD/AIMD-98-51, March 6, 1998). Year 2000 Readiness: NRC's Proposed Approach Regarding Nuclear Powerplants (GAO/AIMD-98-90R, March 6, 1998). Year 2000 Computing Crisis: Federal Deposit Insurance Corporation's Efforts to Ensure Bank Systems Are Year 2000 Compliant (GAO/T-AIMD-98-73, February 10, 1998). Year 2000 Computing Crisis: FAA Must Act Quickly to Prevent Systems Failures (GAO/T-AIMD-98-63, February 4, 1998). FAA Computer Systems: Limited Progress on Year 2000 Issue Increases Risk Dramatically (GAO/AIMD-98-45, January 30, 1998). Defense Computers: Air Force Needs to Strengthen Year 2000 Oversight (GAO/AIMD-98-35, January 16, 1998). Year 2000 Computing Crisis: Actions Needed to Address Credit Union Systems' Year 2000 Problem (GAO/AIMD-98-48, January 7, 1998). Veterans Health Administration Facility Systems: Some Progress Made In Ensuring Year 2000 Compliance, But Challenges Remain (GAO/AIMD-98-31R, November 7, 1997). Year 2000 Computing Crisis: National Credit Union Administration's Efforts to Ensure Credit Union Systems Are Year 2000 Compliant (GAO/T-AIMD-98-20, October 22, 1997). Social Security Administration: Significant Progress Made in Year 2000 Effort, But Key Risks Remain (GAO/AIMD-98-6, October 22, 1997). Defense Computers: Technical Support Is Key to Naval Supply Year 2000 Success (GAO/AIMD-98-7R, October 21, 1997). Defense Computers: LSSC Needs to Confront Significant Year 2000 Issues (GAO/AIMD-97-149, September 26, 1997). Veterans Affairs Computer Systems: Action Underway Yet Much Work Remains To Resolve Year 2000 Crisis (GAO/T-AIMD-97-174, September 25, 1997). Year 2000 Computing Crisis: Success Depends Upon Strong Management and Structured Approach (GAO/T-AIMD-97-173, September 25, 1997). Year 2000 Computing Crisis: An Assessment Guide (GAO/AIMD-10.1.14, September 1997). Defense Computers: SSG Needs to Sustain Year 2000 Progress (GAO/AIMD-97-120R, August 19, 1997). Defense Computers: Improvements to DOD Systems Inventory Needed for Year 2000 Effort (GAO/AIMD-97-112, August 13, 1997). Defense Computers: Issues Confronting DLA in Addressing Year 2000 Problems (GAO/AIMD-97-106, August 12, 1997). Defense Computers: DFAS Faces Challenges in Solving the Year 2000 Problem (GAO/AIMD-97-117, August 11, 1997). Year 2000 Computing Crisis: Time Is Running Out for Federal Agencies to Prepare for the New Millennium (GAO/T-AIMD-97-129, July 10, 1997). Veterans Benefits Computer Systems: Uninterrupted Delivery of Benefits Depends on Timely Correction of Year-2000 Problems (GAO/T-AIMD-97-114, June 26, 1997). Veterans Benefits Computer Systems: Risks of VBA's Year-2000 Efforts (GAO/AIMD-97-79, May 30, 1997). Medicare Transaction System: Success Depends Upon Correcting Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16, 1997). Medicare Transaction System: Serious Managerial and Technical Weaknesses Threaten Modernization (GAO/T-AIMD-97-91, May 16, 1997). Year 2000 Computing Crisis: Risk of Serious Disruption to Essential Government Functions Calls for Agency Action Now (GAO/T-AIMD-97-52, February 27, 1997). Year 2000 Computing Crisis: Strong Leadership Today Needed To Prevent Future Disruption of Government Services (GAO/T-AIMD-97-51, February 24, 1997). High-Risk Series: Information Management and Technology (GAO/HR-97-9, February 1997). The first copy of each GAO report and testimony is free. 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GAO discussed the year 2000 computer system risks facing the nation, focusing on: (1) GAO's major concerns with the federal government's progress in correcting its systems; (2) state and local government year 2000 issues; and (3) critical year 2000 data exchange issues. GAO noted that: (1) the public faces a high risk that critical services provided by the government and the private sector could be severely disrupted by the year 2000 computing crisis; (2) the year 2000 could cause problems for the many facilities used by the federal government that were built or renovated within the last 20 years and contain embedded computer systems to control, monitor, or assist in operations; (3) overall, the government's 24 major departments and agencies are making slow progress in fixing their systems; (4) in May 1997, the Office of Management and Budget (OMB) reported that about 21 percent of the mission-critical systems for these departments and agencies were year 2000 compliant; (5) in May 1998, these departments reported that 40 percent of the mission-critical systems were year 2000 compliant; (6) unless progress improves dramatically, a substantial number of mission-critical systems will not be compliant in time; (7) in addition to slow governmentwide progress in fixing systems, GAO's reviews of federal agency year 2000 programs have found uneven progress; (8) some agencies are significantly behind schedule and are at high risk that they will not fix their systems in time; (9) other agencies have made progress, although risks continue and a great deal of work remains; (10) governmentwide priorities in fixing systems have not yet been established; (11) these governmentwide priorities need to be based on such criteria as the potential for adverse health and safety effects, adverse financial effects on American citizens, detrimental effects on national security, and adverse economic consequences; (12) business continuity and contingency planning across the government has been inadequate; (13) in their May 1998 quarterly reports to OMB, only four agencies reported that they had drafted contingency plans for their core business processes; (14) OMB's assessment of the status of federal year 2000 progress is predominantly based on agency reports that have not been consistently reviewed or verified; (15) GAO found cases in which agencies' systems' compliance status as reported to OMB had been inaccurate; (16) end-to-end testing responsibilities have not yet been defined; (17) state and local governments also face a major risk of year 2000-induced failures to the many vital services that they provide; (18) recent surveys of state year 2000 efforts have indicated that much remains to be completed; and (19) at the time of GAO's review, much work remained to ensure that federal and state data exchanges will be year 2000 compliant.
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In 2007, we evaluated retrospective review activities conducted between 2001 and 2006 by nine agencies covering health, safety, environmental, financial, and economic regulations. Agencies reported that the main purpose of most of their reviews was to examine the effectiveness of the implementation of regulations. We found that the agencies had conducted more retrospective reviews, and a greater variety of these reviews (such as ones examining the efficiency and effectiveness of regulations and others identifying opportunities to reduce regulatory burdens) than was readily apparent, especially to the public. Reviews mandated by requirements in statutes or executive orders and related OMB memorandums were sometimes the impetus for reviews, but agencies more often exercised their own discretionary authorities to review regulations. As a result of these reviews, agencies amended regulations, changed guidance and related documents, decided to conduct additional studies, and confirmed that existing rules achieved the intended results. Agencies noted that discretionary reviews generated additional action more often than mandatory reviews, which most often resulted in no changes. We also found that agencies, to varying extents, were developing written procedures, processes, and standards to guide how they select which rules to review, analyze those rules, and report the results. Multiple factors helped or impeded the conduct and usefulness of retrospective reviews. Agencies identified time and resources as the most critical barriers, but also cited factors such as data limitations and overlapping or duplicative review requirements. Nonfederal parties also identified a lack of transparency in agency review processes as a barrier and said they were rarely aware of the agencies' reviews. We made seven recommendations for executive action in the 2007 report to improve the effectiveness and transparency of retrospective regulatory reviews. Among the elements that we recommended incorporating in policies, procedures, or guidance were: minimum standards for documenting and reporting completed review results; inclusion of public input as a factor in regulatory review decisions; and consideration of how agencies will measure the performance of new regulations. OMB took actions that addressed our recommendations which, if effectively implemented, will improve the transparency, credibility, and effectiveness of agencies' retrospective review efforts. For example, in 2011 and 2012, the administration issued new directives to agencies on how they should plan and conduct analyses of existing regulations, among other subjects, that addressed each of our prior recommendations. Collectively, they directed executive agencies and encouraged independent regulatory agencies to develop and implement plans to periodically review existing significant regulations. OMB's guidance on the 2011 and 2012 executive orders advised agencies to identify in their final plans specific reforms and initiatives that will significantly reduce existing regulatory burdens and promote economic growth and job creation. We are currently completing a report at the request of Senators Ron Johnson and Mark Warner concerning agencies' retrospective regulatory analyses under the 2011 and 2012 executive orders. The report will identify for selected agencies (1) the results and anticipated outcomes of completed retrospective analyses included in agencies' review plans and progress reports, (2) strategies, practices, or factors that facilitated or limited agencies' ability to implement retrospective analyses, and (3) the extent to which agencies are incorporating retrospective analyses into their processes for measuring and achieving agency priority goals. In a series of products from 1996 through 2009 examining implementation of the OIRA regulatory review process, we consistently found that OIRA's reviews of agencies' draft rules often resulted in changes, but the transparency and documentation of the review process could be improved. Unfortunately, as I will detail below, to date, OIRA has implemented only 1 of our 12 most recent recommendations on this process. A brief explanation of OIRA's review process provides helpful context for understanding why these findings and recommendations remain relevant today. Centralized presidential reviews of agency's regulations have a long history and can be traced back to a program established by President Nixon in 1971. President Reagan's Executive Order 12291 in 1981 expanded the scope of presidential reviews of rulemakings and delegated responsibility for this review function to OIRA. President Clinton's issuance of Executive Order 12866 in 1993 established the current process and requirements regarding reviews of covered agencies' draft proposed and final rules. More recently, in 2011, President Obama issued Executive Order 13563, which supplemented and reaffirmed the principles, structures, and definitions governing contemporary regulatory review established in the 1993 executive order. The basic procedures and requirements for the regulatory review process today follow the provisions of that 1993 executive order. This practice of centralized regulatory reviews is now well established as part of the rulemaking process, although it continues to attract some controversy and criticism. In essence, OIRA is responsible for the coordinated review of agencies' draft proposed and final rules to ensure that regulations are consistent with applicable law, the President's priorities, and the principles set forth in executive orders. OIRA is also to ensure that decisions made by one agency do not conflict with the policies or actions taken or planned by another agency. Executive agencies, except for independent regulatory agencies, are required to submit their significant regulatory actions to OIRA for review. OIRA is generally required to complete its review within 90 days after an agency formally submits a draft regulation. The review process can be summarized as follows: OIRA reviews agencies' draft rules at both the proposed and final stages of rulemaking. In each phase, the rulemaking agency submits a regulatory review package to OIRA (consisting of the rule, any supporting materials, and a transmittal form) and OIRA initiates a review. During the review process, OIRA analyzes the draft rule in light of executive order principles and discusses the package with staff and officials at the rulemaking agency, as well as with other agencies with which interagency coordination will be necessary. In the course of that process, the draft rule that is submitted by the agency often changes. In some cases, agencies withdraw the draft rule from OIRA during the review period and the rule may or may not be subsequently resubmitted to OIRA. At the end of the review period, OIRA either concludes that the draft rule is consistent with the principles of the executive order (which occurs in the vast majority of cases) or returns the rule to the agency "for further consideration." If a draft rule that was determined to be consistent with the executive order has been modified in the course of the review, the rule is coded in the OIRA database as "consistent with change" (regardless of the source or extent of the change). If no changes have been made to the draft rule during the review, the rule is coded as "consistent without change." OIRA only codes rules as "consistent without change" if they are exactly the same at the end of the review period as the original submission. Even editorial changes made at the rulemaking agency's initiative can cause a rule to be coded "consistent with change." Executive Order 12866 also contains several transparency provisions that require both OIRA and agencies to disclose certain information about the OIRA review process. For example, the order requires OIRA to disclose information about communications between OIRA and persons not employed by the executive branch pertinent to rules under OIRA's review and, if OIRA returns a rule to the issuing agency for reconsideration, the executive order requires OIRA to provide a written explanation for the return. If a rule is withdrawn from OIRA review, however, the order has no requirement for OIRA or the regulatory agency to provide a written explanation. After the rule has been published in the Federal Register or otherwise issued to the public, the regulatory agency publishing the rule is required to make available to the public the information provided to OIRA in accordance with the executive order; identify for the public, in a complete, clear, and simple manner, the substantive changes between the draft submitted to OIRA and the action subsequently announced; and identify for the public those changes in the regulatory action that were made at the suggestion or recommendation of OIRA. These transparency requirements and documentation are not simply a matter of administrative paperwork. Agencies' documentation of the OIRA review process and its outcomes become part of the regulatory docket for each rulemaking. The docket publicly documents the support and basis for decisions made about the substance of the rule, thus serving as a source of information for decision makers, the general public, and for purposes of potential judicial review. Since the issuance of Executive Order 12866, Congress has periodically asked us to examine the implementation of the OIRA regulatory review process. Multiple products we issued from 1996 through 2009 consistently found that the OIRA regulatory review process often resulted in changes to agencies' rules but the transparency and documentation of the review process could be improved. For example, in 2003, we examined 85 rules from nine health, safety, or environmental agencies that had been changed, returned or withdrawn as a result of the OIRA review process. We found that the OIRA review process had significantly affected 25 of those 85 rules. While almost all returned rules were from the Department of Transportation, the rules that were most often significantly changed were from the Environmental Protection Agency. OIRA's suggestions appeared to have at least some effect on almost all of the 25 rules' potential costs and benefits or the agencies' estimates of those costs and benefits. The agencies' docket files did not always provide clear and complete documentation of the changes made during OIRA's review or at OIRA's suggestion, as required by the executive order, though a few agencies exhibited exemplary transparency practices. In 2009, we again found that OIRA's reviews of agencies' draft rules often resulted in changes. Of our 12 case-study rules subject to OIRA review, 10 reviews resulted in changes, about half of which included changes to the regulatory text. Agencies used various methods to document OIRA's reviews and these methods generally met disclosure requirements. However, we found that agencies could improve the transparency of this documentation. In particular, agencies did not always clearly attribute changes made at the suggestion of OIRA. Additionally, agencies' interpretations were not necessarily consistent regarding what constitutes a substantive change that should be documented to comply with the executive order transparency requirements. Both of these issues had been identified in our earlier work. In our 2003 and 2009 reports, we made a total of 12 recommendations to OMB about the review process under Executive Order 12866 (see appendix I for a list of the recommendations). In 2003 we made 8 recommendations targeting several aspects of the OIRA review process that remained unclear and where improvements could allow the public to better understand the effects of OIRA's review. For example, these aspects included addressing a lack of documentation requirements regarding (1) staff-level exchanges during the review process, (2) the reasons for withdrawal of a rule, or (3) the source or impetus of changes made to rules. In 2009, based on similar findings, we made 4 additional recommendations that OMB provide guidance to agencies to improve transparency and documentation of the OIRA review process. OMB generally agreed with the 4 recommendations in our 2009 report, but disagreed with 7 of the 8 recommendations in our 2003 report. OIRA to date has implemented only 1 of those 12 recommendations--to more clearly indicate in the posted information which regulatory action was being discussed and the affiliations of participants when meeting with outside parties regarding draft rules under OIRA review. We believe that our past recommendations still have merit and, if acted upon, would improve the transparency of the OIRA review process. For example, regarding our recommendation that the Administrator of OIRA should establish procedures whereby either OIRA or the agencies disclose the reasons why rules are withdrawn from OIRA review, we note that OIRA's records on the outcomes of regulatory reviews indicate many more withdrawals, which currently require no explanation, than returns, which do require explanations. Importantly, other organizations have raised concerns about the timeliness of OIRA regulatory reviews. In particular, the Administrative Conference of the United States (ACUS) issued a report and adopted a statement in December 2013 on improving the timeliness of OIRA's regulatory review process. ACUS noted an increase in average review times since 2011, including many reviews that extended well past the limits established in Executive Order 12866, while also acknowledging that OIRA had recently made progress in addressing the backlog. ACUS offered a set of principles for improving the timeliness of review and the transparency concerning the causes for delays, such as that OIRA should, whenever possible, adhere to the timeliness provisions of Executive Order 12866 and, if unable to complete the review of an agency's draft rule within a reasonable time--but in no event beyond 180 days after submission--should inform the public as to the reasons for the delay or return the rule to the submitting agency. Our recent work has continued to highlight both progress made in facilitating transparency, oversight, and public participation in regulatory actions as well as room for improvement. Improvements made in transparency of the rulemaking process benefit not only the public but also congressional oversight. In 2012, we reviewed a generalizable random sample of 1,338 final rules published during calendar years 2003 through 2010 to provide information on the frequency, reasons for, and potential effects of agencies issuing final rules without a notice of proposed rulemaking (NPRM). Before issuing a final rule, agencies are generally required to publish an NPRM in the Federal Register. Agencies must then respond to public comments when issuing final rules. However, agencies may use exceptions in certain circumstances to forgo this NPRM process to expedite rulemaking. For example, agencies may use the good cause exception when they find that notice and comment procedures are "impracticable, unnecessary, or contrary to the public interest." We found that agencies frequently cited the good cause exception and other statutory exceptions to publish final rules without NPRMs. Agencies did not publish an NPRM for about 35 percent of major rules and about 44 percent of nonmajor rules published from 2003 through 2010. We found that agencies, though not required, often requested comments on major final rules issued without an NPRM, but they did not always respond to the comments received. For example, we found that agencies requested comments on 77 of the 123 major rules issued without an NPRM in our sample. The agencies did not issue a follow-up rule or respond to comments on 26 of these 77. This is a missed opportunity, because we found that, when agencies did respond to public comments, they often made changes to improve the rules. Each of these 26 rules is economically significant and some of these rules have an effect of one billion dollars a year or more. To better balance the benefits of expedited rulemaking procedures with the benefits of public comments that are typically part of regular notice-and-comment rulemakings, and improve the quality and transparency of rulemaking records, we recommended that OMB, in consultation with ACUS, issue guidance to encourage agencies to respond to comments on final major rules, for which the agency has discretion, that are issued without a prior notice of proposed rulemaking. OMB stated that it did not believe it necessary to issue guidance on the topic at that time and has not, to date, taken any action to implement our recommendation. We continue to believe that the recommendation has merit and urge OMB to reconsider its prior position. In our 2013 review of international regulatory cooperation we again found opportunities to better facilitate public participation in regulatory activities. In that report, we noted the growing importance of considering regulations in an international context. Agency officials stated that they cooperate with their foreign counterparts (1) because they are operating in an increasingly global environment and many products that agencies regulate originate overseas and (2) in an effort to gain efficiencies--for example, by sharing resources or avoiding duplicative work. Agencies' efforts to cooperate on regulatory programs may also facilitate trade and support the competitiveness of U.S. business. Agency officials we interviewed said that stakeholder involvement is important and nonfederal stakeholders are uniquely positioned to identify and call attention to unnecessary differences among U.S. regulations and those of its trading partners. However, stakeholders we spoke with, such as academics, organizations representing businesses, and consumer advocacy groups, said it can be challenging for them to provide input into agencies' international regulatory cooperation activities because of the required resources and the difficulty of becoming aware of such activities. In addition to effective collaboration with affected nonfederal stakeholders, effective international regulatory cooperation requires interagency coordination and effective collaboration with federal agency officials' foreign counterparts. In an environment of constrained resources it is even more important for agencies to share knowledge on the effective implementation of international regulatory cooperation. We recommended that the Regulatory Working Group, a forum chaired by the OIRA Administrator to assist agencies in identifying and analyzing important regulatory issues, establish one or more mechanisms to facilitate staff level collaboration on international regulatory cooperation issues and include independent regulatory agencies. Such a mechanism could be addressed as part of forthcoming guidance on Executive Order 13609. This May 2012 executive order on promoting international regulatory cooperation was intended to provide high-level support and direction for U.S. agencies' international regulatory cooperation efforts. The executive order directed agencies to consider addressing unnecessary differences in existing regulations and describes processes to help avoid regulatory divergence in the future. If implemented, our recommendation regarding a staff level collaboration mechanism could help ensure that U.S. agencies have the necessary tools and guidance to effectively implement international regulatory cooperation. Chairman Tester, Ranking Member Portman, and Members of the Subcommittee, this concludes my prepared statement. Once again, I appreciate the opportunity to testify on these important issues. I would be pleased to address any questions you or other members of the subcommittee might have at this time. If additional information is needed regarding this testimony, please contact Michelle Sager, Director, Strategic Issues, at (202) 512-6806 or [email protected]. Appendix I: Relevant GAO Recommendations on Regulatory Processes Recommendation Rulemaking: OMB's Role in Reviews of Agencies' Draft Rules and the Transparency of Those Reviews, Published: Sep. 22, 2003. The Director of the Office of Management and Budget should improve the implementation of the transparency requirements in the executive order that are applicable to rulemaking agencies. Specifically, the Administrator should instruct agencies to put information about changes made in a rule after submission for OIRA's review and those made at OIRA's suggestion or recommendation in the agencies' public rulemaking dockets, and to do so within a reasonable period after the rules have been published. The Director of the Office of Management and Budget should improve the implementation of the transparency requirements in the executive order that are applicable to rulemaking agencies. Specifically, the Administrator should define the types of "substantive" changes during the OIRA review process that agencies should disclose as including not only changes made to the regulatory text but also other, noneditorial changes that could ultimately affect the rules' application (e.g., explanations supporting the choice of one alternative over another and solicitations of comments on the estimated benefits and costs of regulatory options). The Director of the Office of Management and Budget should improve the implementation of the transparency requirements in the executive order that are applicable to OIRA. Specifically, the Administrator should establish procedures whereby either OIRA or the agencies disclose the reasons why rules are withdrawn from OIRA review. The Director of the Office of Management and Budget should improve the implementation of the transparency requirements in the executive order that are applicable to OIRA. Specifically, OIRA should reexamine its current policy that only documents exchanged by OIRA branch chiefs and above need to be disclosed because most of the documents that are exchanged while rules are under review at OIRA are exchanged between agency staff and OIRA desk officers. The Director of the Office of Management and Budget should improve the implementation of the transparency requirements in the executive order that are applicable to OIRA. Specifically, the Administrator should more clearly indicate in the meeting log which regulatory action was being discussed and the affiliations of the participants in those meetings. The Director of the Office of Management and Budget should change OIRA's database to clearly differentiate within the "consistent with change" outcome category which rules were substantively changed at OIRA's suggestion or recommendation and which were changed in other ways and for other reasons. The Director of the Office of Management and Budget should define the transparency requirements applicable to the agencies and OIRA in section 6 of Executive Order 12866 in such a way that they include not only the formal review period, but also the informal review period when OIRA says it can have its most important impact on agencies' rules. Doing so would make the trigger for the transparency requirements applicable to OIRA's and the agencies' interaction consistent with the trigger for the transparency requirements applicable to OIRA regarding its communications with outside parties. Executive Office of the President: Office of Management and Budget Recommendation The Director of the Office of Management and Budget should improve the implementation of the transparency requirements in the executive order that are applicable to rulemaking agencies. Specifically, the Administrator should encourage agencies to use "best practice" methods of documentation that clearly describe those changes (e.g., like those used by the Food and Drug Administration, the Environmental Protection Agency's Office of Water, or the Federal Motor Carriers Safety Administration). Reexamining Regulations: Opportunities Exist to Improve Effectiveness and Transparency of Retrospective Reviews, GAO-07-791: Published July 16, 2007. The Director of the Office of Management and Budget, through the Administrator of the Office of Information and Regulatory Affairs (OIRA), and the Chief Counsel for Advocacy should develop guidance to regulatory agencies to consider or incorporate into their policies, procedures, or agency guidance documents that govern regulatory review activities consideration, during the promulgation of certain new rules, of whether and how they will measure the performance of the regulation, including how and when they will collect, analyze, and report the data needed to conduct a retrospective review. Such rules may include significant rules, regulations that the agencies know will be subject to mandatory review requirements, and any other regulations for which the agency believes retrospective reviews may be appropriate. The Director of the Office of Management and Budget, through the Administrator of the Office of Information and Regulatory Affairs, and the Chief Counsel for Advocacy should develop guidance to regulatory agencies to consider or incorporate into their policies, procedures, or agency guidance documents that govern regulatory review activities prioritization of review activities based upon defined selection criteria. These criteria could take into account factors such as the impact of the rule; the length of time since its last review; whether changes to technology, science, or the market have affected the rule; and whether the agency has received substantial feedback regarding improvements to the rule, among other factors relevant to the particular mission of the agency. The Director of the Office of Management and Budget, through the Administrator of the Office of Information and Regulatory Affairs, and the Chief Counsel for Advocacy should develop guidance to regulatory agencies to consider or incorporate into their policies, procedures, or agency guidance documents that govern regulatory review activities specific review factors to be applied to the conduct of agencies' analyses that include, but are not limited to, public input to regulatory review decisions. The Director of the Office of Management and Budget, through the Administrator of the Office of Information and Regulatory Affairs, and the Chief Counsel for Advocacy should develop guidance to regulatory agencies to consider or incorporate into their policies, procedures, or agency guidance documents that govern regulatory review activities minimum standards for documenting and reporting all completed review results. For reviews that included analysis, these minimal standards should include making the analysis publicly available. Recommendation The Director of the Office of Management and Budget, through the Administrator of the Office of Information and Regulatory Affairs, and the Chief Counsel for Advocacy should develop guidance to regulatory agencies to consider or incorporate into their policies, procedures, or agency guidance documents that govern regulatory review activities mechanisms to assess their current means of communicating review results to the public and identify steps that could improve this communication. Such steps could include considering whether the agency could make better use of its agency Web site to communicate reviews and results, establishing an e-mail listserve that alerts interested parties about regulatory reviews and their results, or using other Web-based technologies (such as Web forums) to solicit input from stakeholders across the country. The Director of the Office of Management and Budget, through the Administrator of the Office of Information and Regulatory Affairs, and the Chief Counsel for Advocacy should develop guidance to regulatory agencies to consider or incorporate into their policies, procedures, or agency guidance documents that govern regulatory review activities steps to promote sustained management attention and support to help ensure progress in institutionalizing agency regulatory review initiatives. Executive Office of the President: Office of Management and Budget: Office of Information and Regulatory Affairs and the Small Business: Office of Advocacy In light of overlapping and duplicative review factors in statutorily mandated reviews and the difficulties identified by agencies in their ability to conduct useful reviews with predetermined time frames, the Administrator of OIRA and Chief Counsel for Advocacy should work with regulatory agencies to identify opportunities for Congress to revise the timing and scope of existing regulatory review requirements and/or consolidate existing requirements. Federal Rulemaking: Improvements Needed to Monitoring and Evaluation of Rules Development as Well as to the Transparency of OMB Regulatory Reviews, GAO-09-205: Published: Apr. 20, 2009. If the current administration retains Executive Order 12866, or establishes similar transparency requirements, to improve the monitoring and evaluation of rules development and the transparency of the review process, the Director of OMB, through the Administrator of OIRA, should define in guidance what types of changes made as a result of the OIRA review process are substantive and need to be publicly identified to more consistently implement the order's requirement to provide information to the public "in a complete, clear, and simple manner." If the current administration retains Executive Order 12866, or establishes similar transparency requirements, to improve the monitoring and evaluation of rules development and the transparency of the review process, the Director of OMB, through the Administrator of OIRA, should direct agencies to clearly state in final rules whether they made substantive changes as a result of the OIRA reviews to more consistently implement the order's requirement to provide information to the public "in a complete, clear, and simple manner." If the current administration retains Executive Order 12866, or establishes similar transparency requirements, to improve the monitoring and evaluation of rules development and the transparency of the review process, the Director of OMB, through the Administrator of OIRA, should standardize how agencies label documentation of these changes in public rulemaking dockets to more consistently implement the order's requirement to provide information to the public "in a complete, clear, and simple manner." Executive Office of the President: Office of Management and Budget Recommendation If the current administration retains Executive Order 12866, or establishes similar transparency requirements, to improve the monitoring and evaluation of rules development and the transparency of the review process, the Director of OMB, through the Administrator of OIRA, should instruct agencies to clearly attribute those changes "made at the suggestion or recommendation of OIRA to more consistently implement the order's requirement to provide information to the public "in a complete, clear, and simple manner." Federal Rulemaking: Agencies Could Take Additional Steps to Respond to Public Comments, GAO-13-21: Published: Dec. 20, 2012. To better balance the benefits of expedited rulemaking procedures with the benefits of public comments that are typically part of regular notice-and- comment rulemakings, and improve the quality and transparency of rulemaking records, the Director of OMB, in consultation with the Chairman of Administrative Conference of the United States (ACUS), should issue guidance to encourage agencies to respond to comments on final major rules, for which the agency has discretion, that are issued without a prior notice of proposed rulemaking. International Regulatory Cooperation: Agency Efforts Could Benefit from Increased Collaboration and Interagency Guidance, GAO-13-588: Published: Aug. 1, 2013. To ensure that U.S. agencies have the necessary tools and guidance for effectively implementing international regulatory cooperation, the Regulatory Working Group, as part of forthcoming guidance on implementing Executive Order 13609, should establish one or more mechanisms, such as a forum or working group, to facilitate staff level collaboration on international regulatory cooperation issues and include independent regulatory agencies. Agency affected Executive Office of the President: Office of Management and Budget Executive Office of the President: Office of Management and Budget Executive Office of the President: Office of Management and Budget: Regulatory Working Group Checkmarks indicate that the recommendation has been closed as implemented. International Regulatory Cooperation: Agency Efforts Could Benefit from Increased Collaboration and Interagency Guidance. GAO-13-588. Washington, D.C.: August 1, 2013. Federal Rulemaking: Agencies Could Take Additional Steps to Respond to Public Comments. GAO-13-21. Washington, D.C.: December 20, 2012. Federal Rulemaking: Improvements Needed to Monitoring and Evaluation of Rules Development as Well as to the Transparency of OMB Regulatory Reviews. GAO-09-205. Washington, D.C.: April 20, 2009. Reexamining Regulations: Opportunities Exist to Improve Effectiveness and Transparency of Retrospective Reviews. GAO-07-791. Washington, D.C.: July 16, 2007. Federal Rulemaking: Past Reviews and Emerging Trends Suggest Issues That Merit Congressional Attention. GAO-06-228T. Washington, D.C.: November 1, 2005. Rulemaking: OMB's Role in Reviews of Agencies' Draft Rules and the Transparency of Those Reviews. GAO-03-929. Washington, D.C.: September 22, 2003. Regulatory Reform: Procedural and Analytical Requirements in Federal Rulemaking. GAO/T-GGD/OGC-00-157. Washington, D.C.: June 8, 2000. Regulatory Reform: Changes Made to Agencies' Rules Are Not Always Clearly Documented. GAO/GGD-98-31. Washington, D.C.: January 8, 1998. Regulatory Reform: Agencies' Efforts to Eliminate and Revise Rules Yield Mixed Results. GAO/GGD-98-3. Washington, D.C.: October 2, 1997. Regulatory Reform: Implementation of the Regulatory Review Executive Order. GAO/T-GGD-96-185. Washington, D.C.: September 25, 1996. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. 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 regulation is a basic tool of government. Agencies issue thousands of regulations each year to achieve public policy goals such as ensuring that workplaces, air travel, foods, and drugs are safe; that the nation's air, water and land are not polluted; and that the appropriate amount of taxes is collected. Congresses and Presidents have taken a number of actions to refine and reform the regulatory process over the last several decades. Among the goals of such initiatives are enhancing oversight of rulemaking by Congress and the President, promoting greater transparency and participation in the process, and reducing regulatory burdens on affected parties. Over the past two decades Congress has often asked GAO to evaluate the implementation of procedural and analytical requirements that apply to the rulemaking process. The importance of improving the transparency of the rulemaking process emerged as a common theme throughout GAO's body of work. Based on that body of work, this testimony addresses (1) GAO's findings and recommendations regarding federal agencies' retrospective reviews, (2) GAO's findings and OIRA's progress to date on GAO recommendations to improve the transparency of the regulatory review process, and (3) other opportunities for increasing congressional oversight and public participation in the rulemaking process. GAO is not making recommendations in this testimony. In 2007, GAO found that agencies had conducted more retrospective reviews of the costs and benefits of existing regulation than was readily apparent, especially to the public. Requirements in statutes or executive directives were sometimes the impetus for reviews, but agencies more often conducted these retrospective reviews based on their own discretionary authorities. Agencies reported that discretionary reviews more often generated actions, such as amending regulations or changes to guidance. GAO also found that multiple factors, such as data limitations and lack of transparency, impeded agencies' reviews. GAO made 7 recommendations in 2007 to improve the effectiveness and transparency of retrospective regulatory reviews. Among GAO's recommendations were: minimum standards for documenting and reporting completed review results; including public input as a factor in regulatory review decisions; and consideration of how agencies will measure the performance of new regulations. In 2011 and 2012, the administration issued new directives to agencies on how they should plan and conduct analyses of existing regulations that addressed each of GAO's recommendations. By executive order, the Office of Management and Budget's (OMB) Office of Information and Regulatory Affairs (OIRA) reviews draft proposed and final rules from executive agencies, other than independent regulatory agencies. Among the purposes of these reviews are ensuring that regulations are consistent with applicable law and the President's priorities and that decisions made by one agency do not conflict with the policies or actions taken or planned by another. Both OIRA and executive agencies are also required to disclose certain information about the review process. In 2003 and 2009, GAO found that the OIRA regulatory review process often resulted in changes to agencies' rules, but the transparency and documentation of the review process could be improved. GAO made 12 recommendations to OMB about the review process. For example, GAO recommended that OMB provide guidance to agencies regarding documentation of the reasons for an agency's withdrawal of a draft rule from OIRA review and the source or impetus of changes made to rules. OMB to date has implemented only 1 of those 12 recommendations--to clarify information posted about the topic and participants in meetings with outside parties on rules under review. GAO believes that its past recommendations still have merit and would improve the transparency of the OIRA review process. GAO's recent work continues to highlight progress in facilitating transparency and public participation as well as room for improvement. In 2012, GAO found that agencies often requested comments when issuing major rules without a notice of proposed rulemaking but missed an opportunity to improve those rules because they did not always respond to the comments. GAO's 2013 review of international regulatory cooperation also found opportunities to better facilitate public participation in these activities. GAO also found that effective international regulatory cooperation requires interagency coordination and effective collaboration with federal agency officials' foreign counterparts. Agency officials stated that they cooperate with their foreign counterparts (1) because they are operating in an increasingly global environment and many products that agencies regulate originate overseas and (2) in an effort to gain efficiencies--for example, by sharing resources or avoiding duplicative work.
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The major requirements for the protection of personal privacy by federal agencies are specified in two laws, the Privacy Act of 1974 and the E-Government Act of 2002. The Federal Information Security Management Act of 2002 (FISMA) also addresses the protection of personal information in the context of securing federal agency information and information systems. The Privacy Act places limitations on agencies' collection, disclosure, and use of personal information maintained in systems of records. The act describes a "record" as any item, collection, or grouping of information about an individual that is maintained by an agency and contains his or her name or another personal identifier. It also defines "system of records" as a group of records under the control of any agency from which information is retrieved by the name of the individual or by an individual identifier. The Privacy Act requires that when agencies establish or make changes to a system of records, they must notify the public by a "system-of-records notice": that is, a notice in the Federal Register identifying, among other things, the type of data collected, the types of individuals about whom information is collected, the intended "routine" uses of data, and procedures that individuals can use to review and correct personal information. Among other provisions, the act also requires agencies to define and limit themselves to specific predefined purposes. For example, the act requires that to the greatest extent practicable, personal information should be collected directly from the subject individual when it may affect an individual's rights or benefits under a federal program. The provisions of the Privacy Act are largely based on a set of principles for protecting the privacy and security of personal information, known as the Fair Information Practices, which were first proposed in 1973 by a U.S. government advisory committee; these principles were intended to address what the committee termed a poor level of protection afforded to privacy under contemporary law. Since that time, the Fair Information Practices have been widely adopted as a standard benchmark for evaluating the adequacy of privacy protections. Attachment 2 contains a summary of the widely used version of the Fair Information Practices adopted by the Organization for Economic Cooperation and Development in 1980. The E-Government Act of 2002 strives to enhance protection for personal information in government information systems and information collections by requiring that agencies conduct privacy impact assessments (PIA). A PIA is an analysis of how personal information is collected, stored, shared, and managed in a federal system. More specifically, according to Office of Management and Budget (OMB) guidance, a PIA is to (1) ensure that handling conforms to applicable legal, regulatory, and policy requirements regarding privacy; (2) determine the risks and effects of collecting, maintaining, and disseminating information in identifiable form in an electronic information system; and (3) examine and evaluate protections and alternative processes for handling information to mitigate potential privacy risks. Agencies must conduct PIAs (1) before developing or procuring information technology that collects, maintains, or disseminates information that is in a personally identifiable form, or (2) before initiating any new data collections involving personal information that will be collected, maintained, or disseminated using information technology if the same questions are asked of 10 or more people. To the extent that PIAs are made publicly available, they provide explanations to the public about such things as the information that will be collected, why it is being collected, how it is to be used, and how the system and data will be maintained and protected. FISMA also addresses the protection of personal information. It defines federal requirements for securing information and information systems that support federal agency operations and assets; it requires agencies to develop agencywide information security programs that extend to contractors and other providers of federal data and systems. Under FISMA, information security means protecting information and information systems from unauthorized access, use, disclosure, disruption, modification, or destruction, including controls necessary to preserve authorized restrictions on access and disclosure to protect personal privacy. To oversee its implementation of privacy protections, DHS has established a Chief Privacy Officer, as directed by the Homeland Security Act of 2002. According to the act, the Chief Privacy Officer is responsible for, among other things, "assuring that the use of technologies sustain, and do not erode privacy protections relating to the use, collection, and disclosure of personal information," and "assuring that personal information contained in Privacy Act systems of records is handled in full compliance with fair information practices as set out in the Privacy Act of 1974." As it develops and participates in important homeland security activities, DHS faces challenges in ensuring that privacy concerns are addressed early, are reassessed when key programmatic changes are made, and are thoroughly reflected in guidance on emerging technologies and uses of personal data. Our reviews of DHS programs have identified cases where these challenges were not fully met, including data mining, airline passenger prescreening, use of data from commercial sources, use of personal identification technologies (especially RFID), and development of an information sharing environment. I will now discuss each of these subjects in greater detail. Many concerns have been raised about the potential for data mining programs to compromise personal privacy. In our May 2004 report on federal data mining efforts, we defined data mining as the application of database technology and techniques--such as statistical analysis and modeling--to uncover hidden patterns and subtle relationships in data and to infer rules that allow for the prediction of future results. As we noted in our report, mining government and private databases containing personal information raises a range of privacy concerns. In the government, data mining was initially used to detect financial fraud and abuse. However, its use has greatly expanded. Among other purposes, data mining has been used increasingly as a tool to help detect terrorist threats through the collection and analysis of public and private sector data. Through data mining, agencies can quickly and efficiently obtain information on individuals or groups from large databases containing personal information aggregated from public and private records. Information can be developed about a specific individual or a group of individuals whose behavior or characteristics fit a specific pattern. For example, terrorists can be tracked through travel and immigration records, and potential terrorist-related activities, including money transfers and communications, can be pinpointed. The ease with which organizations can use automated systems to gather and analyze large amounts of previously isolated information raises concerns about the impact on personal privacy. As a July 2006 report by the DHS Privacy Office points out, "privacy and civil liberties issues potentially arise in every phase of the data mining process." Potential privacy risks include improper access or disclosure of personal information, erroneous associations of individuals with undesirable activities, misidentification of individuals with similar names, and misuse of data that were collected for other purposes. Our recent report notes that early attention to privacy in developing a data mining tool known as ADVISE (Analysis, Dissemination, Visualization, Insight, and Semantic Enhancement) could reduce risks that personal information could be misused. ADVISE is a data mining tool under development intended to help DHS analyze large amounts of information. It is designed to allow an analyst to search for patterns in data--such as relationships among people, organizations, and events--and to produce visual representations of these patterns, referred to as semantic graphs. The intended benefit of the ADVISE tool is to help detect threatening activities by facilitating the analysis of large amounts of data. Although the tool is being considered for several different applications within DHS, none of them are yet operational. DHS is currently in the process of testing the tool's effectiveness. DHS did not conduct a PIA as it developed the ADVISE tool, as required by the E-Government Act of 2002. A PIA, if it had been completed, would identify specific privacy risks and help officials determine what controls were needed to mitigate those risks. DHS officials believed that ADVISE did not need to undergo such an assessment because the tool itself did not contain personal data. However, the intended uses of the tool included personal data, and the E-Government Act and related guidance emphasize the need to assess privacy risks early in system development. Further, if an assessment were conducted and privacy risks identified, a number of controls could be built into the tool to mitigate those risks. Because privacy had not been assessed and mitigating controls had not been implemented, the department faced the risk that systems based on ADVISE that also contained personal information could require costly and potentially duplicative retrofitting to add the needed controls. We made recommendations to DHS to conduct a PIA of the ADVISE tool and implement privacy controls, as needed, to mitigate any identified risks. In its comments, DHS stated that it is currently developing a "Privacy Technology Implementation Guide" to be used to conduct a PIA. Broadly considered, data mining is a tool that has the potential to provide valuable assistance to analysts and investigators as they pursue the war on terror. However, it has been challenging for DHS to thoroughly consider and address privacy concerns early enough in its attempts to develop data mining tools and applications. As the department moves forward with ADVISE and other data mining activities, close attention to privacy will remain a critical concern. An example of the importance of ongoing attention to privacy can be taken from TSA's development of passenger prescreening programs. TSA is responsible for securing all modes of transportation while facilitating commerce and the freedom of movement for the traveling public. Passenger prescreening is one program among many that TSA uses to secure the domestic aviation sector. The process of prescreening passengers--that is, determining whether airline passengers might pose a security risk before they reach the passenger-screening checkpoint--is used to focus security efforts on those passengers that represent the greatest potential threat. In accordance with a requirement set forth in the Aviation and Transportation Security Act, TSA has been working since 2003 to develop a computer-assisted passenger prescreening system to be used to evaluate passengers before they board an aircraft on domestic flights. An early version of that system, known as the Computer-Assisted Passenger Prescreening System II, was canceled in 2004 based in part on concerns about privacy and other issues expressed by us and others. In its place, TSA announced a new passenger prescreening program, called Secure Flight, that would be narrower in scope and designed to avoid problems that had been raised about the previous program. Aspects of the new Secure Flight system underwent development and testing in 2005. In July 2005, we reported on privacy problems associated with testing of Secure Flight. In 2004, TSA had issued privacy notices in the Federal Register that included descriptions of how personal information drawn from commercial sources would be used during planned upcoming tests. However, these notices did not fully inform the public about the procedures that TSA and its contractors would follow for collecting, using, and storing commercial data. In addition, the scope of the data used during commercial data testing was not fully disclosed. Specifically, a contractor, acting on behalf of the agency, collected more than 100 million commercial data records containing personal information such as name, date of birth, and telephone number without informing the public. As a result, the public did not receive the full protections of the Privacy Act. In its comments on our findings, DHS stated that it recognized the merits of the issues we raised, and that TSA had acted immediately to address them. The privacy problems faced in developing Secure Flight arose not because it was prohibitively difficult to protect privacy while prescreening airline passengers, but because TSA had not reassessed privacy risks when key programmatic changes were made and taken appropriate steps to mitigate them. Recently, TSA officials stated that as they work to restructure the Secure Flight program, they plan a more privacy-enhanced program by addressing concerns identified by us and others. For example, officials stated that the program no longer plans to use commercial data. Officials also stated that they have added privacy experts to the system development teams to address privacy issues as they arise. It is encouraging that TSA is now including privacy experts within its development teams, with the express goal of continuously monitoring privacy concerns. We will continue to assess TSA's efforts to manage system privacy protections as part of our ongoing review of the program. A major task confronting federal agencies, especially those engaged in antiterrorism tasks, is to ensure that information obtained from resellers is being appropriately used and protected. In fiscal year 2005, DHS reported planning to spend about $9 million on acquiring personal information from information resellers. The information was acquired chiefly for law enforcement purposes, such as developing leads on subjects in criminal investigations, and for detecting fraud in immigration benefit applications (part of enforcing the immigration laws). For example, the agency's largest investigative component, U.S. Immigration and Customs Enforcement--the largest user of personal information from resellers--collects data such as address and vehicle information for criminal investigations and background security checks. DHS also reported using information resellers in its counterterrorism efforts. For example, as already discussed, TSA used data obtained from information resellers as part of a test associated with the development of Secure Flight. In our report on the acquisition of personal information from resellers by agencies such as DHS, we noted that the agencies' practices for handling this information did not always reflect the Fair Information Practices. For example, system-of-records notices issued by these agencies did not always state that agency systems could incorporate information from data resellers, a practice inconsistent with the principle that the purpose for a collection of personal data should be disclosed beforehand and its use limited to that purpose. Furthermore, accountability was not ensured, as the agencies did not generally monitor usage of personal information from resellers; instead, they relied on end users to be responsible for their own behavior. Contributing to the uneven application of the Fair Information Practices was a lack of agency policies, including at DHS, that specifically address these uses. Reliance on information from resellers is an emerging use of personal data for which the government has been challenged to develop appropriate guidance. We recommended that DHS and other agencies develop specific policies, reflecting the Fair Information Practices, for the collection, maintenance, and use of personal information obtained from resellers. According to the DHS Privacy Office, while a policy governing the department's use of commercial data is being drafted, the document has not yet been issued. Until the department issues clear guidance on this use, it faces the risk that appropriate privacy protections may not be in place consistently across its programs and applications. RFID is an automated data-capture technology that can be used to electronically identify, track, and store information contained on a tag. The tag can be attached to or embedded in the object to be identified, such as a product, case, or pallet. RFID technology provides identification and tracking capabilities by using wireless communication to transmit data. In May 2005, we reported that major initiatives at federal agencies that use or propose to use the technology included physical access controls and tracking assets, documents, or materials. For example, DHS was using RFID to track and identify assets, weapons, and baggage on flights. The Department of Defense was also using it to track shipments. In our May 2005 report we identified several privacy issues related to both commercial and federal use of RFID technology. Among these privacy issues is the potential for the technology to be used inappropriately for tracking an individual's movements, habits, tastes, or predilections. Tracking is real-time or near-real-time surveillance in which a person's movements are followed through RFID scanning.) Public surveys have identified a distinct unease with the potential ability of the federal government to monitor individuals' movements and transactions. Like tracking, profiling-- the reconstruction of a person's movements or transactions over a specific period of time, usually to ascertain something about the individual's habits, tastes, or predilections--could also be undertaken through the use of RFID technology. Once a particular individual is identified through an RFID tag, personally identifiable information can be retrieved from any number of sources and then aggregated to develop a profile of the individual. Both tracking and profiling can compromise an individual's privacy. Concerns also have been raised that organizations could develop secondary uses for the information gleaned through RFID technology; this has been referred to as mission or function "creep." The history of the Social Security number, for example, gives ample evidence of how an identifier developed for one specific use has become a mainstay of identification for many other purposes, governmental and nongovernmental. Secondary uses of the Social Security number have been a matter not of technical controls but rather of changing policy and administrative priorities. DHS uses and has made plans to use RFID technology to track individuals in several border security programs. This has been met with concern from the DHS Data Privacy and Integrity Advisory Committee, which reiterated our concerns that employing the technology for human identification poses privacy risks, including notice problems and potential for secondary use. One program that planned to make use of RFID was the US-VISIT program, a multibillion dollar program that collects, maintains, and shares information on selected foreign nationals who enter and exit the United States at over 300 ports of entry around the country. The incorporation of RFID into the program arose from the agency's requirement for a less costly alternative to biometric verification of visitors exiting the country. We recently testified that US-VISIT RFID tests revealed numerous performance and reliability problems. For example, the readers placed to detect identifying tags failed to do so for a majority of the RFID tags. Faced with these test results, the Secretary of Homeland Security recently stated that the agency would cancel the use of RFID for US-VISIT. However, despite having rejected RFID for US-VISIT, the department has endorsed the technology for another border control initiative, the proposed PASSport (People Access Security Service) system identification card, which is part of the Western Hemisphere Travel Initiative. The RFID-enabled PASSport card would serve as an alternative to a traditional passport for use by U.S. citizens who cross the land borders and travel by sea between the United States, Canada, Mexico, the Caribbean, or Bermuda. The department's varying approaches to the use of RFID for human identification suggests the need for a departmentwide policy that fully addresses privacy concerns. Unless DHS issues comprehensive guidance to direct the development and implementation of new technologies such as RFID, it faces the risk that appropriate privacy protections may not be implemented consistently across its programs and applications. According to the DHS Privacy Office, it is considering developing guidance to address the use of specific technologies, including RFID. The challenges that DHS faces in protecting privacy extend beyond the need to consider and address privacy issues while developing its own programs and systems. The department also interacts with many other intelligence and law enforcement entities, both within and outside the federal government, and potentially shares information with them all. As with its own programs and systems, it will be important for DHS to ensure that privacy has been thoroughly considered and guidelines clearly established as it participates in the emerging information sharing environment. As directed by the Intelligence Reform and Terrorism Prevention Act of 2004, the administration has taken steps, beginning in 2005, to establish an information sharing environment to facilitate the sharing of terrorism information. The direction to establish an information sharing environment was driven by the recognition that before the attacks of September 11, 2001, federal agencies had been unable to effectively share information about suspected terrorists and their activities. In addressing this problem, the National Commission on Terrorist Attacks Upon the United States (9/11 Commission) recommended that the sharing and uses of information be guided by a set of practical policy guidelines that would simultaneously empower and constrain officials, closely circumscribing what types of information they would be permitted to share as well as the types they would need to protect. Exchanging terrorism-related information continues to be a significant challenge for federal, state, and local governments--one that we recognize is not easily addressed. Accordingly, since January 2005, we have designated information sharing for homeland security a high-risk area. In developing guidelines for the information sharing environment, there has been general agreement that privacy considerations must be addressed. The Intelligence Reform Act called for the issuance of guidelines to protect privacy and civil liberties in the development and use of the information sharing environment, and the President reiterated that requirement in an October 2005 directive to federal departments and agencies. Based on the President's directive, a committee within the Office of the Director of National Intelligence was established to develop such guidelines, and they were approved by the President in November 2006. According to its annual report for 2004-2006, the DHS Privacy Office has played a role in developing these guidelines. However, the guidelines as issued provide only a high-level framework for addressing privacy protection and do not include all of the Fair Information Practices. The 9-page document includes statements of principles, such as "purpose specification," "data quality," "data security," and "accountability, enforcement, and audit" that align with certain elements of the Fair Information Practices, but it provides little or no guidance on how these principles are to be implemented and does not address another key practice--limiting the collection of personal information. For example, as the policy director of the Center for Democracy and Technology has pointed out, a number of principles mentioned in the guidelines do not include any specificity on how they should be carried out. The guidelines call for agencies to "take appropriate steps" when merging information about an individual from two or more sources to ensure that the information is about the same individual, but they give no indication of what steps would be adequate to achieve this goal. For example, no guidance is provided on gauging the reliability of sources or determining the minimum amount of information needed to determine that different sources are referring to the same individual. Likewise, the guidelines direct agencies to implement adequate review and audit mechanisms to ensure compliance with the guidelines but, again, do not specify the nature of these mechanisms, which could include, for example, the use of electronic audit logs that cannot be changed by individuals. Finally, the guidelines also direct agencies to put in place internal procedures to address complaints from persons regarding protected information about them that is under the agency's control. No further guidance is provided about the essential elements of a complaint process or what sort of remedies to provide. According to the DHS Privacy Office, individual agencies, including DHS, are to develop specific guidelines that implement the high- level framework embodied in the governmentwide guidelines. However, no overall DHS guidance on the protection of privacy within the context of the information sharing environment has yet been developed. According to the Privacy Office, an effort is currently being initiated to develop such guidance. While DHS is only one participant in the governmentwide information sharing environment, it has the responsibility to ensure that the information under its control is shared with other organizations in ways that adequately protect privacy. Until it adopts specific implementation guidelines, the department will face the risk that its information sharing activities may not protect privacy adequately. In summary, DHS faces continuing challenges in ensuring that privacy concerns are addressed early, are reassessed when key programmatic changes are made, and are thoroughly reflected in guidance on emerging technologies and uses of personal data. We have made recommendations previously regarding ADVISE, Secure Flight, and use of information resellers, and officials have taken action or told us they are taking action to address our recommendations. Implementation of these recommendations is critical to ensuring that privacy protections are in place throughout key DHS programs and activities. Likewise, issuing guidance for participation in the information sharing environment will also be critical to ensure implementation of consistent, appropriate protections across the department. Mr. Chairman, this concludes my testimony today. I would be happy to answer any questions you or other members of the subcommittee may have. If you have any questions concerning this testimony, please contact Linda Koontz, Director, Information Management, at (202) 512-6240, or [email protected]. Other individuals who made key contributions include Barbara Collier, Susan Czachor, John de Ferrari, Timothy Eagle, David Plocher, and Jamie Pressman. Data Mining: Early Attention to Privacy in Developing a Key DHS Program Could Reduce Risks. GAO-07-293. Washington, D.C.: February 28, 2007. Aviation Security: Progress Made in Systematic Planning to Guide Key Investment Decisions, but More Work Remains. GAO- 07-448T. Washington, D.C.: February 13, 2007. Border Security: US-VISIT Program Faces Strategic, Operational, and Technological Challenges at Land Ports of Entry. GAO-07-248. Washington, D.C.: December 6, 2006. Personal Information: Key Federal Privacy Laws Do Not Require Information Resellers to Safeguard All Sensitive Data. GAO-06-674. Washington, D.C.: June 26, 2006. Veterans Affairs: Leadership Needed to Address Information Security Weaknesses and Privacy Issues. GAO-06-866T. Washington, D.C.: June 14, 2006. Privacy: Preventing and Responding to Improper Disclosures of Personal Information. GAO-06-833T. Washington, D.C.: June 8, 2006. Privacy: Key Challenges Facing Federal Agencies. GAO-06-777T. Washington, D.C.: May 17, 2006. Personal Information: Agencies and Resellers Vary in Providing Privacy Protections. GAO-06-609T. Washington, D.C.: April 4, 2006. Personal Information: Agency and Reseller Adherence to Key Privacy Principles. GAO-06-421. Washington, D.C.: April 4, 2006. Information Sharing: The Federal Government Needs to Establish Policies and Processes for Sharing Terrorism-Related and Sensitive but Unclassified Information. GAO-06-385. Washington, D.C.: March 17, 2006. Data Mining: Agencies Have Taken Key Steps to Protect Privacy in Selected Efforts, but Significant Compliance Issues Remain. GAO- 05-866. Washington, D.C.: August 15, 2005. Aviation Security: Transportation Security Administration Did Not Fully Disclose Uses of Personal Information during Secure Flight Program Testing in Initial Privacy Notices, but Has Recently Taken Steps to More Fully Inform the Public. GAO-05- 864R. Washington, D.C.: July 22, 2005. Identity Theft: Some Outreach Efforts to Promote Awareness of New Consumer Rights are Under Way. GAO-05-710. Washington, D.C.: June 30, 2005. Information Security: Radio Frequency Identification Technology in the Federal Government. GAO-05-551. Washington, D.C.: May 27, 2005. Aviation Security: Secure Flight Development and Testing Under Way, but Risks Should Be Managed as System is Further Developed. GAO-05-356. Washington, D.C.: March 28, 2005. Social Security Numbers: Governments Could Do More to Reduce Display in Public Records and on Identity Cards. GAO-05-59. Washington, D.C.: November 9, 2004. Data Mining: Federal Efforts Cover a Wide Range of Uses, GAO-04- 548. Washington, D.C.: May 4, 2004. Aviation Security: Computer-Assisted Passenger Prescreening System Faces Significant Implementation Challenges. GAO-04-385. Washington, D.C.: February 12, 2004. Privacy Act: OMB Leadership Needed to Improve Agency Compliance. GAO-03-304. Washington, D.C.: June 30, 2003. Data Mining: Results and Challenges for Government Programs, Audits, and Investigations. GAO-03-591T. Washington, D.C.: March 25, 2003. Technology Assessment: Using Biometrics for Border Security. GAO-03-174. Washington, D.C.: November 15, 2002. Information Management: Selected Agencies' Handling of Personal Information. GAO-02-1058. Washington, D.C.: September 30, 2002. Identity Theft: Greater Awareness and Use of Existing Data Are Needed. GAO-02-766. Washington, D.C.: June 28, 2002. Social Security Numbers: Government Benefits from SSN Use but Could Provide Better Safeguards. GAO-02-352. Washington, D.C.: May 31, 2002. The Fair Information Practices are not precise legal requirements. Rather, they provide a framework of principles for balancing the need for privacy with other public policy interests, such as national security, law enforcement, and administrative efficiency. Ways to strike that balance vary among countries and according to the type of information under consideration. The version of the Fair Information Practices shown in table 1 was issued by the Organization for Economic Cooperation and Development (OECD) in 1980 and has been widely adopted.
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Advances in information technology make it easier than ever for the Department of Homeland Security (DHS) and other agencies to obtain and process information about citizens and residents in many ways and for many purposes. The demands of the war on terror also drive agencies to extract as much value as possible from the information available to them, adding to the potential for compromising privacy. Recognizing that securing the homeland and protecting the privacy rights of individuals are both important goals, the Congress has asked GAO to perform several reviews of DHS programs and their privacy implications over the past several years. For this hearing, GAO was asked to testify on key privacy challenges facing DHS. To address this issue, GAO identified and summarized issues raised in its previous reports on privacy and assessed recent governmentwide privacy guidance. As it develops and participates in important homeland security activities, DHS faces challenges in ensuring that privacy concerns are addressed early, are reassessed when key programmatic changes are made, and are thoroughly reflected in guidance on emerging technologies and uses of personal data. GAO's reviews of DHS programs have identified cases where these challenges were not fully met. For example, increased use by federal agencies of data mining--the analysis of large amounts of data to uncover hidden patterns and relationships--has been accompanied by uncertainty regarding privacy requirements and oversight of such systems. As described in a recent GAO report, DHS did not assess privacy risks in developing a data mining tool known as ADVISE (Analysis, Dissemination, Visualization, Insight, and Semantic Enhancement), as required by the E-Government Act of 2002. ADVISE is a data mining tool under development intended to help the department analyze large amounts of information. Because privacy had not been assessed and mitigating controls had not been implemented, DHS faced the risk that uses of ADVISE in systems containing personal information could require costly and potentially duplicative retrofitting at a later date to add the needed controls. GAO has also reported on privacy challenges experienced by DHS in reassessing privacy risks when key programmatic changes were made during development of a prescreening program for airline passengers. The Transportation Security Administration (TSA) has been working to develop a computer-assisted passenger prescreening system, known as Secure Flight, to be used to evaluate passengers before they board an aircraft on domestic flights. GAO reported that TSA had not fully disclosed uses of personal information during testing of Secure Flight, as required by the Privacy Act of 1974. To prevent such problems from recurring, TSA officials recently said that they have added privacy experts to Secure Flight's development teams to address privacy considerations on a continuous basis as they arise. Another challenge DHS faces is ensuring that privacy considerations are addressed in the emerging information sharing environment. The Intelligence Reform and Terrorism Prevention Act of 2004 requires the establishment of an environment to facilitate the sharing of terrorism information, as well as the issuance of privacy guidelines for operation in this environment. Recently issued privacy guidelines developed by the Office of the Director of National Intelligence provide only a high-level framework for privacy protection. While DHS is only one participant, it has the responsibility to ensure that the information under its control is shared with other organizations in ways that adequately protect privacy. Accordingly, it will be important for the department to clearly establish departmental guidelines so that privacy protections are implemented properly and consistently.
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Wildland fires triggered by lightning are both natural and inevitable and play an important ecological role on the nation's landscapes. These fires shape the composition of forests and grasslands, periodically reduce vegetation densities, and stimulate seedling regeneration and growth in some species. Over the past century, however, various land use and management practices--including fire suppression, grazing, and timber harvesting--have reduced the normal frequency of fires in many forest and rangeland ecosystems and contributed to abnormally dense, continuous accumulations of vegetation. Such accumulations not only can fuel uncharacteristically large or severe wildland fires, but also--with more homes and communities built in or near areas at risk from wildland fires-- threaten human lives, health, property, and infrastructure. The Forest Service and four Interior agencies--the Bureau of Indian Affairs, Bureau of Land Management, Fish and Wildlife Service, and National Park Service--are responsible for wildland fire management. These five agencies manage about 700 million acres of land in the United States, including national forests, national grasslands, Indian reservations, national parks, and national wildlife refuges. The federal wildland fire management program has three major components: preparedness, suppression, and fuel reduction. To prepare for a wildland fire season, the agencies acquire firefighting assets-- including firefighters, engines, aircraft, and other equipment--and station them either at individual federal land management units (such as national forests or national parks) or at centralized dispatch locations. The primary purpose of these assets is to respond to fires before they become large--a response referred to as initial attack--thus forestalling threats to communities and natural and cultural resources. The agencies fund the assets used for initial attack primarily from their wildland fire preparedness accounts. When a fire starts, current federal policy directs the agencies to consider land management objectives--identified by land and fire management plans developed by each local unit, such as a national forest or a Bureau of Land Management district--and the structures and resources at risk when determining whether or how to suppress it. A wide spectrum of fire response strategies is available to choose from, and the manager at the affected local unit--known as a line officer--is responsible for determining which strategy to use. In the relatively rare instances when fires escape initial attack and grow large, the agencies respond using an interagency system that mobilizes additional firefighting assets from federal, state, and local agencies, as well as private contractors, regardless of which agency or agencies have jurisdiction over the burning lands. Federal agencies typically fund the costs of these activities from their wildland fire suppression accounts. In addition to preparing for and suppressing fires, the agencies attempt to reduce the potential for severe wildland fires, lessen the damage caused by fires, limit the spread of flammable invasive species, and restore and maintain healthy ecosystems by reducing potentially hazardous vegetation that can fuel fires. The agencies generally remove or modify hazardous vegetation using prescribed fire (that is, fire deliberately set in order to restore or maintain desired vegetation conditions), mechanical thinning, herbicides, certain grazing methods, or combinations of these and other approaches. The agencies fund these activities from their fuel reduction accounts. Congress, the Office of Management and Budget, federal agency officials, and others have expressed concern about mounting federal wildland fire expenditures. Federal appropriations to the Forest Service and the Interior agencies to prepare for and respond to wildland fires, including appropriations for reducing fuels, have more than doubled, from an average of $1.2 billion from fiscal years 1996 through 2000 to an average of $2.9 billion from fiscal years 2001 through 2007 (see table 1). Adjusting for inflation, the average annual appropriations to the agencies for these periods increased from $1.5 billion to $3.1 billion (in 2007 dollars). The Forest Service received about 70 percent and Interior about 30 percent of the appropriated funds. The Forest Service and the Interior agencies have improved their understanding of wildland fire's role on the landscape and have taken important steps toward improving their ability to cost-effectively protect communities and resources. Although the agencies have long recognized that fire could provide ecological benefits in some ecosystems, such as certain grassland and forest types, a number of damaging fires in the 1990s led them to develop the Federal Wildland Fire Management Policy. The policy formally recognizes not only that wildland fire can be beneficial in some areas, but also that fire is an inevitable part of the landscape and, moreover, that past attempts to suppress all fires have been in part responsible for making recent fires more severe. Under this policy, the agencies abandoned their attempt to put out every wildland fire, seeking instead to (1) make communities and resources less susceptible to being damaged by wildland fire and (2) respond to fires so as to protect communities and important resources at risk but also to consider both the cost and long-term effects of that response. By emphasizing firefighting strategies that focus on land management objectives, rather than seeking to suppress all fires, the agencies are increasingly using less aggressive firefighting strategies--strategies that can not only reduce costs but also be safer for firefighters by reducing their exposure to unnecessary risks, according to agency fire officials. To help them better achieve the federal wildland fire management policy's vision, the Forest Service and the Interior agencies in recent years have taken several steps to make communities and resources less susceptible to damage from wildland fire. These steps include reducing hazardous fuels, in an effort to keep wildland fires from spreading into the wildland-urban interface and to help protect important resources by lessening a fire's intensity. As part of this effort, the agencies reported they have reduced fuels on more than 29 million acres from 2001 through 2008. The agencies have also nearly completed their geospatial data and modeling system, LANDFIRE, as we recommended in 2003. LANDFIRE is intended to produce consistent and comprehensive maps and data describing vegetation, wildland fuels, and fire regimes across the United States. Such data are critical to helping the agencies (1) identify the extent, severity, and location of wildland fire threats to the nation's communities and resources; (2) predict fire intensity and rate of spread under particular weather conditions; and (3) evaluate the effect that reducing fuels may have on future fire behavior. LANDFIRE data are already complete for the contiguous United States, although some agency officials have questioned the accuracy of the data, and the agencies expect to complete the data for Alaska and Hawaii in 2009. The agencies have also begun to improve their processes for allocating fuel reduction funds to different areas of the country and for selecting fuel reduction projects, as we recommended in 2007. The agencies have started moving away from "allocation by tradition" toward a more consistent, systematic allocation process. That is, rather than relying on historical funding patterns and professional judgment, the agencies are developing a process that also considers risk, effectiveness of fuel reduction treatments, and other factors. Despite these improvements, further action is needed to ensure that the agencies' efforts to reduce hazardous fuels are directed to areas at highest risk. The agencies, for example, still lack a measure of the effectiveness of fuel reduction treatments and therefore lack information needed to ensure that fuel reduction funds are directed to the areas where they can best minimize risk to communities and resources. Forest Service and Interior officials told us that they recognize this shortcoming and that efforts are under way to address it; these efforts are likely to be long term involving considerable research investment, but they have the potential to improve the agencies' ability to assess and compare the cost-effectiveness of potential treatments in deciding how to optimally allocate scarce funds. The agencies have also taken steps to foster fire-resistant communities. Increasing the use of protective measures to mitigate the risk to structures from wildland fire is a key goal of the National Fire Plan. The plan encourages, but does not mandate, state or local governments to adopt laws requiring homeowners and homebuilders to take measures--such as reducing vegetation and flammable objects within an area of 30 to 100 feet around a structure, often called creating defensible space, and using fire- resistant roofing materials and covering attic vents with mesh screens--to help protect structures from wildland fires. Because these measures rely on the actions of individual homeowners or homebuilders, or on laws and land-use planning affecting private lands, achieving this goal is primarily a state and local government responsibility. Nonetheless, the Forest Service and the Interior agencies have helped sponsor the Firewise Communities program, which works with community leaders and homeowners to increase the use of fire-resistant landscaping and building materials in areas of high risk. Federal and state agencies also provide grants to help pay for creating defensible space around private homes. In addition, the agencies have made improvements laying important groundwork for enhancing their response to wildland fire, including: Implementing the Federal Wildland Fire Management Policy. The Federal Wildland Fire Management Policy directs each agency to develop a fire management plan for all areas they manage with burnable vegetation. Without such plans, agency policy does not allow the use of the entire range of wildland fire response strategies, including less aggressive strategies, and therefore the agencies must attempt to suppress a fire regardless of any benefits that might come from allowing it to burn. We reported in 2006 that about 95 percent of the agencies' 1,460 individual land management units had completed the required plans. The policy also states that the agencies' responses to a wildland fire are to be based on the circumstances of a given fire and the likely consequences to human safety and natural and cultural resources. Interagency guidance on implementing the policy, adopted in 2009, clarifies that the full range of fire management strategies and tactics are to be considered when responding to every wildland fire, and that a single fire may be simultaneously managed for different objectives. Both we and the Department of Agriculture's Inspector General had criticized the previous guidance, which required each fire to be managed either for suppression objectives--that is, to put out the fire as quickly as possible--or to achieve resource benefits--that is, to allow the fire to burn to gain certain benefits such as reducing fuels or seed regeneration. By providing this flexibility, the new guidance should help the agencies better achieve management objectives and help contain the long-term costs of fire management. Improving fire management decisions. The agencies have recently undertaken several efforts to improve decisions about firefighting strategies. In one such effort, the agencies in 2009 began to use a new analytical tool, known as the wildland fire decision support system. This new tool helps line officers and fire managers analyze various factors-- such as the fire's current location, adjacent fuel conditions, nearby structures and other highly valued resources, and weather forecasts--in determining the strategies and tactics to adopt. For example, the tool generates a map illustrating the probability that a particular wildland fire, barring any suppression actions, will burn a certain area within a specified time, and the structures or other resources that may therefore be threatened. Having such information can help line officers and fire managers understand the resources at risk and identify the most appropriate response--for example, whether to devote substantial resources in attempting full and immediate suppression or to instead take a less intensive approach, which may reduce risks to firefighters and cost less. Other efforts include (1) establishing experience and training requirements for line officers to be certified to manage fires of different levels of complexity, and (2) forming four teams staffed with some of the most experienced fire managers to assist in managing wildland fires. The Forest Service has also experimented in recent years with several approaches for identifying ongoing fires where suppression actions are unlikely to be effective and for influencing strategic decisions made during those fires, in order to help contain costs and reduce risk to firefighters. Although these efforts are new, and we have not fully evaluated them, we believe they have the potential to help the agencies strengthen how they select firefighting strategies. By themselves, however, these efforts do not address certain critical shortcomings. We reported in 2007, for example, that officials in the field have few incentives to consider cost containment in making critical decisions affecting suppression costs, and that previous studies had found that the lack of a clear measure to evaluate the benefits and costs of alternative firefighting strategies fundamentally hindered the agencies' ability to provide effective oversight. Acquiring and using firefighting assets effectively. The agencies have continued to make improvements--including better systems for contracting with private vendors to provide firefighting assets and for dispatching assets to individual fires--in how they determine the firefighting assets they need and in how they acquire and use those assets, although further action is needed. For example, although the agencies in 2009 began deploying an interagency budget-planning system known as fire program analysis (FPA) to address congressional direction that they improve how they determine needed firefighting assets, our 2008 report on FPA's development identified several shortcomings that limit FPA's ability to meet certain key objectives. FPA was intended to help the agencies develop their wildland fire budget requests and allocate funds by, among other objectives, (1) providing a common budget framework to analyze firefighting assets without regard for agency jurisdictions; (2) examining the full scope of fire management activities; (3) modeling the effects over time of differing strategies for responding to wildland fires and treating lands to reduce hazardous fuels; and (4) using this information to identify the most cost-effective mix and location of federal wildland fire management assets. We reported in 2008 that FPA shows promise in achieving some of the key objectives originally established for it but that the approach the agencies have taken hampers FPA from meeting other key objectives, including the ability to project the effects of different levels of fuel reduction and firefighting strategies over time. We therefore concluded that agency officials lack information that would help them analyze the extent to which increasing or decreasing funding for fuel reduction and responding more or less aggressively to fires in the short term could affect the expected cost of responding to wildland fires over the long term. Senior agency officials told us in 2008 that they were considering making changes to FPA that may improve its ability to examine the effects over time of different funding strategies. The exact nature of these changes, or how to fund them, has yet to be determined. Officials also told us the agencies are currently working to evaluate the model's performance, identify and implement needed corrections, and improve data quality and consistency. The agencies intend to consider the early results of FPA in developing their budget requests for fiscal year 2011, although officials told us they will not rely substantially on FPA's results until needed improvements are made. As we noted in 2008, the approach the agencies took in developing FPA provides considerable discretion to agency decision makers and, although providing the flexibility to consider various options is important, doing so makes it essential that the agencies ensure their processes are fully transparent. In addition, previous studies have found that agencies sometimes use more, or more-costly, firefighting assets than necessary, often in response to political or social pressure to demonstrate they are taking all possible action to protect communities and resources. Consistent with these findings, fire officials told us they were pressured in 2008 to assign more firefighting assets than could be effectively used to fight fires in California. More generally, previous studies have found that air tankers may be used to drop flame retardants when on-the-ground conditions may not warrant such drops. Aviation activities are expensive, accounting for about one- third of all firefighting costs on a large fire. We believe that providing clarity about when different types of firefighting assets can be used effectively could help the agencies resist political and social pressure to use more assets than they need. Despite the important steps the agencies have taken, much work remains. We have previously recommended several key actions that, if completed, would improve the agencies' management of wildland fire. Specifically, the agencies need to: Develop a cohesive strategy. Completing an investment strategy that lays out various approaches for reducing fuels and responding to wildland fires and the estimated costs associated with each approach and the trade- offs involved--what we have termed a cohesive strategy--is essential for Congress and the agencies to make informed decisions about effective and affordable long-term approaches for addressing the nation's wildland fire problems. The agencies have concurred with our recommendations to develop a cohesive strategy but have yet to develop a strategy that clearly formulates different approaches and associated costs, despite our repeated calls to do so. In May 2009, agency officials told us they had begun planning how to develop a cohesive strategy but were not far enough along in developing it to provide further information. Because of the critical importance of a cohesive strategy to improve the agencies' overall management of wildland fire, we encourage the agencies to complete one and begin implementing it as quickly as possible. The Federal Land Assistance, Management, and Enhancement Act, introduced in March 2009 and sponsored by the chairman of this committee, would require the agencies to produce, within 1 year of the act's enactment, a cohesive strategy consistent with our previous recommendations. Although they have yet to complete a cohesive strategy, the agencies have nearly completed two projects--LANDFIRE and FPA--they have identified as being necessary to development of a cohesive strategy. However, the shortcomings we identified in FPA may limit its ability to contribute to the agencies' development of a cohesive strategy. Establish a cost-containment strategy. We reported in 2007 that although the Forest Service and the Interior agencies had taken several steps intended to help contain wildland fire costs, they had not clearly defined their cost-containment goals or developed a strategy for achieving those goals--steps that are fundamental to sound program management. The agencies disagreed, citing several agency documents that they argued clearly define their goals and objectives and make up their strategy to contain costs. Although these documents do provide overarching goals and objectives, they lack the clarity and specificity needed by land management and firefighting officials in the field to help manage and contain wildland fire costs. Interagency policy, for example, established an overarching goal of suppressing wildland fires at minimum cost, considering firefighter and public safety and importance of resources being protected, but the agencies have established neither clear criteria for weighing the relative importance of the often-competing elements of this broad goal, nor measurable objectives for determining if the agencies are meeting the goal. As a result, despite the improvements the agencies are making to policy, decision support tools, and oversight, we believe that managers in the field lack a clear understanding of the relative importance that the agencies' leadership places on containing costs and--as we concluded in our 2007 report--are therefore likely to continue to select firefighting strategies without duly considering the costs of suppression. Forest Service officials told us in July 2009 that although they are concerned about fire management costs, they are emphasizing the need to select firefighting strategies that will achieve land management objectives and reduce unnecessary risks to firefighters, an emphasis they believe may, in the long run, also help them contain costs. Nonetheless, we continue to believe that our recommendations, if effectively implemented, would help the agencies better manage their cost-containment efforts and improve their ability to contain wildland fire costs. Clearly define financial responsibilities for fires that cross jurisdictions. Protecting the nation's communities is both one of the key goals of wildland fire management and one of the leading factors contributing to rising fire costs. A number of relatively simple steps--such as using fire-resistant landscaping and building materials--can dramatically reduce the likelihood of damage to a structure from wildland fire. Although nonfederal entities--including state forestry entities and tribal, county, city, and rural fire departments--play an important role in protecting communities and resources and responding to fires, we reported in 2006 that federal officials were concerned that the existing framework for sharing suppression costs among federal and nonfederal entities insulated state and local governments from the cost of providing wildland fire protection in the wildland-urban interface. As a result, there was less incentive for state and local governments to adopt laws--such as building codes requiring fire-resistant building materials in areas at high risk of wildland fires--that, in the long run, could help reduce the cost of suppressing wildland fires. We therefore recommended that the federal agencies work with relevant state entities to clarify the financial responsibility for fires that burn, or threaten to burn, across multiple jurisdictions and develop more specific guidance as to when particular cost-sharing methods should be used. The agencies have updated guidance on when particular cost-sharing methods should be used, although we have not evaluated the effect of the updated guidance; the agencies, however, have yet to clarify the financial responsibility for fires that threaten multiple jurisdictions. Without such clarification, the concerns that the existing framework insulates nonfederal entities from the cost of protecting the wildland-urban interface from fire--and that the federal government, therefore, would continue to bear more than its share of that cost--are unlikely to be addressed. Mitigate effects of rising fire costs on other agency programs. The sharply rising costs of managing wildland fires have led the Forest Service and the Interior agencies to transfer funds from other programs to help pay for fire suppression, disrupting or delaying activities in these other programs. Better methods of estimating the suppression funds the agencies request, as we recommended in 2004, could reduce the likelihood that the agencies would need to transfer funds from other accounts, yet the agencies continue to use an estimation method with known problems. A Forest Service official told us the agency had analyzed alternative methods for estimating needed suppression funds but determined that no better method was available. Because the agencies have had to transfer funds in each of the last 3 years, however, a more accurate method for estimating suppression costs may still be needed. To further reduce the likelihood of transferring funds from the agencies' other programs to cover suppression costs, our 2004 report also noted, Congress could consider establishing a reserve account to fund emergency wildland firefighting. Congress, for example, could provide either a specified amount (known as a definite appropriation) or as much funding as the agencies need to fund emergency suppression (known as an indefinite appropriation). Establishing a reserve account with a definite appropriation would provide the agencies with incentives to contain suppression costs within the amount in the reserve account, but depending on the size of the appropriation and the severity of a fire season, suppression costs could still exceed the funds reserved, and the agencies might still need to transfer funds from other programs. An account with an indefinite appropriation, in contrast, would eliminate the need for transferring funds from other programs but would offer no inherent incentives for the agencies to contain suppression costs. Furthermore, both definite and indefinite appropriations could raise the overall federal budget deficit, depending on whether funding levels for other agency or government programs are reduced. The Federal Land Assistance, Management, and Enhancement Act proposes establishing a wildland fire suppression reserve account; the administration's budget overview for fiscal year 2010 also proposes a $282 million reserve account for the Forest Service and a $75 million reserve account for the Interior to provide funding for firefighting when the appropriated suppression funds are exhausted. We are making no new recommendations at this time. Rather, we believe that our previous recommendations--which the agencies have generally agreed with--could, if implemented, substantially assist the agencies in capitalizing on the important progress they have made to date in responding to the nation's growing wildland fire problem. We discussed the factual information in this statement with agency officials and incorporated their comments where appropriate. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact me at (202) 512-3841 or [email protected], or Robin M. Nazzaro, Director, 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. Steve Gaty, Assistant Director; David P. Bixler; Ellen W. Chu; Jonathan Dent; and Richard P. Johnson made key contributions to this statement. Wildland Fire Management: Interagency Budget Tool Needs Further Development to Fully Meet Key Objectives. GAO-09-68. Washington, D.C.: November 24, 2008. Wildland Fire Management: Federal Agencies Lack Key Long- and Short- Term Management Strategies for Using Program Funds Effectively. GAO-08-433T. Washington, D.C.: February 12, 2008. Wildland Fire Management: Better Information and a Systematic Process Could Improve Agencies' Approach to Allocating Fuel Reduction Funds and Selecting Projects. GAO-07-1168. Washington, D.C.: September 28, 2007. Wildland Fire Management: Lack of Clear Goals or a Strategy Hinders Federal Agencies' Efforts to Contain the Costs of Fighting Fires. GAO-07-655. Washington, D.C.: June 1, 2007. Wildland Fire Suppression: Lack of Clear Guidance Raises Concerns about Cost Sharing between Federal and Nonfederal Entities. GAO-06-570. Washington, D.C.: May 30, 2006. Wildland Fire Management: Update on Federal Agency Efforts to Develop a Cohesive Strategy to Address Wildland Fire Threats. GAO-06-671R. Washington, D.C.: May 1, 2006. Wildland Fire Management: Important Progress Has Been Made, but Challenges Remain to Completing a Cohesive Strategy. GAO-05-147. Washington, D.C.: January 14, 2005. Wildfire Suppression: Funding Transfers Cause Project Cancellations and Delays, Strained Relationships, and Management Disruptions. GAO-04-612. Washington, D.C.: June 2, 2004. Wildland Fire Management: Additional Actions Required to Better Identify and Prioritize Lands Needing Fuels Reduction. GAO-03-805. Washington, D.C.: August 15, 2003. Western National Forests: A Cohesive Strategy Is Needed to Address Catastrophic Wildfire Threats. GAO/RCED-99-65. Washington, D.C.: April 2, 1999. 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 nation's wildland fire problems have worsened dramatically over the past decade, with more than a doubling of both the average annual acreage burned and federal appropriations for wildland fire management. The deteriorating fire situation has led the agencies responsible for managing wildland fires on federal lands--the Forest Service in the Department of Agriculture and the Bureau of Indian Affairs, Bureau of Land Management, Fish and Wildlife Service, and National Park Service in the Department of the Interior--to reassess how they respond to wildland fire and to take steps to improve their fire management programs. This testimony discusses (1) progress the agencies have made in managing wildland fire and (2) key actions GAO believes are still necessary to improve their wildland fire management. This testimony is based on issued GAO reports and reviews of agency documents and interviews with agency officials on actions the agencies have taken in response to previous GAO findings and recommendations. The Forest Service and Interior agencies have improved their understanding of wildland fire's ecological role on the landscape and have taken important steps toward enhancing their ability to cost-effectively protect communities and resources by seeking to (1) make communities and resources less susceptible to being damaged by wildland fire and (2) respond to fire so as to protect communities and important resources at risk while also considering both the cost and long-term effects of that response. To help them do so, the agencies have reduced potentially flammable vegetation in an effort to keep wildland fires from spreading into the wildland-urban interface and to help protect important resources by lessening a fire's intensity; sponsored efforts to educate homeowners about steps they can take to protect their homes from wildland fire; and provided grants to help homeowners carry out these steps. The agencies have also made improvements that lay important groundwork for enhancing their response to wildland fire, including adopting new guidance on how managers in the field are to select firefighting strategies, improving the analytical tools that assist managers in selecting a strategy, and improving how the agencies acquire and use expensive firefighting assets. Despite the agencies' efforts, much work remains. GAO has previously recommended several key actions that, if completed, would substantially improve the agencies' management of wildland fire. Specifically, the agencies should: (1) Develop a cohesive strategy laying out various potential approaches for addressing the growing wildland fire threat, including estimating costs associated with each approach and the trade-offs involved. Such information would help the agencies and Congress make fundamental decisions about an effective and affordable approach to responding to fires. (2) Establish a cost-containment strategy that clarifies the importance of containing costs relative to other, often-competing objectives. Without such clarification, GAO believes managers in the field lack a clear understanding of the relative importance that the agencies' leadership places on containing costs and are therefore likely to continue to select firefighting strategies without duly considering the costs of suppression. (3) Clarify financial responsibilities for fires that cross federal, state, and local jurisdictions. Unless the financial responsibilities for multijurisdictional fires are clarified, concerns that the existing framework insulates nonfederal entities from the cost of protecting the wildland-urban interface from fire--and that the federal government would thus continue to bear more than its share of the cost--are unlikely to be addressed. (4) Take action to mitigate the effects of rising fire costs on other agency programs. The sharply rising costs of managing wildland fires have led the agencies to transfer funds from other programs to help pay for fire suppression, disrupting or delaying activities in these other programs. Better methods of predicting needed suppression funding could reduce the need to transfer funds from other programs.
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The federal government faces a series of challenges that in many instances are not possible for any single agency to address alone. Many federal program efforts, including those related to ensuring food safety, providing homeland security, monitoring incidence of infectious diseases, or improving response to natural disasters, transcend more than one agency. Agencies face a range of challenges and barriers when they attempt to work collaboratively. GPRAMA establishes a new framework aimed at taking a more crosscutting and integrated approach to focusing on results and improving government performance. It requires the Office of Management and Budget (OMB), in coordination with agencies, to develop--every 4 years--long-term, outcome-oriented goals for a limited number of crosscutting policy areas. On an annual basis, OMB is to provide information on how these long-term crosscutting goals will be achieved. Also, we recently reported that a system of key national indicators currently under development in the U.S. could contribute to the implementation of the act's requirements for establishing crosscutting goals as well as agency-level goals. Such a system aims to aggregate essential statistical measures of economic, social, and environmental issues to provide reliable information on a country's condition, offering a shared frame of reference that enables collective accountability. Federal officials could look to measures included in a system of key national indicators to highlight areas in need of improvement and could use this information to inform the selection of future crosscutting and agency-level goals. Also, by providing information on economic, social, and environmental conditions and trends across the nation, a key indicator system may help provide context and a broader perspective for interpreting how the federal government's efforts contribute to national outcomes. The crosscutting approach required by the act will provide a much needed basis for more fully integrating a wide array of federal activities as well as a cohesive perspective on the long-term goals of the federal government that is focused on priority policy areas. It could also be a valuable tool for governmentwide reexamination of existing programs and for considering proposals for new programs. Our recent report on duplication, overlap, and fragmentation highlights a number of areas where a more crosscutting approach is needed--both across agencies and within a specific agency. We found that duplication and overlap occur because programs have been added incrementally over time to respond to new needs and challenges, without a strategy to minimize duplication, overlap, and fragmentation among them. Also, there are not always interagency mechanisms or strategies in place to coordinate programs that address crosscutting issues, which can lead to potentially duplicative, overlapping, and fragmented efforts. Effective GPRAMA implementation could help inform reexamination or restructuring efforts related to these and other areas by identifying the various agencies and federal activities--including spending programs, regulations, and tax expenditures--that contribute to each crosscutting goal. These efforts could also be supported by a system of key national indicators. For example, to influence positive movement in certain indicators, federal officials could look at all the programs that contribute to improving outcomes related to those indicators, examine how each contributes, and use this information to streamline and align the programs to create a more effective and efficient approach. Examples from our work on duplication, overlap, and fragmentation include: Teacher quality programs: In fiscal year 2009, the federal government spent over $4 billion specifically to improve the quality of our nation's 3 million teachers through numerous programs across the government. Federal efforts to improve teacher quality have led to the creation and expansion of a variety of programs across the federal government; however, there is no governmentwide strategy to minimize fragmentation, overlap, or duplication among these many programs. Specifically, we identified 82 distinct programs designed to help improve teacher quality, either as a primary purpose or as an allowable activity, administered across 10 federal agencies. The proliferation of programs has resulted in fragmentation that can frustrate agency efforts to administer programs in a comprehensive manner, limit the ability to determine which programs are most cost effective, and ultimately increase program costs. Department of Education (Education) officials believe that federal programs have failed to make significant progress in helping states close achievement gaps between schools serving students from different socioeconomic backgrounds, because in part, federal programs that focus on teaching and learning of specific subjects are too fragmented to help state and district officials strengthen instruction and increase student achievement in a comprehensive manner. Education has established working groups to help develop more effective collaboration across Education offices, and has reached out to other agencies to develop a framework for sharing information on some teacher quality activities, but it has noted that coordination efforts do not always prove useful and cannot fully eliminate barriers to program alignment. Congress could help eliminate some of these barriers through legislation, particularly through the pending reauthorization of the Elementary and Secondary Education Act of 1965 and other key education bills. Specifically, to minimize any wasteful fragmentation and overlap among teacher quality programs, Congress may choose either to eliminate programs that are too small to evaluate cost effectively or to combine programs serving similar target groups into a larger program. Education has already proposed combining 38 programs into 11 programs in its reauthorization proposal, which could allow the agency to dedicate a higher portion of its administrative resources to monitoring programs for results and providing technical assistance. Military health system: The Department of Defense's (DOD) Military Health System (MHS) costs have more than doubled from $19 billion in fiscal year 2001 to $49 billion in 2010 and are expected to increase to over $62 billion by 2015. The responsibilities and authorities for the MHS are distributed among several organizations within DOD with no central command authority or single entity accountable for minimizing costs and achieving efficiencies. Under the MHS's current command structure, the Office of the Assistant Secretary of Defense for Health Affairs, the Army, the Navy, and the Air Force each has its own headquarters and associated support functions. DOD has taken limited actions to date to consolidate certain common administrative, management, and clinical functions within its MHS. To reduce duplication in its command structure and eliminate redundant processes that add to growing defense health care costs, DOD could take action to further assess alternatives for restructuring the governance structure of the military health system. In 2006, if DOD and the services had chosen to implement one of the reorganization alternatives studied by a DOD working group, a May 2006 report by the Center for Naval Analyses showed that DOD could have achieved significant savings. Our adjustment of those savings from 2005 into 2010 dollars indicates those savings could range from $281 million to $460 million annually, depending on the alternative chosen and the numbers of military, civilian, and contractor positions eliminated. The Under Secretary of Defense for Personnel and Readiness has recently established a new position to oversee DOD's military healthcare reform efforts. Employment and training programs: In fiscal year 2009, 47 federal employment and training programs in nine agencies spent about $18 billion to provide services, such as job search and job counseling, to program participants. Most of these programs are administered by the Departments of Labor, Education, and Health and Human Services (HHS). Forty-four of the 47 programs we identified, including those with broader missions such as multipurpose block grants, overlap with at least one other program in that they provide at least one similar service to a similar population. As we reported in January 2011, nearly all 47 programs track multiple outcome measures, but only five programs have had an impact study completed since 2004 to assess whether outcomes resulted from the program and not some other cause. We examined potential duplication among three selected large programs--HHS's Temporary Assistance for Needy Families (TANF) and the Department of Labor's Employment Service, and Workforce Investment Act of 1998 (WIA) Adult programs--and found they provide some of the same services to the same population through separate administrative structures. Colocating services and consolidating administrative structures may increase efficiencies and reduce costs, but implementation can be challenging. Some states have colocated TANF employment and training services in one-stop centers where Employment Service and WIA Adult services are provided. An obstacle to further progress in achieving greater administrative efficiencies is that little information is available about the strategies and results of such initiatives. In addition, little is known about the incentives that states and localities have to undertake such initiatives and whether additional incentives are needed. To facilitate further progress by states and localities in increasing administrative efficiencies in employment and training programs, we recommended in 2011 that the Secretaries of Labor and HHS work together to develop and disseminate information that could inform such efforts. As part of this effort, Labor and HHS should examine the incentives for states and localities to undertake such initiatives and, as warranted, identify options for increasing such incentives. Labor and HHS agreed they should develop and disseminate this information. HHS noted that it does not have the legal authority to mandate increased TANF-WIA coordination or create incentives for such efforts. As part of its proposed changes to the Workforce Investment Act of 1998, the administration proposes consolidating nine programs into three. In addition, the budget proposal would transfer the Senior Community Service Employment Program from Labor to HHS. Sustained oversight by Congress could also help ensure progress is realized. Although agencies have made progress improving their operations in recent years, they need more effective management capabilities to better implement new programs and policies. As part of the new governmentwide framework created by GPRAMA, OMB is required to develop long-term goals to improve management functions across the government. The act specifies that these goals should include five areas: financial management, human capital management, information technology management, procurement and acquisition management, and real property management. All five of these areas have been identified by GAO as key management challenges across the government. Moreover, some aspects of these areas have warranted our designation as high risk, either governmentwide or at certain agencies. For example, although significant improvements have been made since we initially designated it as high risk in 2001, strategic human capital management in the federal government remains high risk because of a need to address current and emerging critical skills gaps that are undermining agencies' abilities to meet their vital missions. Another example is financial management at DOD, which we designated as high risk in 1995 due to pervasive financial and related business management systems and control deficiencies. In addition, a number of the cost-savings or revenue-enhancement opportunities we recently identified touch on needed improvements to management functions. Examples include: Noncompetitive contracts: Federal agencies generally are required to award contracts competitively, but a substantial amount of federal money is being obligated on noncompetitive contracts annually. Federal agencies obligated approximately $170 billion on noncompetitive contracts in fiscal year 2009 alone. While there has been some fluctuation over the years, the percentage of obligations under noncompetitive contracts recently has been in the range of 31 percent to over 35 percent. Although some agency decisions to forego competition may be justified, we found that when federal agencies decide to open their contracts to competition, they frequently realize savings. For example, the Department of State (State) awarded a noncompetitive contract for installation and maintenance of technical security equipment at U.S. embassies in 2003. In response to our recommendation, State subsequently competed this requirement, and in 2007 it awarded contracts to four small businesses for a total savings of over $218 million. In another case, we found in 2006 that the Army had awarded noncompetitive contracts for security guards, but later spent 25 percent less for the same services when the contracts were competed. In July 2009, OMB called for agencies to reduce obligations under new contract actions that are awarded using high-risk contracting authorities by 10 percent in fiscal year 2010. These high-risk contracts include those that are awarded noncompetitively and those that are structured as competitive but for which only one offer is received. While sufficient data are not yet available to determine whether OMB's goal was met, we are currently reviewing the agencies' savings plans to identify steps taken toward that goal, and will continue to monitor the progress agencies make toward achieving this and any subsequent goals set by OMB. Undisbursed grant balances: Past audits of federal agencies by GAO and Inspectors General, as well as agencies' annual performance reports, have suggested grant management challenges, including failure to conduct grant closeouts and undisbursed balances, are a long-standing problem. In August 2008, we reported that during calendar year 2006, about $1 billion in undisbursed funding remained in expired grant accounts in HHS's Payment Management System--the largest civilian grant payment system, which multiple agencies use. In August 2008, we recommended that OMB instruct all executive departments and independent agencies to track undisbursed balances in expired grant accounts and report on the resolution of this funding in their annual performance plan and Performance and Accountability Reports. As of April 2011, OMB had not issued guidance to all agencies to track and report on such balances. Unneeded real property: Many federal agencies hold real property they do not need, including property that is excess or underutilized. Excess and underutilized properties present significant potential risks to federal agencies because they are costly to maintain. For example, in fiscal year 2009, agencies reported underutilized buildings accounted for over $1.6 billion in annual operating costs. In a June 2010 Presidential Memorandum to federal agencies, the administration established a new target of saving $3 billion through disposals and other methods by the end of fiscal year 2012; the President reiterated this goal in his 2012 budget. However, federal agencies continue to face obstacles to disposing of unneeded property, such as requirements to offer the property to other federal agencies, then to state and local governments and certain nonprofits at no cost. If these entities cannot use the property, agencies may also need to comply with costly historic preservation or environmental cleanup requirements before disposing of the property. Finally, community stakeholders may oppose agencies' plans for property disposal. OMB could assist agencies in meeting their property disposal target by implementing our April 2007 recommendation of developing an action plan to address key problems associated with disposing of unneeded real property, including reducing the effect of competing stakeholder interests on real property decisions. The President's fiscal year 2012 budget proposed the Civilian Property Realignment Act (CPRA), which was recently introduced in the House of Representatives. The act would establish a Civilian Property Realignment Board modeled on the Base Closure and Realignment Commission. We are engaged in discussions with Congress to determine how we can best support Congress, should the act become law. Agencies need to consider the differing information needs of various users--such as agency top leadership and line managers, OMB, and Congress--to ensure that performance information will be both useful and used in decision making. We have previously reported that to be useful, performance information must meet diverse users' needs for completeness, accuracy, validity, timeliness, and ease of use. GPRAMA puts into place several requirements that could address these needs. Completeness: Agencies often lack information on the effectiveness of programs; such information could help decision makers prioritize resources among programs. Our work on overlap and duplication has found crosscutting areas where performance information is limited or does not exist. For example, not enough is known about the effectiveness of many domestic food assistance programs--an area where three federal agencies administer 18 programs, covering more than $62.5 billion in spending in fiscal year 2008. Research suggests that participation in 7 of the 18 programs--including the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), the National School Lunch Program, the School Breakfast Program, and SNAP--is associated with positive health and nutrition outcomes consistent with programs' goals, such as raising the level of nutrition among low-income households, safeguarding the health and well-being of the nation's children, and strengthening the agricultural economy. Yet little is known about the effectiveness of the remaining 11 programs because they have not been well studied. In another area, economic development, where four agencies administer 80 programs, a lack of information on program outcomes is a current and long- standing problem. In shedding light on these and other areas, the new crosscutting planning and reporting requirements could lead to the development of performance information in areas that are currently incomplete. Accuracy and validity: Agencies are required to disclose more information about the accuracy and validity of their performance information in their performance plans and reports, including the sources for their data and actions to address limitations to the data. Timeliness and ease of use: While agencies will continue to report annually on progress towards the rest of their goals, GPRAMA requires reporting for governmentwide and agency priority goals on a quarterly basis. By also requiring information to be posted on a governmentwide Web site, the act will make performance information more accessible and easy to use by stakeholders and the public, thus fostering transparency and civic engagement. In addition, to help ensure that performance information is used--not simply collected and reported as a compliance exercise--GPRAMA requires top leadership and program officials to be involved in quarterly reviews of priority goals. During these sessions, they are expected to review the progress achieved toward goals; assess the contributions of underlying federal organizations, programs, and activities; categorize goals by their risk of not being achieved; and develop strategies to improve performance. To be successful, these officials must have the knowledge and experience necessary to use and trust the information they are gathering. Building analytical capacity to use performance information and to ensure its quality--both in terms of staff trained to do the analysis and availability of research and evaluation resources--is critical to using performance information in a meaningful fashion and will play a large role in the success of government performance improvements. Federal officials must understand how the performance information they gather can be used to provide insight into the factors that impede or contribute to program successes; assess the effect of the program; or help explain the linkages between program inputs, activities, outputs, and outcomes. Our periodic surveys of federal managers on government performance and management issues have found a positive relationship between agencies providing training and development on setting program performance goals and the use of performance information when setting or revising performance goals. These surveys have also found a significant increase in training between our initial survey in 1997 and our most recent one in 2007. However, only about half of our survey respondents in 2007 reported receiving any training that would assist in strategic planning and performance assessment. We previously recommended that OMB ensure that agencies are making adequate investments in training on performance planning and measurement, with a particular emphasis on how to use performance information to improve program performance. Consistent with this, according to the President's Fiscal Year 2012 Budget, in the coming year OMB and the Performance Improvement Council intend to help agencies strengthen their employees' skills in analyzing and using performance information to achieve greater results. To further develop this capacity, within 1 year of enactment, GPRAMA requires the Office of Personnel Management (OPM), in consultation with the Performance Improvement Council, to identify the key skills and competencies needed by federal employees to carry out a variety of performance management activities including developing goals, evaluating programs, and analyzing and using performance information. Once those key skills and competencies are identified, OPM is then required to incorporate those skills and competencies into relevant position classifications and agency training no later than 2 years after enactment. Perhaps the single most important element of successful management improvement initiatives is the demonstrated commitment of top leaders. This commitment is most prominently shown through the personal involvement of top leaders in developing and directing reform efforts. Organizations that successfully address their long-standing management weaknesses do not "staff out" responsibility for leading change. Top leadership involvement and clear lines of accountability for making management improvements are critical to overcoming organizations' natural resistance to change, marshalling the resources needed in many cases to improve management, and building and maintaining the organizationwide commitment to new ways of doing business. GPRAMA creates several new leadership structures and responsibilities aimed at sustaining attention on improvement efforts at both the agency and governmentwide levels. The act designates the deputy head of each agency as Chief Operating Officer (COO), with overall responsibilities for improving the management and performance of the agency. In addition, the act requires each agency to designate a senior executive as Performance Improvement Officer (PIO) to support the COO. The act also establishes a Performance Improvement Council--chaired by the OMB Deputy Director for Management and composed of PIOs from various agencies--to assist the Director of OMB in carrying out the governmentwide planning and reporting requirements. GPRAMA also creates individual and organizational accountability provisions that have the potential to keep attention focused on achieving results. For each governmentwide performance goal, a lead government official is to be designated and held responsible for coordinating efforts to achieve the goal. Similarly, at the agency level, for each performance goal, an agency official, known as a goal leader, will be responsible for achieving the goal. To promote overall organizational accountability, the act requires OMB to report each year on unmet agency goals. Where a goal has been unmet for 3 years, OMB can identify the program for termination or restructuring, among other actions. In order for performance improvement initiatives to be useful to Congress for its decision making, garnering congressional buy-in on what to measure and how to present this information is critical. In past reviews, we have noted the importance of considering Congress a partner in shaping agency goals at the outset. Congressional committee staff, in discussing the Program Assessment Review Tool (PART) developed by the previous administration, told us that communicating the PART assessment results was not a replacement for the benefit of early consultation between Congress and OMB about what they consider to be the most important performance issues and program areas warranting review. While GPRA called for agencies to consult with Congress on their strategic plans, the act did not provide detailed or specific requirements on the consultation process or how agencies were to treat information obtained. GPRAMA significantly enhances requirements for agencies to consult with Congress when establishing or adjusting governmentwide and agency goals. OMB and agencies are to consult with relevant committees, obtaining majority and minority views, about proposed goals at least once every 2 years. In addition, OMB and agencies are to describe on the governmentwide Web site or in their strategic plans, respectively, how they incorporated congressional input into their goals. Beyond this opportunity to provide input to OMB and agencies as they shape their plans, Congress can also play a decisive role in fostering results-oriented cultures in the federal government by using information on agency goals and results as it carries out its legislative responsibilities. For example, authorizing, appropriations, and oversight committees could schedule hearings to determine if agency programs have clear performance goals, measures, and data with which to track progress and whether the programs are achieving their goals. Where goals and objectives are unclear or not results oriented, Congress could articulate the program outcomes it expects agencies to achieve. This would provide important guidance to agencies that could then be incorporated in agency strategic and annual performance plans. Most important, congressional use of agency goals and measured results in its decision making will send an unmistakable message to agencies that Congress considers agency performance a priority. Over the years, the Committee on Homeland Security and Governmental Affairs and its predecessors have done commendable work focusing attention on improving government management and performance--by reporting out legislation, such as the original GPRA and GPRAMA, and through hearings, such as this one. Moving forward, congressional oversight and sustained attention by top administration officials will be essential to ensure further improvement in the performance of federal programs and operations. In fact, as we noted in our recent high-risk issues report, these two factors were absolutely critical to making the progress necessary for the DOD Personnel Security Clearance Program and the 2010 Census to be removed from our high-risk list. Realizing the promise of GPRAMA for improving government performance and accountability and reducing waste will require sustained oversight of implementation. GAO played a major role in evaluating the implementation of the original GPRA's strategic and annual performance planning requirements including various pilot provisions. For example, by evaluating agency plans during a pilot phase, we were able to offer numerous recommendations for improvement that led to more effective final plans. We further supported implementation by reporting on leading management practices that agencies should employ as they implemented GPRA. It is worth noting that much of our work on government performance has been conducted at the request of the Committee on Homeland Security and Governmental Affairs and your two subcommittees, showing a sustained commitment to ensure GPRA was effectively implemented. Similarly, GPRAMA includes provisions requiring GAO to review implementation of the act at several critical junctures, and provide recommendations for improvements to implementation of the act. First, following a period of initial implementation, by June 2013, GAO is to report on implementation of the act's planning and reporting requirements--at both the governmentwide and agency levels. Subsequently, following full implementation, by September 2015 and 2017, GAO is to evaluate whether performance management is being used by federal agencies to improve the efficiency and effectiveness of agency programs. Also in September 2015 and 2017--and every 4 years thereafter--GAO is to evaluate the implementation of the federal government priority goals and performance plans, and related reporting required by the act. Looking ahead, a number of other required recurrent reports will help to inform Congress about government management and performance. For example, GAO has an ongoing statutory requirement to report each year on federal programs, agencies, offices, and initiatives, either within departments or governmentwide, which have duplicative goals or activities. In addition, each year GAO reports on its audit of the consolidated financial statements of the U.S. government and the condition of federal financial management systems. GAO continues to report periodically to Congress on the adequacy and effectiveness of agencies' information security policies and practices and other requirements of the Federal Information Security Management Act of 2002. Additionally, the Presidential Transition Act of 2000 identifies GAO as a source of briefings and other materials to help inform presidential appointees of the major management issues, risks, and challenges they will face. During the last presidential transition, we identified for Congress and the new administration urgent issues and key program and management challenges in the major departments and across government. Finally, GAO reports to each new Congress on government operations that it identifies as high risk due to their greater vulnerabilities to fraud, waste, abuse, and mismanagement or the need for broad-based transformation to address economy, efficiency, or effectiveness challenges. In conclusion, everything must be on the table as we address the federal long-term fiscal challenge. While the long-term outlook is driven on the spending side of the budget by rising health care costs and demographics, other areas of the budget should not be exempt from scrutiny. All areas should be reexamined in light of the contributions they make to achieving outcomes for the American public. If programs are overlapping, fragmented, or duplicative, they must be streamlined. Programs and management functions at significant risk of waste, fraud, and abuse must be corrected. GPRAMA provides the administration and Congress with new tools to identify strategies that are achieving results as well as those that are ineffective, duplicative, or wasteful that could be eliminated. GAO stands ready to help Congress ensure that the act's promises are met. Thank you, Chairmen Akaka and Carper, Ranking Members Johnson and Brown, and Members of the Subcommittees. This concludes my prepared statement. I would be pleased to answer any questions you may have. For further information on this testimony, please contact Bernice Steinhardt, Director, Strategic Issues, at (202) 512-6543 or [email protected]. Key contributions to this testimony were made by Elizabeth Curda (Assistant Director), and Benjamin T. Licht. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. Agency quarterly priority progress reviews, consistent with the requirements of the act, begin for the goals contained in the Fiscal Year 2011 Budget of the United States Government. OMB publishes interim federal government priority goals and prepares and submits a federal government performance plan consistent with the requirements of the act. Agencies adjust their current strategic plans, prepare and submit performance plans, and identify new or update existing agency priority goals to make them consistent with the requirements of the act. Agencies make performance reporting updates on their fiscal year 2011 performance consistent with the requirements of the act. OMB begins federal government quarterly priority progress reviews. OMB launches a single governmentwide performance website. Full implementation of the act with a new strategic planning cycle. 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 is the world's largest and most complex entity, with about $3.5 trillion in outlays in fiscal year 2010 that fund a broad array of programs and operations. GAO's long-term simulations of the federal budget show--absent policy change--growing deficits accumulating to an unsustainable increase in debt. While the spending side is driven by rising health care costs and demographics, other areas should also be scrutinized. In addition, there are significant performance and management challenges that the federal government needs to confront. GAO was asked to testify on the Government Performance and Results Act (GPRA) Modernization Act of 2010 (GPRAMA), as the administration begins implementing the act. This statement is based on GAO's past and ongoing work on GPRA implementation, as well as recently issued reports (1) identifying opportunities to reduce potential duplication in government programs, save tax dollars, and enhance revenue; and (2) updating GAO's list of government operations at high risk due to their greater vulnerabilities to fraud, waste, abuse, and mismanagement, or the need for transformation. As required by GPRAMA, GAO will periodically evaluate implementation of the act and report to Congress on its findings and recommendations. GAO's past and ongoing work illustrates how GPRAMA could, if effectively implemented, help address government challenges in five areas: Instituting a more coordinated and crosscutting approach to achieving meaningful results. GPRAMA could help inform reexamination or restructuring efforts and lead to more effective, efficient, and economical service delivery in overlapping program areas by identifying the various agencies and federal activities--including spending programs, regulations, and tax expenditures--that contribute to crosscutting outcomes. These program areas could include numerous teacher quality initiatives or multiple employment and training programs, among others. Focusing on addressing weaknesses in major management functions. Agencies need more effective management capabilities to better implement their programs and policies. GPRAMA requires long-term goals to improve management functions in five key areas: financial, human capital, information technology, procurement and acquisition, and real property management. GAO's work has highlighted opportunities for improvements in each of these areas and aspects of all of them are on the GAO high risk list. Ensuring performance information is both useful and used in decision making. Agencies need to consider the differing needs of various stakeholders, including Congress, to ensure that performance information will be both useful and used. For performance information to be useful, it must be complete, accurate, valid, timely, and easy to use. Yet decision makers often do not have the quality performance information they need to improve results. To help address this need, GPRAMA requires (1) disclosure of information about accuracy and validity, (2) data on crosscutting areas, and (3) quarterly reporting on priority goals on a publicly available Web site. Sustaining leadership commitment and accountability for achieving results. Perhaps the single most important element of successful management improvement initiatives is the demonstrated commitment of top leaders, as shown by their personal involvement in reform efforts. GPRAMA assigns responsibilities to a Chief Operating Officer and Performance Improvement Officer in each agency to improve agency management and performance. Engaging Congress in identifying management and performance issues to address. In order for performance improvement initiatives to be useful to Congress for its decision making, garnering congressional buy-in on what to measure and how to present this information is critical. GAO has previously noted the importance of considering Congress a partner in shaping agency goals at the outset. GPRAMA significantly enhances requirements for agencies to consult with Congress.
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Dramatic changes that occurred in the world as a result of the end of the Cold War and the dissolution of the Soviet Union have fundamentally altered the United States' security needs. In March 1993, DOD initiated a comprehensive review to define and redesign the nation's defense strategy, force structure, modernization, infrastructure, and budgets "from the bottom up." The report of the Bottom-Up Review, issued in October 1993, concluded that DOD could reduce its forces and infrastructure from a posture designed to meet a global Soviet threat to one that focuses on potential regional conflicts. In our review of the 1995 FYDP, the first FYDP to reflect the implementation of the Bottom-Up Review strategy, we concluded that DOD's major planning assumptions relied too heavily on optimistic cost estimates and potential savings. As a result, it had not gone far enough to meet economic realities, thus leaving its new plan with more programs than proposed budgets would support. This included approximately $20 billion in overprogramming, which DOD identified in the 1995 FYDP as undistributed future adjustments. The 1995 FYDP, which totaled $1,240 billion, represented DOD's 5-year program plan through fiscal year 1999. The 1996 FYDP, which totals $1,544 billion, covers the 6-year period from fiscal year 1996 through fiscal year 2001. The 1996 plan overlaps the 1995 plan for the years 1996-99. Table 1 compares the two plans by primary appropriation account. The shaded area represents the common years to both plans. Our analysis of the two FYDPs shows that during the 4 common years, the budget increases by about $3 billion annually. In addition, DOD reduced the 1996 FYDP for the $20 billion in undistributed future adjustments included in the 1995 FYDP. These reductions were made primarily in the procurement account. The largest changes from one year to the next in the 1996 FYDP occur during the last 2 years of the plan when the budget is projected to increase by about $10 billion from 1999 to 2000 and by another $10.4 billion from 2000 to 2001. This represents about a 1-percent real increase after inflation for those years. According to the Secretary of Defense, the 1996 FYDP emphasizes readiness and quality-of-life programs. As such, the Secretary increased the budgeted amounts for the operation and maintenance, military personnel, and family housing accounts from the 1995 FYDP to the 1996 FYDP as shown in table 1. The following sections discuss some of the more significant changes in each of the primary appropriation accounts. The 1995 FYDP proposed holding military pay raises below the amount included in current law, about 1.6 percent versus 2.6 percent. According to DOD, the 1996 FYDP funds the full military pay raises provided for under law through 1999. About $7.3 billion of the $8.7 billion of additional funds proposed for the military personnel account is to cover the planned pay raises. Table 2 shows a comparison of the military personnel account in the 1995 and 1996 FYDPs. As table 3 shows, the operation and maintenance account is projected to increase by a total of about $10 billion for the common years of the 1995 and 1996 FYDPs. The budgeted amounts for many operation and maintenance programs changed from the 1995 to the 1996 FYDP resulting in the net increase of $10 billion during the 4 common years, 1996-99. Our review shows that the largest increases were in the base operations and management headquarters functions. These functions include child care and development, family centers, base communications, real property services, environmental programs, and other infrastructure-related activities. For example, Army base operations and management headquarters, including maintenance and repair activities funding show a net increase of about $3 billion. Similarly, the Navy's base operations, operations support, and management headquarters activities show a net increase of over $2 billion. Similar Air Force accounts show a net increase in these functions of about $2 billion. The 1995 FYDP contained undistributed future adjustments of about $20 billion. Because of the magnitude of the decrease in the procurement account from the 1995 to the 1996 FYDP, it is evident that most of these adjustments were taken from the procurement account. As table 4 shows, the procurement account decreased by almost $27 billion for the common years in the 1995 and 1996 FYDPs. DOD decreased the procurement account in the 4 common years by stretching out the planned buys for some systems to the year 2000 and beyond and by reducing the total acquisition quantities for others. For example, according to the 1995 FYDP, Defense planned to procure one LPD-17 amphibious ship in 1996, two in 1998, and two in 1999. This procurement schedule slipped in the 1996 FYDP to one ship in 1998, two in 2000, and two in 2001. Also, the F-22 procurement program was slipped 1 year so that the 12 aircraft that were to be procured in 1999, according to the 1995 FYDP, are now programmed to be procured in 2000. The total planned procurement quantities were reduced for other programs, including the F/A-18C/D fighter aircraft and the Navy's Tomahawk missile. Appendix I shows 14 of the more significant procurement program deferrals or reductions relative to last year's FYDP. The 14 programs account for about $14.7 billion, or 54 percent, of the approximately $27 billion in reductions to the procurement account. The decrease in procurement dollars during the 4 common years of the 1995 and 1996 FYDPs comes on top of an already steep decline in procurement that began in the mid-1980s. The 1996 procurement budget request is $39.4 billion, which when adjusted for inflation, is a decline of 71 percent from fiscal year 1985. The implication of this trend is that future years' budgets will eventually have to accommodate a recapitalization of equipment and weapon systems. DOD plans to reverse this trend and increase its procurement budgets starting in fiscal year 1997. Figure 1 shows the sharp decline in the procurement account from fiscal years 1985 to 1996 and, as indicated by the dotted line, DOD's proposed increase from fiscal years 1997 through 2001. Budget authority is the authority to incur legally binding obligations of the government that will result in immediate or future outlays. Most Defense budget authority is provided by Congress in the form of enacted appropriations. According to the Secretary of Defense, future modernization funds will come from savings achieved through infrastructure reductions and acquisition reforms and from larger future Defense budgets. Significant spending increases are planned in the last 2 years of the 1996 FYDP. Specifically, procurement funding estimates are 15 and 24 percent greater in 2000 and 2001 compared with 1999. Congressional action may result in increasing near-term funding for defense, which could mitigate the need for DOD to increase out-year budgets. The June 1995 Concurrent Resolution on the Budget for Fiscal Year 1996 includes over $24 billion more for defense than the President's budget for fiscal years 1996-2001. The additional funds are expected, in part, to lessen the need for DOD to reduce or defer weapon modernization programs to meet other near-term readiness requirements. Assuming the funds are appropriated, Congress will specify how defense is to spend some of the added funds, but DOD may have an opportunity to restore some programs that were reduced or deferred in the 1996 FYDP. The Concurrent Resolution on the Budget is discussed further in a later section. As table 5 shows, the research, development, test, and evaluation account increased by $1.6 billion during the common years of the 1995 and 1996 FYDPs. The budgeted amounts for many research and development programs changed from the 1995 FYDP to the 1996 FYDP. Two programs that are projected to receive some of the largest funding increases over the 1995-99 period are special classified programs, which increased by about $1.8 billion, and the F-22 advanced fighter aircraft engineering and manufacturing development, which increased by about $700 million. Two programs that are budgeted substantially less are the defense reinvestment program, which decreased by about $1 billion, and the Comanche helicopter development program, which decreased by about $700 million. Overall, the comparison of the 1995 and 1996 FYDPs for the common years 1996-99 shows that programs in the latter stages of development are receiving increased funds, while those in the earlier stages of development are receiving less funds. For example, programs in demonstration and validation, engineering and manufacturing development, and operational systems development increased by about $7.1 billion while programs in basic research, exploratory development, and advanced development decreased by about $5.4 billion. A large part of the shift was in ballistic missile defense programs from earlier development to later stages of development. As table 6 shows, the 1996 FYDP budgets less for military construction than was planned in the 1995 FYDP. The table shows that although the biggest reduction is projected to occur in fiscal year 1996, the funds continue to decrease through 1998, increase slightly in 1999, and drop below $4 billion in 2000 and 2001. Table 7 shows that, over the common years of the 1995 and 1996 FYDPs, the family housing account increases by about $2.5 billion. According to DOD, worldwide military housing is inadequate and needs to be improved. Most of the funding increases in the 1996 FYDP are for operation and maintenance, new construction, and improvements to DOD's family housing. DOD anticipates that the realignment and closure of unneeded military bases and facilities resulting from the four rounds of closures since 1988 and force structure reductions will result in substantial savings. Our analysis of the 1996 FYDP shows that savings that have accrued or are expected to accrue from the base closings and force reductions appear to have been offset by increased infrastructure funding requirements primarily for base operations and management headquarters functions and quality-of-life programs. Thus, the proportion of infrastructure funding in the total defense budget in 2001 is expected to be about the same as it was reported for fiscal year 1994 in DOD's Bottom-Up Review report. DOD stated in its Bottom-Up Review report that $160 billion, or approximately 59 percent, of its total obligational authority for fiscal year 1994 was required to fund infrastructure activities. These activities include logistics support, medical treatment and facilities, personnel costs, including a wide range of dependent support programs, formal training, and installation support such as base operations, acquisition management, and force management. The Bottom-Up Review report noted that a key defense objective was to reduce this infrastructure without harming readiness. Figure 2 shows a breakdown of these infrastructure categories for fiscal year 1994 as displayed in DOD's report. Using the infrastructure categories identified by DOD, we calculated the amount of infrastructure funding for fiscal years 1995 through 2001. Table 8 shows that, on the basis of current program plans, infrastructure funding (as a percentage of DOD's total budget) stays relatively stable through 2001 and shows no improvement over the 59-percent infrastructure level DOD reported for fiscal year 1994. According to DOD's Bottom-Up Review report, approximately 40 percent of infrastructure funding such as for training, supply, and transportation are tied directly to force structure and would be expected to decline with force structure reductions. Historically, savings resulting from force structure reductions lag a few years behind. On the basis of this, and because DOD's planned drawdown of forces is essentially complete in fiscal year 1996, the 1996 FYDP should begin to reflect some significant infrastructure savings. However, FYDP estimates include the costs of new requirements as well as anticipated savings. Our analysis indicates that increases in personnel, operation and maintenance, research and development, and family housing, which include increases in infrastructure costs, appear to offset most planned infrastructure savings through 2001. As a result, the 1996 FYDP does not show the decline in the proportion of infrastructure funding that might be expected. The concurrent budget resolution approved by both the Senate and the House in June 1995 anticipates $35.6 billion more funding for national defense over the 1996-99 period than the President's budget request. However, as shown in table 9, the resolution would reduce the President's proposed budgets for 2000-2001 by a total of $11.4 billion. The net effect of these adjustments is a $24.2-billion increase over the period. These estimates include funding for DOD military, atomic energy defense activities, and defense-related activities. According to the conference agreement on the budget resolution, most of the increase for DOD in 1996 is assumed to be used for the procurement of weapons and research and development activities. For the period 1997 through 2001, budget authority increases are assumed to be split equally between procurement and operation and maintenance. In providing additional defense funds, it is the intent of the conferees to lessen the need for decisionmakers to sacrifice future readiness to meet current readiness requirements. When the funds are appropriated, Congress will undoubtedly specify how DOD is to spend some of the added funds. For example, the House bill on the defense authorization act for fiscal year 1996 would add programs such as the B-2 bomber, which DOD did not request and for which DOD would have to find funding in the future. Also, the Senate's 1996 authorization bill would significantly increase DOD's proposed funding for a missile defense system. In addition, DOD may have an opportunity to restore some of the programs that it reduced or deferred to the year 2000 and beyond. The Secretary of Defense shall submit to Congress each year, at or about the time that the President's budget is submitted . . . a future-years defense program . . . reflecting the estimated expenditures and proposed appropriations included in that budget. The provision requires that program and budget information submitted to Congress by DOD be consistent with the President's budget. The President's fiscal year 1996 budget was submitted to Congress on February 6, 1995. The 1996 FYDP was submitted to Congress on March 29, 1995, and was accompanied by a written certification by the Secretary of Defense that the FYDP and associated annexes satisfied the requirements of section 221 of title 10, United States Code. This certification was made after consultation with the DOD Inspector General. On the basis of our review, we consider the FYDP estimates to be consistent with the President's budget submission. Therefore, in our opinion, the fiscal year 1996 FYDP was submitted in compliance with all applicable legislative requirements. In commenting on this report, DOD stated that we had fairly and accurately assessed the funding adjustments it made to balance the program plans for fiscal years 1996-2001. DOD also stated that the report correctly identified the fiscal implications of funding priorities and strategies that guided the preparation of the 1996-2001 program. We reported that infrastructure funding, as a proportion of the defense budget, is relatively constant from 1995 through 2001. DOD agreed and said that it would be incorrect to infer from this finding that the Department is failing to achieve savings from a smaller infrastructure and applying them to higher priority activities like readiness, quality-of-life, and procurement. We agree with DOD in part. Our analysis shows that infrastructure savings that have occurred have been applied toward new infrastructure requirements, but not to weapons procurement or modernization in any appreciable amounts. DOD expressed concern that it may not be able to accelerate the procurement of programs that are already in the defense program if Congress directs that additional funding be used to acquire new programs with large out-year funding requirements. The full text of DOD's comments are included as appendix II. To evaluate the major planning assumptions underlying DOD's fiscal year 1996 FYDP, we interviewed officials in the Office of the DOD Comptroller, the Office of Program Analysis and Evaluation, Office of Environmental Security, Base Closure and Utilization Office, and the Congressional Budget Office. We examined a variety of DOD planning and budget documents, including the FYDP and associated annexes. We also reviewed the President's fiscal year 1996 budget submission; the fiscal year 1996 concurrent budget resolution; our prior reports; and pertinent reports by the Congressional Budget Office, the Congressional Research Service, and others. To calculate the amount of infrastructure funding for fiscal years 1995 through 2001 we used the infrastructure definitions and categories provided by DOD. Results of our infrastructure analysis were provided to cognizant DOD officials within the Office of Program Analysis and Evaluation for validation and comment. Department officials stated the analysis was correct on the basis of the definitions and categories established in 1994. However, they also stated they were redefining some infrastructure activities and categories that may change the results. DOD would not provide us with the details supporting these new categories during our review so we were unable to evaluate them. To determine whether the FYDP submission complies with the law, we compared its content with the requirements established in section 221 of title 10 of the United States Code and section 1005 of the Defense Authorization Act for fiscal year 1995. We also reviewed references to the reporting requirement in various legislative reports to clarify congressional intent. Our work was conducted from March to August 1995 in accordance with generally accepted government auditing standards. We are providing copies of this report to appropriate House and Senate Committees; the Secretaries of Defense, the Air Force, the Army, and the Navy; and the Director, Office of Management and Budget. We will also provide copies to other interested parties upon request. If you have any questions concerning this report, please call me on (202) 512-3504. Major contributors to this report are listed in appendix III. Table I.1 shows 14 of the more significant procurement program changes for 1996-99 from the 1995 FYDP to the 1996 FYDP. The 14 programs account for about $14.7 billion, or 54 percent, of the approximately $27 billion in reductions to the procurement account. Table I.1: Selected Procurement Program Deferrals or Reductions for 1996-99 From the 1995 FYDP to the 1996 FYDP Although DOD is to decide later this year whether to procure more than 40 C-17s or a commercial alternative, it has reduced the amount of funds available for this procurement by $1.3 billion over the 1996-99 period. Joint Air Force and Navy program. The funds are to be used for the procurement of modification parts. DOD Budget: Selected Categories of Planned Funding for Fiscal Years 1995-99 (GAO/NSIAD-95-92, Feb. 17, 1995). Future Years Defense Program: Optimistic Estimates Lead to Billions in Overprogramming (GAO/NSIAD-94-210, July 29, 1994). DOD Budget: Future Years Defense Program Needs Details Based on Comprehensive Review (GAO/NSIAD-93-250, Aug. 20, 1993). Transition Series: National Security Issues (GAO/OCG-93-9TR, Dec. 1992). High Risk Series: Defense Weapons Systems Acquisition (GAO/HR-93-7, Dec. 1992). Weapons Acquisition: Implementation of the 1991 DOD Full Funding Policy (GAO/NSIAD-92-238, Sept. 24, 1992). Defense Budget and Program Issues Facing the 102nd Congress (GAO/T-NSIAD-91-21, Apr. 25, 1991). DOD Budget: Observations on the Future Years Defense Program (GAO/NSIAD-91-204, Apr. 25, 1991). Department of Defense: Improving Management to Meet the Challenges of the 1990s (GAO/T-NSIAD-90-57, July 25, 1990). DOD Budget: Comparison of Updated Five-Year Plan With President's Budget (GAO/NSIAD-90-211BR, June 13, 1990). DOD's Budget Status: Fiscal Years 1990-94 Budget Reduction Decisions Still Pending (GAO/NSIAD-90-125BR, Feb. 22, 1990). Status of Defense Forces and Five Year Defense Planning and Funding Implications (GAO/T-NSIAD-89-29, May 10, 1989). Transition Series: Defense Issues (GAO/OCG-89-9TR, Nov. 1988). Defense Budget and Program Issues: Fiscal Year 1989 Budget (GAO/T-NSIAD-88-18, Mar. 14, 1988). Underestimation of Funding Requirements in Five Year Procurement Plans (GAO/NSIAD-84-88, Mar. 12, 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. 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 compared the Department of Defense's (DOD) fiscal year (FY) 1996 Future Years Defense Program (FYDP) with its FY 1995 FYDP, focusing on: (1) what major program adjustments DOD made from FY 1995 to FY 1996; (2) the implications of these changes for the future; and (3) whether the FY 1996 FYDP complies with statutory requirements. GAO found that: (1) the FY 1996 FYDP, which covers FYs 1996-2001, is considerably different from the 1995 FYDP, which covers FYs 1995-99; (2) the total program increased by about $12.6 billion in the 4 common years of both plans (FYs 1996-99); (3) approximately $27 billion in planned weapon system modernization programs for these 4 years have been eliminated, reduced, or deferred to the year 2000 and beyond; (4) the military personnel, operation and maintenance, and family housing accounts increased by over $21 billion during the common period and continue to increase to 2001 to support Defense's emphasis on readiness and quality-of-life programs; (5) the net effect is a more costly defense program, despite substantial reductions in DOD's weapon modernization programs between 1996 and 1999; (6) Defense plans to compensate for the decline in procurement during the early years of the 1996 FYDP by substantially increasing procurement funding in 2000 and 2001; (7) the Secretary of Defense plans to pay for the increased future modernization with a combination of savings from infrastructure reductions and acquisition reforms and from real budget growth; (8) GAO's analysis shows that the 1996 FYDP does not reflect reduced infrastructure costs, primarily because of funding increases for base operation and management headquarters functions and quality-of-life programs; however, the Concurrent Resolution on the Budget for Fiscal Year 1996 includes over $24 billion more for Defense than requested in the President's budget for FYs 1996-2001; (9) the additional budget amounts are expected, in part, to lessen the need for Defense to reduce or defer weapon modernization programs to meet other near-term readiness requirements; (10) assuming the funds are appropriated, Congress will specify how Defense is to spend some of the added funds; however, DOD may have an opportunity to restore some programs that were reduced or deferred to 2000 and beyond; and (11) the additional near-term funding could mitigate the need for DOD to increase out-year budgets.
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Government agencies at all levels have already implemented a broad array of e-government applications: through the Internet, government agencies collect and disseminate information and forms; government and businesses order and pay for goods and services; and businesses and the public apply for licenses, grants, and benefits, and submit bids and proposals. Despite this substantial progress, the federal government has not yet taken full advantage of the potential that electronic government offers. As we have previously testified, the government faces significant challenges in this area, including sustaining executive leadership, protecting personal privacy, implementing appropriate security controls, using enterprise architectures effectively, and managing IT human capital. Recognizing the magnitude of challenges facing the federal government, the Congress has enacted important legislation to guide the development of e-government. In 1998, the Government Paperwork Elimination Act (GPEA) was enacted, establishing a requirement that by October 21, 2003, federal agencies provide the public, when practicable, the option of submitting, maintaining, and disclosing required information electronically. More recently, the Congress passed the E-Government Act of 2002, which includes provisions to promote the use of the Internet and other information technologies to provide government services electronically; strengthen agency information security; and define how to manage the federal government's growing IT human capital needs. In addition, this act established an Office of Electronic Government within OMB to provide strong central leadership and full-time commitment to promoting and implementing e-government. The executive branch has also acted to enhance and accelerate the development of electronic government. The President made e-government expansion one of five top priorities in his fiscal year 2002 management agenda, which outlines a number of specific electronic government projects. For example, the FirstGov Web portal--which is intended to serve as a single consolidated source for government services to citizens-- was targeted for expansion and improvement to offer services better organized according to citizens' needs. Also targeted for enhancement was the FedBizOpps portal, designed to be a single point of entry for information about federal government procurement opportunities. Further, the agenda endorsed the establishment of a federal public key infrastructure to ensure that electronic transactions with and within the federal government would be private and secure. A major element of the President's management agenda was establishment of the Quicksilver Task Force, which was charged with identifying (1) systematic barriers that had blocked the deployment of e-government advances and (2) electronic government projects that could deliver significant productivity and performance gains across government. Together, the federal government's e-government initiatives are expected to provide high-quality customer services regardless of whether the citizen contacts the agency by phone, in person, or on the Web; reduce the expense and difficulty of doing business with the government; cut government operating costs; provide citizens with readier access to government services; increase access for persons with disabilities to agency Web sites and E- government applications; and make government more transparent and accountable. In its e-government strategy, released in 2002, OMB stated that the 25 e- government initiatives were selected on the basis of (1) value to citizens, (2) potential improvement in agency efficiency, and (3) likelihood of deploying within 18 to 24 months. The selected initiatives would achieve their results by simplifying and unifying agency work processes and information flows, providing one-stop services to citizens, and enabling information to be collected on line once and reused, rather than being collected many times. The initiatives are aimed at providing a wide variety of services. For example, some are focused on setting up Web sites or portals that channel information more effectively to citizens, businesses, or other government entities. Recreation One-Stop is one such example, a Web portal for a single point of access to information about parks and other recreation venues at the federal, state, and local levels. One-Stop Business Compliance provides an analogous service to businesses, giving them a single Web site to consult regarding the multitude of government regulations that may affect their activities. Other initiatives strive for more ambitious services that may not necessarily rely on the Internet for delivery. SAFECOM, for example, seeks to impose order and standards on wireless communications among emergency responders across all levels of government. The e-Payroll initiative is intended to consolidate the federal government's many incompatible payroll systems into just two that would service all government employees. As shown in figure 1, OMB has divided these efforts into five broad categories that reflect the different customer groups targeted by each of the initiatives: 1. government to individual citizens, 2. government to business, 3. government to government, 4. internal efficiency and effectiveness, and 5. cross cutting. Government to individual citizens. One of the major benefits of on-line and Internet-based services is that they provide opportunities for greater citizen access to and interaction with the federal government. An example is GovBenefits.gov, a Web site designed to assist users in locating and determining potential eligibility for government benefits and services. Other initiatives in this category aim to improve customer service. USA Services, for example, is intended to deploy tools, such as call centers and coordinated E-mail systems linked to the FirstGov Web site, that will enable citizens to ask questions and receive responses from the federal government without having to know in advance which specific departments or bureaus have responsibilities related to their areas of interest. Government to business. Initiatives in this category seek to reduce the reporting burden on businesses by adopting processes that eliminate redundant data collection, provide one-stop access to information, and enable communication using electronic business standards, such as the Extensible Markup Language. The Expanding Electronic Tax Products for Businesses initiative, for example, seeks to reduce the number of tax- related forms businesses must file. The Federal Asset Sales initiative aims to create a single electronic interface for businesses to find and buy government assets. Government to government. The primary goal of these initiatives is to enable federal, state, and local governments to more easily work together to better serve citizens within key lines of business. For example, Geospatial One-Stop seeks to provide a single portal for accessing standardized and coordinated federal, state, and local geospatial data. The Disaster Management initiative seeks to provide federal, state, and local emergency managers on-line access to disaster management information, planning, and response tools. Internal efficiency and effectiveness. The initiatives in this category seek to improve the performance and reduce the costs of federal government administration by using e-business best practices. For example, the Integrated Acquisition Environment initiative seeks to consolidate business processes and information to facilitate cost-effective acquisition of goods and services across the federal government. Lastly, e-Travel is planned to streamline the administration of government travel by creating a governmentwide Web-based travel management process. Cross-cutting initiative. The e-Authentication initiative is to develop common interoperable authentication techniques to support all the other initiatives. Authentication refers to the critical process of confirming the identity of the participants in an electronic transaction. Without a means to satisfactorily establish identities, e-government transactions are too risky, and the potential of e-government to transform citizen services remains severely constrained. The initiative plans to provide authentication services through an electronic "gateway," which will offer different assurance levels to meet the varying needs of the other projects. While several of the projects have already achieved tangible results, not all of them are making the same degree of progress. For example, some have had major management changes--management of the SAFECOM initiative, for example, was transferred from Treasury to the Federal Emergency Management Agency. Major management changes such as this have led to delays in project milestones and changes in objectives. We believe that fluctuations such as these indicate a need for oversight to ensure that the larger goal--to realize the full potential of e-government-- is not jeopardized. When we reviewed project-planning documentation collected by OMB from each of the initiatives, we found indications that important aspects of some of the initiatives had not been addressed and that, for many of them, funding strategies and milestones were in a state of flux. These findings add urgency to our concern that the initiatives be carefully monitored to ensure that implementation challenges are identified and addressed as quickly as possible. I would like to go through some of the specific results of our analysis now. As part of OMB's selection process, the Quicksilver task force screened over 350 project ideas during the summer of 2001 and selected 34 potential project proposals for more in-depth consideration. In September 2001, task force members developed brief (or "mini") business cases for each of the 34 proposals. According to OMB officials, these mini business cases were to include all the information necessary to enable sound selection decisions. The task force reviewed the mini business cases and the final selections were made in October. We analyzed the mini business cases, which were prepared for 23 of the 25 initiatives, to determine whether they were complete. To conduct our analysis, we first identified e-government business case "best practices" as cited by federal agencies, private sector and academic researchers, and state and local governments. From these sources, we compiled the most frequently cited elements of a complete business case, such as a description of the proposed concept for improved future processes and a discussion of the benefits of implementing it. We also included elements identified by OMB as important to e-government business cases--whether an initiative is driven by identified customer needs and whether it contains a strategy for successful collaboration. As shown in figure 2, our analysis of the mini business cases showed that although they addressed some of the required elements, the majority of them did not include some key elements identified by OMB and best practice guidance. All the business cases we reviewed included a discussion of the expected benefits of the proposed initiative, and all but one included a discussion of the initiatives' objectives and planned future conditions. However, only 9 of the 23 initiatives' business cases discussed how customer needs were to be identified and addressed, and only 8 addressed collaboration among agencies and other government entities, even though OMB considered these elements fundamental to its e-government strategy. Mr. Chairman, addressing how a proposed project links to the needs of its potential customers is key to the success of that project, and should be discussed in the project's business case. Without a plan to assess users' needs, there is a greater risk that the project will focus too heavily on issues that customers do not consider important or disrupt processes that are already working well and accepted by users. In the case of the e- government initiatives, the result could be that the Internet sites and services created might not be useful to those customers they are intended to serve. Collaboration across agencies and other organizations is likewise a key component of most of the initiatives, and therefore a discussion of strategies for collaboration is essential to a complete e-government business case. As the government attempts to integrate services across organizations--particularly in cases where federal agencies overlap in providing similar services to customers--the issue of how agencies collaborate can determine an initiative's success or failure. To help mitigate the risk of failure, the business case needs to provide a convincing argument that collaboration can be accomplished and a plan for how collaboration will be carried out. Let me point out that the initial "mini" business cases that we reviewed are not the latest ones in existence for the 25 initiatives. More extensive business cases were developed for each of the projects in fall 2002, in conjunction with the fiscal year 2004 budget process. We have not yet had an opportunity to review these documents. OMB required the managing partners of the e-government initiatives to prepare and submit work plans and funding plans in May 2002. We assessed the completeness of these plans, which provided the most up-to- date cost and schedule information available at the time of our review. To conduct our analysis, we identified best practices from GAO and OMB guidance for the effective oversight and implementation of IT projects and compared those best practice elements to the information contained in the May 2002 plans. In addition, several months later, we obtained updated status information from 23 of the initiatives' project managers. According to the guidance we reviewed, project implementation documents should include components such as cost estimates, a schedule with milestones, identification of project deliverables, and an overall strategy for obtaining needed funding and staff resources. As shown in figure 3, four of the five best practice elements we identified were included in a majority of the project plans. Plans for all but two of the initiatives contained a schedule with milestones, and all the plans identified project deliverables. However, other best practice elements were not included in some of the plans. For example, only 9 identified a strategy for obtaining needed funds, and only 16 contained information about how staffing commitments would be obtained. In addition to the findings shown in figure 3, our analysis of the plans showed uncertainties about milestones for many of the initiatives. Ten of the 24 did not identify a final completion date for the initiatives, resulting in inadequate information to determine whether they were moving forward in a timely manner. Further, 6 of the initiatives were not planned to be completed within the 18 to 24 month time frame originally established by OMB as a criterion for inclusion in its e-government effort. Accurate cost information was also generally lacking. The updated information we obtained from project managers in September 2002 on estimated costs revealed significant changes--changes of more than 30 percent--for about half of the initiatives. These changes, occurring within such a short period of time, rendered the funding plans outdated soon after they were developed. This uncertainty about how much the initiatives would cost, combined with the fact that only 9 of the 24 plans identified a strategy for obtaining these needed funds, led us to conclude that OMB was not receiving adequate information to properly oversee the e-government projects and ensure that they would have the resources to meet their objectives efficiently and economically. Given the challenges we've identified, OMB's oversight role takes on critical importance. Each of the e-government initiatives needs a well- thought-out strategy for directly addressing its biggest challenges, such as getting relevant government agencies to effectively collaborate. And each also needs detailed and stable project plans, so that they can be held accountable for achieving realistic results within budget and according to schedule. Accordingly, in our report, we recommended that OMB take steps as overseer of the e-government initiatives to reduce the risk that the projects would not meet their objectives. Specifically, we recommended that OMB ensure that the managing partners for all the initiatives focus on customers by soliciting input from the public and conducting user needs assessments, work with partner agencies to develop and document effective provide OMB with adequate information to monitor the cost, schedule, and performance of the e-government initiatives. In following up on our recommendations, we requested from OMB updated business cases that were submitted as part of the fiscal year 2004 budget process. These updated business cases should provide not only indications of whether key topics such as collaboration and customer focus are now being addressed, but also updated cost and schedule information. As noted in our report, OMB agreed to provide us this information once it was updated after release of the 2004 budget. However, we have not yet received this information. OMB officials (from the Office of General Counsel and the Office of Information and Regulatory Affairs) stated earlier this week that the business cases still needed to be reviewed before they could be released to us. In summary, e-government offers many opportunities to better serve the public, make government more efficient and effective, and reduce costs. Legislation such as GPEA and the E-Government Act of 2002 have laid a strong foundation for building on these opportunities, and the federal government continues to make strides in taking advantage of them. Overall, few can argue that the 25 e-government projects are not worthy initiatives with commendable objectives. Nevertheless, many critical details remain to be fully addressed before the promise of e-government is fully realized. Because the 25 projects represent such a broad range of activities, it is difficult to gauge their progress collectively. Some of their objectives may be much easier to attain than others. However, our review of the initial planning documents associated with the projects led us to conclude that important aspects--such as collaboration and customer focus--had not been thought out for all the projects, and major uncertainties in funding and milestones were not uncommon. Priority should now be given to ensuring that the agencies managing these initiatives tackle these issues and gain cost and schedule stability so that they can ultimately succeed in achieving their potential. We believe that careful oversight--on the part of OMB as well as the Congress--is crucial to ensuring this success. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the subcommittee may have at this time. If you should have any questions about this testimony, please contact me at (202) 512-6222 or via E-mail at [email protected]. Other major contributors to this testimony included Shannin Addison, Barbara Collier, Felipe Colon, Jr., John de Ferrari, Neha Harnal, and Elizabeth Roach. Description Provides citizens with a single point of access to a Web- based resource, offering information and access to government recreational sites in a user-friendly format. OMB-reported performance metrics Number of partners sharing data via Recreation.gov (target: 35 partners added) in Recreation.gov (target: 25% increase) Provides a single point of access for citizens to locate and determine potential eligibility for government benefits and services. Hits to site per month (target: 350,000) partner benefit sites (target: 10% increase) benefits and determine eligibility (target: 20 minutes or less) Creates a single point of access for citizens to locate loans. Description Develops and deploys governmentwide citizen customer service using industry best practices that provides citizens with timely, consistent responses about government information and services. OMB-reported performance metrics Average time to respond to inquiries through Firstgov.gov and Federal Citizen Information Center (FCIC) (target: 100% of inquiries responded to within 24 hours) inquiries through Firstgov.gov and FCIC wide inquiries that call center and E-mail systems can handle (target: 3.3M calls per year and 150,000 emails peryear) Customer satisfaction Percentage of coverage of tax filing public (target: minimum of 60%) Creates a single point of access to free on-line preparation and electronic tax filing services. Allows citizens to access and participate in the rulemaking process through a cross- agency front-end Web application. electronically (target: 15% increase) Description Reduces the number of tax- related forms that businesses must file, provides timely and accurate tax information to businesses, increases the availability of electronic tax filing, and models simplified federal and state tax employment laws. Creates a single, one-stop access point for businesses to find and buy government assets. Makes it easy for small and medium enterprises (SME) to obtain the information and documents needed to conduct business abroad. OMB-reported performance metrics Burden reduction for corporations per return, application filed, or both federal government per return filed Employer Identification Number (EIN)--interim EIN granted immediately tax-related transactions (all forms) Description Reduces the burden on businesses by making it easy to find, understand, and comply with relevant laws and regulations at all levels of government. OMB-reported performance metrics Time savings for business compliance and filing (target: 50% reduction) savings through transition to compliance from enforcement through automated processes (target: 25% increase) for issuing permits and licenses permits and licenses (target: within 24 hours) page views (target: 10- 20% increase) Adopts a portfolio of existing health information interoperability standards enabling all agencies in the federal health enterprise to communicate based on common enterprisewide business and information technology architectures. Provides federal and state agencies with a single point of access to map- related data, enabling consolidation of redundant data. Description Creates a single, on-line portal for all federal grant customers to access and apply for grants. Provides federal, state, and local emergency managers on-line access to disaster management- related information and planning and response tools. Departments of Agriculture, Defense, Energy, Housing and Urban Development, Justice, Commerce, Education, Health and Human Services, the Interior, Labor, State, the Treasury, Transportation, and Veterans Affairs; Appalachian Regional Commission, Environmental Protection Agency, Federal Communications Commission, General Services Administration, Interstate Commerce Commission, Office of Personnel Management, Tennessee Valley Authority, U.S. Postal Service, National Aeronautics and Space Administration, Nuclear Regulatory Commission, Small Business Administration, National Oceanic and Atmospheric Administration, Geological Survey (target: reduce by 15%) planning capability (target: improve by 25%) responders using disaster management information system tools (target: increase by 10%) Description Provides interoperable wireless solutions for federal, state, and local public safety organizations and ensures they can communicate and share information as they respond to emergency incidents. Establishes common electronic processes for federal and state agencies to collect, process, analyze, verify and share birth and death record information. Also promotes automating how deaths are registered with the states. Provides a single point of on-line training and strategic human capital development solutions for all federal employees. Time for state to report death to Social Security Administration (target: 15 days) Time to verify birth and death entitlement factors (target: 24 hours) Description Outsources delivery of USAJOBS Federal Employment Information System to deliver state-of- the-art on-line recruitment services to job seekers that include intuitive job searching, on-line resume submission, applicant data mining, and on-line feed-back on status and eligibility. Streamlines and automates the exchange of federal employee human resources information. Replaces official paper employee records. Streamlines and improves the quality of the current security clearance process. Description Consolidates 22 federal payroll systems to simplify and standardize federal human resources/payroll policies and procedures to better integrate payroll, human resources, and finance functions. Provides a common governmentwide end-to-end travel service that rationalizes, automates, and consolidates the travel process in a self-service Web- centric environment, covering all aspects of travel planning, from authorization and reservations to expense reporting and reimbursement. OMB-reported performance metrics Payroll cost per transaction per employee (target: in line with industry averages) disbursements, post payroll interfaces, and periodic reporting trip (target: in line with industry averages) Creates a secure business environment that will facilitate and support cost- effective acquisition of goods and services by agencies, while eliminating inefficiencies in the current acquisition environment. Description Provides policy guidance to help agencies to better manage their electronic records, so that records information can be effectively used to support timely and informed decision making, enhance service delivery, and ensure accountability. Minimizes the burden on businesses, public and government when obtaining services on line by providing a secure infrastructure for on- line transactions, eliminating the need for separate processes for the verification of identity and electronic signatures. Internet Gambling: An Overview of the Issues. GAO-03-89. Washington, D.C.: December 2, 2002. International Electronic Commerce: Definitions and Policy Implications. GAO-02-404. Washington, D.C.: March 1, 2002. Electronic Commerce: Small Business Participation in Selected On-line Procurement Programs. GAO-02-1. Washington, D.C.: October 29, 2001. On-Line Trading: Investor Protections Have Improved but Continued Attention Is Needed. GAO-01-858. Washington, D.C.: July 20, 2001. Internet Pharmacies: Adding Disclosure Requirements Would Aid State and Federal Oversight. GAO-01-69. Washington, D.C.: October 19, 2000. Sales Taxes: Electronic Commerce Growth Presents Challenges; Revenue Losses Are Uncertain. GGD/OCE-00-165. Washington, D.C.: June 30, 2000. Commodity Exchange Act: Issues Related to the Regulation of Electronic Trading Systems. GGD-00-99. Washington, D.C.: May 5, 2000. Trade with the European Union: Recent Trends and Electronic Commerce Issues. GAO/T-NSIAD-00-46. Washington, D.C.: October 13, 1999. Electronic Banking: Enhancing Federal Oversight of Internet Banking Activities. GAO/T-GGD-99-152. Washington, D.C.: August 3, 1999. Electronic Banking: Enhancing Federal Oversight of Internet Banking Activities. GAO/GGD-99-91. Washington, D.C.: July 6, 1999. Securities Fraud: The Internet Poses Challenges to Regulators and Investors. GAO/T-GGD-99-34. Washington, D.C.: March 22, 1999. Retail Payments Issues: Experience with Electronic Check Presentment. GAO/GGD-98-145. Washington, D.C.: July 14, 1998. Identity Fraud: Information on Prevalence, Cost, and Internet Impact is Limited. GAO/GGD-98-100BR. Washington, D.C.: May 1, 1998. Electronic Banking: Experiences Reported by Banks in Implementing On-line Banking. GAO/GGD-98-34. Washington, D.C.: January 15, 1998. IRS's 2002 Tax Filing Season: Returns and Refunds Processed Smoothly; Quality of Assistance Improved. GAO-03-314. Washington, D.C.: December 20, 2002. Tax Administration: Electronic Filing's Past and Future Impact on Processing Costs Dependent on Several Factors. GAO-02-205. Washington, D.C.: January 10, 2002. GSA On-Line Procurement Programs Lack Documentation and Reliability Testing. GAO-02-229R. Washington, D.C.: December 21, 2001. U.S. Postal Service: Update on E-Commerce Activities and Privacy Protections. GAO-02-79. Washington, D.C.: December 21, 2001. Computer-Based Patient Records: Better Planning and Oversight By VA, DOD, and IHS Would Enhance Health Data Sharing. GAO-01-459. Washington, D.C.: April 30, 2001. USDA Electronic Filing: Progress Made, But Central Leadership and Comprehensive Implementation Plan Needed. GAO-01-324. Washington, D.C.: February 28, 2001. Information Security: IRS Electronic Filing Systems. GAO-01-306. Washington, D.C.: February 16, 2001. U.S. Postal Service: Postal Activities and Laws Related to Electronic Commerce. GAO/GGD-00-188. Washington, D.C.: September 7, 2000. U.S. Postal Service: Electronic Commerce Activities and Legal Matters. GAO/T-GGD-00-195. Washington, D.C.: September 7, 2000. Defense Management: Electronic Commerce Implementation Strategy Can Be Improved. GAO/NSIAD-00-108. Washington, D.C.: July 18, 2000. Food Stamp Program: Better Use of Electronic Data Could Result in Disqualifying More Recipients Who Traffic Benefits. GAO/RCED-00-61. Washington, D.C.: March 7, 2000. National Archives: The Challenge of Electronic Records Management. GAO/T-GGD-00-24. Washington, D.C.: October 20, 1999. National Archives: Preserving Electronic Records in an Era of Rapidly Changing Technology. GAO/GGD-99-94. Washington, D.C.: July 19, 1999. Labor-Management Reporting and Disclosure: Status of Labor's Efforts to Develop Electronic Reporting and a Publicly Accessible Database. GAO/HEHS-99-63R. Washington, D.C.: March 16, 1999. Acquisition Reform: NASA's Internet Service Improves Access to Contracting Information. GAO/NSIAD-99-37. Washington, D.C.: February 9, 1999. Tax Administration: Increasing EFT Usage for Installment Agreements Could Benefit IRS. GAO/GGD-98-112. Washington, D.C.: June 10, 1998. Electronic Government: Selection and Implementation of the Office of Management and Budget's 24 Initiatives. GAO-03-229. Washington, D.C.: November 22, 2002. Electronic Government: Proposal Addresses Critical Challenges. GAO-02- 1083T. Washington, D.C.: September 18, 2002. Information Management: Update on Implementation of the 1996 Electronic Freedom of Information Act Amendments. GAO-02-493. Washington, D.C.: August 30, 2002. Information Technology: OMB Leadership Critical to Making Needed Enterprise Architecture and E-government Progress. GAO-02-389T. Washington, D.C.: March 21, 2002. Electronic Government: Challenges to Effective Adoption of the Extensible Markup Language. GAO-02-327. Washington, D.C.: April 5, 2002. Information Resources Management: Comprehensive Strategic Plan Needed to Address Mounting Challenges. GAO-02-292. Washington, D.C.: February 22, 2002. Elections: Perspectives on Activities and Challenges Across the Nation. GAO-02-3. Washington, D.C.: October 15, 2001. Electronic Government: Better Information Needed on Agencies' Implementation of the Government Paperwork Elimination Act. GAO-01- 1100. Washington, D.C.: September 28, 2001. Electronic Government: Challenges Must Be Addressed With Effective Leadership and Management. GAO-01-959T. Washington, D.C.: July 11, 2001. Electronic Government: Selected Agency Plans for Implementing the Government Paperwork Elimination Act. GAO-01-861T. Washington, D.C.: June 21, 2001. Information Management: Electronic Dissemination of Government Publications. GAO-01-428. Washington, D.C.: March 30, 2001. Information Management: Progress in Implementing the 1996 Electronic Freedom of Information Act Amendments. GAO-01-378. Washington, D.C.: March 16, 2001. Regulatory Management: Communication About Technology-Based Innovations Can Be Improved. GAO-01-232. Washington, D.C.: February 12, 2001. Electronic Government: Opportunities and Challenges Facing the FirstGov Web Gateway. GAO-01-87T. Washington, D.C.: October 2, 2000. Electronic Government: Government Paperwork Elimination Act Presents Challenges for Agencies. GAO/AIMD-00-282. Washington, D.C.: September 15, 2000. Internet: Federal Web-based Complaint Handling. GAO/AIMD-00-238R. Washington, D.C.: July 7, 2000. Federal Rulemaking: Agencies' Use of Information Technology to Facilitate Public Participation. GAO/GGD-00-135R. Washington, D.C.: June 30, 2000. Electronic Government: Federal Initiatives Are Evolving Rapidly But They Face Significant Challenges. GAO/T-AIMD/GGD-00-179. Washington, D.C.: May 22, 2000. Information Technology: Comments on Proposed OMB Guidance for Implementing the Government Paperwork Elimination Act. GAO/AIMD- 99-228R. Washington, D.C.: July 2, 1999. Bank Regulators' Evaluation of Electronic Signature Systems. GAO-01- 129R. Washington, D.C.: November 8, 2000. Electronic Signature: Sanction of the Department of State's System. GAO/AIMD-00-227R. Washington, D.C.: July 10, 2000. Internet Management: Limited Progress on Privatization Project Makes Outcome Uncertain. GAO-02-805T. Washington, D.C.: June 12, 2002. Telecommunications: Characteristics and Competitiveness of the Internet Backbone Market. GAO-02-16. Washington, D.C.: October 16, 2001. Telecommunications: Characteristics and Choices of Internet Users. GAO-01-345. Washington, D.C.: February 16, 2001. Telecommunications: Technological and Regulatory Factors Affecting Consumer Choice of Internet Providers. GAO-01-93. Washington, D.C.: October 12, 2000. Department of Commerce: Relationship with the Internet Corporation for Assigned Names and Numbers. GAO/OGC-00-33R. Washington, D.C.: July 7, 2000. Internet Privacy: Implementation of Federal Guidance for Agency Use of "Cookies." GAO-01-424. Washington, D.C.: April 27, 2001. Record Linkage and Privacy: Issues in Creating New Federal Research and Statistical Information. GAO-01-126SP. Washington, D.C.: April 2001. Internet Privacy: Federal Agency Use of Cookies. GAO-01-147R. Washington, D.C.: October 20, 2000. Internet Privacy: Comparison of Federal Agency Practices with FTC's Fair Information Principles. GAO-01-113T, Washington, D.C.: October 11, 2000. Internet Privacy: Comparison of Federal Agency Practices with FTC's Fair Information Principles. GAO/AIMD-00-296R. Washington, D.C.: September 11, 2000.
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A key element of the President's Management Agenda is the expansion of electronic government (e-government) to enhance access to information and services, particularly through the Internet. In response, the Office of Management and Budget (OMB) established a task force that selected a strategic set of initiatives to lead this expansion. GAO previously reviewed the completeness of the information used for choosing and overseeing these initiatives, including business cases and funding plans. E-government offers many opportunities to better serve the public, make government more efficient and effective, and reduce costs. To achieve these goals, the 25 e-government initiatives selected by OMB's Quicksilver task force focus on a wide variety of services, aiming to simplify and unify agency work processes and information flows, provide one-stop services to citizens, and enable information to be collected on line once and reused, rather than being collected many times. For example, Recreation One-Stop is a Web portal for a single point of access to information about parks and other federal, state, and local recreation areas. Other initiatives are being pursued that do not necessarily rely on the Internet, such as the e-Payroll initiative to consolidate federal payroll systems. GAO's review of the initial planning documents for the initiatives highlights the critical importance of management and oversight to their success. Important aspects--such as collaboration and customer focus--had not been addressed in early program plans for many of the projects, and major GAO's review of the initial planning documents for the initiatives highlights the critical importance of management and oversight to their success. Important aspects--such as collaboration and customer focus--had not been addressed in early program plans for many of the projects, and major uncertainties in funding and milestones were not uncommon. As shown by GAO's comparison of the content of the initiatives' business cases with best practices, all the business cases included key information, but many elements were missing. In particular, fewer than half addressed collaboration and customer focus, despite the importance of these topics to e-government strategy and goals. Similarly, the accuracy of estimated costs in the funding plans was questionable: between May and September 2002, these estimates for 12 of the initiatives changed significantly--by more than 30 percent. Accurate cost, schedule, and performance information is essential to ensure that projects are on schedule and achieve their goals.
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As required by section 11 of the GAO Human Capital Reform Act of 2004 (Pub. L. No. 108-271), GAO is providing its final report not later than 6 years after the date of the Act's enactment. This report provides, as required by the Act, (1) a summary of the information included in GAO's annual reports for the fiscal year 2005 through 2009 reporting cycle for sections 2, 3, 4, 6, 7, 9, and 10; (2) recommendations for any legislative changes to sections 2, 3, 4, 6, 7, 9, and 10; and (3) any assessment furnished by the GAO Personnel Appeals Board or any interested groups or associations representing officers and employees of GAO. Table 1 provides a summary of the number of employees separated from the agency under both the agency-wide and exception provisions for voluntary early retirement in fiscal years 2005 through 2009. The voluntary separation incentive provision requires us to make the payment out of current appropriations and to pay an additional amount into the retirement fund, which at a minimum is equal to 45 percent of the basic pay of the employee who is receiving the payment. Thus, the cost of using this flexibility is considerable and, given the many demands on our resources, this provision was not used during the 5-year reporting period. Section 3(a) of the Act authorized the Comptroller General to determine the amount of annual pay adjustments for its officers and employees and described the factors to be considered in making those determinations. This provision amended 31 U.S.C. 732(c)--which required employees' pay to be adjusted at the same time and to the same extent as the General Schedule. Under section 3(b) the Comptroller General's authority to establish the annual pay adjustment is also applicable to employees in the Senior Executive Service (SES) and in Senior Level (SL) positions. Under both sections 3(a) and 3(b) an employee must be performing at a satisfactory level in order to receive an annual pay adjustment In January 2006, we issued regulations addressing the satisfactory performance requirement for GAO's analysts and attorneys. Pursuant to the regulation, GAO analysts and attorneys had to be performing at "Meets Expectations" in all competencies to be considered satisfactory. In addition, most Band IIB and Band III analysts, had to have a performance appraisal that was in the top 50 percent or 80 percent, respectively, of their band and team. In subsequent years this added condition was not required. Since the annual adjustment is a significant component of employees' annual compensation, limiting its applicability to satisfactory performers is critical to the integrity of GAO's overall pay for performance system. For calendar years 2006 through 2009, consistent with section 31 U.S.C. 732 (c)(3), the Comptroller General considered various data to determine the amount of GAO's annual adjustments, including salary planning data reported by the professional services, public administration, and general industry organizations; the General Schedule adjustment; the amount of Performance Based Compensation (PBC) and the appropriate distribution of funds between the annual adjustment and PBC. and GAO's funding levels. The Comptroller General provided an annual adjustment in 2006 and 2007 of 2.6 percent and 2.4 percent, respectively, to those who were performing at a satisfactory level and who were paid within applicable competitive compensation limits, except for wage-grade employees, and GAO Personnel Appeals Board employees. In addition to the annual adjustment, GAO employees were eligible for PBC based on their performance appraisal ratings. PBC was calculated using a budget factor of 2.15 percent for both 2006 and 2007. Under section 3(b), the Comptroller General is required to consider the statutory criteria set out in section 3(a) in determining an annual increase for members of the GAO SES and SL employees. The Comptroller General considered these criteria and determined that each member performing at a satisfactory level would receive in 2006 and 2007 a 1.9 percent and 1.7 percent increase, respectively--the same increase that was provided to the Executive Schedule for calendar years 2006 and 2007, respectively. In 2007, SES and SL members were also eligible for PBC using a budget factor of 2.25 percent. In 2008, after the Comptroller General made preliminary determinations regarding pay adjustments as had been done in 2006 and 2007, GAO management negotiated with representatives of the newly established GAO Employees Association, International Federation of Professional and Technical Engineers (IFPTE) Local 1921 to reach final agreement regarding salary adjustments. In addition to the annual adjustment, GAO employees were eligible for PBC based on their performance appraisal ratings. Pay adjustments for GAO staff included an annual adjustment of 3.5 percent as well as performance based compensation using a budget factor of 2.75 percent. In 2008, for the first time, GAO implemented a "floor guarantee." The 2008 floor guarantee provided that if the total increase from the annual adjustment and PBC did not equal at least 4.49 percent of salary, the employee would receive an additional increase to base pay to equal this amount regardless of geographic location. For example, in Washington, D.C., the floor guarantee ensured that all staff received a base pay increase of at least 4.49 percent and was provided without regard to pay range maximums limited only by the GS-15, step 10, statutory maximum rate. In providing the floor guarantee to staff, the additional amount required to bring the base pay adjustment to 4.49 percent of salary was deducted from any PBC bonus. Overall, the average total dollar amount resulting from employees' annual adjustments, PBC base pay increases and bonuses, and floor guarantees was approximately 6.12 percent of salary. GAO employees participating in one of GAO's development programs (Professional Development Program, Attorney Development Program, Communication Analysts Pay Process, Program and Technical Development Program, and Administrative Pay Process) received the 3.5 percent annual adjustment, not to exceed the maximum rate of their bands. These employees were not eligible for the floor guarantee because they received additional performance-based salary increases every 6 months for the 2-year duration of the development program. GAO's SES and SL employees were provided the same 2.5 percent increase authorized for the executive branch. SES and SL members were also eligible for PBC using a budget factor of 2.25 percent. The PBC was provided to the SES and SL staff as a base pay increase not to exceed $169,300. Employees of GAO's Personnel Appeals Board and student employees are paid according to GS rates, and GAO's wage grade employees are paid according to the Federal Wage System (FWS) salary rates. These employees received the same percentage across-the-board adjustment on the same effective date as the increases authorized for GS and FWS employees in the executive branch. The pay ranges for these employees incorporated the changes made to the comparable executive branch pay ranges. Prior to the annual adjustment for 2009, the Government Accountability Office Act of 2008, Public Law 110-323, September 22, 2008, was passed. Under section 2 of this Act, the so called "floor guarantee", as described above, was enacted into law as section 731(j) of title 31, United States Code. For year 2009, following preliminary determinations by the Acting Comptroller General and negotiations between management and IFPTE Local 1921, GAO employees received an annual adjustment equal to the "floor guarantee," which, for example, equaled 4.78 percent in Washington, D.C. In addition, employees were eligible for performance based compensation using a 2.65 percent budget factor. GAO's SES and SL employees rated "Fully Successful" were provided a 2.8 percent pay adjustment pursuant to 31 U.S.C. SS 733(a)(3)(B) effective January 4, 2009. SES and SL members were also eligible for PBC using a budget factor of 2.65 percent. PBC was provided to the SES and SL staff as a permanent base pay increase not to exceed $174,000. As in 2008, employees of GAO's Personnel Appeals Board and student employees were paid according to GS rates, and GAO's wage grade employees are paid according to the Federal Wage System (FWS) salary rates. These employees received the same percentage across-the-board adjustment on the same effective date as the increases authorized for GS and FWS employees in the executive branch. The pay ranges for these employees incorporated the changes made to the comparable executive branch pay ranges. In fiscal years 2005 through 2009, there were no extraordinary economic conditions or budgetary constraints that had a significant impact on the determination of the annual pay adjustments. Section 4 authorizes the Comptroller General to establish pay retention regulations applicable to employees who are placed in lower grades or bands as a result of workforce restructuring, reclassification, or other appropriate circumstances. Table 2 summarizes these data for fiscal years 2005 through 2009. Under section 6, certain key employees with less than 3 years' service for purposes of leave accrual may be treated as if they had 3 years of federal service. Therefore, they would earn 160 hours on an annual basis instead of 104 hours. These key employees must be occupying positions that are difficult to fill or have unique or unusually high qualifications and would be difficult to recruit without additional incentives. Table 3 shows the number of employees receiving this flexibility in fiscal years 2005 through 2009. Section 7 authorized GAO to establish an Executive Exchange Program. After soliciting and analyzing employees' comments on draft regulations, we issued the final regulations for GAO's Executive Exchange Program on May 20, 2005. The authority was not used in fiscal years 2006, 2008, or 2009. However, during fiscal year 2007, this authority was used to bring in two executives from private industry, each for a period of 4 months. At GAO, the executives worked on several special projects related to federal agency audits and agency financial statement issues. In addition to helping revise the GAO/PCIE Financial Audit Manual, they used their experience as auditors of agency financial statements to help develop protocols to help GAO interact with the agency-level auditors (inspectors general as well as public accounting firms) during GAO's audit of the U.S. government's consolidated financial statement. This program was considered a success from GAO's standpoint and it met the expectation of the private industry employer that was involved. The authority expired on July 7, 2009. Section 9 relates to GAO's performance management system and, among other things, requires a link between the performance management system and the agency's strategic plan, adequate training on the implementation and operation of the system, and a process for ensuring ongoing performance feedback. Even before the imposition of these requirements, GAO's performance management system was in conformity with the statutory requirements of section 9. In fiscal years 2005 and 2006, we conducted annual reviews and assessments of our performance management policies and processes and made improvements, when appropriate. During fiscal year 2007, an evaluation of the fiscal year 2006 appraisal and pay cycle was deferred pending the outcome of the then-ongoing union election. In fiscal year 2008, GAO undertook various initiatives to ensure the performance management system met its objectives and provided an even playing field for all employees. In response to continuing differences between African American and Caucasian analyst performance appraisal averages, the Ivy Planning Group conducted an independent assessment of the factors that may influence these differences, and was also tasked with identifying what additional steps GAO could take. A final report was issued on April 25, 2008, which contained over 25 major recommendations. GAO is committed to implementing the Ivy Planning Group's recommendations and has a number of efforts completed and underway to address the recommendations. In fiscal year 2009, the agency continued to pursue actions designed to ensure that the system met its objectives and was fair and equitable for all employees. GAO established its Management Improvement Priorities Action Plan that includes five areas of concentration: recognizing and valuing diversity; reassessing the performance appraisal system; managing workload, sustaining quality, and streamlining processes; enhancing staffing practices and developing the workforce; and, finally, strengthening recruitment and retention incentives. Projects within these five areas originated from multiple sources, including the Ivy Planning Group's recommendations, CG Special Projects, and suggestions received over time from GAO staff at all levels throughout the agency. These areas also reflect the ongoing efforts of the Office of Opportunity and Inclusiveness, QCI, the Human Capital Office, and the Chief Administrative Office. GAO completed one of the key management improvement projects--a full, systematic, and inclusive review of the performance appraisal system. The objectives of the review were to examine what works, what does not, and what could be done better. Data collected included a comprehensive content analysis of existing data, the results of 28 focus groups of employees, and 53 semistructured interviews with managing directors and a random sample of SES/SL, Band III, and field office managers. In addition, GAO conducted an agencywide, Web-based survey of employees, with an overall survey response rate of 67 percent. Data from all of these sources were synthesized into a final report issued in November 2009 with extensive findings and short- and long-term recommendations for improving GAO's performance appraisal system. Planning for implementing the recommendations is in progress with over 50 percent of the short-term recommendations already under way. GAO has also established a steering committee composed of managers and employees including representatives from IFPTE Local 1921 to guide the direction of a more extensive contractor review of the current system to address the findings from the systematic review of the appraisal system. GAO continues to provide continuing training on the performance appraisal system and the roles and responsibilities of staff, supervisors, and managers. To ensure that all designated performance managers are knowledgeable about appraisal policies, procedures, and practices, GAO required all raters to take online training prior to preparing fiscal year 2008 ratings. Each subsequent year, all new designated performance managers must take online training. GAO also continues to expand staff, supervisory and managerial training and development to include offerings in how to give and receive feedback. Lastly, during this period, GAO instituted consistent practices across the organization with regard to the review of ratings. Designated performance managers present their preliminary ratings of staff to all Senior Executive Service reviewers. This panel helps to ensure that all raters are consistently applying the rating criteria. Section 10 requires us to consult with any interested groups or associations representing officers and employees of GAO when implementing changes brought about by this Act. Typically, in implementing changes such as those in this Act, we have consulted with interested groups and associations within GAO, provided them with draft policies and regulations, and obtained input from them on suggested clarifications or changes to the policies and regulations. We carefully considered this input and have incorporated it, when appropriate, before distributing policies and regulations for comment to all employees. In 2007, GAO Band I and Band II analysts, auditors, specialists, and investigators, and staff in the Professional Development Program, elected to be represented by a union and established IFPTE, Local 1921. In 2008, GAO and IFPTE, Local 1921, reached an interim collective bargaining agreement. GAO is committed to continuing to work constructively with IFPTE, Local 1921, to finalize and implement a master term collective bargaining agreement. GAO management actively consults with IFPTE Local 1921; the Employee Advisory Council-which is comprised of headquarters and field administrative, professional, and support staff (APSS), as well as Assistant Directors in analyst and analyst-related positions, and attorneys-and the Diversity Advisory Council-comprised of diversity representatives of IFPTE, Local 1921, and employee liaison groups for employees who are disabled, Asian-American, African-American, Hispanic, veterans of the armed forces, people over 40, and advocates for nondiscrimination based on sexual orientation or gender identity-to hear and consider employee needs, concerns, and suggestions as they arise. IFPTE, Local 1921; the Employee Advisory Council; and the Diversity Advisory Council (DAC) are the primary mechanisms for fostering collaboration and open communication between GAO management and staff. GAO provided all employees with the opportunity to comment on draft orders concerning proposed policies and regulations prior to publication in final form. These steps were taken in regard to the promulgation of all policies and regulations implementing the provisions of the Human Capital Reform Act of 2004. The Executive Committee considered all input from Employee Advisory Council and Diversity Advisory Council members and other GAO employees before implementing any changes. Although GAO specifically solicited comments from the PAB, IFPTE Local 1921, the DAC, and the EAC, only the PAB responded to this request with comments. These are included in appendix I. IFPTE Local 1921 informed GAO management that it will provide its input directly to Congress. The flexibilities provided in the GAO Human Capital Reform Act of 2004, along with the human capital flexibilities provided in the 2002 and 2008 Acts, have provided GAO with the ability to attract and retain high caliber employees so that GAO can meet its responsibilities to the Congress and the American people. GAO is making no recommendations for legislative change.
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As required by section 11 of the GAO Human Capital Reform Act of 2004 (Pub. L. No. 108-271), GAO is providing its final report not later than 6 years after the date of the Act's enactment. This report provides, as required by the Act, (1) a summary of the information included in GAO's annual reports for the fiscal year 2005 through 2009 reporting cycle for sections 2, 3, 4, 6, 7, 9, and 10; (2) recommendations for any legislative changes to sections 2, 3, 4, 6, 7, 9, and 10; and (3) any assessment furnished by the GAO Personnel Appeals Board or any interested groups or associations representing officers and employees of GAO.
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The Telework Enhancement Act of 2010, enacted in December 2010, requires each executive agency to designate a telework managing officer, develop training programs, establish a telework policy, and submit an annual report to the Chair and Vice Chair of the Chief Human Capital Officers Council on the agency's efforts to promote telework. Under the act, OPM is to play a leading role in helping executive agencies implement the new telework provisions, which include setting telework goals and establishing qualitative and quantitative measures. The law requires OPM to provide policy and guidance for telework in several areas, including pay and leave, agency closure, performance management, official worksite information, recruitment and retention, and accommodations for employees with disabilities. In an annual report to Congress, OPM is to assess each agency's progress toward goals for participation and other goals relating to telework, such as emergency readiness. The first of these reports under the act is due to Congress in June 2012. Since 2002, OPM has used a telework survey--the data call--to annually collect information from the executive agencies in order to provide Congress with a report on the status of telework across these agencies. OPM conducts this data call to determine the extent to which agency employees are teleworking and to gauge agency progress in various aspects of their telework programs, such as participation, policy, eligibility, cost savings, and technology, as well as to provide examples of barriers agencies face to implementing telework programs. However, throughout the past decade, OPM has been concerned about the reliability of the telework data it receives from executive agencies because, although data reported from agencies have improved, OPM continues to consider it an estimate of telework participation and frequency. In its 2003 and 2007 telework reports to Congress, OPM raised concerns about the ability of agencies to track employee participation in their telework programs. In its 2008 report, OPM identified weaknesses in the methodology most agencies used to collect and report telework participation data and OPM stated that inconsistencies within data systems and inaccuracies triggered by hand- counting telework agreements could affect data reliability. OPM cautions that existing measures of telework participation are a barrier to measuring any increase in telework as the measures vary widely in validity and reliability and limit the capability of any federal body to track the actual level and frequency of telework participation. At the request of Congress, we have previously reported on telework programs across the federal government and have made recommendations related to the reliability of agency-reported data. In a 2005 report, we reviewed the telework data for five federal agencies and found they had reported the total number of employees who were eligible to telework, but had included individuals who were, in fact, excluded from participation based on various criteria such as employee performance, thereby raising concerns about the reliability of the telework data reported by these agencies. In addition, none of the agencies could report the actual number of employees who teleworked or how often they did so because none had fully implemented the capability to track this through their time and attendance systems. Our 2007 testimony reiterated our concern that agencies were measuring employee participation in telework based on their potential to telework rather than their actual usage. More recently, we reported that since the 2004 data call, OPM asked agencies if they had integrated telework into agency emergency and continuity of operations plans, but agencies had no guidance as to what constitutes incorporating telework into continuity and emergency planning. This lack of a definition or description raised concerns about the reliability of reports on this matter. In response to the Telework Enhancement Act of 2010, OPM revised the 2011 data call and provided instructions to executive agency respondents that incorporated common definitions and standards to use in providing OPM with their agency data. The revisions and additions to the 2011 data call were developed in consultation with an Interagency Telework Measurement Group (ITMG), which OPM formed in January 2011. (See app. II for a comparison of definitional and instructional changes from the 2010 and 2011 telework data calls.) The OPM official designated with leading the ITMG said 10 agency officials from 7 agencies were selected for the group because of their knowledge of federal telework programs. According to the OPM official, the ITMG provided expertise in telework program implementation, policy, and methodology development, work/life balance programs, and expertise in research methods, such as surveys. The ITMG met on biweekly from January 2011 until July 2011 and resumed biweekly meetings in September 2011 with the goal of addressing three primary topics: Definitions of key terms, such as telework, eligibility, and employee, to use in the 2011 data call. ITMG interpreted some requirements of the act and developed additional instructions to encourage common reporting methodology across the agencies. For example, according to OPM officials, ITMG clarified the definition of eligibility in light of agencies' concerns that the act did not specifically define the categories of employees that should be eligible to participate in their agencies' telework programs, and therefore notified about their eligibility to telework. The group instructed respondents to ensure they excluded military and contract personnel as employees when reporting their telework data. The group also clarified that respondents should include full-time, part-time and intermittent employees when responding to questions about telework participation and frequency. Revision and/or addition of data call questions. For example, OPM officials stated that in collaboration with the ITMG, they clarified the definition of telework to specifically state that telework includes what is generally referred to as remote work, but excludes mobile work and work done on official travel. OPM officials added a new question to capture the number of mobile workers. This addressed a reliability problem from the previous data call when some agencies included mobile work in reporting telework. Revision and development of data collection instruments, in addition to the data call, to collect telework information. For example, ITMG worked to revise telework-related items in the Federal Employee Viewpoint Survey, an OPM data collection instrument that gauges employees' perceptions of their agency. In the 2011 survey three out of 84 questions focused on telework. In the past, OPM has found this survey to provide complementary employee views on telework. The ITMG also assisted in developing focus groups of telework managing officers and telework coordinators to identify issues, challenges and strategies associated with implementing telework programs at the agency level, such as successful telework implementation strategies, as well as barriers to telework. According to an OPM official, these revisions also included questions that may enable them to better understand the differences between telework programs across executive agencies, including differences in training on telework, use of technology, and how agencies responded to the requirements of the act. This official said such information will help inform the development of telework programs. OPM also made changes to the 2011 data call time period for which employee telework participation and frequency was to be reported. This change was made to allow agencies time to develop telework policies in accordance with the act and to allow OPM time to meet its reporting obligation under the act (see fig. 1). In previous data calls, OPM asked agencies for telework data during the calendar year (12 months), if available. OPM reduced the time period for the 2011 data call to 4 weeks, as it decided this was the best methodology to meet its reporting requirements under the act. Agencies were to select a 4 week period during September and October on which to report. In addition to the change in time period for requested telework data, the 2011 data call asked for more detail on employee telework participation, frequency of employee telework participation, and additional information on telework policy and program implementation, and telework goals as required by the act. OPM officials believe the information they obtained from the 2011 data call will enable the agency to satisfy some of the act's reporting requirements, but for this report to Congress, OPM cannot fulfill other requirements. OPM officials stated that it is not feasible for OPM to measure agencies' progress against their Telework Enhancement Act of 2010 goals, since these goals were established in June 2011, and the time period for agencies' actual participation data was September/October 2011--just 3 to 4 months after agencies established their goals. However according to OPM officials, based on the information collected, OPM will be able to report the percentage and frequency of telework at individual agencies. To communicate changes to the 2011 data call, OPM officials increased their training efforts to aid executive agency officials in developing a common understanding of terms, key concepts, and the objectives of the data call. According to OPM officials, in July 2011, OPM officials responsible for the data call met with agency respondents to provide an introduction and overview to the 2011 data call. The meeting covered the new requirements under the act, and the planned timeframe for agency reporting and OPM processing and analysis of the data collected through the data call. OPM could not require agency officials to attend. Nonetheless, OPM reminded agency officials responsible for the data call, that it was important that they attend both September and October training sessions being offered by OPM. The September training session covered the data call questions and incorporated specific content of the near final data call. The October training session reviewed specific instructions on how to enter information into the online data call form, in addition to reviewing instructions and questions from respondents. While some of the information provided at the two training sessions was similar, each session contained some new information usually in response to questions raised at a previous session. OPM staff also maintained and disseminated via email a list of the most frequently asked questions posed by data call respondents. The act requires OPM to report, among other things, year-to-year executive agency progress on the number of employees who telework. To accomplish this, OPM needs reliable baseline data on telework participation to be able to make year-to-year comparisons. However, OPM officials expressed continuing concerns over the reliability of quantitative participation and frequency data submitted by the agencies through the 2011 telework data call. OPM officials explained that 2011 is a transition year for telework programs across executive agencies, and some agencies made changes to their policies to bring their telework programs into compliance with the requirements of the act. For example, some agencies were implementing new data collection systems while collecting data on telework. These agencies first needed to create and implement new policies, and then consider and establish processes related to the collection of telework data to report to OPM. OPM officials responsible for preparing the report to Congress stated that because of these changes, it would not be appropriate to compare the 2011 data to data collected in prior years. OPM will not be able to make comparisons to prior years due to the previously discussed modifications to the data call, such as changes to definitions. Definitional changes, including the change to specifically exclude mobile workers, could result in agencies interpreting and reporting telework participation and frequency of telework differently than they did in the past. While these changes should improve the consistency of data going forward, according to OPM officials there is no way that OPM can assure that all agencies would provide comparable responses to the same data call questions. Moreover, OPM officials have said that key terms and definitions for the 2012 data call may continue to evolve. If OPM reports agency telework progress based on data collected using definitions revised year to year, OPM may reach erroneous conclusions, although OPM officials have said they are taking steps to try and prevent this possibility. Another reason why comparisons to prior data calls would be invalid is because of the changes OPM made to the time period when agencies reported telework data. Maintaining consistent data series over time necessitates using consistent data collection procedures for ongoing data collections. OPM said that changing the reporting period from 1 calendar year to 4 weeks may result in greater data consistency because in previous data calls, agencies may have reported data from different time periods within a calendar year. Now all agencies will report data from a narrower and more similar time frame. However, there are no available studies to support that the new time period is representative or "typical" of other months in total or of the experience of particular agencies. OPM officials said that they will need to indicate this in their report to Congress. While OPM made changes to the 2011 data call to allow it to meet some of its reporting requirements under the act and better assist agencies in responding to the data call, our analysis found the 2011 data call did not fully meet some generally accepted survey standards. According to these standards, to be valid, survey questions must adequately represent the concept or behavior in question and consistently predict outcomes. Moreover, questions must be designed and asked so that each recipient will understand and answer the same question in the same way. But for the 2011 data call, there can be no assurance that all respondents were aware of associated definitions and instructions provided by the training sessions and the frequently asked questions (FAQ). Although OPM invested more in providing training in preparation for the 2011 data call than in previous data calls and it disseminated training slides to all invitees of its final training session, attendance lists were not recoverable for all training sessions so there can be no assurance that all respondents received training or reviewed the slides. Consequently, some data call respondents may not have been aware of the definitions and instructions provided in the training sessions or in the FAQ. Additionally, some of the information provided in the training sessions was inconsistent. For example, OPM officials said that during the last training session they instructed respondents to report an employee "telework day" if the employee teleworked for any portion of a work day. However, this clarification of "telework day" was not given in either the July overview meeting or in the other training session, and not clearly included in the instructions in the survey instrument or distributed in the FAQ. This information may have been important to agencies reporting on situational telework through automated systems intended to capture more precise data. OPM officials also explained that responses to certain questions should reference the same time period, and this information was not available in the data call instructions. During one training session, an OPM official said she instructed those participants who determined employee participation by counting telework agreements to limit the agreements counted to those in effect after the agency implemented its telework program under the act; however, this information was not available in the online data call instructions. Uncertainty about whether data call respondents attended both the September and October training sessions, and variations in training sessions, could cause agencies to have different understandings of data call concepts and terms. OPM recognizes that the existing measures of federal telework participation vary in validity and reliability, which affects agencies' ability to report accurate data, and it is taking steps to verify data submitted by respondents to provide a more accurate picture of telework in the federal government based on current definitions and collection methodologies. However, as a result of issues raised above, respondents may have provided inconsistent or inaccurate data on topics required by the act. OPM officials anticipate that telework data will be more reliable next year because of the expected governmentwide implementation of automated data collection based on time and attendance records. As we have reported, OPM has concluded from research that the most reliable telework data are collected through time and attendance tracking systems. Data collected through automated systems eliminate the need to track telework data by counting telework agreements or relying on estimates. Since 2003, OPM has consistently expressed concerns about the methods agencies use to collect telework data. In its previous telework reports to Congress, OPM has advocated for the development of an automated data collection system. OPM officials noted that OPM does not control what telework data responding agencies maintain, or their methods of data collection. Executive agencies provide telework participation and frequency data using a variety of methods, such as relying on estimates, counting telework agreements, and using automated time and attendance records to track telework participation. In an effort to collect more uniform data across agencies, OPM officials are standardizing definitions and data elements for use in automated time and attendance systems. For example, OPM has identified routine telework hours in a pay period as a data element for automated data collection and provided a standardized definition that will be used by all agencies using the Enterprise Human Resources Integration (EHRI) system. OPM has introduced a timeline for modifying the existing EHRI system to allow OPM to collect telework data from executive agencies. According OPM, agencies will begin piloting these automated data collection systems for the 2012 telework data call. OPM began to discuss automated governmentwide data collection with the ITMG in July 2011. According to OPM's timeline, OPM began to communicate internal requirements for automated telework data collection to telework managing officers in March 2012, but an OPM official has stated they do not expect full automation of telework data until 2013. This official also noted that different agencies have varying abilities to implement this new type of data collection and reporting mechanism, and considering different levels of comfort with new systems, it will take time to adjust to this method. However, continuous improvement efforts sometimes result in a trade-off between the desire for data consistency and a need to improve data collection and maintenance of a consistent data series over time. Because of the eventual planned move to automation, OPM may not be able to use 2011 data as a baseline. With the planned change to the method of data collection, it may not be possible to compare the 2011 data to future data. The 2011 data call requested data for a 2-month period, and some data call respondents relied upon estimates. Planned automation can provide a more uniform and accurate method for collecting telework data, however it may make comparisons using the 2011 telework data as a baseline difficult. However, OPM officials believe the 2011 data will provide an improved report of telework status because of standardized definitions and the more uniform time period of data collection. According to OPM officials, some executive agencies will need time to become comfortable with automated reporting systems and, during a period of transition to a new system, there could be initial reliability issues. However, these officials said that the 2011 data, notwithstanding its limitations, will be useful in identifying and understanding any major agency changes in reported participation that could occur during a transition to automated data collection. Such changes could alert OPM to possible transition related issues in agencies' conversion to automated governmentwide data call collection efforts in 2012 and 2013. In addition, for those agencies already responding on the basis of time and attendance reporting, major changes in agency responses provide OPM the opportunity to confirm with agencies that the uniform definitions are being consistently applied. The Telework Enhancement Act of 2010 requires OPM to collect telework data and report annually to Congress, which emphasizes the need for telework data to be valid and reliable. OPM revised the 2011 telework data call in order to allow it to meet some of the act's reporting requirements and assist agencies in responding to the data call. This revision resulted in changes to terminology, as well as changes in the collection time period of requested telework data. OPM provided greater assistance to agencies through training on changes to the 2011 data call to improve accuracy of agency reporting of telework participation and frequency for the data call reporting period of September and October 2011. However, agencies use various methods, which OPM does not control, to report, collect, and maintain telework data, and this could affect the reliability of the telework data submitted. In addition, variation in training sessions and OPM's uncertainty as to whether all respondents attended training, could lead to respondents' potential misunderstanding of important terms and instructions. The validity and reliability of the reported 2011 telework data for some of the responding agencies may be questionable, and therefore agency telework participation and frequency data will not likely be comparable with previous data calls because of differences in definitions used, time periods of reporting, and individual agency tracking methods. With the revised 2011 data call, OPM establishes a baseline it could use to conduct a limited crosscheck of data collected through a governmentwide automated telework data collection system, which OPM plans to implement over the course of 2012 and 2013. OPM expects that automated data collection will provide it increasingly more reliable data on which to report progress. However, these efforts to improve future automated data collection may result in changes to agencies' methods of data collection and a trade-off between the desire for consistency with previous data calls for comparison purposes and a need to improve overall data collection. To improve OPM's annual reporting of telework to Congress, we recommend that the OPM Director take the following two actions: Ensure that the reliability limitations related to the 2011 telework data call are clearly reported in its June 2012 report to Congress by fully describing how existing measures of telework participation vary widely in validity and reliability and limit the capability of OPM to reliably report the actual level and frequency of telework participation. Continue efforts to improve data collection and gather information that allows for the appropriate qualification of year-to-year comparisons and informs users about the effects of data collection changes going forward. We provided a draft of this report to the Director of OPM for review and comment. The Associate Director of OPM provided written comments, which we have reprinted in appendix III. In summary, OPM partially concurred with our first recommendation and fully concurred with the second. OPM highlighted a number of actions the agency has under way or plans to undertake in response. For the first recommendation, OPM noted that inadequate methods of data collection exist at the agency level and OPM continues to address this data reliability issue through training on evaluation and measurement. While this is an important step in addressing data reliability issues, OPM should ensure that telework data reliability limitations are clearly reported in their annual reports to Congress. For the second recommendation, OPM noted its continued plans to automate collection of telework data, and to regularly meet with telework managing officers and telework coordinators to keep them updated on changes to telework policy and data collection. OPM also provided a number of technical comments, which we incorporated as appropriate. We are sending copies of this report to the Chairman and Ranking Member of the Subcommittee on the Federal Workforce, U.S. Postal Service and Labor Policy, Committee on Oversight and Government Reform, House of Representatives; and the Director of OPM. In addition, this report will be available at no charge on the GAO website at www.gao.gov. If you have any questions about this report, please contact me at 202-512-6806 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributions to this report are listed in appendix IV. This report (1) describes the Office of Personnel Management's (OPM) actions to respond to the requirements of the Telework Enhancement Act of 2010 and (2) assesses how OPM is handling and addressing identified data reliability issues in the 2011 telework data call. To address these two objectives, we reviewed relevant reports and guidance published by OPM that describe the status of telework programs across executive agencies and previous telework data calls and their instructions. We also reviewed previous GAO reports on telework and the reliability of OPM's telework data. Lastly, we interviewed the OPM officials responsible for the planning, design, implementation, and analysis of the 2011 telework data call. This included discussions on the role of the Interagency Telework Measurement Group (ITMG), the process for developing the definitions and key terms used in the data call, the training and assistance provided to executive agency officials responsible for completing the data call, and agency plans to address outstanding data reliability issues associated with the data call. We conducted additional analysis to answer selected objectives as described below. To assess the extent to which the 2011 telework data call met generally accepted survey methodology, GAO internal experts in survey research identified principles from the Office of Management and Budget's (OMB) Standards and Guidelines for Statistical Surveys relevant to assessing the 2011 telework data call. We also used relevant aspects of GAO's guide to Developing and Using Questionnaires. Using the OMB principles, two analysts independently reviewed the data call, supporting documentation, and clarifying information provided in interviews to assess the extent to which the data call methodology met research practices. The initial rate of agreement across 15 rated practices, including those rated as having insufficient information to judge, was 12 of 15, or 80 percent agreement. The rating for the three practices on which there was initial disagreement were reconciled by the two analysts conducting the review and the reconciled rating was then reviewed by a third analyst with survey expertise. The third analyst did not recommend any changes to the reconciled ratings. We also simulated completion of the Web-based data call, accessing and responding to the data call in the same manner as executive agency respondents. Table 1 outlines the generally accepted survey research principles, derived from OMB's guidelines, which we used in our assessment. This is not an exhaustive list of all OMB guidelines. When we completed this review in April of 2012, OPM had not yet completed analyzing and reporting on the results of telework data call. Based on this, we could not yet assess whether the data call met all of the OMB principles related to data analysis and reporting. Some OMB principles, such as those related to sample design, were not appropriate to apply to the telework data call. These principles were therefore excluded as not relevant to our review. We conducted this performance audit from June 2011 through April 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. 2010 Telework data call Time period: Based on the agency's calendar year (Jan. 1 to Dec. 31, 2009). 2011 Telework data call Time period: Based on the months of Sept. and Oct. 2011. Participation: agencies invited to participate in data call. Participation: agencies required to submit telework data to OPM. Telework: "Telework refers to any arrangement in which an employee regularly performs officially assigned duties at home or other work sites geographically convenient to the residence of the employee." Telework: "Telework is a work arrangement that allows an employee to perform work, during any part of regular, paid hours, at an approved alternative worksite (e.g., home, telework center). This definition of telework includes what is generally referred to as remote work but does not include any part of work done while on official travel or mobile work. See the following clarifications on remote and mobile work as telework." Employee: Employee refers to federal civilian employees excluding military personnel and contractors. Employee may also include full-time, part-time, and/or intermittent employees. Eligibility: An employee is eligible to participate in telework if all of the following parameters are true: positions require, on a daily basis (every work day), direct handling of secure materials, or on- site activity that cannot possibly be handled remotely or at an alternate worksite; most recent federal government performance rating of record (or its equivalent) is below fully successful or conduct has resulted in disciplinary action within the last year. The employee has not been officially disciplined for being absent without permission for more than 5 days in any calendar year. The employee has not been officially disciplined for violations of subpart G of the Standards of Ethical Conduct for Employees of the Executive Branch. Teleworking does not diminish the employee's performance or agency operations. Participation and performance complies with the requirements and expectations of his/her telework agreement. The employee's official duties do not require on a FULL daily basis (ALL DAY, every work day): direct handling of secure materials determined to be inappropriate for telework by the agency head; or on-site activity that cannot be handled remotely or at an alternate worksite. The employee and/or the employee's position are not disqualified based on additional criteria established by the organization. 2010 Telework data call Types of telework: None provided 2011 Telework data call Types of telework: Routine: telework that occurs as part of an ongoing, regular schedule, and Situational: telework that is approved on a case-by-case basis, where the hours worked were not part of a previously approved, ongoing and regular telework schedule (e.g., telework as a result of special work assignments or doctor appointment.) Situational telework is sometimes also referred to as episodic, intermittent, unscheduled or ad-hoc telework. In addition to the contact named above, William Doherty, Assistant Director, and Keith O'Brien, analyst-in-charge, led the development of this report. Virginia Chanley, Patricia Donahue, Robert Gebhart, Jill Lacey, and Joseph Santiago made significant contributions to this report. Karin Fangman provided legal counsel. Shirley Hwang, Jessica Nierenberg, and Kathleen Padulchick verified the information in the report. Emergency Preparedness: Agencies Need Coordinated Guidance on Incorporating Telework into Emergency and Continuity Planning. GAO-11-628. Washington, D.C.: July 22, 2011. Human Capital: Telework Programs Need Clear Goals and Reliable Data. GAO-08-261T. Washington, D.C.: November 6, 2007. Human Capital: Greater Focus on Results in Telework Programs Needed. GAO-07-1002T. Washington, D.C.: June 12, 2007. Agency Telework Methodologies: Departments of Commerce, Justice, State, the Small Business Administration, and the Securities and Exchange Commission. GAO-05-1055R. Washington, D.C.: September 27, 2005. Human Capital: Key Practices to Increasing Federal Telework. GAO-04-950T. Washington, D.C.: July 8, 2004. Human Capital: Further Guidance, Assistance, and Coordination Can Improve Federal Telework Efforts. GAO-03-679. Washington, D.C.: July 18, 2003.
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The Telework Enhancement Act of 2010 requires OPM to report to Congress on the degree of telework participation at executive agencies. To meet this requirement, OPM collects information on agency telework programs through an annual survey, which it refers to as the data call. However, concerns exist about the reliability of these data. GAO was asked to assess OPM's: (1) actions in response to the requirements of the act and (2) handling of identified data reliability issues in the 2011 telework data call. To address these objectives GAO reviewed its previous reports addressing telework data reliability, and used the Office of Management and Budget's guidance for federal surveys to review OPM's (1) plans to collect telework participation data from agencies and (2) development of a data collection instrument. GAO interviewed key OPM officials about its implementation of the 2011 data call. To prepare for its reporting obligations under the Telework Enhancement Act of 2010, the Office of Personnel Management (OPM) assembled the Interagency Telework Measurement Group, consisting of officials from several federal agencies, to assist in revising the telework data call--the survey OPM has used since 2002 to collect telework data from executive agencies. This group standardized key terms such as telework, employee, and eligibility to promote a common reporting methodology among the agencies. The revised telework data call also included changes to the time period for which OPM requested agencies report telework data, and included more extensive training for respondents. Because of changes made to the data call to allow OPM to meet requirements of the act and assist agencies in responding to the data call, OPM officials believe they will be able to provide to Congress an improved report on telework in June 2012. However, these changes also mean that OPM officials will not be able to use participation and frequency data from the 2011 data call to compare to data from previous years and across agencies. OPM officials have noted that this could limit OPM's ability to report agency progress in its first report to Congress. The ability to compare with previous years is affected by: agencies use of methods of varying reliability to collect telework data, and some agencies made changes to their data collection systems for the 2011 data call. Executive agencies provide telework participation and frequency data by relying on estimates, counting telework agreements, or using automated time and attendance records. modifications to the data call instrument, including changes to terminology and the time period during which telework data was requested. OPM officials said they expect these changes will improve the consistency of data. But if OPM reports progress based on data collected using changing terminology and from different time periods, the agency may reach erroneous conclusions. Participants at the two data call training sessions may not have received the same reporting instructions, and uncertainty about whether all agency respondents attended training, created a risk that some respondents may be unaware of important terms and instructions. While some of the information provided at the two training sessions was similar, each session contained some new information, usually in response to questions raised at a previous session. Future data call improvement efforts could result in a trade-off between the desire for maintenance of a consistent data series over time for comparison with previous data calls and a need to improve data collection. According to OPM, agencies will begin piloting automated telework data collection during 2012 and 2013. OPM expects that this method of data collection will provide it more reliable data than other methods. However, these efforts to standardize methods for tracking telework data may result in changes to agencies' methods of data collection. The 2011 data call, notwithstanding its limitations, will be useful to help OPM identify and understand major changes in reported participation data that could occur during a transition to automated data collection. GAO recommends that OPM (1) clearly report reliability limitations with the 2011 telework data call in its June 2012 report to Congress and (2) continue efforts to improve data collection and gather information to allow for the appropriate qualification of year-to-year comparisons and inform users about the effects of data collection changes going forward. OPM partially concurred with the first recommendation. However, GAO believes it should report limitations in its annual report. OPM fully concurred with the second. OPM provided a number of technical comments which GAO incorporated as appropriate.
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In 1992, the Energy Policy Act (P.L. 102-486) directed DOE to develop a voluntary reporting program to collect information on activities to reduce greenhouse gas emissions. The act required DOE to (1) develop and issue program guidelines, (2) develop forms for reporting emissions reduction activities, and (3) establish a publicly available database of this information. The program, by design, was to encourage voluntary participation and offer organizations reporting their emissions flexibility in what they reported and how they estimated their emissions reductions. Claims submitted to the program are reviewed by program managers for arithmetic accuracy and for the clarity of the information presented; however, there is no verification of supporting documentation or determination that the emissions reductions actually occurred. The program, however, requires that the persons reporting the information certify its accuracy. For the first two reporting periods (i.e., 1994 and 1995), the program received a total of 250 reports that provided information on 1,612 greenhouse gas emissions projects. For these periods, claims for reducing greenhouse gas emissions reported to the program totaled approximately 257 million tons of carbon dioxide equivalents. On October 22, 1997, President Clinton announced a three-phased Climate Change Proposal that challenged key U.S. industries to plan how they can best reduce greenhouse gas emissions. Among other initiatives was a proposal to reward organizations that would take early action to reduce their greenhouse gas emissions before any international agreements would take effect. This effort's goal was to make any future required emissions reduction targets easier to achieve. In early December 1997, the United States and other nations met in Kyoto, Japan, and agreed to reduce their greenhouse gas emissions and set specific targets to achieve during an initial period for monitoring emissions reductions between 2008 and 2012. Specific targets varied among nations, and the United States agreed to reach a target of 7 percent below its 1990 level of emissions. A White House Task Force on Climate Change was established to address a broad array of issues relating to climate change, such as the task of working on a credit for emissions reductions through an early action program. In May 1998, preliminary information on the credit for early action indicated that the Task Force was considering several options for that program. As of October, the Task Force was continuing to receive input from industry and environmental groups on the issue. Efforts to develop a credit for early action program to reduce greenhouse gas emissions involve consideration of many issues before such a program could be implemented. We identified four issues, stated here as questions, that will have to be addressed in developing a credit for early action program. (1) How should emissions reductions be estimated? (2) How should emissions reduction ownership be determined? (3) Should the emissions reduction claims be reported at the organization, project, or some other level? and (4) How should emissions reduction claims be verified? While these issues appear straightforward, in fact, they are complicated and will require difficult choices. Various views and opinions have been offered on these issues by a variety of groups, including business, industry, public interest, and environmental groups involved in the issues of climate change and greenhouse gas reporting. Determining what qualifies as a creditable reduction of greenhouse gas emissions would likely be one of the first and primary questions in developing a credit for reductions through an early action program. Resolving this question would lay the foundation for the program and strongly influence how many other issues would be addressed. Estimating a creditable emissions reduction involves establishing a baseline, or point from which emissions reductions will be measured. Several approaches have been proposed, including a "historical baseline" of emissions for a given period, such as 1990, that is developed from an organization's historical data on emissions. As shown in figure 1, a company's current level of emissions may be above its 1990 historical baseline. Projected plan to reduce emissions Under a historical baseline approach, an organization takes actions to get its total emissions at or below the baseline, for example, in 1990. Once a company's emissions fall below its historical baseline (represented by the shaded area in fig. 1), the company would be eligible for credit. DOE's Energy Information Administration and such groups as the Edison Electric Institute have indicated that growing companies may have more difficulty reducing their emissions because their businesses and consequently their emissions are expanding. For example, a small manufacturing company that generated 5.5 million metric tons of carbon dioxide equivalents in 1990 and today generates 8.5 million metric tons might have experienced this increase because of business expansion. This company will be faced with the decision to either take steps to reduce its emissions or purchase emissions reduction credits from another company that was able to achieve reductions below its baseline. In contrast, companies in economic decline could more easily demonstrate reductions. The historical baseline was the approach selected for the Kyoto Protocol. While the Environmental Defense Fund has essentially supported the historical baseline concept, it has also noted that alternative methods would also be acceptable, if they produced greater precision or reliability. Both DOE's Energy Information Administration and the Center for Clean Air Policy have noted that, with the historical baseline approach, only reductions below that baseline would be recognized as creditworthy. Another proposal would use a "projected baseline" that reflects what an organization believes would be its emissions over a given period of time. As shown in figure 2, with a projected baseline, an organization would take actions to get below its projected emissions level and would try to continue reducing its emissions to meet specific targets over time. Carbon dioxide equivalents (in million metric tons) Projected plan to reduce emissions Under this approach, any reduction below the projected baseline would be considered creditable (represented by the shaded area in fig. 2). In the Voluntary Reporting Program, participants have flexibility to choose which baseline approach they want to use to measure their reductions. Because the program tries to encourage participation, organizations are also given latitude in developing their baselines. So far, most of the participants have used a projected baseline. Another approach to measure emissions reductions that has been proposed is a rate-based or performance-based system that would determine emissions reductions through changes in emissions levels in relation to a predetermined unit of output of the organization. For example, measurement units could include emissions per unit of revenue earned or emissions per unit of product produced. The concept of developing a standard rate for different industries and industry sectors has also been proposed. For example, the Coalition to Advance Sustainable Technology has supported the rate-based approach because it believes that approach would accommodate a wide range of businesses and industries and attract a greater cross-section of U.S. companies to participate in early efforts to reduce their greenhouse gas emissions. Who owns the emissions reductions is another issue that will need to be addressed in developing a credit for early action program. While ownership would appear to be easily determined, it is not always clear to the involved parties. Resolving this issue is important because, without clear ownership, there may be problems in reporting and counting emissions reductions. Ownership of a reduction can be based on a legal determination, established under a contractual arrangement, or can be established by what has been called the chain of causation--who caused the emissions to occur. Central to the ownership issue are the links between parties who may view responsibility for emissions reductions differently, and each may have a legitimate argument for their perspective. An example of the links between manufacturers, retailers, consumers, and power-generating companies reflects the significance and potential complexity of the issue. An appliance manufacturer building a highly energy-efficient product with performance exceeding normal energy efficiency standards for similar products provides an opportunity for several parties to claim emissions reductions. The retailer carrying the product promotes it as a power saver. The electric utility offers rebates to customers for purchasing it. The consumer buys the product, accepts the rebate, and uses less electricity. The electric utility generates less electricity from fossil fuels, thus reducing its greenhouse gas emissions. Thus, responsibility for the emissions reductions and credit is hard to distinguish. Depending on one's position, any of the parties--the manufacturer, the retailer, the consumer, or the electric utility--could be the owner and claim the credit. Under the flexibility of the Voluntary Reporting Program, all parties could have submitted claims from this activity. To help address the potential for duplication, the program established the concept of "direct" and "indirect" ownership, which attempts to categorize the claims. Direct ownership refers to emissions from a source owned and controlled by an organization. Indirect ownership refers to emissions that an organization, in some sense, "caused" to occur, although it did not own or control the facility producing the emissions. This approach does not, however, resolve the issue of who would be credited for the claim, and as a result, there is the potential for the double reporting of a reduction. How ownership issues are resolved would likely influence the size and scope of a credit for early action program. DOE's Energy Information Administration and the Environmental Defense Fund have pointed out that determining ownership and reporting responsibility would influence the size and scope of a credit for early action program. Environmental Defense Fund officials have indicated that a decision might need to be made on whether all U.S. greenhouse gas emitters should report emissions reductions or whether only the largest companies, those emitting the majority of greenhouse gases, should report. This decision depends on whether the goal of the program is to stimulate wide participation, to focus on where the greatest potential for reductions can be achieved, or some combination of both goals. In this regard, the Center for Clean Air Policy has raised the question of whether participation should include fuel producers or fuel users or both and thought that a credit program should focus on fuel users. Determining how claims for emissions reductions should be reported is another important issue in designing a credit for early action program. This issue focuses on whether emissions are recognized at the project or organizationwide level. Reporting at the organization level would indicate whether an entire organization is actually reducing its overall greenhouse gas emissions. Reporting at the project level would likely reflect the positive results of selected projects but would not convey information on an organization's overall achievement. For example, suppose a large electric power utility reported carbon dioxide reductions from replacing a boiler in one of its four coal-fired plants with a new gas-fired boiler that produced lower emissions. The company could claim the difference between the emissions of the coal- and gas-fired boilers as a reduction in carbon dioxide. While this claim could appear to reflect a reduction in emissions, if the company did not report that it also had to increase the generating time of its other three coal-fired plants, to produce the same amount of electricity, it would not have accurately reflected companywide emissions. In this case, a net increase would have occurred, not a reduction in the company's total emissions. Some organizations believe that any emissions reductions are valuable and should be encouraged and receive some type of credit. The Edison Electric Institute believes that any effort to deny credit for reductions at the project level would discourage companies from taking early actions to reduce their greenhouse gas emissions. It believes that a more flexible approach should be taken to increase participation and reductions at this early stage of our national efforts to reduce greenhouse gas emissions. The reporting level has also been addressed by several other groups involved in the issue of reporting emissions reductions. In its position statement on credit for early action, the Center for Clean Air Policy said that participants in such a program should report on a comprehensive companywide level. The Center also stated that adjustments should be made for changes to or replacements of a company's assets. The Environmental Defense Fund has expressed support for companywide reporting over project-level reporting for similar reasons, namely that the latter does not provide an accurate picture of a company's total emissions reductions. DOE's Energy Information Administration has stated that, without companywide reporting, it would not be possible to determine if a company's overall emissions were reduced. While the Voluntary Reporting Program permitted emissions reduction claims at both the organization and project level, the program was not designed to automatically grant credit for emissions reductions and thus preserved opportunities to report alternative approaches. Providing some assurance that claims for emissions reductions are legitimate and accurately developed will also be a key issue in determining any credits for reductions through an early action program. There appears to be a consistent view that these claims would need to receive some type of review and verification. The options for verification range from self-review and -certification to an independent third-party review. The Voluntary Reporting Program uses self-review and -certification, with program managers reviewing reported information for internal consistency, accurate calculations, and comparisons with other sources of information. However, the program has no procedures to review or verify the supporting documentation to determine if emissions reductions actually occurred. Program officials at the Energy Information Administration said that accurate reporting is encouraged because the reports are open to public scrutiny and that it is illegal to knowingly submit false information on a certified submission. In its position paper on an early credit program, the Coalition to Advance Sustainable Technology, addressed the benefits of establishing a technical group to develop guidelines, standards for quantifying estimates, and protocols for making emissions reduction claims and their review. In contrast, the U.S. Initiative on Joint Implementation, which has been promoting joint initiatives between U.S. companies and non-U.S. partners to reduce emissions of greenhouse gases, is in the process of developing procedures for an independent third-party review and verification of projects included in the initiative. Many of the claims for reductions of greenhouse gas emissions submitted to the Voluntary Reporting Program would probably be ineligible for credit depending on the restrictive nature of the crediting mechanism. While the voluntary program was designed to encourage wide participation by allowing companies to submit emissions reduction claims under flexible alternative reporting criteria, it was not designed to automatically provide emissions credits to participants. A program to grant credits for early actions taken to reduce greenhouse gas emissions would probably require more restrictive reporting criteria to help ensure that the reductions claimed are real, not being double reported by others, and accurately determined. The Voluntary Reporting Program was designed to provide companies with wide flexibility in reporting their claims for reductions of greenhouse gas emissions. Depending on the type of credit program developed, reductions reported under the voluntary program may or may not meet the new reporting criteria. According to DOE's Energy Information Administration and industry experts whom we identified that were considering options on how a credit for early action program might be developed, the program could establish more restrictive definitions of, among other things, the baseline, or point from which to measure reductions, than the voluntary program. With that in mind, we analyzed two sets of more restrictive reporting criteria that potentially could be part of a future credit for early action program and compared them to the voluntary program. Each set of criteria varied by the range of restrictions reflecting lower and upper boundaries placed upon the participants. Table 1 analyzes each of the four basic issues needing resolution in an early credit program by using three sets of reporting criteria--the current flexible Voluntary Reporting Program and two sets of more restrictive criteria. The first column lists the four basic issues as questions to decide. The second column describes the flexible criteria currently used in the Voluntary Reporting Program. The third and fourth columns describe the more restrictive criteria. Comparing the two sets of more restrictive reporting criteria that could be part of a future credit for early action program (see table 1) to claims reported to the Voluntary Reporting Program indicates that many would probably be ineligible for credit. According to information from DOE's Energy Information Administration, the issues of (1) how emissions reductions should be estimated and (2) whether the emissions reduction claims should be reported at the organization, project, or some other level illustrate why many reported claims would probably be ineligible for credit. For example, according to the Energy Information Administration's reports summarizing the results of the first and second years of the Voluntary Reporting Program, only 22 of the 250 companies reporting, or about 9 percent, reported organizationwide reductions from some historical baseline and thus would meet the "Restricted" reporting criteria. With regard to the issue of reporting level, only 91, or about 36 percent, of the organizations claimed emissions reductions for their entire company and thus would meet the organizationwide reporting criteria of the "Somewhat restricted" reporting criteria. Since we could not easily determine how many of the current participants to the Voluntary Reporting Program are reporting ownership of emissions reductions that may also be reported by others, we did not compare the criteria for it to the two sets of more restrictive reporting criteria. Under the Voluntary Reporting Program, no independent verification was required. Therefore, if some form of independent verification were required to receive a credit for reductions through an early action program, none of the current claims submitted to the Voluntary Reporting Program would be automatically eligible without further review or some demonstration that independent verification had been done. We provide further perspective on these four issues by selecting some examples of actual reduction claims submitted to the Voluntary Reporting Program to show how they would fare under more restrictive reporting criteria (see app. III.) We provided a draft of this report to DOE for its review and comment. We obtained comments on the results of our work from the Department of Energy, including the Director, Office of Economic, Electricity, and Natural Gas Analysis, Office of the Assistant Secretary for Policy; and the Director, International Greenhouse Gases, and Macroeconomic Division (the division that is responsible for administering the Voluntary Reporting Program), Energy Information Administration. DOE agreed with the information in the report and observed that while the Voluntary Reporting Program was not specifically designed to automatically provide credit, it does provide a mechanism for organizations to demonstrate their achieved reductions of greenhouse gas emissions, should a credit for early action program be established. In this regard, we clarified the text throughout the report to include this observation. DOE also made other clarifying comments, which we incorporated as appropriate. We conducted our work from July 1998 through October 1998 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to the Secretary of Energy and the Administrator of the Energy Information Administration. We will also make copies available to others on request. If you or your staff have any questions concerning this report, please call me at (202) 512-3841. Major contributors to this report are listed in appendix IV. To address the question of issues associated with developing a credit for early action program, we primarily reviewed documentation and conducted interviews with the Department of Energy (DOE) and other groups involved in reporting emissions of greenhouse gases. We conducted interviews on issues related to reporting greenhouse gas emissions and the concept of a credit for early action with officials and professional staff from DOE's Energy Information Administration's Voluntary Reporting Program. We reviewed the Voluntary Reporting Program's reporting guidance and issues identified by the program officials through their experience with emissions reduction claims. We also reviewed the program's summary reports and a cross section of reports claiming emissions reductions by participants in the program. We obtained the views and the perspectives of other public and private sector groups involved in issues relating to global climate change and greenhouse gas emissions. We obtained and reviewed available documentation from several organizations involved with the issues, including the Center for Clean Air Policy, the Coalition to Advance Sustainable Technology, the Environmental Defense Fund, the Edison Electric Institute, the Pew Center on Global Climate Research, the Nature Conservancy, and Resources for the Future. When possible, we interviewed some of these groups to obtain additional information on their positions. We also obtained and reviewed related reports and information from the Congressional Research Service and the Environmental Protection Agency. To address the question of how emissions reduction claims that are submitted to the Voluntary Reporting Program might be considered under a credit for reductions through an early action program, we reviewed program data on the basic issues and judgmentally selected several examples of claims that reflected some of those basic issues. We then considered two sets of more restrictive reporting criteria that could potentially be part of a credit for early action program and compared them to the Voluntary Reporting Program. This comparison highlights some of the decisions that have to be made in developing a credit for early action program. As agreed with your office, we did not present the names of the organizations whose emissions reduction claims we used to, in part, illustrate how some claims could fare under different emissions reporting criteria. This appendix provides a brief description of some of the other issues that may need to be considered in designing a credit program for early actions to reduce greenhouse gas emissions. These descriptions are not intended to be all inclusive but rather a brief overview of each issue and why it is important. An emissions trading system provides a vehicle for the transfer of ownership of emissions reduction credits from one party to another. Some groups have suggested that a trading system would be an incentive for organizations to participate in an early credit program. This is because some organizations may have difficulty reducing their greenhouse gas emissions, while others may be capable of reducing their emissions significantly. Therefore, an emissions trading system provides an economic incentive for companies to achieve maximum levels of emission reductions at the least cost. Companies could choose the lower cost option of either buying credits or making the changes in their operations to reduce its own emissions. Carbon sequestration is the capturing of carbon dioxide from the atmosphere through the process of photosynthesis. It plays a significant role in reducing the amount of carbon dioxide in the atmosphere; each year, about 100 billion metric tons of carbon dioxide is captured in trees and other vegetation throughout the world. At issue, are concerns about how estimates are developed and what source data are used. For example, according to a recent Congressional Research Service report examining sequestration projects reported to the Voluntary Reporting Program, the sequestration claims were difficult to compare because of variations in how the quantities were measured and the source data used for the estimates. Therefore, how sequestration projects will be handled in a credit for early action program becomes an important issue. There are differing views on the issue of whether to recognize emissions reductions that would have occurred anyway, without the incentive of a credit for early action program. Some organizations thought that if an organization took an action that would be considered part of its normal business activities and it also happened to reduce greenhouse gas emissions, it should not receive recognition for this reduction because it would have occurred anyway. Others organizations, including Edison Electric Institute, believe that any efforts to reduce greenhouse gases are worthy of some type of recognition and putting restrictions on these kinds of reductions could discourage participation in an early action program. Numerous gases affect the Earth's atmosphere and act as "greenhouse gases" which trap heat from sunlight at, or close to, the Earth's surface. In addition to the six greenhouse gases that were recognized in the Kyoto Protocol, other greenhouse gases, as well as other gases that have "indirect effects" on global warming because they may contribute to the buildup or decomposition of the greenhouse gases in the atmosphere. Some of these gases include carbon monoxide and volatile organic compounds other than methane. Because the Voluntary Reporting Program allows the reporting of these gases, there may be a need to consider to what extent they should be included in an early action program. Should an organization reporting to the Voluntary Reporting Program be treated differently under a new credit for early action program? How will growing companies be able to reduce greenhouse gas emissions without affecting economic success? Should growing and declining companies be treated the same under a credit for early action program? Should there be restrictions on who is eligible to receive emissions credits? Should a credit for early action program be focused on the entire U.S. economy or selected segments that represent the majority of greenhouse gas emitters? How should a historical base for measuring reductions be adjusted for corporate mergers and acquisitions? How should companies having no historical data be treated? The following examples of actual claims of greenhouse gas emissions reductions that companies have reported to the Voluntary Reporting Program serve to (1) further illustrate the four basic issues that will likely need to be addressed in designing a credit for early action program and (2) show how such claims may be evaluated if more restrictive reporting criteria were established. We used examples contained in the DOE's Energy Information Administration publications that summarize the results of the program's first and second years. We supplemented this information with information contained in the program's public database. The first issue is how should greenhouse gas emissions reductions be estimated. A large investor-owned utility located in the Midwest produces electric power from several fossil-based plants and one nuclear plant. It compared its 1991, 1992, and 1993 emissions to those that had occurred in 1990 to calculate its emissions reductions. However, in 1994 its nuclear plant was shut down because of an equipment failure. To compensate for the lost electricity that had been generated from its nuclear power plant, it increased generation from its fossil plants, reduced sales, and purchased electricity from another company. As a result, in 1994, its emissions rose for the first time beyond its 1990 baseline and it reported an emissions increase. This example meets the "Restricted" reporting criterion shown in table 1 on determining reductions from a historical baseline. However, the utility would not have received credit in 1994 because its emissions increased above its 1990 level. The second basic issue is how should emissions reductions ownership be determined. A large investor-owned utility took several specific actions to improve the reliability and performance of its two nuclear power generators (one unit is 100 percent owned by the utility and the other unit is 41 percent owned). One action increased the time between refueling from 18 months to 24 months. Another action decreased the number of days for each refueling outage. A third action improved maintenance procedures, which reduced forced outages and automatic shutdowns. As a result of these actions, the utility claimed total cumulative reductions in carbon dioxide emissions from 1991 to 1994 compared with its 1990 baseline of more than 11 million metric tons. The utility reported only 41 percent (its ownership share) of the emissions reductions for the second unit. This example meets the "Restricted" reporting criterion shown in table 1 on reporting only those emissions reductions that are directly owned. Another example helps to clarify the differences between "direct" and "indirect" ownership of emissions reductions. A printing company based in Wisconsin initiated some projects to reduce its own and its employees' demand for transportation services. These projects included (1) a return load policy requiring its trucks not to return empty, thus saving 8 million vehicle miles per year; (2) a change from three 8-hour shifts to two 12-hour shifts, which allows employees to work fewer days per year, thus reducing their commuting trips and associated emissions by an estimated 20 million fewer miles in 1995; (3) the redevelopment of an existing building structure which was closer to town and workers' homes than a new proposed site, thus saving them an estimated 3.5 million vehicle miles in 1995; and (4) an arrangement for the public transportation system to have buses provide service to its plants, thus reducing the number of employees' vehicle round trips by 23,185 and saving more than 20,000 gallons of gasoline. Under the Voluntary Reporting Program, the company claimed "direct" emissions reductions associated with the return load policy, and "indirect" reductions associated with the shift change, the building redevelopment, and the public transportation projects. Under the "Restricted" reporting criterion shown in table 1 on obtaining credit for only those reductions directly owned, the company would receive credit only for the return load policy savings because the company directly owned the trucks and their emissions. Under the "Somewhat restricted" criterion on ownership, the company would receive credit for the indirect reductions in workers' driving miles if the company could show that the employees and the bus company did not claim them. The third basic issue concerns the level at which emissions reductions should be reported. An investor-owned utility located in the Midwest built a 16 megawatt natural-gas fired cogeneration facility to meet the electricity and steam needs of a grain-processing company. The grain company retired its own coal-fired boilers and less efficient gas-fired boilers that had been used to make the steam needed for its operations. On a project-level basis, the utility reported direct and indirect emissions reductions resulting from the operation of the cogeneration facility and the shutdown of the grain processor's steam boilers. The utility claimed direct emissions reductions by comparing electricity generation that would have otherwise occurred at its coal-fired plant. It also claimed indirect reductions from, among other things, the grain company's previous replacement of the coal-fired steam boilers with gas-fired steam boilers. None of the company's claims would have been accepted under the "Restricted" or "Somewhat restricted" criteria because these claims were reported at a project level, and it is unknown whether the company as a whole had net reductions. The last basic issue concerns how are emission reductions verified. All companies' reporting to the Voluntary Reporting Program are required to self-certify the accuracy of their emissions reduction estimates. Independent or third-party verification is not required. As a result, we were not able to find any company that went beyond the self-certification process. Daniel M. Haas Richard E. Iager Michael S. Sagalow The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO provided information on the Department of Energy's (DOE) proposal to develop a credit for an early action program promoting environmental cleanups, focusing on: (1) some of the basic issues that have to be addressed by any effort to develop a credit for early action program; and (2) how claims for reductions of greenhouse gas emissions that are reported to the Voluntary Reporting Program might fare under a credit for early action program that has less flexible reporting criteria. GAO noted that: (1) it identified four basic issues that will have to be addressed to develop a credit for early action program to reduce greenhouse gas emissions: (a) how emissions reductions should be estimated; (b) how emissions reduction ownership should be determined; (c) whether emissions reduction claims should be reported at the organization, project, or some other level; and (d) how emissions reduction claims should be verified; (2) on the surface, these issues appear straightforward; in fact, they are complicated and will require difficult choices; (3) furthermore, the resolution of these issues will likely influence the design of a credit for early action program; (4) the amount of flexibility such a program would provide on each of these issues would ultimately help to determine the extent of participation and the credit awarded; (5) many of the claims for reducing greenhouse gas emissions that have been submitted to the Voluntary Reporting Program would probably be ineligible for credit under a new program having more restrictive reporting criteria; (6) this is because the voluntary program was designed to encourage wide participation by allowing companies to submit emissions reduction claims under flexible reporting criteria and was not designed to automatically provide credit to participants for emissions reductions; (7) for example, the voluntary program, among other things, allowed companies discretion in determining the basis from which their emissions reductions were estimated and allowed companies to self-certify that their claims were accurate; and (8) according to DOE's Energy Information Administration and other organizations, such as the Edison Electric Institute and the Environmental Defense Fund, a credit for early action program could require more restrictive reporting criteria than the Voluntary Reporting Program to help ensure that emissions reduction claims are real, appropriately reviewed, and verified.
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JWST is envisioned to be a large deployable, infrared-optimized space telescope and the scientific successor to the aging Hubble Space Telescope. JWST is being designed for a 5-year mission to find the first stars and trace the evolution of galaxies from their beginning to their current formation, and is intended to operate in an orbit approximately 1.5 million kilometers--or 1 million miles--from the Earth. With a 6.5-meter primary mirror, JWST is expected to operate at about 100 times the sensitivity of the Hubble Space Telescope. JWST's science instruments are to observe very faint infrared sources and as such are required to operate at extremely cold temperatures. To help keep these instruments cold, a multi-layered tennis-court-sized sunshield is being developed to protect the mirrors and instruments from the sun's heat. The JWST project is divided into three major segments: the observatory segment, the ground segment, and the launch segment. When complete, the observatory segment of JWST is to include several elements (Optical Telescope Element (OTE), Integrated Science Instrument Module (ISIM), and spacecraft) and major subsystems (sunshield and cryocooler). The hardware configuration created when the Optical Telescope Element and the Integrated Science Instrument Module are integrated, referred to as OTIS, is not considered an element by NASA, but we categorize it as such for ease of discussion. Additionally, JWST is dependent on software to deploy and control various components of the telescope as well as collect and transmit data back to Earth. The elements, major subsystems, and software are being developed through a mixture of NASA, contractor, and international partner efforts. See figure 1 below for an interactive graphic that depicts the elements and major subsystems of JWST. For the majority of the work remaining, the JWST project will rely on three contractors: Northrop Grumman Corporation, Harris Corporation (formerly Exelis), and the Association of Universities for Research in Astronomy's Space Telescope Science Institute (STScI). Northrop Grumman plays the largest role, developing the sunshield, the OTE, the spacecraft, the cryocooler for the Mid-Infrared Instrument, and integrating and testing the observatory. Northrop Grumman performs most of this work under a contract with NASA, but its work on the Mid-Infrared Instrument (MIRI) cooler is performed under a separate subcontract with the Jet Propulsion Laboratory (JPL). Harris is manufacturing the test equipment, equipping the test chamber, and assisting in the testing of the optics of JWST. Finally, STScI will solicit and evaluate research proposals from the scientific community and will receive and store the scientific data collected, both of which are services that they currently provide for the Hubble Space Telescope. Additionally, STScI is developing the ground system that manages and controls the telescope's observations and will operate the observatory on behalf of NASA. JWST depends on 22 deployment events--more than a typical science mission--to prepare the observatory for normal operations on orbit. For example, the sunshield and primary mirror are designed to fold and stow for launch to fit within the launch vehicle payload fairing and deploy once in space. Due to its large size, it is nearly impossible to perform deployment tests of the fully assembled observatory, so the verification of deployment elements on JWST is accomplished by a combination of lower level component tests in flight-simulated environments; ambient deployment tests for assembly, element, and observatory levels; and detailed analysis and simulations at various levels of assembly. Complex development efforts like JWST face myriad risks and unforeseen technical challenges, which oftentimes can become apparent during integration and testing. To accommodate these risks and unknowns, projects reserve extra time in their schedules--which is referred to as schedule reserve--and extra money in their budgets-- which is referred to as cost reserve. Schedule reserve is allocated to specific activities, elements, and major subsystems in the event there are delays or to address unforeseen risks. Each JWST element and major subsystem has been allocated schedule reserve. When an element or major subsystem exhausts schedule reserve, it may begin to affect schedule reserve on other elements or major subsystems whose progress is dependent on prior work being finished for its activities to proceed. The element or major subsystem with the least amount of schedule reserve determines the critical path for the project. Any delay to an activity that is on the critical path will reduce schedule reserve for the whole project, and could ultimately impact the overall project schedule. Cost reserves are additional funds within the project manager's budget that can be used to address unanticipated issues for any element or major subsystem and are used to mitigate issues during the development of a project. For example, cost reserves can be used to buy additional materials to replace a component or, if a project needs to preserve schedule reserve, reserves can be used to accelerate work by adding shifts to expedite manufacturing and save time. NASA's Goddard Space Flight Center (Goddard)--the NASA center with responsibility for managing JWST--has issued procedural requirements that establish the levels of both cost and schedule reserves that projects must hold at various phases of development. In addition to cost reserves held by the project manager, management reserves are funds held by the contractors that allow them to address cost increases throughout development. We have found that management reserves should contain 10 percent or more on the cost to complete a project and are used to address different issues. JWST has experienced significant cost increases and schedule delays. Prior to being approved for development, cost estimates of the project ranged from $1 billion to $3.5 billion with expected launch dates ranging from 2007 to 2011. Before 2011, early technical and management challenges, contractor performance issues, low level cost reserves, and poorly phased funding levels caused JWST to delay work after confirmation, which contributed to significant cost and schedule overruns, including launch delays. The Chair of the Senate Subcommittee on Commerce, Justice, Science, and Related Agencies requested from NASA an independent review of JWST in June 2010. In response, NASA commissioned the Independent Comprehensive Review Panel, which issued its report in October 2010, and concluded that JWST was executing well from a technical standpoint, but that the baseline funding did not reflect the most probable cost with adequate reserves in each year of project execution, resulting in an unexecutable project. Following this review, the JWST program underwent a replan in September 2011, and Congress in November 2011 placed an $8 billion cap on the formulation and development costs for the project. On the basis of the replan, NASA rebaselined JWST with a life-cycle cost estimate of $8.835 billion that included additional money for operations and a planned launch in October 2018. The revised life-cycle cost estimate included a total of 13 months of funded schedule reserve. We have previously found that since the project's replan in 2011, the JWST project has met its cost and schedule commitments. Most recently, in December 2015, we found that the JWST project was meeting its schedule commitment established at the replan but would soon face some of its most challenging integration and testing. All of the project's elements and major subsystems were within weeks of becoming the project's critical path--the schedule with the least amount of reserve--for the overall project. The project had yet to begin 3 of 5 integration and test events, where problems are most often identified and schedules begin to slip, while working to address over 100 identified technical risks and to ensure that potential causes of mission failure were fully tested and understood. We further found that JWST continued to meet its cost commitments, but that larger than planned workforce levels, particularly with the observatory contractor, posed a threat to meeting cost commitments. Additionally, unreliable contractor data could pose a risk to project management. We recommended that the JWST project require contractors to identify, explain, and document anomalies in contractor- delivered monthly earned value management reports. NASA concurred with this recommendation and, in February 2016, directed the contractors to implement the actions stated in the recommendation. We have made recommendations in previous reports with regard to improving cost and schedule estimating, updating risk assessments, and strengthening management oversight. NASA has generally agreed and taken steps to implement a number of our recommendations; however, there are three recommendations that NASA has not fully implemented that could still benefit the JWST project. The project has completed most of its major hardware deliveries including the telescope, instrument module, and the majority of the spacecraft. The project has also made significant advances on the sunshield and cryocooler, two major subsystems that have historically posed challenges. Two of five planned integration efforts are complete and two more are currently underway. The project has used 8 months of its schedule reserve to address technical challenges, but is maintaining its schedule commitment. The project's schedule reserve, currently 6 months, remains above the Goddard Space Flight Center requirement, as determined by project officials, and is on track with the project's more conservative internal plan. Integrating the Optical Telescope Element (OTE) and Integrated Science Instrument Module (ISIM) into the combined OTE+ISIM (OTIS) element has taken longer than initially planned and is currently the critical path for the project. As a result, the reserve allocated to the remaining OTIS integration and test work, including a cryovacuum test that takes 93 days to complete, has been reduced from 3 to 2 months. However, risk reduction tests on pathfinder hardware have mitigated issues that would likely have consumed additional schedule reserves during OTIS testing. As we also found in 2015, other JWST elements and major subsystems are within weeks of becoming the project's critical path, which could further reduce schedule reserves. As we have previously reported, integration and testing is the phase where problems are most likely to be found and schedules tend to slip. Thus, going forward, technical issues encountered are more likely to require critical path schedule reserves to address. The project and its contractors have delivered the majority of the observatory's hardware, including the telescope, instrument module, and the majority of the spacecraft components. These deliveries also include significant advances on two subsystems that have historically been sources of numerous technical challenges and delays. For example, Northrop Grumman received the sunshield's final membrane layer from its subcontractor in September 2016, following a delay of over 3 months. This delay in delivery of the final sunshield membrane layer capstones a series of challenges Northrop Grumman and its subcontractor have experienced with the membranes. According to Northrop Grumman officials, their subcontractor struggled to deliver the membranes on time due to a variety of technical factors including additional time needed to seam the last layers with a new lot of material, additional testing requirements, and facility limitations. Technical challenges with the membranes were further complicated by Northrop Grumman's difficulty in addressing the resulting schedule issues with their subcontractor. After an 18-month delay and numerous technical challenges, the cryocooler compressor assembly was delivered by the subcontractor to the Jet Propulsion Laboratory in July 2015, where it met its acceptance and end-to-end testing requirements. The Jet Propulsion Laboratory then delivered the compressor and electronics assemblies to Northrop Grumman for spacecraft integration and test in May 2016, about 9 weeks ahead of the need date that was based on a revised schedule. Over the last several years, the project has accommodated a series of cryocooler schedule slips by reordering and compressing the Jet Propulsion Laboratory's test schedule and resequencing the spacecraft integration schedule. Some additional work on the cryocooler will be carried forward into spacecraft integration and test, including completion of vibration verification of refrigerant lines and related hardware that was augmented after cryocooler vibration testing had been completed and confirming bonding resistance of cryocooler hardware when it is integrated with the spacecraft. Jet Propulsion Laboratory officials characterized residual risks as minor and the additional work required at the higher level of integration as typical. JWST project officials further stated that the cryocooler's performance in testing was excellent and met all of its requirements with healthy margin, and that they are comfortable with the work that will be carried forward into spacecraft integration and test. With most major hardware deliveries complete, the project is primarily focused on integrating and testing the individual elements and major subsystems that compose the observatory. Specifically, the project and Northrop Grumman completed two of five planned integration efforts--the instrument module and the telescope elements--respectively, in March 2016. Two additional integration efforts--integrating the OTE and ISIM into the OTIS element and integrating the spacecraft--are underway, as illustrated in figure 2. The project has consumed 8 of 14 total months of its overall schedule reserve to address technical challenges across elements and major subsystems. Almost 3 months of this reserve have been consumed within the past year. The remaining 6 months of reserve is more than required by Goddard Space Flight Center, as determined by project officials, and on track with the project's more conservative internal plan--which was set above the Goddard standard at the replan in 2011. The OTIS integration and test work is currently the project's critical path. However, as we also found in 2015, all of JWST's elements and major subsystems are within weeks of moving onto the critical path, increasing the likelihood of further use of schedule reserve. While the project plans to use all its available schedule reserve to mitigate issues as it approaches launch, the proximity of each element to the critical path means that the project must prioritize the mitigations when problems occur. See Figure 3 below for a comparison of the schedule reserve held by each element and major subsystem in 2016, compared to last year. Each of JWST's elements and major subsystems have experienced technical issues that, while reducing their individual schedule reserves as shown in Figure 3 above, also consumed overall project critical path schedule reserve in the past year. OTIS: In August 2016, the project designated one month of critical path schedule reserve to the OTIS element integration effort. According to the project, a portion of the additional time was needed due to the complexity inherent in integrating the telescope and instruments. For example, project officials explained that work progressed slower than planned because of the manual nature of the work and physical reach and access limitations, which created a more serial work flow, particularly with installing over 900 thermal blankets. Additionally, the project addressed concerns regarding contamination control in the clean room. The project took steps to optimize the OTIS integration and test flow to minimize critical path schedule impact. For example, the project conducted some tasks in parallel and added more work shifts to minimize the length of time to complete a task. In addition to addressing integration challenges, a portion of the one month was designated for the chamber operations and preparation work to be conducted at Johnson Space Center in advance of the OTIS cryovacuum test--the final event in the OTIS integration and test effort--based on lessons learned from the integration and test work that has occurred thus far. As a result, the reserve allocated for the OTIS integration and test effort has been reduced from 3 to 2 months. If an issue occurred that required stopping and repeating the cryovacuum test, which is planned to take 93 days, the remaining 2 months of OTIS reserve before the observatory integration and test effort begins, could easily be exhausted and consume reserve allocated for later integration and test work. Figure 4 shows the OTIS element. In an effort to allow OTIS testing to proceed more smoothly and prevent the use of additional schedule reserve, the project and its contractor for OTIS testing, Harris Corporation, have undertaken a series of three risk reduction tests on pathfinder hardware at Johnson Space Center. Optical ground support equipment tests 1 and 2 were completed in June and October 2015, respectively, and the third and final risk reduction test, Thermal Pathfinder, was completed in October 2016, after a 3-month delay to update the processes for cooling down the chamber. The pathfinder work was conducted in parallel to instrument, telescope, and OTIS integration and test activities and was scheduled to conclude in time to begin the OTIS cryovacuum test in early 2017. See figure 5 below. The pathfinder tests have allowed the project and Harris to practice processes and procedures that will be used for the eventual OTIS cryovacuum testing and validate the performance of ground support equipment. This is intended to create a more efficient test flow and proactively address issues before the test on flight hardware commences. For example, the second pathfinder test showed that vibration levels inside the test chamber were too high, and adjustments to the ground support equipment were implemented to address this issue. Additionally, after the second pathfinder test, the project discovered that the adhesive on the back of the tape used throughout the observatory can flake and release particles at cryogenic temperatures, which raised concerns about contamination of sensitive hardware, particularly in the instrument module. Because these issues were discovered during the pathfinder tests, the project was able to address them before OTIS testing where flight hardware could have been affected and prevent the use of additional schedule reserve. Sunshield: The sunshield experienced several issues, which in total reduced schedule reserves by 7 weeks and required adjustments to the integration and test flow at Northrop Grumman to minimize further schedule impacts. For example, in October 2015, the project reported that a piece of flight hardware for the sunshield's mid-boom assembly was irreparably damaged during vacuum sealing in preparation for shipping. The damaged piece had to be remanufactured, which consumed 3 weeks of schedule reserve. In January 2016, subcontractor manufacturing delays with the individual sunshield membrane layers consumed 2 additional weeks of schedule reserves. Most recently, in June 2016, Northrop Grumman redesigned the membrane tensioning system, which allows the sunshield to unfold and maintain its shape when deployed. According to contractor officials, during previous mass reduction efforts, the pulley walls in the system were thinned out; however, when tested under higher loads, the weaker walls allowed a cable to become pinched during a test. Because the observatory now has sufficient mass margin, the system was redesigned to thicken the walls. The redesign of the system consumed an additional 2 weeks of schedule reserves, and the project is tracking further schedule threats related to conducting an anti- corrosion chemical treatment of the system's parts and investigating a deployment test anomaly. To accommodate the 2-week slip and minimize use of additional schedule reserves, Northrop Grumman adjusted its planned sunshield and spacecraft integration and test flow. For example, delivery of the structures that support the sunshield will now be delayed from September to December 2016. Sunshield integration needs to be completed by September 2017 to avoid delaying integration and testing of the completed observatory. Figure 6 shows the full scale sunshield templates used for testing the deployment of the sunshield. Spacecraft: The spacecraft consumed 4 weeks of schedule reserves due to a variety of technical challenges, particularly with the electronics and propulsion components. For example, 2 weeks of reserves were consumed in January 2016 due to a deficient test cable which caused a vibration test anomaly, following the late delivery of spacecraft electronics components from the supplier. According to program officials, a series of assembly issues on the propulsion system consumed another 2 weeks of reserves. For example, installation and welding of the spacecraft propellant lines was more complicated and took more time than expected. Additionally, Northrop Grumman discovered that, during spacecraft check out testing, components in the propulsion system that are used to measure fuel levels had been damaged due to operator error. The damaged parts will require replacement and the project and Northrop Grumman continue to track this issue as a schedule threat. Due to the technical issues experienced, the reserves allocated for spacecraft integration and test have been reduced from 3 to 2 months. However, significant integration and test work remains. Specifically, Northrop Grumman will complete integration of the cryocooler electronics and compressor assemblies and spacecraft electronics panels into the spacecraft bus structure, conduct the first comprehensive system test in 2016, and begin integration testing in early 2017. Figure 7 shows the spacecraft. In an effort to provide additional schedule margin, the JWST project has been working with the launch vehicle provider on the possibility of expanding the potential launch window. According to program officials, at its former expected mass and due to its planned trajectory and its relationship to the moon, JWST could not launch for a period before and after the solstices. This means if it misses the planned October 2018 launch date, the project would have to wait until February 2019 for another opportunity. However, prior mass reduction efforts have made the observatory lighter and resulted in more flexibility in launch dates near the winter solstice. JWST is one of the most technologically complex science projects NASA has undertaken. In addition to the previously noted challenges that have reduced schedule reserves, much significant and technologically challenging work remains to be completed in the 2 years remaining before launch, which could further erode schedule reserves if problems occur. As integration and testing moves forward, the project will need to be able to reduce a significant amount of risk and address technical challenges in a timely manner to stay on schedule. The project maintains a list of risks--currently with 73 items--that need to be tested and mitigated to an acceptable level in the remaining 2 years before launch. According to the project, approximately 25 of these risks are not likely to be closed until the conclusion of the observatory integration and test effort--just prior to project launch. In some cases, the project will determine that no further mitigations are feasible and whether to accept any residual risk. Many of these risks relate to the project's numerous deployments or single point failures. According to project officials, in comparison with other NASA unmanned spaceflight missions, JWST has a greater number of and more complex deployments. The extent of these deployments--which are necessary because the telescope and sunshield must be stowed for launch to fit within the launch vehicle payload fairing--means the telescope could fail to operate as planned in an extensive number of ways. For example, the four release mechanisms that hold the spacecraft and OTE together for launch are key deployments, as well as potential single point failures, for the project. Once in space, these mechanisms are to activate and release to allow the OTE to separate from the spacecraft. If the mechanisms fail to deploy, or release prematurely, mission failure could occur. The project has redesigned the mechanisms due to excessive shock when performing the release function, and efforts to qualify the new design and mitigate as much of the risk of failure or premature release as possible are ongoing. According to project officials, there are over 100 different single point failure modes across hundreds of individual items in the observatory, nearly half of which involve the deployment of the sunshield. To ensure that all deployment mechanisms are ready for flight, Northrop Grumman--with participation from the project--is conducting a series of deployment reviews using standards developed by the contractor and employed on a variety of systems with large, complex, or high risk mission deployments. These reviews are tailored to the more rigorous requirements of JWST and provide a phased series of assessments throughout the mission's development. The project is also seeking a waiver from NASA's Office of Safety and Mission Assurance for its numerous single point failures throughout the observatory, including those related to the sunshield. The approval of critical single point failures requires justification from the project including sound engineering judgement, supporting risk analysis, and implementation of measures to mitigate the risk to acceptable levels. According to project officials, this approach is consistent with other high-priority NASA missions, which require the most stringent design and development approach that NASA takes to ensure the highest level of reliability and longevity on orbit. Additionally, program officials noted that NASA leadership has been well informed of JWST's potential single point failures, and that the items covered in the waiver are well understood and expected. JWST also faces a number of risks related to software integration. According to NASA's Independent Verification and Validation office-- which independently examines mission critical software development for most NASA programs and projects, the project is unique among spaceflight projects in the amount and complexity of the software required to operate it and the number of developers contributing the software. For example, while most science programs or projects have two to four software developers, JWST has eight. This creates inherent cost and schedule risk for the project. The project is tracking a number of software- related risks throughout the observatory. However, NASA's Independent Verification and Validation officials stated that they believe that JWST is on track to continue meeting its software milestones, but the testing that lies ahead--when the different components are integrated--will be a challenge. Going forward, NASA's Independent Verification and Validation office will be focusing its efforts on the software related to the ongoing OTIS integration and test work. Our prior work has shown that integration and testing is the phase in which problems are most likely to be found and schedules tend to slip. For a complex project such as JWST, this risk is magnified. Now that the project is well into its complex integration and test efforts, events are more sequential in nature and there are few opportunities to mitigate issues in parallel. According to contractor officials, opportunities for schedule work-arounds and recovery options, which have preserved some schedule reserves in the past, are diminishing. Thus, going forward, technical issues encountered during integration and test are more likely to require critical path schedule reserves to address, as has recently been observed in the OTIS integration and test effort. Program and Project Reserves Project reserves are those costs that are expected to be incurred but have not yet been allocated to a specific project cost element. A project's reserves may be held at the project level, program level, and mission directorate level. The project's reserves are divided and portions are controlled by the project manager, the program and mission directorate. Though the project spent $42.8 million more than planned for fiscal year 2016, project officials managed JWST within its allocated budget for the fifth consecutive year since the 2011 replan. The project estimates that it will carry over into fiscal year 2017 about half of the amount it projected. NASA officials attribute the reduced amount of carry over to their emphasis on maintaining schedule, which has required additional dollars to meet technical challenges. As in past years, the project used a portion of its cost reserves to address technical challenges, such as completing OTIS integration. The project also received additional program-level cost reserves in fiscal year 2016. For example, program-held reserves were used to offset cryocooler costs in fiscal year 2016 for the work remaining. Our analysis indicates that these additional costs will not result in exceeding the project's overall cost commitment. However, NASA has already committed the majority of its fiscal year 2017 program-held reserves to address increased costs on the Northrop Grumman contract. As a result, NASA will have diminished project and program reserves to address technical and other challenges that may occur. Though 89 percent of the work on the Northrop Grumman contract has been completed, the primary threat to JWST continues to be the ability of Northrop Grumman, the observatory contractor, to control its costs and decrease its workforce. For the past 32 months, Northrop Grumman's actual workforce has exceeded its projections and is not expected to fall to under 300 full-time equivalents until the spring of 2017. Based on its projections at the beginning of the fiscal year, Northrop Grumman exceeded its total fiscal year 2016 workforce monthly projections by about 37 percent. Figure 8 below illustrates the difference between the workforce levels that Northrop Grumman projected at the beginning of fiscal year 2016 and its actual workforce levels for that period. Northrop Grumman's workforce has declined slightly in fiscal year 2016 when compared to fiscal year 2015, but, on average, Northrop Grumman was above its projections by 165 full-time equivalents each month in fiscal year 2016. In the beginning of the fiscal year, Northrop Grumman's workforce was close to projected levels. However, in the latter half of the year, the contractor increased its workforce instead of decreasing as projected. For example, in July 2016, Northrop Grumman's workforce was 593 instead of 284 as projected. Almost half of the July increase was due to a need for more workers to work on observatory integration and test activities. According to project officials, Northrop Grumman continues to maintain overall higher workforce levels than planned because the project has asked them to prioritize schedule when addressing technical issues that arise to minimize impacts to the project's schedule. The project, however, has also communicated the need to reduce the workforce size, including holding frequent discussions with the contractor on workforce planning. As Northrop Grumman hardware schedule milestones are completed, NASA expects the contractor to reduce its workforce accordingly. While Northrop Grumman did consume fiscal year 2016 reserves to address technical issues and challenges, it was able to operate within budget for fiscal year 2016. However, in July 2016, Northrop Grumman submitted its first cost overrun proposal to NASA since the replan in 2011. The costs associated with Northrop Grumman's higher workforce levels is the primary reason for their overrun proposal. The project had independently forecasted that Northrop Grumman costs would be higher than anticipated as the contractor dealt with technical issues and cost increases for critical hardware deliveries such as the sunshield and spacecraft. Currently, the project is evaluating Northrop Grumman's proposal, including the impact on program cost reserves, and does not expect to conclude negotiations before early 2017. While Northrop Grumman is developing and manufacturing large portions of the observatory, as well as integrating and testing the observatory, NASA relies on other entities for other support, components, and observatory operations. For example, Harris Corporation is manufacturing the test equipment used to test the OTIS flight hardware. Since most of the work performed by these entities is complete or has a significantly lower contract value than the observatory contractor, it is unlikely that it will result in JWST exceeding its cost commitments as a result. For example; Harris Corporation: Projected costs will likely overrun the contract when it completes the work performed under this contract in December 2016, but our analysis shows that it will not cause JWST to exceed its cost commitment. In 2017, Harris will perform additional work on JWST, but that work will be performed through a Goddard Space Flight Center support contract rather than a contract specifically for JWST. Jet Propulsion Laboratory: In fiscal year 2016, the laboratory overran its cost for work related to JWST and the project used budget reserves to cover additional costs. Overall, in developing and testing the cryocooler system, the Jet Propulsion Laboratory costs grew about 258 percent and consumed a disproportionate amount of JWST reserves. Because most of the work remaining for JPL is complete--testing of the spare cryocooler remains--it is unlikely that cryocooler costs will have any significant impact on JWST cost reserves in the future. Space Telescope Science Institute: The STScI has generally performed work within planned costs. To gain further insight on its costs, NASA has an ongoing effort to require the institute to provide earned value management data on its JWST contract. STScI has submitted its proposal on how it will meet this new requirement and a contract modification is expected to be executed in January 2017. We requested comments from NASA, but agency officials determined that no formal comments were necessary. NASA provided technical comments, which were incorporated as appropriate. We are sending copies of the report to NASA's Administrator and interested congressional committees. In addition, the report will be available at no charge on GAO's website at http://www.gao.gov. Should you or your staff have any questions on matters discussed in this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Our objectives were to assess the extent to which the James Webb Space Telescope (JWST) project is (1) managing technological issues and development challenges to maintain its committed schedule and (2) meeting its committed cost levels and managing its workforce plans. To assess the extent to which the JWST project is managing technological issues and development challenges to maintain its committed schedule, we reviewed project and contractor schedule documentation, and held interviews with program, project, and contractor officials on the progress made and challenges faced building and integrating the different components of the observatory. We examined and analyzed monthly project status reports to management to monitor schedule reserve levels and usage and potential risks and technical challenges that may impact the project's schedule, and to gain insights on the project's progress since our last report in December 2015. Further, we attended flight program reviews at the National Aeronautics and Space Administration (NASA) headquarters on a quarterly basis, where the current status of the program was briefed to NASA headquarters officials outside of the project. We examined selected individual risks for elements and major subsystems from monthly risk registers prepared by the project to understand the likelihood of occurrence and impacts to the schedule based on steps the project is taking to mitigate the risks. We examined test schedules and plans to understand the extent to which risks will be mitigated. Furthermore, we interviewed project officials at Goddard, contractor officials from the Northrop Grumman Corporation, the Harris Corporation, the Jet Propulsion Laboratory, and the Association of Universities for Research in Astronomy's Space Telescope Science Institute concerning technological challenges that have had an impact on schedule, and the project's and contractor's plans to address these challenges. To assess the extent to which the JWST project is meeting its committed cost levels and managing its workforce plans, we reviewed and analyzed program, project, and contractor data and documentation and held interviews with officials from these organizations. We reviewed JWST project status reports on cost issues to determine the risks that could impact cost. We analyzed contractor workforce plans against workforce actuals to determine whether contractors' are meeting their workforce plans. We monitored and analyzed the status of program, and project cost reserves in current and future fiscal years to determine the project's financial posture. We examined and analyzed earned value management data from two of the project's contractors to identify trends in performance, whether tasks were completed as planned and likely estimates at completion. Our work was performed primarily at NASA headquarters in Washington, D.C.; Goddard Space Flight Center in Greenbelt, Maryland; Northrop Grumman Corporation in Redondo Beach, California; and the Space Telescope Science Institute in Baltimore, Maryland. We also conducted interviews at the Independent Verification and Validation facility in Fairmont, West Virginia; the Harris Corporation, Chester, Maryland; and the Jet Propulsion Laboratory in Pasadena, California. We conducted this performance audit from February 2016 to December 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Cristina Chaplain, (202) 512-4841 or [email protected]. In addition to the contact named above, Richard Cederholm, Assistant Director; Karen Richey, Assistant Director; Jay Tallon, Assistant Director; Molly Traci, Assistant Director; Marie P. Ahearn; Brian Bothwell; Laura Greifner; Katherine Lenane; Jose Ramos; Carrie Rogers; and Roxanna Sun made key contributions to this report.
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JWST is one of NASA's most complex and expensive projects, at an anticipated cost of $8.8 billion. Now in the midst of significant integration and testing that will last the 2 remaining years until the planned October 2018 launch date, the JWST project will need to continue to address many challenges and identify problems, some likely to be revealed during its rigorous testing. The continued success of JWST hinges on NASA's ability to anticipate, identify, and respond to these challenges in a timely and cost-effective manner to meet its commitments. Conference Report No. 112-284, accompanying the Consolidated and Further Continuing Appropriations Act, 2012, included a provision for GAO to assess the project annually and report on its progress. This is the fifth such report. This report assesses the extent to which JWST is (1) managing technological and developmental challenges to meet its schedule commitments, and (2) meeting its committed cost levels and managing its workforce plans. To conduct this work, GAO reviewed monthly JWST reports, reviewed relevant policies, conducted independent analysis of NASA and contractor data, and interviewed NASA and contractor officials. The National Aeronautics and Space Administration's (NASA) James Webb Space Telescope (JWST) project is still operating within its committed schedule while in its riskiest phase of development, integration and test. Most hardware deliveries and two of five major integration and test efforts have been completed. Two other integration and test efforts are underway, with the final effort to begin in fall 2017. JWST used about 3 months of schedule reserve since GAO's last report in December 2015. For example, the project used one month of schedule reserve to address delays in integrating the Optical Telescope Element and the Integrated Science Instrument module, due to the complexity of this effort. The project's remaining 6 months of reserve is more than required by Goddard Space Flight Center requirements, as determined by project officials. The figure below shows JWST's elements and major subsystems, the schedule reserve remaining for each, and the critical path--the schedule with the least amount of reserve. JWST is one of NASA's most technologically complex science projects and has numerous risks and single points of failure, which need to be tested and understood before launch. The project also faces a number of risks related to the observatory software. Looking ahead, the project will likely need to consume more reserves for its complex integration and test efforts. JWST is meeting its cost commitments despite technical and workforce challenges. Although the project used $42.8 million more than planned for fiscal year 2016, it is maintaining spending within the levels dictated by the 2011 replan. NASA continues to emphasize that maintaining schedule is the priority, which resulted in the use of the fiscal year 2016 cost reserves to meet technical challenges. Also, as GAO previously found in December 2015, the observatory contractor has continued to maintain a larger workforce for longer than planned in order to address technical issues. For example, in 2016, the observatory contractor averaged 165 full-time equivalents more than projected to address technical issues while minimizing the impact on schedule. The contractor submitted a proposal to NASA this summer to cover cost overruns, which was the first such proposal since the replan in 2011. GAO is not making recommendations in this report. GAO has made recommendations in previous reports, to which NASA has generally agreed and taken steps to implement. There are three recommendations that NASA has not fully implemented that could still benefit the JWST project.
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The tax administration system that collects about $2 trillion in revenues each year is critically dependent on a collection of obsolete computer systems developed by the IRS over the last 40 years. IRS envisions a future in which its tax processing environment will be virtually paper-free, and up-to-date taxpayer information will be readily available to IRS employees to respond to taxpayer inquiries. To accomplish this, IRS embarked on its ambitious BSM program. BSM involves the development and delivery of a number of modernized business, data, and core infrastructure projects that are intended to provide improved and expanded service to taxpayers as well as IRS internal business efficiencies. Recognizing the long-term commitment needed to solve the problem of obsolete computer systems, Congress set up a special BSM account in fiscal year 1998 to fund IRS's systems modernization efforts. IRS initiated CADE as part of BSM, to modernize the agency's outdated and inefficient data management system. IRS also sees this project as the corporate data source enabling future customer service and financial management applications. CADE is therefore IRS's linchpin modernization project. In light of the projects that depend on CADE, as well as the many interrelationships that are to exist among CADE and IRS's modernized applications and among CADE and current IRS applications, the agency must manage this critical project effectively. Without CADE, the business systems modernization program cannot succeed. IRS's attempts to modernize its aging computer systems span several decades. This long history of continuing delays and design difficulties led to our designating IRS's Tax Systems Modernization program, BSM's predecessor, as a high-risk area in 1995. During the mid-1990s we reported on several technical and management weaknesses associated with Tax Systems Modernization, a program that began in the 1980s. These weaknesses related to incomplete or inadequate strategic information management practices; immature software development capability; incomplete systems architecture, integration planning, system testing, and test planning practices; and the lack of an effective organizational structure to consistently manage and control systems modernization organizationwide. We made a series of recommendations for correcting these weaknesses and limiting modernization activities until they were corrected. IRS subsequently discontinued the program after the agency had spent about $4 billion without receiving expected benefits. In fiscal year 1999, IRS launched the BSM program. IRS contracted with CSC as its prime systems integration services contractor for systems modernization, helping it design new systems and identify other contractors to develop software and perform other tasks. In our reviews of IRS's BSM expenditure plans, we have identified numerous deficiencies in the BSM program, including a continuation of the weaknesses noted above. Also, a consistent challenge for IRS has been to make sure that the pace of systems acquisition projects does not exceed the agency's ability to manage them. In May and November 2000, we reported that projects were in fact getting ahead of the modernization management capacity that needed to be in place to manage them effectively. In February 2002 we reported that such an imbalance was due to IRS's first priority and emphasis being on getting the newer, more modern systems--with their anticipated benefits to taxpayers--up and running. In so doing, however, management controls had not been given equal attention and thus had not kept pace. This emphasis on new systems added significant cost, schedule, and performance risks that escalate as a program advances. Moreover, these risks increased as IRS moved forward because of interdependencies among projects, and the complexity of associated workload activities to be performed increased dramatically as more systems projects were built and deployed. In addition, we identified other deficiencies in the BSM program, including the need to establish processes that meet the level 2 requirements of the SEI's Software Acquisition Capability Maturity Model, and to improve modernization management controls and capabilities, such as those related to configuration management, risk management, enterprise architecture implementation, human capital strategic management, integrated program scheduling, and cost and schedule estimating. In response to our recommendations, IRS has made important progress. First, significant progress has been made in establishing the modernization management controls needed to effectively acquire and implement information technology systems. For example, IRS has invested incrementally in its modernization projects; defined a systems life cycle management methodology, which IRS refers to as the Enterprise Life Cycle; developed and is using a modernization blueprint, commonly called an enterprise architecture, to guide and constrain its modernization projects; and established processes that meet the level 2 requirements of the SEI's Software Acquisition Capability Maturity Model. Second, IRS has made progress in establishing the infrastructure systems on which future business applications will run. For example, IRS has delivered elements of the Security and Technology Infrastructure Release to provide the hardware, software, and security solutions for modernization projects. IRS has also built an enterprise integration and test environment that provides the environment and tools for multiple vendors associated with a release to perform integration and testing activities. Third, it has delivered certain business applications that are producing benefits today. These applications include Customer Communications 2001, to improve telephone call management, call routing, and customer self-service applications; Customer Relationship Management Examination, to provide off-the- shelf software to IRS revenue agents to allow them to accurately compute complex corporate transactions; and Internet Refund/Fact of Filing, to improve customer self-service by providing to taxpayers via the Internet instant refund status information and instructions for resolving refund problems. Fourth, IRS took steps to align the pace of the program with the maturity of IRS's controls and management capacity, including reassessing its portfolio of planned projects. Nevertheless, IRS continued to face challenges to fully develop and implement its modernization management capacity. Last June we reported that IRS had not yet fully implemented a strategic approach to ensuring that it has sufficient human capital resources for implementing BSM, nor had it fully implemented management controls in such areas as configuration management, estimating costs and schedules, and employing performance-based contracting methods. We made several recommendations to address those issues. Our analysis has shown that weak management controls contributed directly to the cost, schedule, and/or performance shortfalls experienced by most projects. Given that the tasks associated with those projects that are moving beyond design and into development are by their nature more complex and risky and that IRS's fiscal year 2004 BSM expenditure plan supports progress toward the later phases of key projects and continued development of other projects, systems modernization projects likely will encounter additional cost and schedule shortfalls. IRS will need to continue to assess the balance between the pace of the program and the agency's ability to manage it. Based on IRS's expenditure plans, BSM projects have consistently cost more and taken longer to complete than originally estimated. Table 1 shows the life cycle variance in cost and schedule estimates for completed and ongoing BSM projects. These variances are based on a comparison of IRS's initial and revised cost and schedule estimates to complete initial operation or full deployment of the projects. As the table indicates, the cost and schedule estimates for full deployment of the e-Services project have increased by just over $86 million and 18 months, respectively. In addition, the estimated cost for the full deployment of CADE release 1 has increased by almost $37 million, and project completion has been delayed by 30 months. In addition to the modernization management control deficiencies discussed above, our work has shown that the increases and delays were caused, in part, by inadequate definitions of systems requirements. As a result, additional requirements have been incorporated into ongoing projects. increases in project scope. For example, the e-Services project has changed significantly since the original design. The scope was broadened by IRS to provide additional benefits to internal and external customers. cost and schedule estimating deficiencies. IRS has lacked the capability to effectively develop reliable cost and schedule estimates. underestimating project complexity. This factor has contributed directly to the significant delays in the CADE release 1 schedule. competing demands of projects for test facilities. Testing infrastructure capacity is insufficient to accommodate multiple projects when testing schedules overlap. project interdependencies. Delays with one project have had a cascading effect and have caused delays in related projects. These schedule delays and cost overruns impair IRS's ability to make appropriate decisions about investing in new projects, delay delivery of benefits to taxpayers, and postpone resolution of material weaknesses affecting other program areas. Producing reliable estimates of expected costs and schedules is essential to determining a project's cost-effectiveness. In addition, it is critical for budgeting, management, and oversight. Without this information, the likelihood of poor investment decisions is increased. Schedule slippages delay the provision of modernized systems' direct benefits to the public. For example, slippages in CADE will delay IRS's ability to provide faster refunds and respond to taxpayer inquiries on a timely basis. Delays in the delivery of modernized systems also affect the remediation of material internal management weaknesses. For example, IRS has reported a material weakness associated with the design of the master files. CADE is to build the modernized database foundation that will replace the master files. Continuing schedule delays will place resolution of this material weakness further out into the future. In addition, the Custodial Accounting Project is intended to address a financial material weakness and permit the tracking from submission to disbursement of all revenues received from individual taxpayers. This release has yet to be implemented, and a revised schedule has not yet been determined. Finally, the Integrated Financial System is intended to address financial management weaknesses. When IRS submitted its fiscal year 2003 BSM expenditure plan, release 1 of the Integrated Financial System was scheduled for delivery on October 1, 2003. However, it has yet to be implemented, and additional cost increases are expected. Given the continued cost overruns and schedule delays experienced by these BSM projects, IRS and CSC launched internal and independent assessments during 2003 of the health of BSM as whole, as well as CADE. Table 2 describes these assessments. The IRS root cause analysis, PRIME review, and the Office of Procurement assessment revealed several significant weaknesses that have driven project cost overruns and schedule delays, and also provided a number of actionable recommendations for IRS and CSC to address the identified weaknesses and reduce the risk to BSM. Deficiencies identified are consistent with our prior findings and include low program productivity levels, ineffective integration across IRS, and insufficient applications and technology engineering. As noted, CADE release 1 has experienced significant reported cost overruns and schedule delays throughout its life cycle, and has yet to be delivered. SEI's independent technical assessment of CADE pointed to four primary factors that have caused the project to get off track and resulted in such severe cost and schedule impairments: (1) the complexity of CADE release 1 was not fully understood; (2) the initial business rules engine effort stalled; (3) both IRS and PRIME technical and program management were ineffective in key areas, including significant breakdowns in developing and managing CADE requirements; and (4) the initially contentious relationship between IRS and PRIME hindered communications. SEI also warned that CADE runs the risk of further trouble with later releases due to unexplored/unknown requirements; security and privacy issues that have not been properly evaluated (e.g., online transactions are different from the way IRS does business today); dependence on an unproven business rules engine software product; and the critical, expensive, and lengthy business rules harvesting effort that has not yet been started. SEI offered several recommendations to address current CADE issues and reduce project risk in the future. Based on these assessments, IRS identified a total of 46 specific issues for resolution in the following six areas, and developed a BSM action plan comprising individual action plans to address each issue: Organization and Roles. Immediate steps are needed to clarify IRS/PRIME roles and responsibilities and clearly define decision- making authorities. Key Skills & Strengthening the Team. Strengthened skills and capabilities are needed in such key areas as project management and systems engineering. Technology-Architecture & Engineering. More focus is needed to improve current systems architecture integration. Technology-Software Development Productivity & Quality. Improvements in product quality and productivity are essential to strengthening software delivery performance. Acquisition. Contracting and procurement practices require major streamlining to improve overall contract management. CADE. Delivery of CADE release 1 will require aggressive focus and attention, and a business rules engine solution requires additional evaluation. These 46 issue action plans were assigned completion dates and an IRS or PRIME owner was assigned to take the lead in implementing each plan. IRS and PRIME each also assigned a senior-level executive to drive the execution of the issue action plans, identify and help mitigate implementation hindrances or roadblocks, and ensure successful completion of all planned actions. To assess the efficacy of the BSM action plan, MITRE was tasked with conducting an independent analysis and provided feedback to IRS on the effectiveness of the specific issue action plans to address the associated findings/recommendations and correct any problems found. IRS has reported making steady progress with implementing the BSM action plan. According to the IRS BSM program office, as of late January 2004, 27 of the 46 issue action plans have been completed. Examples of completed actions include (1) making business owners and program directors accountable for project success; (2) assigning teams to investigate and resolve problem areas on key projects such as CADE, the Integrated Financial System, and e-Services; (3) aligning critical engineering talent to the most critical projects; (4) increasing the frequency of CADE program reviews; and (5) issuing a firm fixed-price contracting policy. Significant further work remains to complete implementation of the remaining 19 open issue action tasks. Bain & Company--which conducted the independent review of PRIME--has been hired to facilitate the implementation of various issue action plans within the Organization and Roles challenge area, while IRS has also contracted with SEI to conduct further periodic reviews of the CADE project. Additionally, the IRS Oversight Board recently issued a report on its own independent analysis of the BSM program, which made several observations and recommendations that are consistent with those discussed here. IRS has conducted an analysis of this report to reconcile the board's recommendations with those that are currently being addressed in the BSM action plan. As a result, IRS plans to open two additional issues and action plans to address (1) rationalizing and streamlining oversight of the BSM program, and (2) determining and maintaining a manageable portfolio of projects. IRS expects to complete the majority of the BSM action plan by end of April of this year, and fully implement any remaining open actions by the end of the calendar year. Further, during 2003, the Treasury Inspector General for Tax Administration performed several reviews related to management of the BSM program and for specific BSM projects. These reviews identified several issues, including those related to compliance with the defined management and project development processes, full implementation of disciplined project testing processes and procedures, IRS's cost and schedule estimation process, and contract management. IRS management reaffirmed their commitment to fully implement key management and project development processes. IRS's multibillion-dollar BSM program is critical to agency's successful transformation of its manual, paper-intensive business operations and fulfilling its restructuring activities. The agency has made important progress in establishing long-overdue modernization management capabilities and in acquiring foundational system infrastructure and some applications that have benefited the agency and the public. However, our reviews, those of the Treasury inspector general, and the recently completed internal and independent assessments of the BSM program clearly demonstrate that significant challenges and serious risks remain. IRS acknowledges this and is acting to address them. To successfully address these challenges and risks and to modernize its systems, IRS needs to continue to strengthen BSM program management by continuing efforts to balance the scope and pace of the program with the agency's capacity to handle the workload, and institutionalize the management processes and controls necessary to resolve the deficiencies identified by the reviews and assessments. Commitment of appropriate resources and top management attention are critical to resolving the identified deficiencies. In addition, continuing oversight by the Congress, OMB, and others, as well as ongoing independent assessments of the program, can assist IRS in strengthening the BSM program. Meeting these challenges and improving performance are essential if IRS and the PRIME contractor are to successfully deliver the BSM program and ensure that BSM does not suffer the same fate as previous IRS modernization efforts. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other members of the subcommittee may have at this time. For information about this testimony, please contact me at (202) 512-3317 or by e-mail at [email protected]. Individuals making key contributions to this testimony include Bernard R. Anderson, Michael P. Fruitman, Timothy D. Hopkins, and Gregory C. Wilshusen. 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 Internal Revenue Service (IRS) has been grappling with modernizing its computer systems for many years. IRS's current program, commonly referred to as Business Systems Modernization (BSM), began in fiscal year 1999; about $1.4 billion has been reported spent on it to date. While progress has been made, the program continues to face significant challenges and risks. In recognition of these risks, IRS and a contractor recently completed several comprehensive assessments of BSM, including one of its Customer Account Data Engine (CADE) project, which is to modernize the agency's outdated data management system. At the request of the Subcommittee on Oversight, House Committee on Ways and Means, GAO's testimony will summarize (1) GAO's prior findings and recommendations, along with those of the recent assessments; and (2) actions IRS has taken or plans to take to address these issues. Prior GAO reviews have disclosed numerous modernization management control deficiencies that have contributed to reported cost overruns and schedule delays. Costs and completion dates for ongoing projects have grown from their initial estimates. Reasons for such delays include inadequate definition of systems requirements, increases in project scope, and underestimation of project complexity. These impair IRS's ability to make future systems investment decisions and delay delivery of benefits to taxpayers. GAO has made a series of recommendations focusing on stronger program management--and limiting modernization activities until such management practices were in place. IRS has made important progress in implementing management controls, establishing infrastructure, delivering certain business applications, and balancing the pace of the program with the agency's ability to manage it. Nevertheless, IRS needs to further strengthen BSM program management, including fully implementing modernization management controls in such areas as cost and schedule estimating. The recent BSM assessments identified many weaknesses, consistent with prior GAO findings, that contributed to the cost overruns and schedule delays, and offered recommendations to address them. IRS has responded by identifying 46 discrete issues to be resolved; according to the agency, 27 of these have been completed. Commitment of appropriate resources, top management attention, and continuing oversight by Congress and others are critical to the success of BSM.
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In 1993, in response to calls from local communities and professional associations representing them--such as the U.S. Conference of Mayors--to provide more and better coordinated federal support for brownfields, EPA began providing grants to select communities to conduct assessments of the potential contamination at brownfield sites. EPA got involved because lenders' and developers' fear that contamination would lead to long and costly cleanups was often one of the first barriers to redeveloping these sites. But communities wanted more help than EPA could provide with its assessment grants. Therefore, in July 1996, EPA created the Interagency Working Group on Brownfields, with staff from more than 20 federal agencies, and the Interagency Steering Committee, with senior management representatives from these same agencies. According to EPA, both groups were created to provide a forum for federal agencies to exchange information and develop a coordinated national strategy for brownfields that focused on both environmental and redevelopment issues. Subsequently, while developing this strategy, EPA asked the members of the Working Group to identify specific actions that the federal agencies would take to support brownfield redevelopment and the funding they would obligate for these activities for fiscal years 1997 and 1998. EPA collected this information from the agencies, which totaled more than 100 action items and plans to invest about $469 million--$304 million predominantly in grants and another $165 million in loan guarantees. On May 13, 1997, the administration publicly announced the planned financial assistance and more than 100 action items as part of its Brownfield National Partnership Action Agenda initiative, along with the goals of improving agencies' coordination of their brownfield activities and achieving specific economic benefits for communities. One of the major actions under the initiative is the brownfield Showcase Communities project. In fiscal year 1998, the Working Group selected 16 pilot communities from eligible applicants. The agencies intended for these communities to demonstrate to other communities how they can use federal support to successfully clean up and redevelop brownfields. According to EPA's Director of Outreach and Special Projects, the agencies hope to develop models of how 16 very different types of communities, such as those in rural, urban, and coastal areas, successfully worked with federal agencies to redevelop their unique brownfield properties. The 10 agencies in our review reported that they provided about $413 million --$272 million primarily through grants and $141 million in HUD loan guarantees in financial assistance for brownfield activities in fiscal years 1997 and 1998. EPA, HUD, and EDA within the Department of Commerce were responsible for $409 million, or 99 percent of this assistance. Table 1 below outlines the planned federal investment for brownfields as stated in the Partnership Agenda, and actual obligations and loan guarantees for fiscal years 1997 and 1998 that agencies reported went for brownfield-related activities. In making this dollar comparison, it is important to understand the basis of the planned assistance stated for the three primary agencies in the Partnership Agenda, illustrated in the middle column of the table above. About one-half of the $304 million planned assistance was funding that the agencies could actually commit to obligate on brownfields during the 2-year period. For example, EPA decided to obligate $125 million because it received this amount of new appropriations available for brownfields during this time frame. While HUD's planned financial assistance through grants as stated in the Partnership Agenda was for $155 million, agency brownfield managers clarified that the agency could only commit to spend $25 million because it received this amount of appropriations for its new Brownfield Economic Development Initiative (BEDI) program. Most of the remaining $130 million was an estimate of the amount of fiscal year 1997 grant funds that communities might choose to use for brownfields under the agency's Community Development Block Grant program. HUD could not commit to spend a specific amount of grant funds on brownfields because under this program, grant recipients have broad discretion in how they can use the funds. EDA brownfield managers explained that this was also the case for the $17 million presented as the agency's planned financial assistance in the Partnership. EDA could not commit to spend these funds on brownfields through its economic development grant program because the agency responds to locally identified economic development needs, which may or may not include brownfield redevelopment needs. As a result, EDA cannot estimate the amount of brownfield-related funding assistance that communities will request or the agency will award in any given fiscal year. In comparing these amounts in the Partnership Agenda to the amounts of actual brownfield obligations and loan guarantees the agencies achieved, as illustrated in the right-hand column of the table, we determined that agencies may have obligated more than they reported but not all of these obligations were a result of the Partnership initiative. HUD can document the amount of BEDI funds obligated for brownfields, since this program is dedicated to such activity. However, HUD does not separately track the amount of its Community Development Block Grant funds spent at brownfield sites. Consequently, we could not determine the exact amount of federal funds the Partnership agencies were using on brownfields. More specifically, for the Partnership Agenda, HUD estimated that grant recipients might use up to $100 million during fiscal year 1997 in Community Development Block Grant funds on brownfield-related activities. On the basis of some survey and anecdotal information from grant recipients, HUD brownfield managers estimated that recipients probably spent more than $100 million on brownfields through this program during that year. But the Department cannot demonstrate the extent to which communities used grant funds for brownfields because communities have wide discretion in using the funds and the Department does not track them by this category. EPA and EDA can track their brownfield obligations--EPA because it received its appropriations for brownfields separately and EDA because recipients identify whether they are using grant funds for brownfield-related activities in either their application or their status report on the use of the funds. While EDA can track that it awarded $114 million in grant funds during the 2 fiscal years to communities that used the funds for brownfield-related activities, compared to the $17 million in planned assistance for the agency in the Partnership Agenda, EDA does not attribute its actual brownfield obligations directly to the Partnership initiative. Rather, according to EDA managers, since the beginning of the program in 1965, the agency had been awarding grants for the revitalization and reuse of idle and abandoned industrial facilities, now called brownfields, as a core component of its mission to aid the nation's most economically distressed communities. For example, historically EDA had funded projects to bring about the reuse of closed military facilities; now the agency is counting these activities as brownfield projects. HUD anticipates an increase in the amount of funds going to brownfields in the future. Some communities were not certain if funds under HUD's Community Development Block Grant program could be used to address environmental contamination at certain brownfield properties. HUD's fiscal year 1998 appropriations provided that states and communities may use Community Development Block Grant funds for the cleanup and redevelopment of brownfields, and the agency's fiscal year 1999 appropriations extended this change to all future fiscal years. According to HUD officials, the agency will update its block grant regulations to add that addressing environmental contamination is an allowable activity under the program. HUD is also considering modifying one of the three primary national objectives under its Community Development Block Grant program--preventing or eliminating slums or blight --to clarify that since environmental contamination and economic disincentives contribute to blight, block grant funds can be used to address these concerns. HUD expects that this change will encourage the use of block grant funds for brownfields. EDA has added brownfield redevelopment as a category for which communities can receive priority consideration for grant funds. Under EDA's program, once an applicant meets the agency's basic grant criteria, if the applicant plans to use the funds on brownfields, the agency can give the applicant priority for a grant award. EPA, HUD, and EDA distributed their funds primarily through grants and loan guarantees to communities that used them for activities ranging from assessing a site to conducting some cleanup and on-site construction. In March 1998, we reported on EPA's use of brownfield funding. We reported that the agency obligated the majority of its fiscal year 1997 and 1998 funds for brownfields through (1) grants to state, local, and tribal governments to assess the nature and extent of contamination at these properties in order to promote their cleanup and redevelopment; (2) seed money to these governments to establish revolving loan funds that help to pay for actual cleanup activities; (3) grants to states to develop voluntary programs that provide incentives for developers to clean up and redevelop brownfields; and (4) grants and funding support for pertinent research, outreach to community groups, job training for performing hazardous waste cleanups, and other related activities. Over those same 2 fiscal years, HUD provided funds primarily through (1) the Brownfield Economic Development Initiative (BEDI) grant program, (2) its Section 108 loan guarantee program, (3) the Community Development Block Grant program, and (4) its programs to abate the risks of lead-based paint. HUD awarded its BEDI grants specifically to communities to use the grants for activities such as site cleanup or purchasing a brownfield property and selling it to a private party at a discount price in exchange for the property's redevelopment. HUD must make economic development grants, including the BEDI grants, in conjunction with loan guarantees for, among other things, the acquisition and rehabilitation of properties. Communities have used their Section 108 loan guarantees to pursue larger-scale redevelopment activities, including public facilities and physical development projects, such as acquiring a failed shopping center for rehabilitation. As for its Community Development Block Grant program, HUD conducted a recent survey of a small number of its grant recipients, 80 out of about 1,000 recipients, who voluntarily provided information on the use of their grants. On the basis of these data, HUD managers stated that a majority of these recipients are spending some portion of their funds on brownfield-related activities, such as cleaning up contaminated soil and groundwater and removing asbestos and lead from sites. During fiscal year 1998, HUD also awarded one community in Boston a grant under its lead-based paint program, which the community used to clean up lead-contaminated soil at approximately 56 parcels of brownfields that were then converted into housing units. In these same fiscal years, EDA provided funds for brownfield redevelopment through several of its grant programs. Communities used these funds for a variety of brownfield-related activities, including redevelopment planning; the development of inventories of abandoned, idle, and underutilized properties using geographic information systems; economic assessments of brownfield parcels; building renovation and repair, historical rehabilitation, demolition, and new construction; support for revolving loan funds for cleanup activities; and brownfield research studies. For example, one recipient used an EDA grant at a brownfield site to rehabilitate half of a large building in a former industrial complex. The environmental contamination had already been cleaned up prior to the recipients receiving the grant. Another recipient is using its grant to construct a Bioscience Park Center at a former Defense medical facility site that EDA classifies as a brownfield. EDA grant recipients have reported that their communities are only using up to about 10 percent of their funds on actual cleanup. In May 1997, the administration announced that through its Brownfield National Partnership Action Agenda, it intended to bring together the resources of more than 20 federal agencies to better coordinate federal support so as to empower communities to redevelop their brownfields. The administration reported that the agencies would provide a total of $469 million in financial assistance by implementing more than 100 brownfield action items and that this assistance was expected to result in the (1) leveraging of additional private investments in brownfields, (2) creation of new jobs, and (3) protection of greenfields. The 10 federal agencies in our review have improved both their internal and external coordination of brownfield activities and have accomplished most of their respective Partnership actions, thereby increasing the federal government's role in brownfield redevelopment. However, the administration cannot tell if the initiative is meeting the economic goals because most agencies are not tracking these results or collecting data specific to brownfields that would allow them to do so. Officials of most of the 10 federal agencies in our review stated that they are better coordinating their actions to address brownfields, both within their own agency as well as between agencies. Individual communities and the professional associations that represent them also agreed that federal coordination had improved, although they noted that they still face the administrative burden of managing multiple federal grants and that some states and counties were not included in these efforts at improved coordination. More than half of these agencies reported that, to participate in the Partnership, they established informal internal working groups to better identify what programs and funding within their own agencies could be used to address brownfields. Moreover, agencies' involvement in the Partnership, such as helping to select the showcase communities, has increased their awareness of other agencies' resources available for brownfields. Consequently, agencies can better direct communities to the right sources, depending on the type of assistance the communities need. Some agencies have also signed a memorandum of understanding in which they established joint policies and procedures for conducting brownfield projects. For example, EPA and the National Oceanic and Atmospheric Administration signed such a memorandum, agreeing to, among other things, provide to coastal communities information on brownfields and training on conducting assessment, cleanup, and redevelopment activities. These efforts, according to the agency brownfield managers, have resulted in a more efficient federal approach to brownfields. In another example, the General Services Administration (GSA) helped Denver to redevelop a major brownfield property that, according to the agency's brownfield managers, otherwise probably would have sat in the agency's inventory. The city wanted to turn the federal property, located in a depressed area, into an industrial park that would provide jobs and commerce. The city had already attracted grants from five different federal agencies for the project but could not get the money unless GSA transferred the property. Once GSA became aware of the other agencies' support through its involvement in the Partnership and community efforts, the agency was able to expeditiously transfer the property. Similarly, HUD brownfield managers reported that their coordination with other agencies has made them more sensitive to the agencies' requirements. For example, these managers explained that HUD invited two EPA staff to participate on its panel to select BEDI grant recipients, and the staff provided valuable insights about how the grant recipients might manage contamination issues at their sites. In another instance, brownfield managers for the U.S. Corps of Engineers claimed that agencies were saving a significant amount of money by better coordinating and not duplicating the support they could bring to the showcase communities. Furthermore, several agencies have revised or expect to revise a number of federal regulations as a result of the Partnership. One of the more recent and significant actions that could promote more redevelopment, according to the EPA's brownfield director, was a change in the lending guidelines for Federal Home Loan Banks that encourages lending institutions to provide financial assistance to certain brownfield projects. Perhaps the most evident example of coordination is the Showcase Communities project. According to the city development managers from two of the longest-running showcase communities, in Salt Lake City, Utah, and Dallas, Texas, they are now better aware of the federal resources available to support brownfield redevelopment and how to access them and are getting more technical and financial help from agencies. They also highlighted that federal agencies are now more willing to participate in joint efforts, such as forums and periodic teleconferences, to help the communities overcome any hurdles. The managers acknowledge that a major reason for this success is that EPA loaned a staff person to each city, under the Intergovernmental Personnel Act, for 2 years. For each city, the managers report, this staff person has been invaluable in identifying available federal resources, such as grant programs; helping the city to apply to each relevant agency for these funds; and providing technical assistance, such as information on the extent of cleanup required at brownfield sites. Staff who are managing brownfield issues for four professional associations representing cities, states, and other community stakeholders indicated that coordination among federal agencies had improved, especially in the 16 showcase communities. While federal coordination has increased, local community officials stated that little has been done to reduce the burdensome administrative processes involved in obtaining federal financial assistance. In fact, according to the city manager in Salt Lake City, the rules and regulations governing one HUD program were so onerous and time-consuming that the city chose not to pursue the funding. The HUD brownfield managers acknowledged that federal requirements to ensure grant and loan guarantee recipients are financially accountable for federal funds can be burdensome. The local managers further pointed out that cities not participating in the showcase pilots may not be able to afford to provide the type of staff resource that they had obtained from EPA to assist them in applying for and managing grants from the various agencies. Two of the associations representing state cleanup agencies and county governments also noted that some states and counties are concerned that the federal agencies are bypassing them by meeting with and providing funding directly to municipalities. The EPA brownfield manager explained that the agency had met with state and local government officials when developing the Partnership Agenda and that better coordination with states was beginning to happen at the regional level in some areas. While the manager noted that EPA has been awarding some of its brownfield assessment grants to counties, the Partnership was late in inviting counties to participate. Officials of the 10 federal agencies in our review stated that their agencies had accomplished 63 of their 71 nonfinancial action items in the agenda, or about 89 percent. In our meetings with them, the officials reported that they conducted most of these activities within their ongoing programs and had not established a formal system to separately track their progress in accomplishing the action items in the Partnership Agenda. In general, the action items included implementing changes to existing policies that had presented barriers to brownfield redevelopment, providing technical support to communities, providing information to agencies and communities on federal avenues to support brownfield redevelopment, and conducting brownfield research. For example, HUD issued a joint study with EPA on the redevelopment of brownfields, specifically spotlighting the effects of environmental hazards and regulation on urban redevelopment. The Department of Transportation (DOT) issued a new policy repealing its past policy of avoiding all contaminated properties when undertaking new transportation projects. The new policy encourages state departments of transportation, local planning organizations, and local communities to address their brownfield redevelopment in their transportation plans and projects. Agencies had not yet achieved eight of the action items. Officials reported that agencies did not complete two items and did not realize they had made the commitments for two other items. For example, the Partnership Agenda stated that HUD would fund a job training demonstration project in a low-income community, but brownfield managers stated that they did not meet the commitment because they were unaware that it had been made. Agencies dropped the remaining four action items because they were not feasible or the agencies lacked adequate funding. For example, Agriculture did not complete its studies of the economic impacts of revitalizing brownfields because it did not receive funding for this activity. Also, EPA did not issue guidance to its regions on the process to enter into memorandums of agreement with states regarding their voluntary cleanup programs because of negative comments regarding the guidance from key stakeholders, including the states. EPA recently hired a contractor to take an accounting of the more than 100 action items in the Partnership Agenda for all 20 agencies involved. EPA is asking the agencies to report which action items they achieved, which they did not achieve, why they did not achieve them, how the actions enhanced support for redeveloping brownfields, and what specific examples of this they could provide. EPA expects a final report this summer. The Partnership's expected economic outcomes of new jobs, more private investment, and protected greenfields were estimates of potential long-term benefits, generated from economic models, that might result from the federal support for redeveloping brownfields. They were not goals that the agencies could measure and achieve within the 2-year period of the Partnership initiative. For example, HUD brownfield managers noted that it would take 3 to 5 years after construction is complete at a site before all anticipated jobs are created. Similarly, EDA brownfield managers stated that it may take up to 10 years beyond the completion of a project funded under its grant programs for a community to realize the full economic benefits from the project. While EPA brownfield managers stated that the strategy of the Partnership Agenda was to achieve these long-term outcomes through the action items, there was no documented strategy that showed how all of these individual action items, such as distributing information or providing technical support, were linked in a way that would result in these economic benefits. Also, most federal agencies generally do not have the comprehensive data necessary to determine the extent to which the economic benefits will be achieved, according to the EPA managers. For example, communities applying to EPA for grants to assess the contamination at a site may include an estimate of the number of jobs they expect to generate if they subsequently clean up and redevelop it or the amount of private sector funds they will leverage, and EPA has been compiling these voluntary estimates; however, EPA does not require recipients to submit such data and cannot verify the accuracy of these estimates. HUD will be able to track the number of jobs created at those brownfield sites addressed through its BEDI grants. HUD also tracks the number of jobs created under its Community Development Block Grant program. Recipients provide these data in their annual reports to HUD on their use of the grant funds. HUD can determine which of these jobs were created in communities with low and moderate income but cannot determine which of these jobs were specifically created at brownfields or as a result of the Partnership initiative. EDA grant recipients, beginning with fiscal year 1997 grants, are required to report on the number of permanent jobs created or retained and the private sector dollars invested as a result of brownfield projects that EDA funded. The EPA brownfield managers said that they planned to ask agencies to provide whatever data they have available on the economic benefits achieved through their grant programs and compile this information as an indicator of the success of the Partnership initiative. We provided copies of a draft of this report to EPA, HUD, and EDA for review and comment, since they are the primary agencies involved in federal brownfield efforts. We also provided portions of the draft that pertained to the remaining Partnership agencies in our review to them for their comment. The agencies generally agreed that the report accurately describes their brownfield activities. Representatives from EPA, including the Director of the Outreach and Special Projects Staff, the organizational unit that manages all of EPA's brownfield activities, clarified the goals of the Partnership Agenda and the extent to which agencies can track economic benefits, specific to brownfields, that were generated as a result of the Partnership. We revised the report to more clearly lay out the goals of the Partnership and clarified that the three agencies' ability to track jobs and other economic benefits generated specifically from their brownfield funding varies. HUD brownfield managers, including the Director of the Community Development Block Grant program, the primary program HUD uses to fund brownfield-related activities, pointed out that the agency was not expected to be able to report an exact amount of block grant funds obligated specifically for brownfields because this program does not have such a separate tracking category for this purpose; we revised the report to include this point. In addition, the agency clarified the extent to which it tracks the number of jobs created as a result of its grant programs. We revised the report to explain that HUD can track jobs created at brownfield redevelopment sites under its BEDI grant program but not under its block grant program. Finally, EDA brownfield managers, including the Assistant Secretary for Economic Development, provided a more detailed description of the types of brownfield-related activities the agency funds and reported that communities may not fully realize the economic benefits from funded activities for up to 10 years after construction of a project is complete. We included this expanded description of brownfield activities in the report and also revised the report to clarify that economic benefits from EDA grants would accrue over the long term. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 14 days from the date of this letter. At that time, we will send copies of this report to Senator Max Baucus, Senator Christopher S. Bond, Senator John H. Chafee, Senator Frank R. Lautenberg, Senator Barbara A. Mikulski, Senator Robert C. Smith, Representative Sherwood Boehlert, Representative Robert Borski, Representative John D. Dingell, Representative Alan B. Mollohan, Representative James L. Oberstar, Representative Michael G. Oxley, Representative Bud Shuster, Representative Edolphus Towns, and Representative James T. Walsh in their capacities as Chair or Ranking Minority Member of Senate and House Committees and Subcommittees. We will also send copies of this report to the Honorable William H. Daley, Secretary of Commerce; the Honorable Carole Browner, Administrator of EPA; the Honorable Andrew Cuomo, Secretary of HUD; and the Honorable Jacob Lew, Director of the Office of Management and Budget. Copies will also be made available to others on request. If you would like additional information on this report, please call me at (202) 512-6111. To respond to our first and second objectives--to compare federal agencies' planned financial investment for brownfields, as stated in the Partnership Agenda, to their actual obligations for brownfields in fiscal years 1997 and 1998, and to describe the purposes of these obligations--we used a structured data collection instrument to request and then review the fiscal year 1997 and 1998 brownfield-related obligations and activities of the following agencies: (1) the departments of Energy, Health and Human Services, Housing and Urban Development, and Transportation, (2) the Economic Development, the National Oceanic and Atmospheric, and the General Services administrations, and (3) the Environmental Protection Agency. The stated financial commitments pledged by the administration to the Partnership for these eight agencies made up the total $300 million federal investment as well as $165 million in loan guarantees. We also reviewed the fiscal years 1997 and 1998 obligations for the Department of Agriculture and the U.S. Army Corps of Engineers. While these two agencies did not have an amount of planned financial investment included in the Partnership Agenda, they did have a number of nonfinancial action items to accomplish. We determined that in implementing these actions, both agencies could have obligated funds for brownfields, so we included them in our review. We interviewed those managers responsible for brownfield-related activities in these 10 agencies to confirm that they agreed with the proposed financial assistance as stated in the Partnership Agenda for them. We discussed the extent to which the agencies achieved the planned spending, and we obtained corroborating documentation where available. We also discussed with them the primary reasons why they were not able to obligate funds equal to the planned amounts in the agenda. To respond to our third objective--to determine the extent to which agencies met the Partnership's goals and objectives--we used a structured survey to obtain the brownfield managers' perspectives on these issues. We confirmed with the managers their agency's interpretation of the Partnership's goals and objectives as stated in the May 1997 announcement and determined the extent to which the agencies adopted these or other goals. We next asked them to demonstrate the extent to which they met these goals and to provide documentation where possible. Furthermore, we discussed the primary reasons for any unmet goals. We also selected 2 of the 16 brownfield showcase communities to review, ones in Salt Lake City, Utah, and Dallas, Texas. We chose these two because they were among the first communities selected for this pilot and therefore had the longest experience with it. We used a structured survey to obtain community officials' views on the benefits and limitations of the federal agencies' approach to providing them brownfield assistance under the pilot and on any ways in which the federal government could improve this support. Finally, we also met with representatives of several professional associations that have responsibility for brownfield issues. We selected the following associations because they represent community interests and have been most active in the area of brownfields: the U.S. Conference of Mayors, the National Association of Counties, the Association of State and Territorial Solid Waste Management Officials, and the National Association of Local Government Environmental Professionals. We discussed with them their understanding of the Partnership initiative and overall federal involvement in brownfields, the benefits and limitations they observed from this involvement, and ways in which the federal government could improve its support for redeveloping brownfields. We also obtained and reviewed the results of any studies they had done on the issue of brownfields. We conducted our work from June 1998 through March 1999 in accordance with generally accepted government auditing standards. Eileen Larence, Assistant Director DeAndrea Michelle Leach, Evaluator-in-Charge John Johnson, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO provided information on the status of 10 federal agencies' efforts to implement the Brownfield National Partnership Action Agenda, focusing on: (1) comparing federal agencies' planned financial assistance to brownfields, which are abandoned, idle, or underused industrial facilities, to their actual spending for brownfields in fiscal years (FY) 1997 and 1998; (2) describing the purposes of these obligations; and (3) determining the extent to which agencies met the Partnership's goals and objectives. GAO noted that: (1) during FY 1997 and FY 1998, the 10 federal agencies GAO examined reported that they provided about $413 million in assistance to brownfields, as compared to the Partnership's planned financial assistance of $469 million; (2) brownfield managers at the Department of Housing and Urban Development (HUD) also told GAO that the agency may have provided more financial assistance for brownfields than it reported because it provided most of its financial assistance through its Community Development Block Grant program; (3) about one-half of the total assistance that agencies provided for grant programs was from new funds made available for brownfields; (4) the remainder represented funds that the agencies had traditionally been providing to low-income and depressed communities under their community and economic development grant programs, not new or reprogrammed funds for brownfields; (5) HUD, the Environmental Protection Agency, and the Economic Development Administration were responsible for $409 million, or 99 percent of the assistance provided; (6) the three agencies used most of the funds to make grants and loan guarantees to communities; (7) the 10 federal agencies in GAO's review reported achieving better coordination and accomplishing their brownfield action items but do not have comprehensive data to determine the extent to which this will result in the expected economic benefits of jobs and private investment in brownfields; (8) the agencies reported that they increased their ongoing coordination as a result of the Partnership initiative, most noticeably through their showcase community projects; (9) the agencies also completed about 89 percent of their action items in the Partnership Agenda, such as revising policies that were barriers to brownfield redevelopment and providing communities more information about available assistance, predominantly as part of their ongoing programs; and (10) however, the extent to which the Partnership initiative is meeting the economic goals--creating new jobs, leveraging additional private investments in brownfields, and preserving greenfields--cannot be determined because most agencies are not tracking all of these outcomes or collecting data specific to brownfields that would allow them to do so.
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To help provide a safe operating environment for airlines, the Code of Federal Regulations (C.F.R.) title 14, part 107 requires that U.S. airports control access to secured areas. Such controls are intended to ensure that only authorized persons have access to aircraft, the airfield, and certain airport facilities. Other security measures include requiring that airport and airline employees display identification badges and that airlines screen persons and carry-on baggage for weapons and explosives. In January 1989, FAA made 14 C.F.R. part 107 more stringent by mandating that access controls to the secured areas of certain airports meet four broad requirements. Under the amendment--14 C.F.R. 107.14--access control systems must (1) ensure that only authorized persons gain access to secured areas, (2) immediately deny access to persons whose authorization is revoked, (3) differentiate between persons with unlimited access to the secured area and persons with only partial access, and (4) be capable of limiting access by time and date. According to FAA, these requirements are intended to prevent individuals, such as former airline employees, from using forged, stolen, or noncurrent identification or their familiarity with airport procedures to gain unauthorized access to secured areas. All U.S. airports where airlines provide scheduled passenger service using aircraft with more than 60 seats must meet the requirements of 14 C.F.R. 107.14. Beginning in August 1989, each of these airports had to develop an access control system plan for FAA field security officials to review and approve. Following approval, FAA gives airports up to 2-1/2 years to comply with the regulation, depending on the number of persons screened annually or as designated by FAA on the basis of its security assessment. FAA expects airports to maintain and modernize their systems to keep them in regulatory compliance. As of August 1994, 258 airports were subject to FAA's access control requirements. Appendix I lists these airports. Access control systems are eligible for AIP funds. FAA administers the AIP and provides funds for airport planning and development projects, including those enhancing capacity, safety, and security. FAA's AIP Handbook (Order 5100.38A) provides policies, procedures, and guidance for making project funding decisions. According to the handbook's section on safety, security, and support equipment (section 7), only those system components and facilities necessary to meet the requirements of 14 C.F.R. 107.14 are eligible for AIP funds. The airports themselves must fund any additional equipment or software capability that exceeds these requirements. FAA airport programming officials approve AIP funding requests. Airports have installed various systems--mostly computer-controlled--to meet FAA's four access control requirements. With FAA's approval, airports have taken the following approaches: Airports have placed the equipment for their access control systems in different locations. For example, some airports screen persons at checkpoints, while other airports have installed controls on doors beyond such checkpoints. Also, some airports have installed controls on both sides of doors leading into and out of secured areas. Airports have installed different types of equipment. For example, to secure doors and gates, several airports use magnetic stripe card readers while others use proximity card readers. One airport installed a reader that scans an individual's hand to determine the person's identity. Also, we visited one airport that has an "electronic fence" to segregate the commercial and general aviation operations areas; another has a guard gate and magnetic stripe card reader to separate passenger and cargo operations areas. Additionally, some airports have mounted closed-circuit television cameras at doors and gates, while other airports have chosen not to install such technology. According to FAA's data, most of the 258 regulated airports have now completed installing their systems, but they will need to modernize these systems in the future. Modernization is necessary when equipment wears out, additional equipment is needed, or equipment or software no longer has the capacity to meet security-related demands. For example, in September 1994, FAA provided one airport that had an approved system with over $3 million in AIP funding to purchase closed-circuit television cameras, help construct a communications center, and make other system modifications to meet additional security needs. The costs for access control systems are over three times greater than FAA expected. FAA initially estimated that the costs to install, operate, maintain, and modernize systems at all regulated airports would total $211 millionfrom 1989 through 1998. However, updated data provided by FAA show that actual and projected costs for the same period totaled about $654 million. This amount includes $327 million in AIP funds, or 50 percent of total costs over the 10-year period. As of August 1994, 177 (69 percent) of the 258 regulated airports received AIP funding to help pay for their access control systems. Furthermore, on the basis of the updated information, FAA projects that costs for systems in 1999 through 2003 will total an additional $219 million, half of which would be federally funded. Appendix II shows actual and projected access control costs in 1989 through 2003, including AIP funding. According to FAA officials, FAA's initial cost projection was low primarily because more access points were secured and more sophisticated and expensive equipment was installed than the agency's analysis considered. For example, FAA's analysis assumed that the largest airports would secure 128 access points on average. However, we found that these airports had initially secured about 390 points on average. Appendix III compares FAA's initial cost figures with the agency's updated actual and projected costs of access control systems. Over the next several years, many access control systems will need to be modernized. FAA can help ensure that modernization is implemented in a cost-effective manner by providing detailed guidance and facilitating the development of standards explaining how to meet the requirements of 14 C.F.R. 107.14. Without detailed guidance, many airports initially spent funds to secure access points that FAA later determined did not need to be secured to meet the agency's requirements. Also, without standards to guide the design of systems, some airports purchased systems that did not meet FAA's requirements. Additionally, without guidance and standards to serve as criteria, it was difficult for FAA to ensure that AIP funds were used only for the system components needed to meet the agency's access control requirements as directed by its AIP funding policy. FAA and the industry have several initiatives under way that could address these deficiencies and help ensure that systems are cost-effective. FAA has not developed detailed guidance and standards to explain how systems could meet its four access control requirements in a cost-effective manner. Detailed guidance could help airports determine where equipment should be located. Standards could explain what functions equipment and software should perform and how quickly and reliably these functions should be done. For example, one of FAA's four access control requirements is that systems grant secured-area access only to authorized persons. Detailed guidance for computer-controlled access control systems could include the following: Additional equipment beyond a card reader, such as lights that flash when the door is not secured, should be used only if the access point is in a low-traffic area. Closed-circuit television cameras should be used only at access points where an analysis shows that it is less expensive to have the camera than to have security personnel respond to an alarm. Standards for computer-controlled access control systems could include the period of time that a secured door or gate can remain open before security personnel are notified, the period of time that can elapse before a terminated employee's access code is invalidated, the percentage of time that the system is expected to be operable, and the frequency at which the system can misread a card. Although developing guidance and standards for access control systems is a complex undertaking, FAA has provided airports and airlines with guidance and standards explaining how to meet other agency requirements that are similarly complex. For example, FAA has planning and design guidance explaining how terminals can be configured to accommodate the expected flow of passengers. The guidance recognizes that each airport has its own combination of individual characteristics that must be considered. FAA's standards for equipment include those to design, construct, and test lift devices for mobility-impaired airline passengers and vehicles for aircraft rescue and fire fighting. Such standards do not specify what equipment airports should use, but rather how a vendor's equipment should perform to meet FAA's requirements. For software, FAA has developed standards for the software used in the Traffic Alert and Collision Avoidance System that it requires on most commercial passenger aircraft. FAA requires that airports use its guidance and standards in order to receive AIP funds. In some cases, FAA certifies that equipment and software from certain manufacturers meet its standards, as it has done for the equipment used to screen persons and the Traffic Alert and Collision Avoidance System. However, similar standards and certifications do not exist for access control systems. When FAA issued 14 C.F.R. 107.14 in January 1989, the agency did not conduct tests that could have provided the necessary knowledge to establish detailed guidance and standards for computer-controlled systems. Although airports and airlines suggested that FAA conduct tests at selected airports, the agency determined that nationwide implementation of the new requirements should proceed immediately. According to FAA officials, the Office of the Secretary of Transportation attached a very high priority to implementing improved airport access controls. As a result, FAA decided not to delay implementing the new access control requirements by testing and evaluating systems. According to security experts and airport and airline representatives,detailed guidance and standards would help airports know which systems satisfy FAA's access control requirements in a cost-effective manner. Without detailed guidance and standards, it is difficult to determine if the many different systems installed at a wide range of costs are cost-effective. A November 1993 survey by the Airports Council International-North America of 63 airports (24 percent of all regulated airports) found that virtually no two have systems using the same equipment and software.Also, a November 1993 survey by the Airport Consultants Council of 14 airports found that the installation cost per secured access control point ranged from $6,250 to almost $55,000; the average cost was over $30,000. Without detailed guidance, many airports installed access controls that FAA had approved but later had determined were not needed to meet its requirements. In April 1992, citing concerns about escalating costs, FAA clarified how airports could configure systems. FAA allowed airports that had installed systems to reduce the number of controlled access points if the reduction did not compromise security. According to FAA data, over 120 airports have reduced their number of controlled access points. For example, one airport reduced its total number of controlled access points by 26 percent (106 points) while still meeting FAA's requirements. Another airport now meets FAA's requirements with screening checkpoints at concourse entrances, although its initial system included both the checkpoints and card readers installed on both sides of 114 doors located beyond the checkpoints. FAA's Director of Civil Aviation Security Policy and Planning acknowledges that the agency must take a more proactive approach to ensure that airports meet access control requirements in a cost-effective manner by reducing the number of controlled access points where feasible without decreasing security. Similarly, without standards on which to base system design, airports have incurred higher costs for systems that are based on proprietary software and a "closed architecture." Many airports contracted with firms to install, maintain, and modify their systems using proprietary software and a closed architecture. In such cases, only the vendor providing the system is familiar enough with the system to effectively maintain or make changes to it. According to security experts, the use of proprietary software and a closed architecture can increase a system's lifecycle costs by as much as 100 percent, primarily because of higher maintenance and modification costs. These experts told us that appropriate standards could have provided for an access control system design based on an open architecture. An open architecture would have allowed different vendors to compete for system maintenance, thus decreasing costs. Also, according to security experts, standards would have reduced total system costs by allowing for economies of scale and easier incorporation of new technologies. Furthermore, without standards on which to base system design, some airports purchased systems that did not meet FAA's requirements. When FAA issued 14 C.F.R. 107.14, airports looked to firms that had developed and installed access control systems at locations such as military facilities, prisons, hospitals, office buildings, and homes. According to security experts, in many cases it was difficult to transfer the security technology and operational knowledge used for such systems to the airport environment. The November 1993 survey by the Airport Consultants Council found that 21 major airports incurred costs to replace or significantly modify systems that did not operate adequately to meet FAA's requirements. For example, one such airport had to replace its inadequate system, including card readers, at a cost of over $1.5 million. According to security experts, well-defined standards could have guided vendors in developing systems and provided airports with greater assurance that the systems would meet FAA's access control requirements. Also, standards could have provided a basis for FAA to certify a vendor's system. Finally, detailed guidance and standards could have provided criteria for FAA to use in evaluating airports' AIP funding requests for access control systems. Generally, FAA airport programming officials worked with FAA security officials to determine if AIP funding would be used only for the system components needed to meet FAA's requirements as directed by the agency's AIP Handbook. However, they both lacked well-defined criteria against which proposed access control systems could be compared and evaluated. This problem continues as airports request AIP funds to help modernize their systems. For example, one airport with an approved system requested $1.2 million in AIP funds to secure additional doors. An FAA regional Special Agent for security told us that the lack of criteria has caused her to be unsure how to determine if this funding request should be approved. In January 1994, FAA requested that the public identify up to three regulations that should be amended or eliminated to reduce undue regulatory burdens. Both airports and airlines identified 14 C.F.R. 107.14 as one of the most costly and burdensome regulations imposed on them and stated that FAA should reassess how to control access in a more cost-effective manner without decreasing security. FAA's December 1994 response cites ongoing efforts to revise its security regulations and work with the industry to set standards for access control systems. FAA and the industry have three initiatives under way for considering changes to access control that could help ensure that systems are cost-effective. First, FAA is working with the industry to revise airport and airline regulations, including 14 C.F.R. 107.14. Specifically, FAA is reviewing its four access control requirements to determine how they help meet security needs as part of an overall security strategy. FAA plans to issue a Notice of Proposed Rulemaking on any revisions to its security regulations by mid-1995. Second, through the Aviation Security Advisory Committee, FAA is working with the industry to consider the feasibility of implementing a system that would allow transient employees, such as pilots and flight attendants, to use a single card to gain access at all major airports--a universal access system. Research on and testing of a universal access system is one method to help develop standards for access control technology. The Congress has directed that $2 million of FAA's fiscal year 1994 appropriation be used for the initial costs to develop and implement a universal access system. FAA and the industry are now working to evaluate how such a system could best be implemented. Tests involving three major airlines and two high-security airports are scheduled to begin in March 1995. Third, FAA is facilitating an ongoing effort with the industry to develop standards for systems that would comply with the requirements of 14 C.F.R. 107.14 and meet the needs of all regulated airports. As of December 1994, this effort includes developing standards for how equipment and software should function to meet requirements. FAA and the industry also plan to (1) incorporate knowledge gained from testing the universal access system, (2) identify near-term approaches to make systems easier to maintain and equipment and software easier to modify, and (3) promote modernizing existing systems to the new standards. This effort is scheduled to be completed by October 1995. Airport and airline security is of paramount importance. To this end, FAA and the industry plan to spend millions of dollars to modernize access control systems as part of an overall security strategy. At this time, however, FAA cannot ensure that these modernization efforts will result in the best use of limited federal and industry funds. FAA and the industry have initiatives under way that provide a basis for helping to ensure that access control systems are cost-effective. Specifically, following 5 years of experience with installing and using systems, both FAA and the industry are in a good position to complete their current effort to review overall aviation security needs as they relate to access control requirements and to change the requirements if necessary. As a next step, FAA and the industry can complete their ongoing work to develop and implement standards explaining how equipment and software should function to meet access control requirements. In addition to ongoing initiatives, FAA can help ensure that systems are cost-effective by developing and implementing detailed guidelines explaining where system equipment should be placed. FAA officials can use the detailed guidance and standards as criteria to evaluate AIP funding requests and help ensure that these funds are used only for the system components needed to meet access control requirements. To help ensure that systems are cost-effective, we recommend that the Secretary of Transportation direct the Administrator, FAA, to develop and implement detailed guidance based on the agency's access control requirements that explains where system equipment should be located. FAA should incorporate these guidelines and the standards being developed into its review process for Airport Improvement Program funding requests. We discussed our findings and recommendations with FAA's Assistant Administrator for Civil Aviation Security; Director of Civil Aviation Security Policy and Planning; Director of Civil Aviation Security Operations; Manager, Programming Branch, Airports Financial Assistance Division; and other Department of Transportation officials. These officials provided us with clarifying information, and we revised the text as necessary. FAA officials were concerned that our statement that systems cost more than FAA initially had anticipated implies that the systems and the components used in them should have been less costly. We explained that our purpose is to present factual information on the different systems airports installed and that without detailed guidance and standards, it is difficult to determine if systems should have been less costly. FAA officials also stated their concern that achieving cost-effective systems means using the least expensive equipment. We stated that this is not our position and that systems may be cost-effective using equipment that is more expensive in the short term but lasts longer and performs better, resulting in less cost over time. FAA officials also expressed concern that using standards to assist in making AIP funding decisions would limit the agency's ability to accommodate security needs at individual airports. In our view, the standards would provide a baseline from which to begin evaluating funding requests and would not prohibit FAA from taking into account the access control needs of individual airports. Furthermore, FAA and the industry plan to develop standards that will accommodate the needs of all airports subject to access control requirements. Therefore, we believe that standards could allow for airport-by-airport decisions while still providing a tool to help ensure that systems are cost-effective. Finally, FAA officials noted that the appropriate use of access control systems by airport and airline employees is a critical factor in ensuring that such systems are effective. We concur with this position. We performed our review between October 1993 and January 1995 in accordance with generally accepted government auditing standards. All dollar amounts in this report have been adjusted to constant 1993 dollars. Additional details on our scope and methodology are contained in appendix IV. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days after the date of this letter. At that time, we will send copies of this report to appropriate congressional committees; the Secretary of Transportation; the Administrator, FAA; the Director, Office of Management and Budget; and other interested parties. We will make copies available to others on request. This report was prepared under the direction of Allen Li, Associate Director, who may be reached at (202) 512-3600. Other major contributors are listed in appendix V. To address our objectives, we performed work at FAA headquarters in Washington, D.C. We also met with officials at FAA's Central Region in Kansas City, Missouri; its Northwest Mountain Region in Seattle, Washington; Southern Region in Atlanta, Georgia; and Western-Pacific Region in Los Angeles and San Francisco, California. We visited 17 airports of varying size throughout the country. We interviewed executives and former executives of aviation industry associations, including those representing the interests of airports, airlines, and pilots. We attended a major conference in Nashville, Tennessee, at which we communicated our understanding of access control issues and sought the knowledge of airport managers. We attended meetings of the Aviation Security Advisory Committee; the Committee's Universal Access System subgroup; and RTCA, Incorporated Special Committee 183. We conferred privately with these groups' members, which included senior FAA officials, aviation industry representatives, and system experts. At our request, FAA surveyed all 258 regulated airports to gather detailed data on the costs that airports and airlines have incurred to date and on costs that they anticipate incurring through the year 2003 for access control systems. We worked closely with FAA during all phases of its survey to understand the validity of the information. Finally, we reviewed the agency's regulations, policies, and procedures governing access control systems. Randall B. Williamson, Assistant Director Lisa C. Dobson Dana E. Greenberg 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 provided information on the Federal Aviation Administration's (FAA) access control systems, focusing on the: (1) cost of FAA access control systems; and (2) actions FAA could take to ensure that access control systems are cost-effective in the future. GAO found that: (1) FAA greatly underestimated the costs of its access control systems, due to the installation of more expensive equipment; (2) in many airports, FAA approved the installation of equipment in areas that did not need to be secured; (3) 21 major airports had to replace or significantly modify access control systems that did not meet FAA requirements; (4) FAA officials have been unable to ensure that Airport Improvement Program funds have been used only for those system components necessary to meet FAA access control requirements; and (5) FAA could help ensure that access control systems are cost-effective by providing detailed guidance on how systems should function to meet access control requirements.
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One of DOD's guiding principles for military compensation is that servicemembers, in both the reserve and active components, be treated fairly. Military compensation for reservists is affected by the type of military duty performed. In peacetime--when a reservist is training or performing military duty not related to a contingency operation--certain thresholds are imposed at particular points in service before a reservist is eligible to receive the same compensation as a member of the active component. For example, a reservist is not entitled to a housing allowance when on inactive duty training (weekend drills). If a reservist is on active duty orders that specify a period of 140 days or more, then he or she becomes entitled to the full basic housing allowance. For contingency operations, these thresholds do not apply. Thus, reservists activated for Operation Iraqi Freedom and other contingencies are eligible to receive the same compensation as active component personnel. Basic military compensation, in constant dollars, remained fairly steady during the 1990s but has increased in recent years. As a result, reservists--enlisted personnel and officers--activated today are earning more in the military than they did just a few years ago, as shown in figure 1. For example, an enlisted member in pay grade E-4 who is married with no other dependents (family size 2) earned $3,156 per month in basic military compensation in fiscal year 2003, compared with $2,656 per month in fiscal year 1999, or a 19 percent increase. These figures are calculated in constant 2003 dollars to account for the effects of inflation. In addition to increases in basic military compensation, other pay policies and protections may help to mitigate reservists' financial hardship during deployment. For example: By statute, debt interest rates are capped at 6 percent annually for debts incurred prior to activation. The Servicemembers Civil Relief Act, passed in December 2003, enhanced certain other protections. For example, the act prohibits a landlord, except by court order, from evicting a servicemember or the dependents of a servicemember, during a period of military service of the servicemember, from a residence for which the monthly rent does not exceed $2,400. The act increased the monthly rental limit from $1,200 and required the rental limit to be adjusted annually based on changes to a national housing consumer price index. Some or all of the income that servicemembers earn while serving in combat zones is tax-free. For certain contingencies, including Operation Iraqi Freedom, DOD authorizes reservists to receive both a housing allowance and per diem for their entire period of activation, up to 2 years. Emergency loans are available through the Small Business Administration to help small businesses meet necessary operating expenses and debt payments. An issue of concern that is closely tied with military compensation is income loss experienced by many reservists activated for a military operation. In a recent report, we evaluated information on income change. We found that DOD lacked sufficient information on the magnitude, the causes, and the effects of income change to determine the need for compensation programs targeting reservists who meet three criteria: (1) fill critical wartime specialties, (2) experience high degrees of income loss when on extended periods of active duty, and (3) demonstrate that income loss is a significant factor in their retention decisions. Such data are critical for assessing the full nature and scope of income change problems and in developing cost-effective solutions. DOD data on income change has been derived from self-reported survey data collected from reservists and their spouses. A 2000 DOD survey of reservists showed that of those who served in military operations from 1991 to 2000, an estimated 59 percent of drilling unit members had no change or gain in family income when they were mobilized or deployed for a military operation, and about 41 percent lost income. This survey was conducted before the mobilizations occurring after September 11, 2001. A 2002 DOD survey of spouses of activated reservists showed that an estimated 70 percent of families experienced a gain or no change in monthly income and 30 percent experienced a decrease in monthly income. The survey data are questionable primarily because it is unclear what survey respondents considered as income loss or gain in determining their financial status. We recommended that DOD take steps to obtain more complete information in order to take a targeted approach to addressing income change problems. DOD concurred with this recommendation. In May and September of 2003, DOD implemented two web-based surveys of reservists to collect data on mobilization issues, such as income change. DOD has tabulated the survey results and expects to issue a report with its analysis of the results by July 2004. These surveys should be insightful for this issue. Benefits are another important component of military compensation for reservists and help to alleviate some of the hardships of military life. DOD offers a wide range of benefits, including such core benefits as health care, paid time off, life insurance, and retirement. Notable improvements have been made to the health care benefits for reservists and their families. For example, under authorities granted to DOD in the National Defense Authorization Acts for fiscal years 2000 and 2001, DOD instituted several health care demonstration programs to provide financial assistance to reservists and family members. For example, DOD instituted the TRICARE Reserve Component Family Member Demonstration Project for family members of reservists mobilized for Operations Noble Eagle and Enduring Freedom to reduce TRICARE costs and assist dependents of reservists in maintaining relationships with their current health care providers. The demonstration project eliminates the TRICARE deductible and the requirement that dependents obtain statements saying that inpatient care is not available at a military treatment facility before they can obtain nonemergency treatment from a civilian hospital. Legislation passed in December 2002 made family members of reservists activated for more than 30 days eligible for TRICARE Prime if they reside more than 50 miles, or an hour's driving time, from a military treatment facility. Last year, the Congress passed legislation for a 1-year program to extend TRICARE to reservists who are unemployed or whose employer does not offer health care benefits. As we have previously reported, given the federal government's growing deficits, it is critical that the Congress give adequate consideration to the longer term costs and implications of legislative proposals to further enhance military pay and benefits before they are enacted into law. For example, proposals to enhance reserve retirement should be considered in this context. We have ongoing work looking at proposals to change the reserve retirement system. The key questions we are addressing include: What are the objectives of the reserve retirement system? Is DOD meeting its reserve retirement objectives? What changes to the current reserve retirement system that DOD and others have proposed could help DOD better meet its objectives? What factors should DOD consider before making changes to its reserve retirement system? We anticipate issuing a report addressing these questions in September 2004. While we have not specifically reviewed the use of reenlistment bonuses for reservists, our work has shown that DOD could improve the management and oversight of the SRB program with more methodologically rigorous evaluations. The SRB program is intended to help the services retain enlisted personnel in critical occupational specialties, such as linguists and information technology specialists. Concerned about missing their overall retention goals in the late 1990s, all the services expanded their use of SRBs to help retain more active duty enlisted personnel. There were increases in the number of specialties that the services made eligible for the bonuses and in the number of bonus recipients. The Air Force, for example, awarded bonuses to 158 specialties (80 percent of total specialties) in fiscal year 2001, up from 68 specialties (35 percent of total specialties) in fiscal year 1997. During this time period, the number of active duty Air Force reenlistees receiving bonuses increased from 3,612 (8 percent of total reenlistees) to 17,336 (42 percent of total reenlistees). As a result of the services' expanded use of SRBs for active duty personnel, the cost of the program more than doubled--from $308 million in fiscal year 1997 to $791 million in fiscal year 2002. The SRB budget was expected to rise to over $800 million in fiscal year 2005. About 44 percent of the SRB budget growth over the 1997 to 2005 period is attributable to increases in the Air Force SRB budget. Despite increased use of the SRB program, DOD has cited continued retention problems in specialized occupations such as air traffic controller, linguist, and information technology specialist. In November 2003, we reviewed a congressionally directed DOD report to the Congress on the program and found that DOD had not thoroughly addressed four of the five concerns raised by the Congress. As a result, the Congress did not have sufficient information to determine if the program was being managed effectively and efficiently. More specifically, DOD did not directly address the SRB program's effectiveness or efficiency in correcting shortfalls in critical occupations. DOD had not issued replacement program guidance for ensuring that the program targets only critical specialties that impact readiness. DOD did not address an important change--the potential elimination of the requirement for conducting annual reviews. We were told that the new guidance will require periodic reviews, but neither the frequency nor the details of how these reviews would be conducted was explained. DOD did not describe the steps it would take to match program execution with appropriated funding. Our analysis showed that in fiscal years 1999- 2002, the services spent a combined total of $259 million more than the Congress appropriated for the SRB program. DOD provided only a limited assessment of how each service administers its SRB program. DOD identified the most salient advantages and disadvantages that could result from implementing a lump sum payment option for paying retention bonuses, and we generally concurred with DOD's observations. On the basis of our work, we recommended that the Secretary of Defense direct the Under Secretary of Defense for Personnel and Readiness to (1) retain the requirement for an annual review of the SRB program and (2) develop a consistent set of methodologically sound procedures and metrics for reviewing the effectiveness and efficiency of all aspects of each service's SRB program administration. DOD concurred with the recommendations but has not yet taken actions to address them. Mail can be a morale booster for troops fighting overseas and for their families at home. During Operation Iraqi Freedom, problems with prompt and reliable mail delivery surfaced early in the conflict and continued throughout. More than 65 million pounds of letters and parcels were delivered to troops serving in theater during 2003. Between February and November 2003, the Congress and the White House forwarded more than 300 inquiries about mail delivery problems to military postal officials. We are reviewing mail delivery to troops stationed overseas and plan to issue our report next month. In the report, we will assess (1) the timeliness of mail delivery to troops stationed in the Gulf Region, (2) how mail delivery issues and problems experienced during Operation Iraqi Freedom compare to those during Operations Desert Shield/Storm, and (3) efforts to identify actions to resolve problems for future contingencies. The timeliness of the mail delivery to troops serving in Operation Iraqi Freedom cannot be accurately determined because DOD does not have a reliable, accurate system in place to measure timeliness. Transit time data reported by the Transit Time Information Standard System for Military Mail shows that average transit times for letters and parcels into the theater consistently fell within the 11 to 14-day range--well within the current wartime standard of 12 to 18 days. However, we determined that the method used to calculate these averages masks the actual times by using weighted averages that result in a significant understating of transit times. A second source of data--test letters that were sent to individual servicemembers at military post offices by the Military Postal Service Agency between February and September 2003--indicate that mail delivery, on average, met the wartime standard during all but 1 month. However, we found that a significant number of test letters were never returned, and that test letters do not accurately measure transit time to the individual servicemember because they are sent only to individuals located at military post offices. It could take several more days for mail to get to forward-deployed troops. Even though the data shows otherwise, military postal officials acknowledge that mail delivery to troops serving in Operation Iraqi Freedom was not timely. Despite differences in operational theaters and an effort by postal planners to incorporate Operations Desert Shield/Storm experiences into the planning for Operation Iraqi Freedom, many of the same problems were encountered. These problems include (1) difficulty in conducting joint-service mail operations; (2) postal personnel inadequately trained and initially scarce in number due to late deployments; and (3) inadequate postal facilities, material handling equipment, and transportation assets to handle the initial mail surge. U.S. Central Command--the combatant command for Operation Iraqi Freedom--created an operations plan for joint mail delivery, but some of the planning assumptions were flawed and the plan was not fully implemented. This plan included certain assumptions that were key to its success, but some assumptions produced unforeseen negative consequences and others were not implemented or unrealistic. For example, the elimination of mail addressed to "Any Service Member" increased the number of parcels because senders found ways around the restriction. In addition, plans to restrict the size and weight of letters and parcels until adequate postal facilities had been established were never enacted; and the volume of mail was grossly underestimated. The plan also directed that a Joint Postal Center comprised of postal officials from all services manage and coordinate joint postal operations in theater. However, this effort was never fully implemented, and joint mail delivery suffered as a result. The Military Postal Service Agency did implement one strategy that proved to be successful as a result of lessons learned from Operations Desert Shield/Storm. Dedicated contractor airlift of mail into the contingency area was employed, avoiding the necessity of competing for military air cargo capacity, which greatly improved the regularity of mail service to the theater. No single entity has been officially tasked to resolve the long-standing postal problems seen again during Operation Iraqi Freedom. Military postal officials have begun to identify solutions to some of these issues. However, despite early efforts made by the Military Postal Service Agency to consolidate problems and identify solutions, this agency does not have the authority to ensure that these problems are jointly addressed and resolved before the next military contingency. During our meetings with dozens of key military postal officials serving during Operation Iraqi Freedom, we collected memoranda, after action reports, and their comments regarding the postal issues and problems that should be addressed to avoid a repetition of the same postal problems in future contingencies. These issues include: improving joint postal planning and ensuring joint execution of that plan; early deployment of postal troops; preparing updated tables of organization and equipment for postal units; improving peacetime training for postal units; and reviewing the command and control of postal units in a joint theater. The Military Postal Service Agency hosted a joint postal conference in October 2003 to discuss postal problems with dozens of key postal participants in Operation Iraqi Freedom and is currently in the process of consolidating these issues into a single document with the intent of developing plans to resolve the issues. In addition, the service components and the Military Postal Service Agency have taken some initial steps in employing alternative mail delivery and tracking systems. In our report, we plan to make several recommendations aimed at (1) establishing a system that will accurately track, calculate, and report postal transit times and (2) designating responsibility and providing sufficient authority within the Department to address and fix long-standing postal problems identified in this report. 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 future questions about this statement, please contact Derek B. Stewart at (202) 512-5559 (e-mail address: [email protected]) or Brenda S. Farrell at (202) 512-3604 (e-mail address: [email protected]). Also making a significant contribution to this statement was Thomas W. Gosling. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Since the terrorist attacks of September 11, 2001, the U.S. military has deployed high numbers of active duty and reserve troops to fight the global war on terrorism and for Operation Iraqi Freedom. Ensuring that U.S. military forces are adequately compensated and that the morale of deployed troops remains high have been priorities for the Congress and the Department of Defense (DOD). In response to congressional mandates, GAO has reviewed a number of issues concerning military personnel. For this hearing, GAO was asked to provide the results of its work on military compensation for National Guard and Reserve personnel and on the Selective Reenlistment Bonus (SRB) program, a tool DOD can use to enhance retention of military personnel in critical occupational specialties. In addition, GAO was asked to provide its preliminary views, based on ongoing work, concerning mail delivery to troops stationed in the Middle East. Reservists who are called to active duty to support a contingency operation are eligible to receive the same pay and benefits as members of the active component. Moreover, in constant dollars, basic military compensation has increased in recent years. For instance, an enlisted reservist in pay grade E-4 who is married with no other dependents and who is called to active duty experienced a 19 percent increase in basic military compensation between fiscal years 1999 and 2003. Despite these increases, income loss is a concern to many reservists, although DOD has lacked timely, sufficient information to assess the full scope and nature of this problem. Benefits for reserve personnel have also improved, notably in the area of health care. As GAO has previously reported, given the federal government's growing deficits, it is critical that the Congress give adequate consideration to the longer term costs and implications of legislative proposals to further enhance military pay and benefits before they are enacted into law. For example, proposals to enhance reserve retirement should be considered in this context. Although GAO has not specifically reviewed the use of SRBs to enhance reserve retention, GAO has noted shortcomings in DOD's management and oversight of the SRB program for active duty personnel. GAO's observations of this program may be helpful in making decisions for the use of SRBs for reservists. Concerned about missing their overall retention goals in the late 1990s, all the services expanded their use of SRBs to help retain more active duty enlisted personnel in a broader range of military specialties, even though the program was intended to help the services meet retention problems in selected critical specialties. As a result, the cost of the program more than doubled in just 5 years--from $308 million in fiscal year 1997 to $791 million in fiscal year 2002. However, the effectiveness and efficiency of SRBs in targeting bonuses to improve retention in selected critical occupations is unknown. DOD has not conducted a rigorous review of the SRB program. DOD concurred with GAO's recommendations to institute more effective controls to assess the progress of the SRB program, but has not taken action as yet. Mail can be a morale booster for troops fighting overseas and for their families at home. GAO has been reviewing mail delivery to deployed troops and expects to issue a report soon. GAO's preliminary findings show that mail delivery continues to be hampered by many of the same problems encountered during the first Gulf War. First, DOD does not have a reliable accurate system in place to measure timeliness. Second, despite differences in operational theaters and efforts by DOD postal planners to incorporate lessons learned into planning for Operation Iraqi Freedom, postal operations faced many of the same problems, such as inadequate postal facilities, equipment, and transportation. Third, DOD has not officially tasked any entity to resolve the long-standing postal problems experienced during contingency operations. GAO plans to make several recommendations to improve DOD's mail delivery to deployed troops.
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VA's three operational administrations--the Veterans Health Administration (VHA), the Veterans Benefits Administration (VBA), and the National Cemetery Administration (NCA)--each manage their own separate regional network of facilities to provide program services to veterans and their families. These services include a diverse array of educational, disability, survivor, and health benefits. VHA holds the nation's largest integrated health care system consisting of, among other things, medical centers and community-based outpatient clinics that are decentralized across 21 Veterans Integrated Service Networks. In addition to its primary program mission area of providing health care to veterans, VHA--specifically--is also responsible for managing the majority of the department's underutilized and excess property and land-use agreements at the local level. It should be noted that the management of underutilized and vacant spaces can be costly. Decision making on how to use these properties may involve competing considerations such as budgetary constraints, legal limitations, and stakeholder input. VA utilizes various leasing authorities as a means of avoiding or decreasing its costs by maximizing available resources through the joint use of facility space. VA may use these authorities to enter into agreements that include outleases, licenses, permits, sharing agreements, and EUL agreements with public or private entities to use land and buildings for revenue or in-kind consideration. See table 1 below for the various types of authorities available to VA, a brief description of the authority, and how proceeds may be used if revenue is generated. Depending upon the terms specified and the type of agreement, agreements may generate revenue, in-kind considerations (such as cost savings or avoidance, or enhanced services), or both for the benefit of veterans, VA's operations, or the community at large. When veterans benefit directly from these agreements, they may enjoy access to an expanded range of services that would otherwise not be available on VA medical center campuses because in some cases VA is not authorized to provide such services itself. VA benefits from land-use agreements by offsetting or avoiding altogether the costs associated with operating and maintaining underutilized or vacant properties. Finally, local communities may also benefit from agreements through the provision of services such as credit unions, daycare, or the placement of rooftop antennas to strengthen cell-phone reception. Details about land-use agreements, including estimated revenue and indications of in-kind considerations, are to be recorded in VA's CAI system by administration, network, or medical facility personnel who are responsible for those agreements. According to VA, it uses this system to evaluate property management by its administrations, regional networks, and medical centers. The inventory data from this system are to form the basis for decision making used in VA's strategic capital-investment planning processes. CAI data are also reported to external stakeholders, including Congress and GAO. To be entered into CAI, each land-use agreement must have its own revenue source and accounting codes. VA headquarters staff process requests and register the land-use agreements with these codes. Once assigned, the codes are to be entered into the CAI database. VA medical centers in VA's 21 service networks are then responsible for updating the land-use agreement information into CAI immediately after they are notified that the codes have been entered as well as updating CAI at the time of execution of the land-use agreement. VA medical centers are also required to immediately update the CAI database for any subsequent changes in the land-use agreements. Each year, VA headquarters staff initiate a call for the VA medical centers to review existing data in CAI, including land-use agreements; update any needed changes to CAI; and certify the data are complete and accurate at that point in time. Enhanced use leases (EUL) are centrally managed at headquarters by the Office of Asset Enterprise Management (OAEM). OAEM is responsible for administering and managing the EUL program, with support from local facility staff from VA's administrations. This monitoring includes tracking lease requirements and identifying benefits and expenses for EUL projects, once leases are executed. VA is also responsible for producing an annual consideration report to Congress for EULs that includes information on revenue, cost avoidance, cost savings, enhanced services, and expenses paid by VA. Unlike the central management of revenues and agreements associated with EULs, VA generally uses a decentralized approach in the monitoring of sharing agreements, outleases, licenses, and permits. The scope of projects can be diverse, ranging from space for medical research, day care, and rooftop telecommunications equipment, to 1-day special events for community causes. Regardless of the type of project, roles and responsibilities may vary by medical facility when overseeing land-use agreements. The monitoring of agreements, including ensuring the space is properly maintained or occupied, may involve offices responsible for asset management or contracting, for instance. According to VA officials, the medical centers are allowed considerable discretion in their management of these agreements. Based on our review of land-use agreement data for fiscal year 2012, VA does not maintain reliable data on the total number of land-use agreements and VA did not accurately estimate the revenues those agreements generate.provided to us from VA's CAI system, VA reported that it had over 400 land-use agreements with over $24.8 million in estimated revenues for fiscal year 2012. However, in the course of our testing the reliability of the data, one of VA's administrations--VHA--initiated steps to verify the accuracy and validity of the data it originally provided to us. During this verification process, VHA made several corrections to the data that raised questions about their accuracy, validity, and completeness. Examples of these corrections include the following: According to the land-use agreement data VHA reported multiple entries for a single land-use agreement. Specifically, VHA had 37 separate land-use entries for the same agreement entered in CAI--one for each building listed in the agreement--that were, in fact, for only one agreement at VA's facility in Perry Point, Maryland. VHA also noted in its revisions that there were 13 agreements that had been terminated prior to fiscal year 2012 that should have been removed from the system. At the three VA medical centers we reviewed, we also found examples of errors in the land-use agreement data. Examples of these errors include the following: VHA did not include 17 land-use agreements for the medical centers in New York and North Chicago, collectively. VHA initially reported that it had 9 non-EUL land-use agreements that generated about $3.2 million in revenues at its North Chicago medical center in fiscal year 2012. In its revisions, VHA stated that its North Chicago medical center maintained 7 land-use agreements that generated no revenue, instead of 9 agreements that generated revenues. However, on the basis of our independent review of revenue receipts, we found that 5 agreements generated more than $240,000 in revenue in fiscal year 2012. For the medical center in West Los Angeles, VHA revised its estimated revenues from all land-use agreements in fiscal year 2012 from about $700,000 to over $810,000. However, our review of VA's land-use agreements at this medical center indicated that the amount that should have been generated was approximately $1.5 million. Guidance in this area states that reliable data can be characterized as being accurate, valid, and complete.reasonably complete and accurate, can be used for their intended purposes, and have not been subject to inappropriate alteration. Additionally, data in systems should also be consistent--a subset of accuracy--and valid. Consistency can be impaired when data are entered at multiple sites and there is an inconsistent interpretation of what data should be entered. Finally, data that are valid actually represent what is Reliable data means that data are being measured. Thus, despite the corrections made by VHA, we cannot conclude that the revised number of land-use agreements held by VA or the amount of revenue these agreements generated in fiscal year 2012 are sufficiently reliable. VA policy requires that CAI be updated quarterly until the agreement ends. VA's approach on maintaining the data in CAI relies heavily on data being entered timely (quarterly) and accurately by a staff person in the local medical center. VA OAEM makes annual requests to medical centers to update the data in CAI, which also calls for the medical centers staff to verify the data. VA officials stated that a number of deficiencies remained after an annual update of the data in CAI. According to VA officials, the errors may be a result of manual data entry or medical centers not adhering to the guidance for updating CAI on a quarterly basis. Our review found that VA does not currently have a mechanism to ensure that the data in CAI are updated quarterly as required and that the data are accurate, valid, and complete. Federal internal control standards state that relevant, reliable, and timely information is to be available for external reporting purposes and management decision making. Additionally, these standards also state that management should put in place control mechanisms and activities to enable it to enforce its directives and achieve results, such as providing relevant, reliable, and timely information. VA officials recognize the importance of maintaining quality data. According to VA's guidance on CAI, the maintenance of high-quality data is critical to the organization's credibility and is an indication of VA's commitment to responsible capital asset portfolio management. Additionally, VA contends that high-quality data are needed to be responsive to policymakers and others. Officials at the VA headquarters reported that they undertake a few activities throughout the year to improve their data, such as the annual update. For example, an official told us that staff at headquarters had recently deployed a training session in 2014 that focused on updating data in CAI. According to a VA official, six sessions have been provided through June 2014. While these activities are positive steps, they do not provide the assurance needed that the data maintained in CAI are reliable. By implementing a mechanism that will allow it to assess whether medical centers have timely entered the appropriate land-use agreement data into CAI, and working with the medical centers to correct the data, as needed, VA would be better positioned to reliably account for land-use agreements and the associated revenues that they generate. At the three medical centers we visited, we found weaknesses with the billing and collection processes that impair VA's ability to effectively and timely collect land-use agreement revenues from its sharing partners. Specifically, we found inadequate billing practices at all three medical centers we visited, as well as opportunities for improved collaboration at two of the three medical centers, and duties that were not properly segregated at one medical center. Because we did not perform a systematic review of VA's internal controls outside of the three selected sites, our findings in this section cannot be generalized to other VA medical centers. At the three sites that we visited, we found that VA had billed partners in 20 of 34 revenue-generating land-use agreements for the correct amount; however, the partners in the remaining 14 agreements were not billed for Based on our analysis of the agreements, we found the correct amount.that VA underbilled by almost $300,000 of the approximately $5.3 million that was due under the agreements, a difference of about 5.6 percent. For most of these errors, we found that VA did not adjust the revenues it collected for inflation. According to the department's guidance on sharing agreements, VA must incorporate an annual inflation adjustment to multiple-year agreements to ensure that its maintenance and operating costs--such as future utility costs--continue to be recouped, or exceeded. However, for some of these incorrectly billed agreements, the sharing partners paid the correct amount of rent as specified in the agreement even though the bill stated an incorrect amount. In addition, we found that the West Los Angeles medical center inappropriately coded the billing so that the proceeds of its sharing agreements, which totaled over $500,000, were sent to its facilities account. According to the West Los Angeles chief fiscal officer, these proceeds were mainly used to fund maintenance salaries. However, according to VA policy, proceeds from sharing agreements are required to be deposited in the medical care appropriations account that benefits veterans. According to the policy for sharing agreements, each agreement must include the amount of rent for the space, when the rent is expected to be paid, and the number of payments to be made over a specified period by the sharing partners. In the absence of a bill from VA, the sharing partner still is required to make payments as stipulated under the agreement. However, at all three sites that we visited, we found problems with the billing of rent for the land-use agreements: At the New York City location, VA officials were not aware that a sharing partner--an academic department with the local university-- renewed its agreement to remain at the VA in 2008. As a result and according to a VA New York fiscal official, VA did not bill the sharing partner for several years' rent that totaled over $1 million. After it discovered this error, VA began to take collection action on the unpaid rent in 2012, but over $200,000 in delinquent rent remained outstanding as of April 2014. At the West Los Angeles location, officials did not send periodic invoices to sharing partners as required by policy or under its agreements. As a result, two of its sharing partners did not always submit timely payments. And in a third case, VA has not fully collected on the total amount of past due rent from a sharing partner that it did not bill as expected. Specifically, in August 2011, VA stopped billing a hospitality corporation that operated a laundry facility on the campus. Since that time, the sharing partner has not made any payments as required under the terms of its agreement. The partner vacated the space in December 2013, and owes hundreds of thousands of dollars to VA. A contracting officer in Long Beach, who is responsible for the management of the land-use agreements in West Los Angeles, stated during a February 2014 meeting with GAO that he advised the West Los Angeles location to evict the sharing partner for occupying VA space beyond its agreement term because they were "trespassing" and lacked authorization to remain in the space. The contracting official also stated that VA should bill the sharing partner for the rent due and, if necessary, seek guidance to initiate available collection actions. A West Los Angeles VA official acknowledged that eviction was one of the options that could be pursued; however, the medical center continued to allow the sharing partner to remain in the space so that the agreement could be terminated "amicably." During our visit in December 2013, that same West Los Angeles official also stated that VA would continue to negotiate with the sharing partner on the final payment to be received; and those negotiations would take into account the value of certain inventory items and parts that the partner left in the space. This official later reported to GAO that, as of May 2014, VA would bill the sharing partner for the full amount of past due rent without offsetting the value of the property remaining in the space. We asked for a copy of the letter that would be sent to the sharing partner, but as of June 2014 VA had not provided it. The medical center at West Los Angeles also did not bill a federal government agency sharing space at the Sepulveda Ambulatory Care Center during fiscal year 2012. Instead, the medical center submitted the bill for about $480,000 to the federal agency on October 1, 2012, the day after the end of fiscal year 2012. As a result, the sharing partner did not make any monthly rental payments during fiscal year 2012. The sharing partner subsequently made the full rental payment in November 2012. At the North Chicago medical center, VA officials did not bill one of its sharing partners for about $3,000 for the month of August 2012. Officials were not aware that they had not billed for this agreement until we brought the matter to their attention in January 2014. According to a VA official, the North Chicago medical center submitted a bill to the sharing partner in June 2014. VA officials acknowledged that the department did not perform systematic reviews of the billings and collections practices at the three medical centers, which we discuss in more detail later. Federal internal control standards state that management is to ensure that transactions are promptly recorded to maintain their relevance and value to management in controlling operations and making decisions. This applies to the entire process or life cycle of a transaction or event from its initiation and authorization through its final classification in summary records. In addition, the standards call for agencies to design control activities to help ensure that all transactions are completely and accurately recorded. These standards and OMB guidance also state that management should put in place control mechanisms and activities to enable it to enforce its directives and achieve results. Because VA lacks a mechanism that ensures its transactions are promptly and accurately recorded, VA is not consistently collecting revenues that the sharing partners owe to VA at these three medical centers. At two of the three sites we visited, we found that VA could improve collaboration amongst key staff that could enhance the collections of proceeds for its land-use agreements. Examples include the following: At the New York site, VA finance staff created spreadsheets to improve the collection of its revenues for more than 20 agreements. However, the fiscal office did not have all of the renewed contracts or amended agreements that could clearly show the rent due since the contracting office failed to inform the fiscal office of the new agreements. According to a VA fiscal official at the New York office, repeated requests were made to the contracting office for these documents; however, the contracting office did not respond to these requests by the time of our visit in January 2014. According to the New York Harbor Healthcare System director and the fiscal officials at New York, collection activities suffered because the contracting office was not responsive. At the North Chicago medical center, the finance staff identified differences between what they billed from the sharing partners and what they collected for some agreements. As a result, a North Chicago medical center finance staff official stated that the center's staff had to undertake extra, time-consuming measures--including speaking to the sharing partners themselves--to resolve these differences. At that time, the finance staff discovered that VA was not billing for the increase in rent for inflation. North Chicago did not have a mechanism to communicate the specific terms (such as inflation adjustments) and did not have access to the land-use agreements across offices, according to another North Chicago finance official. Such sharing of information would have helped to expedite the explanation of these differences. Collaboration can be broadly defined as any joint activity that is intended to produce more public value than could be produced when organizations act alone. Best practices state that agencies can enhance and sustain collaborative efforts by engaging in several practices that are necessary for a collaborative working relationship. These practices include defining and articulating a common outcome; agreeing on roles and responsibilities; and establishing compatible policies, procedures, and other means to operate across agency boundaries. By taking additional steps to foster a collaborative environment, VHA could improve its billing and collection practices. For example, rather than contacting sharing partners to confirm the accuracy of its billing, fiscal staff in the North Chicago VA could work with the office that holds the agreements, the contracting office, to confirm the accuracy of its billing and to correct errors. Based on a walkthrough of the billing and collections process we conducted during our field visits, and an interview with a West Los Angeles VA official, we found that West Los Angeles did not utilize proper segregation of duties. Specifically, the office responsible for monitoring agreements also bills the invoices, receives collections, and submits the collections to the agent cashier for deposit. This assignment of roles and responsibilities for one office is not typical of the sites we examined. At the other medical centers we visited, these same activities were separated amongst a few offices, as outlined in VA's guidance on deposits. Federal internal control standards state that for an effectively designed control system, key duties and responsibilities need to be divided or segregated among different people to reduce the risk of error or fraud. These controls should include separating the responsibilities for authorizing transactions, processing and recording them, reviewing them, and accepting any acquired assets. Without proper segregation of duties, risk of errors, improper transactions, and fraud increases. According to West Los Angeles officials, the medical center is considering steps to correct the segregation of duties issue by assigning certain duties to the fiscal office. However, the West Los Angeles site did not provide any details on the steps it would take or the timeline it would follow to implement these actions. Federal internal control standards emphasize the need for federal agencies to establish plans to help ensure goals and objectives can be met. Because of the lack of appropriate segregation of duties at West Los Angeles, the revenue collection- process has increased vulnerability to potential fraud and abuse. VA headquarters officials informed us that program officials located at VA headquarters do not perform any systematic review to evaluate the medical centers' processes related to billing and collections at the local level. VA officials further informed us that VHA headquarters also lacks critical data--the actual land-use agreements--that would allow it to routinely monitor billing and collection efforts for land-use agreements across the department. Federal internal control standards require that departments and agencies assess program quality and performance over time and work to address any identified deficiencies. Further, management must continually assess and evaluate these controls to assure that the activities being used are sufficient and effective. In response to our findings, one VA headquarters official told us that the agency is considering the merits of dispatching small teams of staff from program offices located at VA's headquarters to assist the local offices with activities such as billing and collections. However, as of May 2014, VA had not implemented this proposed action or any other mechanism for monitoring the billing and collections activity at the three medical centers. Federal internal control standards also state that management should put in place control mechanisms and activities to enable it to enforce its directives and achieve results. Until VA performs systematic reviews, VA will lack assurance that the three selected medical centers are taking all required actions to bill and collect revenues generated from land-use agreements, as expected. VA did not effectively monitor the status of the land-use agreements at the medical center level for two selected sites that we visited. As a result, we identified problems associated with many of the land-use agreements including unenforced agreement terms, expired agreements with partners remaining in VA space, and organizations occupying VA space without a written agreement. Because we did not perform a systematic review of VA's internal controls outside of the three selected sites, our findings in this section cannot be generalized to other VA medical centers. During our site visit to West Los Angeles, we noted several sharing agreements that lacked proper enforcement. These agreements included the following: Authorization and Reporting Terms for Parking Services Agreement Not Enforced. VA did not enforce two key modification terms of a West Los Angeles sharing agreement. One modification for this agreement allowed for the receipt of in-kind considerations--such as road repaving and the installation of speed bumps--in lieu of revenue, as originally agreed. This agreement modification stipulates that the sharing partner will provide services (such as paving) as determined necessary by the contracting official. However, the medical center's current contracting officer--an official located in the Long Beach office--stated that he had not approved any services under the agreement since his appointment in June 2012. Another provision in the modification requires the sharing partner to provide an annual reconciliation to the contracting officer. According to a West Los Angeles VA official that was previously responsible for monitoring the agreement, this report reconciles the costs of the in-kind services provided to VA to the revenues generated through the agreement each year. This official could not provide us with either documentation or information regarding any services that were provided during fiscal year 2012, including the value of such services. According to the current contracting officer in Long Beach, neither the sharing partner nor officials at West Los Angeles medical center have provided the reconciliation reports for 2012. We also requested the 2012 reconciliation report from VA West Los Angeles officials, but they could not provide us with a copy. Original Payment Terms with Nonprofit Organization Not Enforced. A West Los Angeles VA agreement with a nonprofit organization to provide space and services for homeless veterans included a rental provision that, if enforced, would have collected over $250,000 in revenue in 2012. However, according to a West Los Angeles VA official, no revenue was collected that fiscal year because the rental provision was waived. According to this same official, the waiver for the rental provision may have occurred in the late 2000s due to the nonprofit experiencing financial hardship.of the VA solicitation for award, demonstrating financial viability was one of the criteria considered in evaluating this partner. Further, VA policy requires the monitoring of sharing agreements and does not have a provision that allows for the waiving of such revenues. According to the contracting officer at the Long Beach VA office, VA has given this nonprofit organization an unfair advantage over other organizations that provide similar services by lowering its operating costs. However, from our review Agreement Terms with Golf Course Manager Not Enforced. During our site visit to West Los Angeles, we observed the installation of an irrigation system to upgrade a nine-hole golf course (shown in fig. 1) located at the medical center. As part of this agreement, the partner managing the golf course is required to obtain prior approval from the VA contracting officer before making any improvements to VA's property. The Long Beach contracting officer told us that, he was unaware of the improvements to the golf course and had not authorized them, in contrast to what was stipulated in the agreement. Improper Subleasing of VA Space. VA guidance does not allow sharing partners to sublease the space obtained through sharing agreements. However, we found that a nonprofit organization--a botanic garden--subleased its space to two other organizations, including an exotic bird sanctuary and a food pantry. The Long Beach VA contracting officer told us that he was not aware of this sublease prior to our audit. We found expired agreements at two of the three VA medical centers we reviewed where the sharing partners were still occupying the space. At the West Los Angeles medical center, a university athletics department, a laundry-services company, and a soccer club occupied VA space after their agreements had expired. According to a West Los Angeles VA official, VA did not renegotiate an extension for these agreements because of an ongoing lawsuit. The university athletics department and soccer club continued to pay rent although they generally did not fully comply with the schedule of payment terms outlined in the expired agreement. However, as previously discussed, the laundry-services company had not made any payments to VA since 2011 but remained in the building until it vacated the space in December 2013. According to the current contracting officer, he advised West Los Angeles to remove the laundry-services company from the premises, but medical center officials did not act on this advice. West Los Angeles VA officials told us that they discussed sending month-to-month tenancy letters to sharing partners that authorized them to operate on the VA property in the absence of an agreement. However, according to the contracting official at Long Beach, the letters were not sent to the partners because the lawsuit prohibited such actions. At the New York medical center, seven agreements expired and were not renewed timely. Because of the lack of monitoring, one sharing partner-- a local School of Medicine--with seven expired agreements remained on the property and occupied the premises without written authorization during fiscal year 2012. Our review of VA's policy on sharing agreements did not have any specific guidance on how to manage agreements before they expired including the renewal process. Federal internal control standards state that the policies and procedures are needed to enforce management directives such as the process for managing expiring agreements. Without such guidance, VA may find it difficult to adequately manage agreements scheduled to expire at any time or determine what specific actions should be taken when an agreement has expired. They help ensure that actions are taken to address risks. GAO/AIMD-00-21.3.1. the New York medical center had recorded in CAI. After we brought this to their attention, New York VA officials researched the owners of these antennas and could not find written agreements or records of payments received for seven antennas. VA did not have written agreements associated with these antennas. According to New York VA officials, now that they are aware of the antennas, they will either establish agreements with the tenants or disconnect the antennas. Dog Park and Baseball Fields. The City of Los Angeles has utilized a 12-acre field--Barrington Park--on VA property for recreational use (e.g., dog park and baseball fields) without a written agreement. The city has posted signs about local ordinances at the site, which purport to show the space is under the city's jurisdiction. VA is forgoing potential revenue for use of this facility by not having a written agreement in place. In the absence of a written agreement, it is also unclear what party should respond to any emergency situation that may occur at the park and fields. The lack of an agreement in this instance could potentially increase VA's risk of liability. VA officials stated there could be a number of reasons that these spaces lacked agreements such as agreements could have been disposed of or misplaced. VA officials acknowledged that agreements are not centrally managed or stored and that CAI does not include all terms of the agreements that are needed for monitoring activity. However, VA's guidance calls for written sharing agreements with all non-VA partners. Further, federal internal control standards state that all transactions and other significant events need to be clearly documented, and the documentation should be readily available for examination and the documentation should be properly managed and maintained. We found that VA had not established mechanisms to monitor the various agreements at the West Los Angeles and New York medical centers. VA officials acknowledged that they had not performed systematic reviews of these agreements and had not established mechanisms to enable them to do so. Federal internal control standards also state that management should put in place control mechanisms and activities to enable it to enforce its directives and achieve results. Federal internal control standards require that departments and agencies assess program quality and performance over time and work to address any identified deficiencies. Further, management must continually assess and evaluate these controls to assure that the activities being used are effective. Without a mechanism for accessing land-use agreements to perform needed monitoring activities, VA lacks reasonable assurance that the partners are meeting the agreed-upon terms, agreements are renewed as appropriate, and agreements are documented in writing, as required. This is particularly important if sharing partners are using VA land for purposes that may increase risk to VA's liability. Finally, with lapsed agreements, VA not only forgoes revenue, but it also misses opportunities to provide additional services to veterans in need of assistance and to enhance its operations. For the past decade, we have reported that the management of federal property is at risk for fraud, waste, and abuse. As one of the U.S. government's largest property holders, many of the issues we identified across the federal government can be found in VA's management of its underutilized and vacant property. VA's system for managing its numerous land-use agreements, including its system for recording associated revenues and benefits, is in need of corrective action. Because we found that the VHA data maintained in CAI are unreliable, these data cannot be used to accurately and reliably manage the bulk of VA's land-use agreements as intended. Developing a mechanism to assess the accuracy, validity, and completeness of land-use agreement data in CAI would better position VHA to reliably account for the current land-use agreements and the associated revenues that they generate. VA has opportunities to enhance the effectiveness of its land-use agreements processes at the three selected medical centers. As noted in our report, deficiencies in its monitoring of the billing and collection of revenues have impaired VA in the timely collection of all revenues due from its sharing partners and the proper recording of the revenues to its medical-care appropriations account at one of the medical centers. In addition, VA did not have mechanisms in place at two medical centers to ensure that different individuals charged with the responsibility of executing and managing agreements and collecting revenues worked together in a collaborative manner. Further, VA lacked adequate processes that enabled it to readily access land-use agreements and perform monitoring of the execution of its land-use agreements at two of the three selected sites, which resulted in land-use agreement terms not being properly documented in writing or being enforced by VA and the failure to execute renewals when the agreements have expired. The ineffective monitoring of land-use agreements at the VA medical centers is further exacerbated by the lack of any detailed guidance by VA on how to manage the expiration of land-use agreements. Finally, the lack of appropriately segregated duties at its West Los Angeles medical center is also problematic and needs to be immediately addressed; however, officials at that medical center have not developed a plan for doing so. This lapse of a key internal control increases the likelihood that revenues from land-use agreements may be vulnerable to potential fraud and abuse. Until VA effectively addresses these weaknesses, it will likely continue to miss opportunities to maximize revenues that can be used to offset VA operational costs--thereby placing a higher burden on taxpayers--or provide additional services to veterans in need of assistance. In order to improve the quality of the data collected on specific land-use agreements (i.e., sharing, outleases, licenses, and permits), enhance the monitoring of its revenue process and monitoring of agreements, and improve the accountability of the VA in this area, we recommend that the Secretary of Veterans Affairs take the following six actions: develop a mechanism to independently verify the accuracy, validity, and completeness of VHA data for land-use agreements in CAI; develop mechanisms to: monitor the billing and collection of revenues for land-use agreements to help ensure that transactions are promptly and accurately recorded at the three medical centers; foster collaboration between key offices to improve billing and collections practices at the New York and North Chicago medical centers; and access and monitor the status of land-use agreements to help ensure that agreement terms are enforced, agreements are renewed as appropriate, and all agreements are documented in writing as required at the New York and West Los Angeles selected medical centers; develop a plan for the West Lost Angeles medical center that identifies the steps to be taken, timelines, and responsibilities in implementing segregation of duties over the billing and collections process; and develop guidance on managing expiring agreements at the three medical centers. We provided the Departments of Veterans Affairs with a draft of this report for its review and comment. In its written comments, reprinted in appendix II, the Department concurred with our recommendations and provided technical comments that we incorporated, as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees and the Secretary of Veterans Affairs. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you have any questions concerning this report, please contact me at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. On August 29, 2013, a federal judge found that certain sharing agreements in the West Los Angeles medical center were unauthorized under the land-use authority under which they were executed. This authority states that the Secretary of Veterans Affairs may enter into agreements to share health care resources with health care providers in support of the Department of Veterans Affairs' (VA) mission. As a result, the federal judge voided several sharing agreements with entities other than health care providers; thus, the district court case called into question whether VA can enter into sharing agreements with entities other than health care providers. The case is under appeal at the United States Court of Appeals for the Ninth Circuit. If this opinion stands, this ruling may affect other sharing agreements VA holds with nonmedical providers nationwide. Our review of VA's land-use agreements at West Los Angeles, North Chicago, and New York found just over 40 percent of VA's sharing agreements were with nonmedical providers, such as telecommunication companies that lease space for rooftop antennas, and collectively generate hundreds of thousands of dollars in revenue each year. In addition to the contact named above, Matthew Valenta (Assistant Director), Erika Axelson, Carla Craddock, Debra Draper, Olivia Lopez, Elke Kolodinski, Edward Laughlin, Barbara Lewis, Paul Kinney, Jeffrey McDermott, Maria McMullen, Linda Miller, Lorelei St. James, April VanCleef, Shana Wallace, and William Woods made key contributions to this report.
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VA manages one of the nation's largest federal property portfolios. To manage these properties, VA uses land-use authorities that allow VA to enter into various types of agreements for the use of its property in exchange for revenues or in-kind considerations. GAO was asked to examine VA's use of land-use agreements. This report addresses the extent to which VA (1) maintains reliable data on land-use agreements and the revenue they generate, (2) monitors the billing and collection processes at selected VA medical centers, and (3) monitors land-use agreements at selected VA medical centers. GAO analyzed data from VA's database on its land-use agreements for fiscal year 2012, reviewed agency documentation, and interviewed VA officials. GAO also visited three medical centers to review the monitoring of land-use agreements and the collection and billing of the associated revenues. GAO selected medical centers with the largest number of agreements or highest amount of estimated revenue. The site visit results cannot be generalized to all VA facilities. According to the Department of Veterans Affairs' (VA) Capital Asset Inventory system--the system VA utilizes to record land-use agreements and revenues--VA had hundreds of land-use agreements with tens of millions of dollars in estimated revenues for fiscal year 2012, but GAO's review raised questions about the reliability of those data. For example, one land-use agreement was recorded 37 times, once for each building listed in the agreement, 13 agreements terminated before fiscal year 2012 had not been removed from the system, and more than $240,000 in revenue from one medical center had not been recorded. VA relies on local medical center staff to enter data timely and accurately, but lacks a mechanism for independently verifying the data. Implementing such a mechanism and working with medical centers to make corrections as needed would better position VA to reliably account for its land-use agreements and the associated revenues they generate. GAO found weaknesses in the billing and collection processes for land-use agreements at three selected VA medical centers due primarily to ineffective monitoring. For example, VA incorrectly billed its sharing partners for 14 of 34 agreements at the three centers, which resulted in VA not billing $300,000 of the nearly $5.3 million owed. In addition, at the New York center, VA had not billed a sharing partner for several years' rent that totaled over $1 million. VA began collections after discovering the error; over $200,000 was outstanding as of April 2014. VA stated that it did not perform systematic reviews of the billing and collection practices at the three centers and had not established mechanisms to do so. VA officials at the New York and North Chicago centers stated that information is also not timely shared on the status of agreements with offices that perform billing due to lack of collaboration. Until VA addresses these issues, VA lacks assurance that it is collecting the revenues owed by its sharing partners. VA did not effectively monitor many of its land-use agreements at two of the centers. GAO found problems with unenforced agreement terms, expired agreements, and instances where land-use agreements did not exist. Examples include the following: In West Los Angeles, VA waived the revenues in an agreement with a nonprofit organization--$250,000 in fiscal year 2012 alone--due to financial hardship. However, VA policy does not allow revenues to be waived. In New York, one sharing partner--a local School of Medicine--with seven expired agreements remained on the property and occupied the premises without written authorization during fiscal year 2012. The City of Los Angeles has used 12 acres of VA land for recreational use since the 1980s without a signed agreement or payments to VA. An official said that VA cannot negotiate agreements due to an ongoing lawsuit brought on behalf of homeless veterans about its land-use agreement authority. VA does not perform systematic reviews and has not established mechanisms to do so, thus hindering its ability to effectively monitor its agreements and use of its properties. GAO is making six recommendations to VA including recommendations to improve the quality of its data, foster collaboration between key offices, and enhance monitoring. VA concurred with the recommendations.
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The act's purposes are to provide Treasury with the authorities and facilities to restore liquidity and stability to the U.S. financial system while protecting taxpayers, including the value of their homes, college funds, retirement accounts, and life savings. The act also mandated that Treasury's efforts help preserve homeownership and promote jobs and economic growth, maximize overall returns to taxpayers, and provide public accountability for the exercise of its authority. The act created OFS within Treasury to administer TARP, which in turn created a number of programs designed to address various aspects of the unfolding financial crisis. Some of those programs resulted in the government having an ownership interest in several companies. The Capital Purchase Program (CPP) is the largest program, with several hundred participants, including Citi. Created in October 2008, it aimed to stabilize the financial system by providing capital to viable banks through the purchase of preferred shares and subordinated debentures. In addition to the value of the assets purchased, these transactions require that the fixed dividends be paid on the preferred shares, that the debentures accrue interest, and that all purchases are accompanied by a warrant to purchase either common stock or additional senior debt instruments. Citi is one of several hundred participants in this program. The Targeted Investment Program (TIP) was created in November 2008 to foster market stability and thus strengthen the economy by investing in institutions that Treasury deemed critical to the functioning of the financial system. In addition to the value of the assets purchased, transactions under this program also required that the fixed dividends be paid on the preferred shares, and that all purchases be accompanied by a warrant to purchase common stock or additional senior debt instruments. TIP provided assistance to two institutions, which Treasury selected on a case-by-case basis. Citi is the only remaining participant but has recently announced plans to repay the Treasury. The Asset Guarantee Program (AGP) was created in November 2008 to provide federal government assurances for assets held by financial institutions that were deemed critical to the functioning of the U.S. financial system. Citigroup is the only institution participating in AGP. As a condition of participation, Citigroup issued preferred shares to the Treasury and the Federal Deposit Insurance Corporation (FDIC) and warrants to Treasury in exchange for their participation, along with the Federal Reserve Bank of New York (FRBNY) $301 billion of loss protection on a specified pool of Citigroup assets. The Systemically Significant Failing Institutions Program was created in November 2008 to help avoid disruptions to financial markets from an institutional failure that Treasury determined would have broad ramifications for other institutions and market activities. AIG has been the only participant in this program and was targeted because of its close ties to other institutions. Assistance provided under this program is in addition to the assistance provided by FRBNY. Under this program, Treasury owns preferred shares and warrants. Treasury now refers to this program as the AIG, Inc. Investment Program. The Automotive Industry Financing Program (AIFP) was created in December 2008 to prevent a significant disruption of the U.S. automotive industry. Treasury has determined that such a disruption would pose a systemic risk to financial market stability and have a negative effect on the U.S. economy. The program requires participating institutions to implement plans to show how they intend to achieve long-term viability. Chrysler and GM participate in AIFP. The government has a long history of intervening in markets during times of crisis. From the Great Depression to the Savings and Loan crisis of the 1980s, the government has shown a willingness to intervene in private markets when national interests are at stake. It has undertaken financial assistance efforts on a large scale, including to private companies and municipalities--for example, Congress created separate financial assistance programs totaling over $12 billion to stabilize Conrail, Lockheed, Chrysler, and the New York City government during the 1970s. Most recently, in response to the most severe financial crisis since the Great Depression, Congress authorized Treasury to buy or guarantee up to $700 billion of the "troubled assets" that were deemed to be at the heart of the crisis. The past and current administrations have used this funding to help stabilize the financial system and domestic automotive industry. While TARP was created to help address the crisis, the Treasury, Federal Reserve Board, FRBNY, and FDIC have also taken a number of steps to address the unfolding crisis. Looking at the government's role in providing assistance to large companies dating back to the 1970s, we have identified three fundamental principles that can serve as a framework for large-scale federal financial assistance efforts and that still apply today. These principles are identifying and defining the problem, determining the national interests and setting clear goals and objectives that reflect them, and protecting the government's interests. The federal response to the current financial crisis generally builds on these principles. Identifying and defining the problem includes separating out those issues that require an immediate response from structural challenges that will take more time to resolve. For example, in the case of AIFP, Treasury identified as a problem of national interest the financial condition of the domestic automakers and its potential to affect financial market stability and the economy at large. In determining what actions to take to address this problem, Treasury concluded that Chrysler's and GM's lack of liquidity needed immediate attention and provided short-term bridge loans in December 2008. Treasury also required Chrysler and GM to prepare restructuring plans that outlined how the automakers intended to achieve long-term financial viability and provided financial assistance to help them through the restructuring process. Determining national interests and setting clear goals and objectives that reflect them requires deciding whether a legislative solution or other government intervention best serves the national interest. For example, during the recent crisis Congress determined that government action was needed and Treasury determined that the benefits of intervening to support what were termed "systemically significant" institutions far exceeded the costs of letting these firms fail. As we have also seen during the current crisis, companies receiving assistance should not remain under federal protection indefinitely, and as we discuss later, Treasury has been clear that it wants to divest as soon as practicable. Because large-scale financial assistance programs pose significant financial risk to the federal government, they necessarily must include mechanisms to protect taxpayers. Four actions have been used to alleviate these risks in financial assistance programs: Concessions from others with a stake in the outcome--for example, from management, labor, and creditors--in order to ensure cooperation and flexibility in securing a successful outcome. For example, as a condition of receiving federal financial assistance, TARP recipients had to agree to limits on executive compensation and GM and Chrysler had to use their "best efforts" to reduce their workers' compensation to what workers at foreign automakers receive. Controls over management, including the authority to approve financial and operating plans and new major contracts, so that any restructuring plans have realistic objectives and hold management accountable for achieving results. Under AIFP, Chrysler and GM were required to develop restructuring plans that outlined their path to financial viability. In February 2009, the administration rejected both companies' restructuring plans, and required them to develop more aggressive ones. The administration subsequently approved Chrysler's and GM's revised plans, which included restructuring the companies through the bankruptcy code. Adequate collateral that, to the extent feasible, places the government in a first-lien position in order to recoup maximum amounts of taxpayer funds. While Treasury was not able to fully achieve this goal given the highly leveraged nature of Chrysler and GM, FRBNY was able to secure collateral on its loans to AIG. Compensation for risk through fees and/or equity participation, a mechanism that is particularly important when programs succeed in restoring recipients' financial and operational health. In return for the $62 billion in restructuring loans to Chrysler and GM, Treasury received 9.85 percent equity in Chrysler, 60.8 percent equity and $2.1 billion in preferred stock in GM, and $13.8 billion in debt obligations between the two companies. These actions have been important in previous financial crises, but the shear size and scope of the current crisis has presented some unique challenges that affected the government's actions. For example, as discussed later, as Treasury attempted to identify program goals and determine, which ones would be in the national interest, its goals were broad and often conflicted. Likewise, while steps were taken to protect taxpayer interests, some actions resulted in increased taxpayer exposure. For example, preferred shares initially held in Citi offered more protection to taxpayers than the common shares into which they were converted. However, the conversion strengthened Citi's capital structure. In the next section, we discuss the federal government's actions in the current crisis that resulted in it having an ownership interest and provide information on how the government is managing its interests. In addition to these principles, we have also reported on important considerations for Treasury in monitoring and selling its ownership interest in Chrysler and GM, which may also serve as useful guidelines for its investments in AIG and Citi as well. The considerations that we identified, based on interviews with financial experts and others, include the following: Retain necessary expertise. Experts stressed that it is critical for Treasury to employ or contract with individuals with experience managing and selling equity in private companies. Individuals with investment, equity, and capital market backgrounds should be available to provide advice and expertise on the oversight and sale of Treasury's equity. Monitor and communicate company, industry, and economic indicators. All of the experts we spoke with emphasized the importance of monitoring company-specific indicators and broader economic indicators such as interest rates and consumer spending. Monitoring these indicators allows investors, including Treasury, to determine how well the companies, and in turn the investment, are performing in relation to the rest of the industry. It also allows an investor to determine how receptive the market would be to an equity sale, something that contributes to the price at which the investor can sell. To the extent possible, determine the optimal time and method to divest. One of the key components of an exit strategy is determining how and when to sell the investment. Given the many different ways to dispose of equity--through public sales, private negotiated sales, all at once, or in batches--experts noted that the seller's needs should inform decisions on which approach is most appropriate. Experts noted that a convergence of factors related both to financial markets and to the company itself create an ideal window for an IPO; this window can quickly open and close and cannot easily be predicted. This requires constant monitoring of up-to-date company, industry, and economic indicators when an investor is considering when and how to sell. Manage investments in a commercial manner. Experts emphasized the importance of Treasury resisting external pressures to focus on public policy goals over focusing on its role as a commercial investor. For example, some experts said that Treasury should not let public policy goals such as job retention interfere with its goals of maximizing its return on investment. Nevertheless, one expert suggested that Treasury should consider public policy goals and include the value of jobs saved and other economic benefits from its investment when calculating its return, since these goals, though not important to a private investor, are critical to the economy. Treasury ownership interests differ across the institutions that have received federal assistance, largely because of differences in the types of institutions and the nature of the assistance they received. Initially, Treasury had proposed purchasing assets from financial institutions as a way of providing liquidity to the financial system. Ultimately, however, Treasury determined that providing capital infusions would be the fastest and most effective way to address the initial phase of the crisis. As the downturn deepened, Treasury provided exceptional assistance to a number of institutions including AIG, Citi, Chrysler, and GM. In each case, it had to decide on the type of assistance to provide and the conditions that would be attached. In several cases, the assistance resulted in the government obtaining an ownership interest that must be effectively managed. First, Treasury has committed almost $70 billion of TARP funds for the purchase of AIG preferred stock, $43.2 billion of which had been invested as of September 30, 2009. The remainder may be invested at AIG's request. As noted earlier, FRBNY has also provided secured loans to AIG. In consideration of the loans, AIG deposited into a trust convertible preferred shares representing approximately 77.9 percent of the current voting power of the AIG common shares after receiving a nominal fee ($500,000) paid by FRBNY. The trust is managed by three independent trustees. The U.S. Treasury (i.e., the general fund), not the Department of the Treasury, is the sole beneficiary of the trust proceeds. Second, Treasury purchased $25 billion in preferred stock from Citi under CPP and an additional $20 billion under TIP. Each of these preferred stock acquisitions was also accompanied by a warrant to purchase Citi common stock. Treasury has also received $4.03 billion in Citi preferred stock through AGP as a premium for Treasury's participation in a guarantee against losses on a defined pool of $301 billion of assets owned by Citi and its affiliates. As part of a series of transactions designed to strengthen Citi's capital, Treasury exchanged all its preferred shares in Citi for a combination of common shares and trust-preferred securities. This exchange, which was completed in July 2009, gave Treasury an almost 34 percent common equity interest in the bank holding company. Finally, under AIFP Treasury owns 9.85 percent of the common equity in the restructured Chrysler and 60.8 percent of the common equity, plus $2.1 billion in preferred stock in the restructured GM. Treasury's ownership interest in the automakers was provided in exchange for the assistance Treasury provided before and during their restructurings. The restructured Chrysler is to repay Treasury $7.1 billion of the assistance as a term loan, and the restructured GM is to repay $7.1 billion of the assistance as a term loan. Recognizing the challenges associated with the federal government having an ownership interest in the private market, the administration developed several guiding principles for managing its TARP investments. According to Treasury, it has developed core principles that will guide its equity investments going forward, which are discussed in detail in OFS's financial report. Acting as a reluctant shareholder. The government has no desire to own equity stakes in companies any longer than necessary and will seek to dispose of its ownership interests as soon as it is practical to do so--that is, when the companies are viable and profitable and can contribute to the economy without government involvement. Not interfering in the day-to-day management decisions of a company in which it is an investor. In exceptional cases, the government may determine that ongoing assistance is necessary but will reserve the right to set upfront conditions to protect taxpayers, promote financial stability, and encourage growth. When necessary, these conditions may include restructurings similar to that now under way at GM and changes to help ensure a strong board of directors. Ensuring a strong board of directors. After any up-front conditions are in place, the government will protect the taxpayers' investment by managing its ownership stake in a hands-off, commercial manner. Any changes to boards of directors will be designed to help ensure that they select management with a sound long-term vision for restoring their companies to profitability and ending the need for government support as quickly as possible. The government will not interfere with or exert control over day-to-day company operations, and no government employees will serve on the boards or be employed by these companies. Exercising limited voting rights. As a common shareholder, the government will vote on only core governance issues, including the selection of a company's board of directors and major corporate events or transactions. While protecting taxpayer resources, the government has said that it intends to be extremely disciplined as to how it uses even these limited rights. Treasury's investments have generally been in the form of nonvoting securities. For example, the preferred shares that Treasury holds in financial institutions under CPP do not have voting rights except in certain limited circumstances, such as amendments to the charter of the company or in the event that dividends are not paid for several quarters (in which case Treasury has the right to elect two directors to the board). However, the agreements that govern Treasury's common ownership interest expressly state that Treasury does not have the right to take part in the management or operation of the company other than voting on certain issues, which are summarized in the following table (table 1). The AIG trust created by FRBNY owns shares that carry 77.9 percent of the voting rights of the common stock. FRBNY has appointed three independent trustees who have the power to vote and dispose of the stock with prior FRBNY approval and after consultation with Treasury. The trust agreement provides that the trustees cannot be employees of Treasury or FRBNY, and Treasury does not control the trust or direct the actions of the trustees. Treasury also owns AIG preferred stock, which does not have voting rights except in certain limited circumstances (such as amendments to the charter) or in the event dividends are not paid for four quarters, in which case Treasury has the right to elect additional directors to the board. As a condition of receiving exceptional assistance, Treasury placed certain conditions on these companies. Specifically, the agreements with the companies impose certain reporting requirements and include provisions such as restrictions on dividends and repurchases, lobbying expenses, and executive compensation. The companies were also required to establish internal controls with respect to compliance with applicable restrictions and provide reports certifying their compliance. While all four institutions were subject to internal control requirements, as set forth in the credit and other agreements that outline Treasury's and the companies' roles and responsibilities, Chrysler and GM have agreed to (1) produce a portion of their vehicles in the United States; (2) report to Treasury on events related to their pension plans; and (3) report to Treasury monthly and quarterly financial, managerial, and operating information. More specifically, Chrysler must either manufacture 40 percent of its U.S. sales volume in the United States, or its U.S. production volume must be at least 90 percent of its 2008 U.S. production volume. In addition, Chrysler's shareholders, including Treasury, have agreed that Fiat's equity stake in Chrysler will increase if Chrysler meets benchmarks such as producing a vehicle that achieves a fuel economy of 40 miles per gallon or producing a new engine in the United States. GM must use its commercially reasonable best efforts to ensure that the volume of manufacturing conducted in the U.S. is consistent with at least 90 percent of the level envisioned in GM's business plan. Treasury has stated that it plans to manage its equity interests in Chrysler and GM in a hands-off manner and does not plan to manage its interests to achieve social policy goals. But Treasury officials also noted that some requirements reflect the administration's views on responsibly utilizing taxpayer resources for these companies as well as efforts to protect Treasury's financial interests as a creditor and equity owner. As a condition of receiving exceptional assistance, all four institutions must also adhere to the executive compensation and corporate governance rules established under the act, as amended by the American Recovery and Reinvestment Act of 2009 (ARRA), which limited compensation to the highest paid executives. Treasury also created the Office of the Special Master (Special Master) to carry out this requirement. The Special Master generally rejected the companies' initial proposals for compensating the top 25 executives and approved a modified set of compensation structures with the following features: generally limited salaries to no greater than $500,000, with the remainder of compensation in equity; most compensation paid as vested "stock salary," which executives must hold until 2011, after which it can be transferred by executives in three equal annual installments (subject to acceleration of the company's repayment of TARP funds); annual incentive compensation payable in "long-term restricted stock," which requires three years of service, in amounts determined based on objective performance criteria; actual payment of the restricted stock is subject to the company's repayment of TARP funds (in 25 percent installments); $25,000 limit on perquisites and "other" compensation, absent special no further accruals or company contributions to executive pension plans. The Special Master also made determinations about the compensation structures (but not individual salaries) of these companies' next 75 most highly compensated employees. He rejected the proposed compensation structures for the companies subject to review, so the companies must make additional changes to their compensation structures and resubmit them for approval. One of the principles guiding the government's management of its investments in the companies includes monitoring and communicating information from company, industry, and economic indicators. According to OFS, the asset management approach is designed to implement these guiding principles. It attempts to protect taxpayer investments and promote stability by evaluating systemic and individual risk through standardized reporting and proactive monitoring and ensuring adherence to the act and compliance with contractual agreements. Treasury has developed a number of performance benchmarks that it routinely monitors. For example, as we reported in November, Treasury will monitor financial and operational data such as cash flow, market share, and market conditions and use this information to determine the optimal time and method of sale. Similarly, for AIG and Citi, Treasury has been monitoring liquidity, capital, profits/losses, loss reserves, and credit ratings. Treasury has hired an outside asset management firm to monitor its investment in Citigroup. The valuation process includes tracking market conditions on a daily basis and collecting data on indicators such as credit spreads, bond and equity prices, liquidity, and capital adequacy. To monitor its investment in AIG, Treasury also coordinates with FRBNY in tracking liquidity, weekly cash forecasts and daily cash reports, among other indicators. As part of our ongoing work with SIGTARP, we are reviewing the extent of government involvement in the corporate governance and operations of companies that have received exceptional assistance, Treasury's mechanisms for ensuring that companies are complying with key covenants, and the government's management of the investment and its divestiture strategies. Today, we will highlight some of our preliminary observations from this review including observations about the advantages and disadvantages of managing these investments directly or though a trust arrangement. According to OFS, investments are managed on the individual (institutional and program) and portfolio levels. As previously discussed, the government generally does not manage the day-to-day activities of the companies. Rather, Treasury monitors the financial condition of the companies with the goal of achieving financial viability. In conducting the portfolio management activities, OFS employs a mix of professional staff and external asset managers. According to OFS, these external asset managers provide periodic market-specific information such as market prices and valuations, as well as detailed credit analysis using public information. A portfolio management leadership team oversees the work of asset management employees organized by program basis, so that investment and asset managers may follow individual investments. OFS uses this strategy to manage its investment in Citi, Chrysler, and GM, and the independent trustees of the AIG trust manage the government's common equity interest in AIG. According to officials we interviewed, each structure--managing the investment directly or through a trust--has advantages and disadvantages. Directly managing the investments offers two significant advantages. First, it affords the government the greatest amount of control over the investment. Second, having direct control over investments better enables the government to manage them as a single portfolio. However, such a structure also has disadvantages. For example, having the government both regulate and hold an ownership interest in an institution or company could create a conflict of interest and potentially expose the government to external pressures. Treasury officials have noted that they have been contacted by members of Congress expressing concern about dealership closings, and as long as Treasury maintains ownership interests in Chrysler and GM, it will likely be pressured to influence the companies' business decisions. Further, a direct investment requires that the government have staff with the requisite skills. For instance, as long as Treasury maintains direct control of its ownership interest in Citi, Chrysler, and GM, among others, it must have staff or hire contractors with the necessary expertise in these specific types of companies. In our previous work, we questioned whether Treasury would be able to retain the needed expertise to assess the financial condition of the auto companies and develop strategies to divest the government's interests given the substantial decline in the number of staff and lack of dedicated staff providing oversight of its investments in the automakers. We recommended that Treasury take action to address this concern. In contrast, a trust structure puts the government's interest in the hands of an independent third party. While the Treasury has interpreted the act as currently prohibiting placing TARP assets in a trust structure, FRBNY was able to create a trust to manage the government's ownership interest in AIG. One potential advantage of a trust structure is that it helps to avoid any potential conflicts of interest that could stem from the government's having both regulatory functions and its ownership interests in a company. It also mitigates any perception that actions taken with respect to TARP recipients were politically motivated or that any actions taken by Treasury were based on any "inside information" received from the regulators. Conversely, a trust structure largely removes control of the investment from the government. Finally, the trustees would also require specialized staff or contractors, would need to develop their own mechanisms to monitor the investments and analyze the data needed to assess the financial condition of the institutions or companies and decide when to divest. We are reviewing Treasury's plans for divesting its investments and so far, have found that the strategy is evolving. Although Treasury has stated that it intends to sell the federal government's ownership interest as soon as doing so is practical, it has yet to develop exit strategies for unwinding most of these investments. For Citi, Chrysler, and GM, Treasury will decide when and how to divest its common shares. With the exception of the TARP investments, the AIG trustees, with FRBNY approval, generally are responsible for developing a divestiture plan for the shares in the trust. For Chrysler and GM, Treasury officials said that they planned to consider all options for selling the government's ownership stakes in each company. However, they noted that the most likely scenario for GM would be to dispose of Treasury's equity in the company through a series of public offerings. While Treasury has publicly discussed the possibility of selling part of its equity in the company through an initial public offering (IPO) that would occur sometime in 2010, some experts we spoke with had doubts about this strategy. Two said that GM might not be ready for a successful IPO by 2010, because the company might not have demonstrated sufficient progress to attract investor interest, and two other experts noted that 2010 would be the earliest possible time for an IPO. Treasury officials noted that a private sale for Chrysler would be more likely because the equity stake is smaller. Several of the experts we interviewed agreed that non-IPO options could be possible for Chrysler, given the relatively smaller stake Treasury has in the company (9.85 percent, versus its 60.8 percent stake in GM) and the relative affordability of the company. Determining when and how to divest the government's equity stake will be one of the most important decisions Treasury will have to make regarding the federal assistance provided to the domestic automakers, as this decision will affect the overall return on investment that taxpayers will realize from aiding these companies. Given the complexity and importance of this decision, we recently recommended that Treasury develop criteria for evaluating the optimal method and timing for divesting its equity stake. In closing, we would like to highlight three issues. First, as we have noted, having clear, nonconflicting goals is a critical part of providing federal financial assistance. Treasury, however, faces a number of competing and at times conflicting goals. For example, the goal of protecting the taxpayers' interests must be balanced against its goal of divesting ownership interests as soon as it is feasible. Consequently, Treasury must temper any desire to exit as quickly as possible with the need to maintain its equity interest long enough for the companies to demonstrate sufficient financial progress. Second, an important part of Treasury's management of these investments is establishing and monitoring benchmarks that will inform the ultimate decision on when and how to sell each investment. To ensure that taxpayer interests are maximized, it will be important for Treasury to monitor these benchmarks regularly. And finally, while many agree that TARP funding has contributed to the stabilization of the economy, the significant sums of taxpayer dollars that are invested in a range of private companies warrant continued oversight and development of a prudent divestiture plan. Mr. Chairman, Ranking Member Jordan, and Members of the Subcommittee, we appreciate the opportunity to discuss these critically important issues and would be happy to answer any questions that you may have. Thank you. For further information on this testimony, please contact Orice Williams Brown on (202) 512-8678 or [email protected] or A. Nicole Clowers on (202) 512-4010 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 Emily Chalmers, Rachel DeMarcus, Francis A. Dymond, Nancy M. Eibeck, Sarah A. Farkas, Heather J. Halliwell, Cheryl M. Harris, Debra R. Johnson, Christopher Ross, and Raymond Sendajas. 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 recent financial crisis resulted in a wide-ranging federal response that included infusing capital into several major corporations. The Troubled Asset Relief Program (TARP) has been the primary vehicle for most of these actions. As a result of actions and others, the government is a shareholder in the American International Group (AIG), Citigroup Inc. (Citi), Chrysler Group LLC (Chrysler), and General Motors Company (GM), among others. As market conditions have become less volatile, the government has been considering how best to manage these investments and ultimately divest them. This testimony discusses (1) the government's approach to past crisis and challenges unique to the current crisis; (2) the principles guiding the Department of the Treasury's implementation of its authorities and mechanisms for managing its investments; and (3) preliminary views from GAO's ongoing work with the Special Inspector General for TARP on the federal government's monitoring and management of its investments. This statement builds on GAO's work since the 1970s on providing government assistance to large corporations and more recent work on oversight of the assistance and investments provided under TARP. In its November 2009 report, GAO recommended that Treasury ensure it has expertise needed to monitor its investment in Chrysler and GM and that it has a plan for evaluating the optimal method and timing for divesting this equity. Looking at the government's role in providing assistance to large companies dating back to the 1970s, we have identified principles that serve as a framework for such assistance; including identifying and defining the problem, setting clear goals and objectives that reflect the national interests, and protecting the government's interests. These actions have been important in the past, but the current financial crisis has unique challenges, including the sheer size and scope of the crisis, that have affected the government's actions. As a result, the government's response has involved actions on the national and international levels and oversight and monitoring activities tailored to specific institutions and companies. We have also reported on considerations important for Treasury's approach to monitoring its investments in the companies that received assistance. The administration developed several guiding principles for managing its ownership interest in AIG, Citigroup, Chrysler, and GM. It does not intend to own equity stakes in companies on a long-term basis and plans to exit from them as soon as possible. It reserves the right to set up-front conditions to protect taxpayers, promote financial stability, and encourage growth. It intends to manage its ownership stake in institutions and companies in a hands-off, commercial manner and to vote only on core governance issues, such as the selection of a company's board of directors. Treasury has also required companies and institutions that receive assistance to report on their use of funds and has imposed restrictions on dividends and repurchases, lobbying expenses, and executive compensation, among other things. As part of its oversight efforts, it also monitors a number of performance benchmarks. Chrysler and GM will submit detailed financial and operational reports to Treasury, while an asset management firm will monitor the data on Citi, including credit spreads, liquidity and capital adequacy. To monitor its investment in AIG, Treasury coordinates with the Federal Reserve Bank of New York in tracking liquidity and cash reports, among other indicators. Treasury directly manages its investment in Citi, Chrysler, and GM, but the common equity investment in AIG, obtained with the assistance of the Federal Reserve, is managed through a trust arrangement. Each of these management strategies has advantages and disadvantages. Directly managing the investment affords the government the greatest amount of control but could create a conflict of interest if the government both regulates and has an ownership share in the institutions and could expose the government to external pressures. A trust structure, which places the government's interest with a third party, could mitigate any potential conflict-of-interest risk and reduce external pressures. But a trust structure would largely remove accountability from the government for managing the investment. GAO is reviewing Treasury's plans for managing and divesting itself of its investments, but the plans are still evolving, and, except for Citi, Treasury has yet to develop exit strategies for unwinding the investments.
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The Forest Service, a component of the USDA is responsible for maintaining the health, diversity, and productivity of the nation's forests and grasslands to meet the needs of present and future generations. This mission is carried out through the use of several programs, the largest being the National Forest System. Through the National Forest System, the Forest Service manages about 192 million acres, comprising about 8.5 percent of the total surface area of the United States. On these lands, the Forest Service, among other things, supports recreation, sells timber, provides rangeland for grazing, and maintains and protects watersheds, wilderness, fish, and wildlife. In addition, the Forest Service provides financial and program support for state and private forests and undertakes research activities. The Forest Service, headed by a chief, conducts its activities through 9 regional offices, 6 research offices, 1 state and private forestry area office, the Forest Products Laboratory, and the International Institute of Tropical Forestry. In addition, the National Forest System has 155 national forest offices and more than 600 ranger district offices. The Chief of the Forest Service manages from the national office, headquartered in Washington, D.C., and provides national-level policy and direction to the field offices. The Forest Service has approximately 30,000 employees and a budget of over $5 billion to carry out its mission. The Forest Service Budget and Finance Deputy Chief/CFO is responsible for the financial accountability of funds appropriated by the Congress for Forest Service programs and reports to the Forest Service Chief. The Chief Financial Officers Act of 1990 calls for CFO Act agencies, such as USDA, to have financial management systems, including internal control, that provide complete, reliable, consistent and timely information. The Government Management Reform Act of 1994 (GMRA) requires the CFO Act agencies to prepare and have audits of annual financial statements. FFMIA builds on the foundation laid by these acts by emphasizing the need for agencies to have systems that routinely generate timely, accurate, and useful information. Specifically, FFMIA requires that the auditor report on whether the agencies' financial management systems substantially comply with (1) federal financial management systems requirements, (2) applicable federal accounting standards, and (3) the U. S. Government Standard General Ledger (SGL) at the transaction level requirements. As authorized by GMRA, the Office of Management and Budget is responsible for identifying components of the designated CFO Act agencies that are required to have audited financial statements. OMB requires that the Forest Service, a major component of USDA, have audited financial statements. Since its first financial statement audit for the fiscal year ended September 30, 1991, the Forest Service has faced numerous serious accounting and financial reporting weaknesses that have prevented it from receiving a positive audit opinion. These are shown in table 1. In the past, we have reported and testified that the Forest Service's (1) unreliable financial data hampers the agency's and the Congress' decision-making ability, (2) lack of accountability exposes the agency to mismanagement and misuse of its assets, and (3) autonomous field structure hampers efforts to achieve financial accountability. In January 1999, due to the longstanding serious accounting and financial reporting problems, we designated Forest Service financial management as a high- risk area. We continued to designate financial management at Forest Service as high-risk in our 2003 report. Since 1997, the IG and independent auditors have continued to report instances of noncompliance with certain federal financial accounting and information system requirements and internal control weaknesses related to Forest Service financial computer systems. The Forest Service, a component of USDA, uses and depends on many financial management systems and services provided by USDA, including the USDA National Finance Center (NFC). Therefore, efforts to improve controls over certain financial management computer systems and internal controls over accounting processes must be made in cooperation with USDA and NFC. For example, the Forest Service uses the USDA Foundation Financial Information System as its standard accounting system. In addition, NFC maintains and controls entry of many Forest Service transactions into FFIS. NFC also reports expenditures and collections it processes on the Forest Service's behalf to Treasury. FFIS also depends on and receives data from feeder systems used by the Forest Service to record its transactions. Many of the Forest Service's longstanding problems with regard to its accounting and information systems are a result of outdated technology of the financial feeder systems that transfer accounting data to FFIS. To address each of our objectives, we analyzed prior IG, consultant, and independent auditor reports including the audit report on the Forest Service's fiscal year 2002 financial statements that described several financial management weaknesses and their effect on the Forest Service's ability to properly account for assets worth billions of dollars entrusted to its care. Further, we examined the Forest Service's financial management policies, procedures, and processes, including completed, ongoing and planned activities and related implementation schedules to determine the Forest Service's progress, plans, and milestones for addressing financial management problems. We attended a Forest Service Budget and Finance planning conference and a financial statement training session conducted by the USDA CFO to gain a further understanding of Forest Service efforts to improve its financial statement compilation processes and overcome other financial management challenges. We analyzed reported financial management problems against the corrective actions taken to determine the remaining challenges. Further, we discussed the remaining challenges and the status of improvement efforts with officials from USDA and the Forest Service Office of the Chief Financial Officer, the USDA IG, and independent contractors working for the Forest Service. We also visited and interviewed financial management staff at five Forest Service field locations. We visited the Intermountain Regional Office, the largest of the National Forest regions, because it processes a wide variety of financial accounting transactions. We also visited the Southern Regional Office, National Forest of North Carolina Supervisor's Office, Mt. Pisgah District Ranger Office, and North Carolina Research Station, each representing a different level of the financial management field organization. At each location, we interviewed staff and performed walk- throughs to obtain an understanding of accounting processes and procedures for certain accounts material to the financial statements, such as accounts receivable; property, plant, and equipment; other liabilities; and certain collections/revenues, such as timber sales. We performed our fieldwork from July 2002 through March 2003 in accordance with generally accepted government auditing standards. We requested written comments on a draft of this report from the Chief of the Forest Service or his designee. The Chief of the Forest Service provided us with written comments, which are discussed in the "Agency Comments and Our Evaluation" section and reprinted in appendix I. The Forest Service has made significant progress toward achieving financial accountability. For the first time since its initial financial statement audit that covered fiscal year 1991, the Forest Service received an unqualified or "clean" opinion on its fiscal year 2002 financial statements. To achieve this milestone, the Forest Service's top management dedicated considerable resources and focused staff efforts to address accounting and reporting deficiencies that had prevented a favorable opinion in the past. Historically the Forest Service's financial management systems have not generated timely and accurate financial statements for its annual audit. In addition, the Forest Service has had long-standing material weaknesses with regard to its two major assets--fund balance with Treasury and property, plant, and equipment. In the past, such weaknesses prevented the IG from validating these two line items on both the Forest Service and the USDA departmentwide financial statements. In fiscal year 2002, the Forest Service reorganized the Budget and Finance Deputy Chief/CFO area and focused staff efforts to address reporting and accounting deficiencies identified in the fiscal year 2001 financial statement audit with the goal that the fiscal year 2002 financial statements would pass audit tests. To assist in these efforts, the Forest Service hired senior financial management officials, consultants and contractors and formed a financial reports team and several reconciliation "strike" teams to improve (1) the financial statement compilation process and (2) reconciliations of its major accounts, including fund balance with Treasury and property, plant, and equipment. During fiscal year 2002, the financial reports team completed a number of efforts to improve the compilation process. For example, the team held a series of financial statement workshops for national office and field staff, updated the methodology for preparing the fiscal year 2002 financial statements, and provided the necessary information to complete the audit, such as account analyses and supporting documentation for sample transactions selected for testing. Six reconciliation strike teams, consisting of contractors with expertise in reconciliation procedures and experienced Forest Service staff, performed financial statement account reconciliations and reviews to help ensure the accuracy and timeliness of recorded accounting data and that subsidiary ledgers were reconciled to general ledger accounts. The strike teams analyzed account data, identifying accounting errors and documenting adjustments to key asset, liability, and budgetary accounts in order to achieve accurate account balances. The fund balance with Treasury team focused on reconciling material fiscal year 2002 and prior-year cash transactions. The property, plant, and equipment reconciliation team analyzed transaction data to identify inaccurate records and reconciled the general ledger to its supporting detailed records. In addition, the property, plant, and equipment strike team, in cooperation with the USDA Office of the Chief Financial Officer, the USDA IG, and consultants, worked to ensure that property documentation supported property records, inventories were complete, and property was valued correctly. Further, the property, plant, and equipment reconciliation team, worked with USDA on modifications and enhancements to certain property feeder systems. For example, in September 2002, USDA completed an automated interface with the Infrastructure Real Property Subsidiary System (INFRA) and FFIS. INFRA was revised to improve security by implementing controls such as user access restriction and password protection. Also, access to key data elements in the Personal Property System (PROP) and the Equipment Management Information System (EMIS) was restricted by September 2002 in order to address security weaknesses. At the same time, certain automated error checks were added to EMIS to help ensure data integrity. While the primary focus of the reports and reconciliations teams was to help attain a clean fiscal year 2002 audit opinion, the teams have been institutionalized to work toward sustainable report compilation and reconciliation processes. Through these established account reconciliations and analyses, the teams are able to identify many of the underlying causes of inaccurate data and out of balance conditions. Specifically, according to the Forest Service CFO management, many of the problems are caused by improper recording of transactions, FFIS system problems, faulty interfaced and integrated feeder systems, lack of consistent formal policies and procedures, lack of staff training and manual accounting processes prone to human error. By understanding the root causes, the Forest Service has resolved some of the problems identified. For example, the strike teams coordinated with USDA to correct several programming errors in FFIS that were causing inappropriate accounting. For instance, the fund balance with Treasury team found that fund transfers between Forest Service units for equipment usage, which are noncash transactions, were incorrectly recorded and reported to Treasury as cash collections. As result, the Forest Service's fund balance account at Treasury was being overstated by these amounts. During fiscal year 2002, the Forest Service CFO management also issued new policies and procedures or revised existing ones to help ensure the quality and integrity of the financial data in FFIS and the feeder systems. To communicate these changes, the Forest Service CFO issued over 25 CFO bulletins to accounting staff as the need for accounting and reporting controls were identified. For example, the CFO issued several bulletins that provided guidance on the proper recording of transactions, such as the types of transaction codes to use when entering data into FFIS. The CFO also issued bulletins (1) requiring analysis of delinquent bills to determine their collectability and (2) to clarify documentation requirements for personal and real property transactions. Further, Forest Service management continued to emphasize the importance of financial accountability to its line managers in the field. In April 2002, the Forest Service CFO implemented a set of financial performance indicators to monitor progress of the field staff in maintaining its accounts, including progress in clearing suspense account items, monitoring collection of receivables, and compliance with CFO accounting guidance. Achieving financial accountability involves more than obtaining a clean audit opinion by producing reliable onetime year-end numbers for financial statement purposes. The Forest Service still must overcome many challenges to sustain this outcome and to reach the end goal of routinely having timely, accurate, and useful financial information. In its December 2002 report on the Forest Service's fiscal year 2002 financial statements, the auditor, KPMG Peat Marwick LLP (KPMG), continued to identify serious material internal control weaknesses and FFMIA noncompliance issues primarily related to weaknesses in controls over financial management computer systems that could adversely affect the Forest Service's ability to record, process, summarize, and report financial data in a timely manner. The auditor attributed many of the deficiencies identified to lack of adequately trained staff; lack of manual internal control procedures, such as supervisory reviews; and poor automated controls, such as user access, system edits and system interfaces, within the FFIS and certain feeder systems that transfer the data to FFIS. As discussed in table 2, the auditor made several recommendations to address these conditions. We support these recommendations and are not making any new recommendations in these areas. In addition, the IG, Forest Service contractors, and we have reported long- standing problems regarding the Forest Service's financial management systems and its financial management organization. Many of the legacy feeder systems that transfer data to FFIS are antiquated technology and must be enhanced or replaced. The agency also faces the challenge of implementing a financial management field organization that supports effective and efficient day-to-day financial operations. Unless the Forest Service addresses these issues and moves to sustainable financial management processes, it will have to continue to undertake extraordinary, costly efforts, outside of its normal business processes, to sustain clean audit opinions. Further, management's ability to routinely obtain reliable financial information to effectively manage operations, monitor revenue and spending levels, and make informed decisions about future funding needs will continue to be hampered. Our Standards for Internal Control in the Federal Government requires that agencies implement a strong internal control system that provides the framework for the accomplishment of management objectives, accurate financial reporting, and compliance with laws and regulations. It contains the specific internal control standards to be followed. These standards define internal controls as the policies, procedures, techniques, and mechanisms that enforce management's directives. They help ensure that actions are taken to address risks and are an integral part of an entity's accountability for stewardship of government resources. The lack of good internal controls puts an agency at risk of mismanagement, waste, fraud, and abuse. Further, without strong internal controls, an agency is unable to generate the consistent, reliable financial information needed to maintain ongoing accountability over its assets. In its fiscal year 2002 audit report on the Forest Service's financial statements, the auditor continued to report serious internal control weaknesses with regard to the Forest Service's two major asset accounts-- fund balance with Treasury and property, plant, and equipment. Also, KPMG reported material deficiencies related to certain estimated liabilities, payroll processes, general controls and certain application software computer controls. The following table provides a brief description of each of the reported deficiencies and recommendations for improvement. Further the auditor reported that the Forest Service's systems did not substantially comply with the three requirements of the FFMIA--federal financial management systems requirements, applicable federal accounting standards, and the U.S. Government Standard General Ledger at the transaction level. One example of noncompliance with federal financial management systems requirements was that the Forest Service did not have required certification and accreditations of security controls performed timely on its procurement and property systems. Further, the Forest Service did not record revenue for certain collections, such as map sales and camp site reservation fees, when they were collected, as required by federal accounting standards. Instead, collections and fees were recorded in a suspense account and revenue was recognized when the money was used for other operational needs instead of when the revenue was actually earned. This practice could result in revenues and related costs being misstated on the Forest Service's financial reports. Weaknesses in the Forest Service's financial management systems continue to hamper its ability to achieve sustainable financial transaction processing and reporting. In the past, the IG and we have reported long-standing problems with the feeder systems that process and transfer financial information into FFIS. Several of the feeder systems that generate data used to support the financial statements predate FFIS and have antiquated technology. Because significant differences existed between the data in the FFIS general ledger and its supporting detail in the feeder systems, financial statements produced by FFIS could not be relied upon. For example, the Forest Service uses several feeder systems to support its multibillion dollar property, plant, and equipment line item in its financial statements, including (1) Infrastructure Real Property Subsidiary System (INFRA), (2) Personal Property System (PROP), and (3) Equipment Management Information Systems (EMIS). These feeder systems also rely, in some cases, on data transferred from other lower level (subsidiary) feeder systems. In prior years, material internal control weaknesses in the compilation of the property, plant, and equipment balance contributed to a disclaimer of an opinion on the Forest Service's financial statements. In preparation for the fiscal year 2002 audit, the Forest Service engaged a consultant to perform extensive procedures to arrive at an opening (October 1, 2001) property, plant, and equipment balance using statistical sampling of property records. The existing data was examined for erroneous and duplicate records through a variety of means, including checks for mathematical accuracy and comparisons with physical records and inventories. During this process, the consultant discovered that the lack of and/or faulty interfaces between these feeder systems and FFIS resulted in erroneous postings to the property, plant, and equipment account. Although the Forest Service has made certain improvements to its property feeder systems during fiscal year 2002, more needs to be done to improve the quality and integrity of financial data in FFIS and the feeder systems. In its fiscal year 2002 report on Forest Service's Information Technology, the auditor reported certain weaknesses in internal controls related to the feeder systems. For example, the auditor found duplicate and dropped records after data was transferred between PROP, the Purchase Order Normal Tracking and Inventory System, and the Purchase Order System. The auditor also reported that system data validation and error detection controls were ineffective in EMIS. Further, the auditor reported weaknesses related to the Automated Timber Sales Accounting System (ASTA). Specifically, there were no controls built into ASTA to prevent duplicate transactions from being recorded. As a result, field unit staff had to manually review the data to identify any transactions that were erroneously entered more than once. We visited and interviewed financial management staff at five Forest Service field offices about the accounting processes and systems used to obtain a "field" perspective on financial management problems and the status of improvement efforts. At the field offices we visited, the financial management staff told us that system issues affect their operations. For example, one field office uses the Timber Information Management (TIM) system, an upfront system used to record the initial information and produce bills for timber sales and wood product permits. Since the system does not interface with FFIS, users have to manually enter the timber sale deposits and permit sales into FFIS. Lack of an automated interface between the systems increases workload as well as the risk of input errors. Problems with the financial management systems continue to hamper the Forest Service's ability to move to sustainable processes. Until the Forest Service resolves its systems problems, the financial statements produced by FFIS cannot be relied upon without significant manual intervention to reconcile differences between FFIS and the feeder-systems. Resolving these differences consumes personnel and other resources and limits the Forest Service's ability to have reliable financial information on an ongoing basis for day-to-day management. Among the other challenges that the Forest Service faces is establishing an efficient and effective organization to accomplish financial management activities. The highly decentralized organizational structure of the Forest Service's financial management presents significant challenges in achieving financial accountability. Under the current organization, financial activities are performed and recorded at the Forest Service national office, nine regional forest offices, six research stations and USDA NFC as well as at hundreds of forest and district ranger offices where many transactions originate. The decentralized financial management organization presents a significant challenge because the Forest Service's national office financial management team is tasked with ensuring that staff at hundreds of field locations are routinely processing accounting transactions accurately and consistently, in accordance with management directives. Since February 1998, we have reported that the Forest Service's autonomous and decentralized organizational structure could hinder management's ability to achieve financial accountability. In March 1998, an independent contractor, hired by the Forest Service to assess the agency's financial management and organization, also raised the issue of the agency's autonomous organizational structure. The contractor reported that the Forest Service lacked a consistent structure for financial management practices and that each field unit was operating independently. In response to these concerns, the Forest Service conducted a Financial Management Field Operation Assessment (FOA), which was completed in March 2001. As part of the assessment, the FOA project team evaluated the current level of accountability for financial management and made six recommendations to strengthen lines of responsibility and accountability. Specifically, the team recommended that the Forest Service (1) ensure that appropriate delegation of authority is in place, (2) finalize performance measures for financial management, (3) appoint field directors as responsible financial accountability officers for their respective units, (4) appoint deputy chiefs in the national office as responsible financial accountability officers for their units, (5) provide training and develop core competencies, and (6) establish policies and guidelines addressing the development, implementation, and financing arrangements for shared services agreements related to financial activities. The Forest Service has taken several actions to address the FOA recommendations related to the autonomous field structure to improve accountability for financial management in the field and throughout the organization. For example, the agency restructured its national office financial management team to create functional lines of accountability for Budget and Finance management, under the leadership of the deputy CFO, who reports directly to the Chief of the Forest Service. The Forest Service also appointed field directors (regional foresters, research station directors, etc.) to serve as the responsible financial accountability officers for their units. Further, beginning in 2001, the Forest Service began to restructure its regional offices to mirror the national office's financial management structure. Currently, six of the nine regional offices have consolidated budget and finance functions, under the direction of a financial director who is responsible for financial management activities in the region. Another regional office is in the process of restructuring its financial management organization. The two remaining regional offices have no definite plans to change their financial management structure. While this is a good first step in resolving the autonomy of the Forest Service field offices, the Forest Service has not determined how best to structure the regions and related suboffices to create an efficient and effective organization to accomplish financial management activities. At the five field offices we visited, the financial management field staff told us that, although progress is being made, more needs to be done to move to sustainable financial transaction processing and reporting in the field. For example, staff reported that they need more training on FFIS and updated policy and procedure manuals. They also stated that the national office needs to improve communication with the field to obtain better understanding of field business processes and to solicit more input from the field staff in developing accounting and reporting policies and procedures. The Forest Service CFO management acknowledges that creating an effective and efficient organizational structure is critical to establishing sustainable processes and addressing many of the financial management issues and challenges that Forest Service faces, including improving internal controls over its accounting functions, such as adequate supervisory review, and over other areas of weakness noted by the auditors; providing training programs and on the job training opportunities for accounting field staff; and providing adequate oversight to ensure accurate and consistent processing of accounting transactions. In 1999, we designated financial management at the Forest Service to be high risk because of serious financial and accounting weaknesses that had been identified and not corrected, in the agency's financial statements for a number of years. We continued to designate financial management at Forest Service as high risk in our 2003 report. In order to be removed from the high-risk list, the Forest Service, at a minimum, will need to demonstrate sustained accountability over its assets on an ongoing basis. While the conditions discussed above present a major challenge to achieving financial accountability, the Forest Service has several efforts underway or planned, that if implemented, should help to resolve many of its financial management problems and to move toward sustainable financial management business processes. Such efforts are designed to address internal control and noncompliance issues identified in the fiscal year 2002 audit report as well as address feeder system and organizational issues. To assist in its efforts, the Forest Service CFO management is developing a financial management strategic plan intended to provide direction for continued improvement efforts and a mechanism to monitor and evaluate performance. To be effective, this plan should be comprehensive--providing a detailed road map of the steps, resources, and time frames for achieving the end goal of sustainable financial management. To address the fiscal year 2002 internal control and FFMIA audit findings, the fund balance with Treasury reconciliation team has documented its reconciliation procedures and is working with NFC to develop a fund balance with Treasury reconciliation process to assist in timely research and resolution of reconciling items related to fund balance with Treasury activities that are processed by NFC on the Forest Service's behalf. According to Forest Service CFO management, the reconciliation process should be in place by August 2003. The property, plant, and equipment reconciliation team has started a project to update existing policies and procedures and plans to issue revised property, plant, and equipment manuals during fiscal year 2003. The property, plant, and equipment team is also continuing to analyze property data files and reconcile data in property feeder systems to data in FFIS monthly. In January 2003, CFO management developed and implemented an automated system to track and monitor the status of issues identified by the reconciliation teams to help ensure timely resolution. They also hired a training coordinator to develop standardized training programs and two additional staff to update all financial policy and procedure manuals. The Forest Service is also continuing to work with USDA to enhance or replace the feeder systems in an effort to resolve data transfer problems between feeder systems and FFIS. For example, it is currently exploring an option for replacing the Forest Service's three property feeder systems with a single USDA-wide property system. A decision on the system will be made by December 2003. The Forest Service expects to begin implementing the system in fiscal year 2004. Also, the Forest Service is scheduled to pilot the Integrated Acquisition System (IAS) by fiscal year 2004. IAS is a procurement system that will replace the current purchase order system and will link to FFIS. IAS will support three major procurement processes: requisitioning, purchasing, and contracting. In addition to the efforts mentioned above, the Forest Service is evaluating options for a more efficient financial management organization. In November 2002, it formed the Financial Management Efficiency Team to assess financial management roles and responsibilities and evaluate models for an efficient financial management organization. In January 2003, the team submitted a draft proposal for financial management roles and responsibilities throughout the organization and is scheduled to submit its recommendation for a financial management organization in June 2003. According to CFO management, the team is expected to make a detailed recommendation for a consolidated accounting and fund control organization either at each regional office or within multiregional shared services centers located at selected regional offices. The Forest Service has several strategic plans that include many of the financial management improvement efforts. For example, the Forest Service prepares agencywide strategic plans and annual performance plans as required by the Government Performance and Results Act. Also, the Forest Service's Budget and Finance Deputy Chief units prepare annual project plans. However, the agencywide strategic and performance plans are broad in scope and focus on high-level goals and objectives. The annual project plans are narrowly focused on specific short-term projects. These plans are not an adequate substitute for a comprehensive financial management implementation strategy because they do not integrate all the improvement efforts and do not include the critical elements needed to effectively manage an overall strategy that will succeed in achieving and sustaining financial accountability. Forest Service CFO management is developing a financial management strategic plan intended to provide direction for continued improvement efforts and a mechanism to monitor and evaluate performance. This plan is designed as a working tool, evolving over 3 to 5 years, which will be reviewed and updated annually. In January 2003, the plan was introduced at the Forest Service's Budget and Finance planning conference. According to Forest Service CFO management the initial plan will be completed by June 30, 2003. To be effective, the Forest Service's plan should combine all the financial management improvement efforts into an overall comprehensive financial management implementation strategy. Such a strategy is a critical tool for the Forest Service, serving as a road map to help in resolving financial management problems. An effective plan includes long-term and short- term plans with clearly defined goals and objectives and specific corrective actions, target dates, and resources necessary to implement those actions. A comprehensive plan also prioritizes projects and assigns accountability by identifying responsible offices and staff responsible for carrying out the corrective actions. Without such a plan, it will be difficult to fix accountability for its many efforts and effectively monitor progress against its end goals. The Forest Service has demonstrated strong leadership and commitment to reach its goal of obtaining an unqualified opinion on its fiscal year 2002 financial statements. At the same time, many of the financial management improvement efforts implemented to date are outside of normal business processes and focus mainly on obtaining reliable year-end numbers for financial statement purposes. The Forest Service still must overcome several major challenges before it can move to sustainable processes that can routinely provide accurate, relevant, and timely information to support program management and accountability. The Forest Service is at a critical juncture. If the Forest Service is to achieve and sustain financial accountability, it must fundamentally improve its underlying internal controls, including financial management computer system controls, and financial management operations. The Forest Service has various efforts underway or planned, that if successfully carried through, will be important steps toward addressing the financial management challenges it faces. However, to date, several problems identified by the IG, KPMG, and us remain. Some of Forest Service problems are deep-seated and therefore will require sustained leadership and commitment of significant resources and time to resolve. The number and significance of the issues still facing the Forest Service emphasizes the need for a comprehensive strategy to manage the various initiatives underway or planned. To help ensure sustained commitment and timely implementation of financial management improvement efforts, we recommend that the Chief of the Forest Service direct the Chief Financial Officer to develop a comprehensive financial management strategic plan that clearly defines long-term and short-term financial management goals specifies corrective actions to address financial management challenges, including internal control weaknesses, FFMIA compliance deficiencies, system problems and organization issues; includes target dates and resources necessary to implement corrective identifies the responsible parties for carrying out corrective actions; and prioritizes and links the various improvement initiatives underway and planned, including USDA financial management systems enhancement efforts. In written comments on a draft of this report, the Forest Service concurred with our recommendations to develop a comprehensive financial management strategic plan that defines financial management goals, specifies corrective actions, identifies target dates and resources needed, identifies responsible parties, prioritizes and links improvement initiatives, and provides details on financial management systems enhancements. Forest Service's response (see appendix I) stated that preparation of a financial management strategic plan is in process. As agreed with your office, unless you publicly announce its contents earlier, we will not distribute this report for 30 days. At that time, copies of this report will be sent to the congressional committees with jurisdiction over the Forest Service and its activities; the Secretary of Agriculture; and the Director of the Office of Management and Budget. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO web site at http://www.gao.gov. If you or your staff have any questions please contact me at (202) 512-6906. Key contributors to this report were Alana Stanfield, Suzanne Murphy, Martin Eble, and Lisa Willett. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. 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Since 1996, we have periodically reported on Forest Service financial management problems that we, the U.S. Department of Agriculture's (USDA) Office of the Inspector General, and other independent auditors have identified. We have designated the Forest Service financial management as a high-risk area since 1999. Because of these longstanding financial management deficiencies, the House Committee on Resource's Subcommittee on Forests and Forest Health asked GAO to report on the Forest Service's progress in correcting its financial management problems and on remaining challenges and actions underway to address those challenges. The Forest Service has made significant progress toward achieving financial accountability, receiving its first "clean" or unqualified audit opinion on its financial statements for fiscal year 2002. This was attained because top management dedicated considerable resources to address accounting and reporting deficiencies. We consider this a positive step; however, sustaining this outcome and achieving financial accountability will require more than obtaining year-end numbers for financial statement purposes. The Forest Service continues to face several major challenges, many of which resulted in unfavorable audit opinions in the past. Specifically, the Forest Service's fiscal year 2002 financial statement audit report disclosed material internal control weaknesses related to its two major asset accounts--fund balance with the U.S. Department of the Treasury, and property, plant, and equipment--as well as for certain estimated liabilities, payroll processes, computer security controls, and software application controls related to its procurement and property systems. Further, the Forest Service has not addressed the challenges of replacing or enhancing legacy feeder systems and implementing a financial management field operation that supports efficient and effective day-to-day financial operations and routinely produces reliable and timely financial information. The Forest Service has corrective actions underway or planned that are intended to resolve these problems, including a financial management strategic plan. If this plan is to serve as a "road map" toward financial accountability, the Forest Service needs to ensure that its plan is comprehensive, integrating and prioritizing the various corrective action initiatives underway and planned.
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Every 4 years, DOD is required to conduct and report on a comprehensive assessment--the Quadrennial Roles and Missions Review--of the roles and missions of the armed services and the core competencies and capabilities of DOD to perform and support such roles and missions. Specifically, the Chairman of the Joint Chiefs of Staff is to conduct an independent military assessment of the roles and missions of the armed forces, assignment of functions among the armed services, and any recommendations regarding issues that need to be addressed. The Secretary of Defense is then to identify the core mission areas of the armed services; the core competencies and capabilities associated with these mission areas; the DOD component responsible for providing the identified core competency or capability; any gaps in the ability of the component to provide the competency or any unnecessary duplication of competencies or capabilities between a plan for addressing any gaps or unnecessary duplication. The Secretary is then to submit a report on this Quadrennial Roles and Missions Review following the review and not later than the submission of the President's budget for the next fiscal year; however, the statutory reporting requirement does not explicitly require that all required elements of the assessment be reported. The Quadrennial Roles and Missions Review that resulted in the July 2012 submission occurred amid a series of strategy and policy reviews that DOD has undertaken over the past 5 years. Some of these reviews resulted in specific strategy documents, such as the National Security Strategy, National Defense Strategy, National Military Strategy, and National Security Space Strategy. DOD is also required to conduct two reviews on a regular basis that relate to the Quadrennial Roles and Missions Review: the Quadrennial Defense Review and the Biennial Review of DOD Agencies and Field Activities. The timing requirements for the Quadrennial Roles and Missions Review and the Quadrennial Defense Review result in each Quadrennial Roles and Missions Review occurring 2 years before and 2 years after a Quadrennial Defense Review. In December 2010, DOD also reissued its internal DOD Directive 5100.01, which establishes the functions of DOD and its major components, and, in September 2011, released an update of the Unified Command Plan, which allocates responsibilities among the combatant commands. In addition to these recurring strategy reviews, comprehensive assessments, and updates to DOD guidance, DOD has recently completed two other reviews: the Defense Strategic Guidance, which identified the strategic interests of the United States, and the Strategic Choices Management Review, initiated by the Secretary of Defense in 2013 to inform DOD's planning for declining future budgets. The Defense Strategic Guidance, released in January 2012, was directed by the President to identify the strategic interests of the United States. The document states that it was an assessment of the defense strategy prompted by the changing geopolitical environment and fiscal pressures. The Defense Strategic Guidance was developed by senior officials from DOD--including the Office of the Secretary of Defense, the Joint Staff, the armed services, and the combatant commands--and the White House. The document outlines security challenges the United States faces and is intended to guide the development of the Joint Force through 2020 and during a period of anticipated fiscal constraints. The Defense Strategic Guidance identified 10 primary missions of the armed forces, as well as several principles to guide the force and program development necessary to achieve these missions. For more information about the Defense Strategic Guidance and other selected strategy and planning documents, see appendix I. In July 2012, DOD submitted the Quadrennial Roles and Missions Review report, together with the Defense Strategic Guidance, to Congress to meet the statutory reporting requirement; however, DOD's submission did not provide sufficiently detailed information about most of the statutorily required elements of the assessment. Although the statute does not require DOD to report on all elements of the roles and missions assessment, a key principle for information quality indicates that information presented to Congress should be clear and sufficiently detailed.armed services and some information about core capabilities, but did not, Specifically, we found that DOD provided the missions of the for any of the 10 missions, clearly identify the components within the department responsible for providing the core competencies and capabilities, or identify any plans to address any capability gaps or unnecessary duplication. The Quadrennial Roles and Missions Review report identifies missions of the armed services and provides information about capabilities and previously identified areas of duplication. The report restates the 10 missions of the armed forces identified in the Defense Strategic Guidance, and identifies some protected capabilities and investments needed to carry out each of the missions. For example, the report restates DOD's mission to project power despite anti-access / area denial challenges. It then lists five key enhancements and protected capabilities associated with this mission: enhance electronic warfare, develop a new penetrating bomber, protect the F-35 Joint Strike Fighter program, sustain undersea dominance and enhance capabilities, and develop and enhance preferred munitions capabilities. Additionally, the report also mentioned some previously identified areas of duplication and actions that were subsequently taken, such as eliminating redundancy in intelligence organizations, or proceeding with previous plans to eliminate organizations that performed duplicative functions or outlived their original purpose: the report notes the consolidation of specialized intelligence offices across DOD into two Defense Intelligence Agency task forces focused on counterterrorism and terrorism finance. Finally, the report also provides specific information about Information Operations as well as detention and interrogation, both of which were required to be included in Prior to the submission to this Quadrennial Roles and Missions Review.Congress, senior DOD leadership--including the Deputy Assistant Secretary of Defense for Force Development, the DOD General Counsel, Assistant Secretary of Defense for Legislative Affairs, Under Secretary of Defense (Comptroller), Director of Cost Assessment and Program Evaluation, Director of the Joint Staff, Under Secretary of the Navy, Secretary of the Army, and Secretary of the Air Force--internally concurred that the submission met the statutory requirement according to a tracking sheet used by the Office of the Under Secretary of Defense for Policy. While the submission identifies core missions for the armed services and provides some information about capabilities and competencies needed for those missions, it does not provide sufficiently detailed information about other statutorily required elements of the roles and missions assessment. In our review of the report, we found that DOD did not, for any of the 10 missions, clearly identify the components within the department responsible for providing the core competencies and capabilities, or identify any plans to address any capability gaps or unnecessary duplication. For example: The submission does not provide clear and sufficiently detailed information on which component or components are responsible for enhancing electronic warfare capabilities, which is identified by DOD as one of the key capabilities needed to project power despite anti- access / area denial challenges. In our prior work, we have found that DOD needed to strengthen its management and oversight of electronic warfare programs and activities, reduce overlap, and improve its return on its multibillion-dollar acquisition investments. DOD has acknowledged that it faces ongoing challenges in determining whether the current level of investment is optimally matched with the existing capability gaps.does not provide sufficiently detailed information of its approach to assign responsibilities, close potential gaps, or eliminate unnecessary duplication. The submission also does not provide clear and sufficiently detailed information on which components are responsible for enhancing airborne intelligence, surveillance, and reconnaissance capabilities, which are required for counterterrorism and irregular warfare missions. In our prior work, we have found that ineffective acquisition practices and collaboration efforts in the DOD unmanned aircraft systems portfolio creates overlap and the potential for duplication among a number of current programs and systems. Similarly, we have noted that opportunities exist to avoid unnecessary redundancies and maximize the efficient use of intelligence, surveillance, and reconnaissance capabilities. However, DOD's submission does not clarify responsibilities among the Air Force, Army, or Navy for developing these capabilities. This is the second time that DOD did not provide sufficiently detailed information to Congress following its roles and missions assessment. In the first Quadrennial Roles and Missions Review Report submitted to Congress in 2009, DOD identified the core missions of the department and identified the DOD Joint Capabilities Areas as the core competencies for the department. However, the report did not provide details for all elements required of the assessment. For example, the report did not provide core competencies and capabilities--including identifying responsible organizations--for each of the missions; instead the report provided some capability information for only specific focus areas within some of these missions. Despite the limited information contained in the 2009 Quadrennial Roles and Missions Review Report, the department used that first review to inform changes later made in DOD Directive 5100.01, which establishes functions of the department and its major components. However, as a result of not providing clear, sufficiently detailed, and relevant information in the most recent submission, DOD did not provide Congress comprehensive information about roles, responsibilities, and needed capabilities and competencies that Congress was seeking. DOD did not conduct a comprehensive process for the roles and missions assessment. Instead DOD limited its approach to leveraging the results of another review, conducted in 2011, that resulted in the January 2012 release of the Defense Strategic Guidance. However, this earlier review was not intended to assess all elements the statute required of the roles and missions review and, as a result, by relying on it DOD does not have the assurance that its resulting assessment was comprehensive. We recognize that there were some benefits to this approach, as the Defense Strategic Guidance did identify primary missions of the armed services, which were then provided as the core missions required for the Quadrennial Roles and Missions Review. In addition, the Defense Strategic Guidance provided several principles to guide the force and program development necessary to achieve these missions. The Defense Strategic Guidance also became the basis for completing the most recent Quadrennial Defense Review. However, neither DOD's review for preparing the Defense Strategic Guidance nor the Quadrennial Roles and Missions Review itself clearly identified the components within the department that are responsible for providing the core competencies and capabilities needed to address each of the primary missions, or plans for addressing any capability gaps or unnecessary duplication. Further, by using such an approach for preparing the roles and missions assessment, DOD did not document and follow key principles for conducting an effective and comprehensive assessment.principles include (1) developing and documenting a planned approach, including the principles or assumptions that will inform the assessment, which addresses all statutory requirements; (2) involving key internal stakeholders; (3) identifying and seeking input from appropriate external stakeholders; and (4) establishing time frames with milestones for conducting the assessment and completing the report. Planned approach: DOD did not develop and document its planned approach, including the principles or assumptions used to inform and address all statutory requirements of the assessment. Specifically, it did not document in its approach how it was going to address the statutory requirements related to the identification of components responsible for providing the core competencies and capabilities, any gaps, or any unnecessary duplication. A documented, planned approach provides a framework for understanding the strategic direction and the assumptions used to identify, analyze, assess, and address the statutory requirements of the assessment. Internal stakeholder involvement: The involvement of key internal stakeholders was limited. As part of a comprehensive process, the involvement of key internal stakeholders helps ensure that the information obtained during the review is complete. According to officials from the armed services, the Joint Staff, and the Office of the Under Secretary of Defense for Policy, officials from those offices had a limited role in the development and review of the roles and missions assessment. For example, the Chairman of the Joint Chiefs of Staff did not conduct an independent assessment of the roles and missions assessment prior to the broader, department-wide assessment. According to officials from the Office of the Secretary of Defense and Joint Staff, this decision was made because the Joint Chiefs of Staff had provided substantial input to, and had endorsed, the recently completed Defense Strategic Guidance. According to Joint Staff officials, the Chairman had agreed with the approach proposed by the Under Secretary of Defense for Policy to rely on the review that resulted in the Defense Strategic Guidance as the primary basis for the Quadrennial Roles and Missions Review. The Joint Staff reviewed the submission prepared by the Office of the Under Secretary of Defense for Policy and the Chairman then cosigned the submission with the Secretary of Defense. The armed services had limited responsibility for participating in the preparation of the roles and missions submission, and were given a limited opportunity to review and provide comment on DOD's draft submission before it was submitted to Congress. In addition, officials from the Office of the Director of Administration and Management--responsible for the biennial review of DOD agencies and field activities where additional efficiencies may be identified--told us they sought an opportunity to participate in the Quadrennial Roles and Missions Review process, but were not included in the review. According to an official from the Office of the Under Secretary of Defense for Policy, internal stakeholder involvement was incorporated from the prior, senior-level review that resulted in the Defense Strategic Guidance. However, the Office of the Director of Administration and Management was not involved in that prior review. By not considering ways to build more opportunity for stakeholder input, DOD was not well-positioned to obtain and incorporate input from across the armed services, agencies, offices, and commands within the department. Identification and involvement of appropriate external stakeholders: DOD had limited input from appropriate external stakeholders, such as Congress and federal agencies, with related national security goals. Input from Congress could have provided more specific guidance and direction for what it expected of the roles and missions assessment. According to DOD officials, they briefly discussed the assessment with some congressional staff early in the process. In addition, the 2012 Quadrennial Roles and Missions Review report did provide specific information about Information Operations as well as detention and interrogation, as requested by Congress. This information was collected in addition to information leveraged from the review for the Defense Strategic Guidance. However, DOD officials told us that they would benefit from additional clarification of Congress's expectations when performing subsequent roles and missions assessments. For example, these officials noted that it would be helpful if Congress highlighted which specific roles and responsibilities areas were of concern so that more detailed information might be provided about these areas in the next report. According to a DOD official, the White House was involved with the review for the Defense Strategic Guidance, but consultation with interagency partners was limited and occurred late in the process. While other federal agency partners were not involved with the latest Quadrennial Roles and Missions Review assessment, the involvement of other federal agency partners--such as the Department of State, Department of Homeland Security, and Office of the Director of National Intelligence--provides an opportunity to enlist their ideas, expertise, and assistance related to strategic objectives that are not solely the responsibility of DOD--such as homeland security and homeland defense. In assessing the capabilities and competencies, but not obtaining input from appropriate external stakeholders, DOD did not have additional support and input for the assessment of its roles and missions, or input as to what these stakeholders expected as an outcome of the assessment. Time frames: DOD did not develop a schedule to gauge progress for conducting the assessment and completing the report. Developing a schedule with time frames is useful to keep the overall review on track to meet deadlines and to produce a final product. However, aside from tracking the final review of the report in tracking sheets used by the Office of the Under Secretary of Defense for Policy and Joint Staff, DOD did not have planning documents that outlined specific time frames with milestones associated with conducting the assessment-- including time allotted for conducting the assessment itself, soliciting input from internal and external stakeholders, and drafting the report prior to circulation for final review. The lack of such a schedule may have been a contributing factor to the delay in DOD's submission. The report was required to be submitted to the congressional defense committees no later than the date in which the President's budget request for the next fiscal year was provided to Congress, which was February 13, 2012; however, the report was submitted on July 20, 2012. DOD's approach for the latest Quadrennial Roles and Missions Review also differed from the department's approach for preparing the 2009 Quadrennial Roles and Missions Review. For the 2009 effort, DOD developed and documented guidance in a "terms of reference" that included, among other things, a methodological approach, time frames with deliverables, and a list of offices within DOD responsible for conducting portions of the assessment. However, no similar document was developed for the 2012 roles and missions assessment. According to officials from the Office of the Under Secretary of Defense for Policy, the 2009 Quadrennial Roles and Missions Review occurred before DOD had to address the challenges of the current fiscal climate, and as a result there might have been more interest in conducting the review. In contrast, in preparing the 2012 roles and missions review, the officials told us that senior DOD leadership had recently considered these difficult issues in preparing the Defense Strategic Guidance, and so preferred to rely on those recent discussions rather than conduct a separate review. According to DOD officials, the primary reason that they did not perform a separate effort to examine roles and missions is that the statutory assessment and reporting requirements of the Quadrennial Roles and Missions Review are largely duplicative of the review conducted for the Defense Strategic Guidance, as well as other reviews and processes. DOD officials stated that identifying core missions as well as core competencies and capabilities is also mirrored in the requirements for the Quadrennial Defense Review. Additionally, according to DOD officials, the annual budget process is designed to identify and assign capabilities within each service's budget request, eliminate capability and capacity gaps, and eliminate unnecessary duplication among DOD components. However, by not conducting a specific, comprehensive roles and missions assessment, DOD missed an opportunity to examine these issues through a broad, department-wide approach, rather than through processes established for other purposes. Strategic assessments of the roles, missions, and needed competencies and capabilities within DOD--whether conducted through the Quadrennial Roles and Missions Review or some other strategic-level, department-wide assessment--can be used to inform the department and strengthen congressional oversight. Given the complex security challenges and increased fiscal pressures that the department faces, such assessments are important to help the department prioritize human capital and other investment needs across the many components within the department. Without a comprehensive roles and missions assessment, documented in a sufficiently detailed report, DOD missed an opportunity to lay the groundwork for the Quadrennial Defense Review and other department-wide reviews, allocate responsibilities among the many components within DOD, prioritize key capabilities and competencies, inform the department's investments and budget requests, identify any unnecessary duplication resulting in cost savings through increased efficiency and effectiveness, and aid congressional oversight. A comprehensive process that outlined a planned approach for addressing all statutory requirements of the roles and missions assessment; involved key internal stakeholders; offered an opportunity for key external stakeholders, such as Congress, to provide input regarding the department's approach; and set clear time frames to gauge progress for the assessment, would have helped provide DOD with reasonable assurance that its resulting assessment of roles and missions was comprehensive and that DOD was positioned to provide such a sufficiently detailed report to Congress. To assist DOD in conducting any future comprehensive assessments of roles and missions that reflect appropriate statutory requirements, we recommend that the Secretary of Defense develop a comprehensive process that includes a planned approach, including the principles or assumptions used to inform the assessment, that addresses all statutory requirements; the involvement of key DOD stakeholders, such as the armed services, Joint Staff, and other officials within the department; an opportunity to identify and involve appropriate external stakeholders, to provide input to inform the assessment; and time frames with milestones for conducting the assessment and for reporting on its results. In written comments on a draft of this report, DOD partially concurred with the report's recommendation to develop a comprehensive process to assist in conducting future assessments of roles and missions. DOD's comments are summarized below and reprinted in appendix II. In its comments, DOD agreed that it is important to make strategy-driven decisions regarding its missions and associated competencies and capabilities, and to assign and clarify to its components their roles and responsibilities. DOD noted that, in the context of dynamic strategic and budgetary circumstances and increasing fiscal uncertainty, the department leveraged its strategic planning and annual budget processes, which resulted in the release of the 2012 Defense Strategic Guidance and associated mission, capability, and force structure priorities to inform and address the 2012 Quadrennial Roles and Missions Review. Specifically, DOD commented on the four recommended principles of a comprehensive process: Regarding a planned approach, the department stated that it determined that using other, ongoing strategic planning efforts to complete the roles and missions assessment met the review's statutory requirement. As noted in the report, there were some benefits to DOD's taking advantage of other processes. However, DOD did not document its approach for identifying the components within the department responsible for providing the core competencies and capabilities, or identify any capability gaps or unnecessary duplication. A documented, planned approach provides a framework for understanding the strategic direction and the assumptions used to identify, analyze, assess, and address the statutory requirements of the assessment. Regarding DOD stakeholders, the department stated that the processes it used did include the involvement of key DOD stakeholders, but acknowledged that formally documenting the process for obtaining stakeholder input would have clarified the role of the Chairman of the Joint Chiefs of Staff. Documenting the decision regarding the Chairman's role would have provided some clarification; however, as noted in the report, it is also important to obtain and document input from all key internal stakeholders--including the armed services, agencies, offices, and commands within the department. Regarding external stakeholders, the department stated that it did seek limited additional clarification from Congress prior to conducting the roles and missions assessment, but did not seek formal input to the assessment from other federal agencies because it relied on the external stakeholder input obtained during the development of the Defense Strategic Guidance. However, during the course of our review, a DOD official told us there was limited involvement from other federal agency partners during the review for the Defense Strategic Guidance. As noted in the report, not obtaining input from appropriate external stakeholders--such as the Department of State, Department of Homeland Security, and Office of the Director of National Intelligence--when assessing the capabilities and competencies hindered DOD from having the additional support for the assessment of its roles and missions. Regarding time frames and milestones, the department stated that the development of time frames just for the roles and missions assessment would have been largely duplicative of existing time frames for other efforts, including the development of the Defense Strategic Guidance and the annual budget process. However, developing a schedule with time frames would have been useful to keep the roles and missions assessment on track and aid the department in submitting its report by the statutory deadline. Developing a comprehensive process for its roles and missions assessment--a process that outlined the department's planned approach for addressing all statutory requirements, involved key internal stakeholders, offered an opportunity for Congress and other key external stakeholders to provide input, and set clear time frames to gauge progress for the assessment--would have helped provide DOD with reasonable assurance that its resulting assessment was comprehensive. The department's approach resulted in a report that was insufficiently detailed, therefore, we continue to believe the recommendation is valid to guide future roles and missions reviews. We are sending copies of this report to the appropriate congressional committees; the Secretary of Defense; the Under Secretary of Defense for Policy; the Chairman of the Joint Chiefs of Staff; the Secretaries of the Army, of the Navy, and of the Air Force; the Commandant of the Marine Corps; DOD's Director of Administration and Management; and the Director of the Office of Management and Budget. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3489 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. The Department of Defense (DOD) is required to regularly assess and report on its roles and missions in the Quadrennial Roles and Missions Review. The most recently completed Quadrennial Roles and Missions Review occurred amid a series of strategy and policy reviews that DOD has undertaken over the past 6 years, including the first Quadrennial Figure 1 provides a Roles and Missions Review conducted in 2009.timeline of the issuance of select DOD strategic-level reports and other documents that contain roles and missions-related information. The National Defense Strategy provides the foundation and strategic framework for much of the department's strategic guidance. Specifically, it addresses how the military services plan to fight and win America's wars and describes how DOD plans to support the objectives outlined in the President's National Security Strategy. It also provides a framework for other DOD strategic guidance related to deliberate planning, force development, and intelligence. Further, the National Defense Strategy informs the National Military Strategy and describes plans to support the objectives outlined in the President's National Security Strategy. By law, DOD is required to conduct the Quadrennial Defense Review every 4 years to determine and express the nation's defense strategy and establish a defense program for the next 20 years. The review is to comprise a comprehensive examination of the national defense strategy, force structure, force modernization plans, infrastructure, budget planning, and other elements of the defense program and policies of the United States. The Quadrennial Defense Review also includes an evaluation by the Secretary of Defense and the Chairman of the Joint Chiefs of Staff of the military's ability to successfully execute its missions. The latest Quadrennial Defense Review was issued in March 2014.addition to these strategic reviews conducted at DOD, both the Department of Homeland Security and the Department of State released strategic reviews that provide a strategic framework to guide the activities In to secure the homeland and to provide a blueprint for diplomatic and development efforts. The Ballistic Missile Defense Review, released in February 2010, is a review conducted pursuant to guidance from the President and the Secretary of Defense, while also addressing the statutory requirement to assess U.S. ballistic missile defense policy and strategy. This review evaluated the threats posed by ballistic missiles and developed a missile defense posture to address current and future challenges. Specifically, this review sought to align U.S. missile defense posture with near-term regional missile threats and sustain the ability to defend the homeland against limited long-range missile attack. The Nuclear Posture Review is a statutorily mandated review that establishes U.S. nuclear policy, strategy, capabilities and force posture for the next 5 to 10 years.April 2010 and provided a roadmap for implementing the President's policy for reducing nuclear risks to the United States and the international community. Specifically, the 2010 report identified long-term modernization goals and requirements, including sustaining a safe, secure, and effective nuclear arsenal through the life extension of existing nuclear weapons; increasing investments to rebuild and modernize the nation's nuclear infrastructure; and strengthening the science, technology, and engineering base. The latest review was released by DOD in The National Security Strategy describes and discusses the worldwide interests, goals, and objectives of the United States that are vital to its national security and calls for a range of actions to implement the strategy.President in May 2010, addressed, among other things, how the United States would strengthen its global leadership position; disrupt, dismantle, and defeat al Qaeda; and achieve economic recovery at home and abroad. This strategy also emphasized the need for a whole-of- government approach with interagency engagement to ensure the security of the American people and the protection of American interests. The National Security Strategy is to be used to inform the National Defense Strategy and the National Military Strategy. The most recent National Security Strategy, released by the DOD Directive 5100.01 established the functions of the department and its major components. DOD reissued the directive in 2010 after the first Quadrennial Roles and Missions Review included what DOD describes as a thorough review of the directive. DOD updated the prior directive to incorporate emerging responsibilities in areas such as special operations and cyberspace operations and reflect other changes in the department's organization over the preceding decade. The Space Posture Review is a statutorily mandated review of U.S. national security space policy and objectives, conducted jointly by the Through Secretary of Defense and the Director of National Intelligence.coordination with the Office of the Director of National Intelligence, DOD released the National Security Space Strategy in January 2011. The strategy is derived from principles and goals found in the National Space Policy and builds on the strategic approach laid out in the National Security Strategy. Specifically, the strategy's stated objectives for national space security include strengthening safety, stability, and security in space; maintaining and enhancing the strategic national security advantages afforded to the United States by space; and engaging the space industrial base that supports U.S. national security. National Military Strategy and the Joint Strategic Capabilities Plan The National Military Strategy and the Joint Strategic Capabilities Plan, along with other strategic documents, provide DOD with guidance and instruction on military policy, strategy, plans, forces and resource requirements and allocations essential to successful execution of the National Security Strategy and other Presidential Directives. Specifically, the National Military Strategy, last issued in 2011, provides focus for military activities by defining a set of interrelated military objectives from which the service chiefs and combatant commanders identify desired capabilities and against which the Chairman of the Joint Chiefs of Staff assesses risk. This strategy defines the national military objectives, describes how to accomplish these objectives, and addresses the military capabilities required to execute the strategy. The Secretary of Defense's National Defense Strategy informs the National Military Strategy, which is developed by the Chairman of the Joint Chiefs of Staff. In addition, the Joint Strategic Capabilities Plan is to provide guidance to the combatant commanders, the chiefs of the military services, and other DOD agencies to accomplish tasks and missions based on current capabilities. It also is to serve as the link between other strategic guidance and the joint operation planning activities. Biennial Review of DOD Agencies and Field Activities By law, DOD is required to conduct a review every 2 years of the services and supplies that each DOD agency and field activity provides.Office of the Director of Administration and Management in the Office of the Secretary of Defense has led this biennial review. The goals are to determine whether DOD needs each of these agencies and activities, or whether it is more effective, economical, or efficient for the armed services to assume the responsibilities. However, unlike the Quadrennial Roles and Missions Review, which assesses the roles of all DOD components, the biennial review focuses on DOD agencies and field activities. The Secretary of Defense recently directed that the biennial review should also include an assessment of the offices within the Office The of the Secretary of Defense. DOD issued the latest report on this biennial review in April 2013. The Unified Command Plan provides guidance to combatant commanders and establishes their missions, responsibilities, force structure, geographic area of responsibility, and other attributes. Section 161 of Title 10 of the U.S. Code tasks the Chairman of the Joint Chiefs of Staff to conduct a review of the plan not less often than every 2 years and submit recommended changes to the President through the Secretary of Defense. The Unified Command Plan was last updated in 2011. Sustaining U.S. Global Leadership: Priorities for 21st Century Defense The Sustaining U.S. Global Leadership: Priorities for 21st Century Defense report (also referred to as the Defense Strategic Guidance), released in January 2012, was directed by the President to identify the strategic interests of the United States. The document states that it was an assessment of the defense strategy prompted by the changing geopolitical environment and fiscal pressures. The Defense Strategic Guidance was developed by senior officials from DOD--including the Office of the Secretary of Defense, the Joint Staff, the armed services, and the combatant commands--and the White House. The document outlines security challenges the United States faces and is intended to guide the development of the Joint Force through 2020 and during a period of anticipated fiscal constraints. The Defense Strategic Guidance identified 10 primary missions of the armed forces: counter terrorism and irregular warfare; deter and defeat aggression; project power despite anti-access / area denial challenges;counter weapons of mass destruction; operate effectively in cyberspace and space; maintain a safe, secure, and effective nuclear deterrent; defend the Homeland and provide support to civil authorities; provide a stabilizing presence; conduct stability and counterinsurgency operations; and conduct humanitarian, disaster relief, and other operations. It also identified several principles to guide the force and program development necessary to achieve these missions. For example, it noted the need for the department to continue to reduce costs through reducing the rate of growth of manpower costs, and the identification of additional efficiencies. In March 2013, the Secretary of Defense directed the completion of a Strategic Choices Management Review. The Strategic Choices Management Review was to examine the potential effect of additional, anticipated budget reductions on the department and develop options for performing the missions in the Defense Strategic Guidance. Specifically, the review was to inform how the department would allocate resources when executing its fiscal year 2014 budget and preparing its fiscal year 2015 through fiscal year 2019 budget plans. According to the Secretary of Defense, the purpose of the Strategic Choices Management Review was to understand the effect of further budget reductions on the department and develop options to deal with these additional reductions. The Secretary of Defense further emphasized that producing a detailed budget blueprint was not the purpose of this review. In addition to the contact named above, key contributors to this report were Margaret Morgan and Kevin L. O'Neill, Assistant Directors; Tracy Abdo; Darreisha M. Bates; Elizabeth Curda; Leia Dickerson; Gina Flacco; Brent Helt; Mae Jones; Amie Lesser; Travis Masters; Judy McCloskey; Terry Richardson; and Sabrina Streagle.
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DOD is one of the largest organizations in the world, with its budget representing over half of the U.S. federal government's discretionary spending. According to DOD, the global security environment presents an increasingly complex set of challenges. Congress requires DOD to assess and report on its roles and missions every 4 years. In July 2012, DOD submitted its most recent Quadrennial Roles and Missions Review report. In June 2013, GAO was mandated to review DOD's process for conducting the latest Quadrennial Roles and Missions Review. GAO evaluated the extent to which DOD developed a sufficiently detailed report and conducted a comprehensive process for assessing roles and missions. GAO compared DOD's July 2012 report with the statutory requirements for the assessment, and compared DOD's assessment process with key principles derived from a broad selection of principles GAO and other federal agencies have identified. The Department of Defense's (DOD) July 2012 submission to Congress following its most recent Quadrennial Roles and Missions Review did not provide sufficiently detailed information about most of the statutorily required elements of the assessment. Specifically, DOD's July 2012 submission included the results of a 2011 review that led to the January 2012 release of a new strategic guidance document (hereinafter referred to as the Defense Strategic Guidance) as well as the Quadrennial Roles and Missions Review report. Although DOD is not statutorily required to report on all elements of the assessment, the submission that it provided to Congress was lacking key information. A key principle for information quality indicates that information presented to Congress should be clear and sufficiently detailed; however, neither the Defense Strategic Guidance nor the Quadrennial Roles and Missions Review included sufficiently detailed information about certain key elements of the roles and missions assessment. For example, while the submitted documents identify the core missions of the armed services and provide some information on capabilities associated with these missions, neither document provides other information required by the roles and missions assessment--including identifying the DOD components responsible for providing the identified core competencies and capabilities and identifying plans for addressing any unnecessary duplication or capability gaps. DOD's process for assessing roles and missions missed key principles associated with effective and comprehensive assessments. Specifically, DOD limited its process to leveraging the prior review that resulted in the Defense Strategic Guidance; by doing so its process did not include the following: A planned approach : DOD did not develop or document a planned approach that included the principles or assumptions used to inform the assessment. Internal stakeholder involvement: DOD included limited internal stakeholder involvement. For example, DOD gave the armed services a limited opportunity to review the draft prior to its release. Identification and involvement of external stakeholders : DOD obtained limited input from relevant external stakeholders, such as Congress, on the specific guidance and direction they expected of the roles and missions assessment. Time frames : DOD did not develop a schedule to gauge progress for conducting the assessment and completing the report, which may have contributed to the report being provided to Congress over 5 months late. DOD officials stated that the primary reason that they did not perform a separate roles and missions review is that the statutory requirements were duplicative of other reviews and processes, such as the Defense Strategic Guidance. However, by not conducting a comprehensive assessment, DOD missed an opportunity to conduct a department-wide examination of roles and missions. Instead, by relying on processes established for other purposes, DOD has limited assurance that it has fully identified all possible cost savings that can be achieved through the elimination of unnecessary duplication and that it has positioned itself to report clear and sufficient information about the statutorily required assessment to Congress. GAO recommends that, in conducting future assessments of roles and missions, DOD develop a comprehensive process that includes a planned approach, involvement of key internal and external stakeholder involvement, and time frames. DOD partially concurred, stating that it had leveraged other processes. GAO maintains that the roles and missions report was insufficiently detailed and continues to believe the recommendation is valid, as discussed in the report.
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The Department of Education's basic functions are to provide financial resources, primarily through student loans and grants for higher education; provide research and information on best practices in education; and ensure that publicly funded schools and education programs observe civil rights laws. It administers a variety of grant and contract programs that provide aid for disadvantaged children; aid for children and adults with disabilities; student loans and grants for higher education; vocational and adult education; and research and evaluation, as well as a variety of smaller programs, such as the gifted and talented education program. Secondary Education Act, which helps support the education of over 6 million disadvantaged children in more than 50,000 schools nationwide--about one-half of the nation's public schools--and special education programs that assist over 5 million children with disabilities from birth through age 21 in meeting their educational and developmental needs. For fiscal year 1997, the Department has an estimated budget of $29.4 billion and is authorized 4,613 full-time-equivalent (FTE) staff-years. The administration's fiscal year 1998 budget request is for $39.5 billion and 4,560 FTE staff. This represents an increase of about $10 billion, $5 billion of which the administration wants to use to assist states in acquiring funds for school construction. The Department's spending for education leverages well beyond its budget authority. For example, the fiscal year 1998 budget request of $12.7 billion for postsecondary student aid programs is expected to generate $47.2 billion for more than 8 million students. And $4 billion in federal appropriations for special education is expected to leverage about $29.5 billion in state and local funds. Through its student aid programs, the Department has enabled millions of students to attend postsecondary educational institutions; however, the current economic conditions make continuing to ensure such access difficult. Rising tuition, coupled with the shift to providing loans instead of grants, could result in fewer low-income and minority students' staying in college. At the same time the Department is concerned with access, its ongoing challenge is to improve its processes to ensure financial accountability in its postsecondary student aid programs, particularly FFELP, FDLP, and the Pell Grant Program. In 1990, we designated the student financial aid program one of 17 federal high-risk programs likely to cause the loss of substantial amounts of federal money because of their vulnerabilities to waste, fraud, abuse, and mismanagement. Although the Department has acted to correct many problems and improve program controls, significant vulnerabilities remain, and we have included the student financial aid program in our 1997 list of 25 high-risk programs. of education is closely linked to unemployment. In addition, level of education is a strong determinant of wage earnings. For example, college graduates earn much more than those with only a high school education, and the differential has been increasing. According to Department data, in 1985 the median annual income of full-time male workers 25 years and over was $41,892 for college graduates and $26,609 for those with high school diplomas only, a difference of $15,283. By 1994, the difference between these two groups had grown to $21,191. Low-income and minority students have traditionally been underrepresented among college students, and access is becoming more and more problematic as the cost of attending college increases. For example, as we reported to the Congress in August 1996, a public college education has become less affordable in the last 15 years as tuition has risen nearly three times as fast as household income. The average tuition for full-time in-state students increased from $804 per year to $2,689, or 234 percent, and median household income, from $17,710 to $32,264, or 82 percent. Students and their families have responded to this "affordability gap" by drawing more heavily on their own financial resources and increasing their borrowing. For example, the annual average student loan at 4-year public schools rose from $518 per full-time student in fiscal year 1980 to $2,417 in fiscal year 1995, an increase of 367 percent, which is almost five times the 74-percent increase in the cost of living--as measured by the consumer price index--for the same period. If this trend continues, rising tuition levels may deter many students from attending college. The Department's primary mechanism for ensuring access to postsecondary institutions is the federal student financial aid programs--principally FFELP, FDLP, and the Pell Grant Program. While federal student financial aid has been substantial in the past, recent trends may inhibit broader college access. A growing proportion of federal aid has taken the form of loans rather than grants since the 1970s. For example, from 1977 to 1980, grant aid exceeded loan aid; since 1985, however, loan aid has been about twice the amount of grant aid. With federal grant aid declining in relative terms, students and their families have had to shoulder a greater share of college expenses. Many policymakers have expressed concern that this trend in college costs and in financial aid patterns, which increases students' net costs for higher education, has diminished college access--both entry and attendance through graduation--for low-income students. Our work supports this belief with respect to attendance through graduation. We concluded from our work that financial aid packages with relatively high grant levels may improve low-income students' access to higher education more than packages that rely more on loans. In addition, our analysis indicated that the sooner low-income students receive grant assistance, the more likely they are to stay in college. We found that grants were most effective in reducing low-income students' dropout probabilities in the first year. For these students, an additional $1,000 grant reduced the dropout probability by 23 percent. In the second year, the additional grant reduced dropout probability by 8 percent, while in the third year it had no statistically discernable effect. Therefore, we believe that restructuring federal grant programs to feature frontloading could improve low-income students' dropout rates with little or no change in each student's overall 4-year allocation of grants and loans. We suggested that, if the Congress was interested in increasing the number of low-income students who stay in college, it could direct the Department to conduct a pilot program for frontloading federal grants. The Congress has yet to act on this suggestion. Although major federal student aid programs, such as FFELP, FDLP, and the Pell Grant Program, have succeeded in providing students access to billions of dollars for postsecondary education, our work has shown that the Department has been less successful in protecting the financial interests of U.S. taxpayers. For example, in fiscal year 1996, while the Department made more than $40 billion available in student aid, the federal government paid out over $2.5 billion to make good its guarantee on defaulted student loans. agencies be conducted annually rather than every 2 years. The Department also has planned and taken a number of actions to correct its financial accountability problems, such as reorganizing the Office of Postsecondary Education to permit it to better administer and oversee federal student aid programs and developing several new information systems to provide more accurate and timely information. Many of the Department's actions are likely to have played a major role in reducing the amount of student loan defaults from $2.7 billion in fiscal year 1992 to $2.5 billion in fiscal year 1996 and in increasing collections on defaulted student loans from $1 billion in fiscal year 1992 to $2.1 billion in fiscal year 1996. However, the Department's actions have not completely resolved many of the underlying problems, and, therefore, vulnerabilities remain. At the core of the Department's financial accountability difficulties are persistent problems with the individual student aid programs' processes, structure, and management. These problems include (1) overly complex processes, (2) inadequate financial risk to lenders or state guaranty agencies for defaulted loans, and (3) management shortcomings. Our work has shown that the student aid programs have many participants and involve complicated, cumbersome processes. Three principal participants--students, schools, and the Department of Education--are involved in all the financial aid programs; two additional participants--lenders and guaranty agencies--also have roles in FFELP. In general, each student aid program has its own processes, which include procedures for student applications, school verifications of eligibility, and lenders or other servicing organizations that collect payments. Further, the introduction of FDLP, originally viewed as a potential replacement for FFELP, has added a new dimension of complexity. Rather than replacing FFELP as initially planned, FDLP now operates along side it. Essentially, this means that the Department has two programs that are similar in purpose but that operate differently. programs now serve more students from low-income families and those attending proprietary schools than in the past. As the number of these higher-risk borrowers has increased, so has the number of defaults. Both of these conditions enhance access for low-income students, yet a tension exists because they jeopardize financial accountability. Management shortcomings also continue as a major problem and contribute to the Department's financial accountability difficulties. In the past, congressional hearings and investigations, reports by the Department's OIG, our reports, and other studies and evaluations have shown that the Department (1) did not adequately oversee schools that participated in the programs; (2) managed each title IV program through a separate administrative structure, with poor or little communication among programs; (3) used inadequate management information systems that contained unreliable data; and (4) did not have sufficient and reliable student loan data to determine the Department's liability for outstanding loan guarantees. These problems cannot be quickly or easily fixed. The Department has taken many actions, such as improving gatekeeping procedures for determining which schools may participate, to address these problems. However, the Department's management problems, such as administrative inefficiencies resulting from the separate administrative structures used to manage each title IV program, have not yet been resolved. We testified before this Subcommittee last June on issues related to "gatekeeping"--the process for ensuring that students are receiving title IV aid to attend only schools that provide quality education and training. At that time, we noted the history of concern about the integrity of title IV programs stemming from our work, that of the Department's OIG, and the Congress--work that led to the conclusion that extensive abuse and mismanagement existed in these programs. For example, some schools received Pell grant funds for students who never applied for the grants or enrolled in or attended the schools. In one instance, a chain of proprietary schools falsified student records and misrepresented the quality of its educational programs to increase its revenues from students receiving Pell grants. that schools cannot exceed and still participate in the title IV programs. Legislation also has strengthened the role of the Department, states, and accrediting agencies--referred to as "the triad"--in determining school eligibility. HEA recognizes the triad as having shared responsibility for gatekeeping. As part of this triad, the Department (1) verifies schools' eligibility and certifies their financial and administrative capacity and (2) grants recognition to accrediting agencies. The Department has improved the gatekeeping process by such actions as requiring all schools to have annual financial and compliance audits, increasing the number of program reviews, hiring additional staff to conduct the reviews, and beginning to develop a new database of school information to help Department staff monitor schools' performance. Nevertheless, as we reported in our recent high-risk report, several weaknesses continue to cause concern. For example, the Department's OIG identified problems with the recertification process that could increase the likelihood that schools not in compliance with eligibility requirements are able to continue to participate in title IV programs. A review of a sample of Department recertification actions showed that 27 percent of schools sampled had violations such as unpaid debts or failures to meet financial responsibility requirements. The Department acknowledged that some recertifications should not have been made and stated that it was taking action to make current financial data available for future recertification reviews. The Department is also implementing a gatekeeping initiative designed to focus resources on high-risk schools: the Institutional Participation and Oversight Service (IPOS) Challenge. Under the IPOS Challenge, the Department plans to use a computer model to identify schools for review on the basis of their risk of noncompliance. Because this initiative has only recently been undertaken, it is too soon to assess its effectiveness. Excellence in education in America has become a major concern for the public, and both the Congress and the Department have promoted initiatives to improve the quality of American education. These efforts include improving the quality of the physical environment in which students learn, ensuring schools have the ability to use the technology needed to provide children with an education appropriate for the 21st century, creating and promoting national standards to shape curriculum and guide test development in order to measure reading and math achievement, supporting efforts to improve the quality of teachers and teacher preparation programs, and ensuring equal access to education. Major legislative efforts, such as Goals 2000: Educate America Act, the Improving America's School Act, and the School-to-Work Opportunities Act, are examples of efforts focusing on improving the quality of America's public education. Because the federal role in funding elementary and secondary education is relatively small, and states and local governments have the primary responsibility for and control of education programs, the Department faces a significant challenge in ensuring access and promoting excellence. Its tools are providing leadership, financial leverage, and technical assistance and information. The Department exercises leadership by shining a spotlight on important national education issues, facilitating communication on quality issues, and fostering intergovernmental and public/private partnerships. However, when one considers how it leverages resources and provides technical assistance and information, the extent to which Department funds are fostering excellence and are being spent efficiently and effectively is unclear. Two questions arise: Does the Department of Education know if its programs are working? And does the Department have the resources to manage its funds and provide the needed information and technical assistance? The Department is responsible for funding over $22 billion in elementary and secondary programs, including title 1, special education, vocational education, adult education, and Safe and Drug Free Schools. A major challenge facing the Department is ensuring that these programs are providing the intended outcomes. To do this the Department's programs must have clearly defined objectives and complete, accurate, and timely program data. $7.7 billion appropriated in fiscal year 1997. Its purpose is to promote access to and equity in education for low-income students. The Congress modified the program in 1994, strengthening its accountability provisions and encouraging the concentration of funds to serve more disadvantaged children. At this time, the Department does not have the information it needs to determine whether the funding is being targeted as intended. Although the Department has asked for $10 million in its fiscal year 1998 budget request to evaluate the impact of title 1, it has only just begun a small study of selected school districts to look at targeting so that necessary mid-course modifications can be identified. The ultimate impact of the 1994 program modifications could be diminished if the funding changes are not being implemented as intended. As another example, we found in our work on the programs funded under the Adult Education Act that the State Grant Program, which funds local programs intended to address the educational needs of millions of adults, had difficulty ensuring that the programs met these needs. The lack of clearly defined program objectives was one of the reasons for the difficulty. The broad objectives of the State Grant Program give the states flexibility to set their own priorities but, as some argue, they do not provide states with sufficient direction for measuring results. Amendments to the act required the Department to improve accountability by developing model indicators that states could adopt and use to evaluate local programs. However, experts disagree about whether developing indicators will help states to define measurable program objectives, evaluate local programs, and collect more accurate data. Recently, we have been examining two of the most basic elements of education--the financing systems that undergird public education and the buildings within which education takes place. For example, in our school facilities series, we documented that officials estimated that a third of our nation's schools had serious facilities problems and that it would take $112 billion to bring our schools into good overall condition. In February, the administration used our reports as the basis for proposing the Partnership to Rebuild America's Schools Act, which, if enacted, would be administered by the Department. Several members of the Congress have raised issues associated with this proposed solution to improve schools' conditions, such as whether the types of financial and information management problems that we discussed earlier regarding postsecondary federal financial aid programs would develop in the administration of this new program, whether the Department has qualified staff to administer the program, and whether information systems to monitor it and account for the funds are available and operational. The administration has also been promoting excellence and access by supporting technology, both through the leadership role of the President and the Office of the Secretary and through the technology programs the Department oversees. In the 1998 budget, the administration has doubled the amount of money requested for educational technology to help schools integrate technology into the curriculum in order to increase students' technological literacy and improve the quality of instruction in core subjects. In our facilities work, we found that schools had large technology infrastructure needs that the Department's Technology Literacy Challenge Grants would only start to address. Again, as in the school construction situation, the Department is facing a large need with relatively small amounts of funds. Adopting improved management practices can help the Department become more effective in achieving its mission of ensuring equal access to education and promoting educational excellence. Recognizing that federal agencies have not always brought the needed discipline to their management activities, the Congress in recent legislation provided a framework for addressing long-standing management challenges. The centerpiece of this framework is GPRA; other elements are the 1990 CFO Act, the 1995 Paperwork Reduction Act, and the 1996 Clinger-Cohen Act. These laws each responded to a need for more accurate, reliable information for executive branch and congressional decision-making. The Department has begun to implement these laws, which, in combination, provide it with a framework for developing (1) fully integrated information about the Department's mission and strategic priorities, (2) performance data to evaluate progress toward the achievement of those goals, (3) the relationship of information technology investments to the achievement of performance goals, and (4) accurate and audited financial information about the costs of achieving mission outcomes. The Department has a history of management problems. In our 1993 review of the Department, we identified operational deficiencies such as lack of management vision, lack of a formal planning process, poor human resource management, and inadequate commitment to management issues by the Department leadership. In addition, financial and information management were serious problems throughout the Department, and not confined to postsecondary programs. Further, recent legislation--Goals 2000: Educate America Act, the School-to-Work Opportunities Act, and the Student Loan Reform Act--requires strong management improvements to support sound implementation. has begun discussions with the Congress and others about the challenges it faces and the kinds of support it needs to move forward in achieving its goals. According to OMB, the Department has developed a fairly broad plan. OMB raised two issues during its review of the plan: (1) the lack of specificity in program performance plans and (2) the extent to which the objectives and indicators were beyond the agency's span of control or influence. With respect to the first concern, during the past few months the Department has been developing specific performance plans for all programs. Regarding the second concern, the Department responded to OMB by describing the nature of its education goals and by recognizing that those goals are shared by many entities. According to the Department, the plan's objectives and indicators recognize the multilevel, intergovernmental nature of federal education support and the need for effective performance partnerships to achieve jointly sought outcomes. At the same time, the Department is updating the strategic plan and intends to differentiate those objectives and indicators that are under the Department's full control more clearly from those that require action from state education agencies, local districts, or postsecondary institutions for effective results. administered by a single federal office, than several programs administered by several different offices. The Department is continuing its long-term efforts to streamline its operations. In its fiscal year 1998 budget request, it has proposed the elimination of 10 programs--representing more than $400 million in funding--that it believes have achieved their purpose; that duplicate other programs; or that are better supported by state, local, or private sources. Our work suggests that the Department needs to continue its efforts to eliminate duplicative or wasteful programs. The CFO Act, as expanded, requires the Department of Education as well as the 23 other major federal agencies to prepare and have audited annual financial statements beginning with those for 1996. Fiscal year 1995 was the first year the Department prepared agencywide financial statements and had them audited. However, the independent auditor could not determine whether the financial statements were fairly presented because of the insufficient and unreliable FFELP student loan data underlying the Department's estimate of $13 billion for loan guarantees. Furthermore, because guaranty agencies and lenders have a crucial role in the implementation and ultimate cost of FFELP, the auditors stressed the need for the Department to complete steps under way for improving oversight of guaranty agencies and lenders. Until such problems are fully resolved, the Department will continue to lack the financial information necessary to effectively budget for and manage the program or to accurately estimate the government's liabilities. In an effort to prepare auditable fiscal year 1996 financial statements, the Department's CFO has requested data from the top 10 guaranty agencies to be used as a basis for computing the liability for loan guarantees. In addition, the Department's independent auditor has developed agreed upon procedures to be applied by these agencies' independent auditors to test the reliability of the requested data. Uncertainty still exists as to whether this new methodology will work; decisions on the effectiveness of the approach will be made later this year once all the data are collected. operational in November 1994, enables schools, lenders, and guaranty agencies to transmit updated loan status data to the Department. However, the Department has not yet integrated the numerous separate data systems used to support individual student aid programs, often because the various "stovepipe" systems have incompatible data in nonstandard formats. As a result, program managers often lack accurate, complete, and timely data to manage and oversee the student aid program. The lack of an integrated system also results in unnecessary manual effort on the part of users and redundant data being submitted and stored in numerous databases, resulting in additional costs to the Department as well as the chance for errors in the data. For example, a Department consultant showed that a simple address change for a college financial aid administrator would require a minimum of 19 manual and automated steps performed by a series of Department contractors who would have to enter the change in their respective systems from printed reports generated by another system. Another problem with this multiple-system environment is a lack of common identifiers for schools. Without these, tracking students and institutions across systems is difficult. The 1992 HEA amendments required the Department to establish common identifiers for students and schools not later than July 1, 1993. The Department's current plans, however, do not call for developing and implementing common identifiers for schools until academic year 1999. Data integrity problems also exist. The lack of a fully functional and integrated title IV-wide recipient database hinders program monitoring and data quality assurance. For example, the current system cannot always identify where a student is enrolled, even after an award is made and thousands of dollars in student aid are disbursed. Although the Department has improved its student aid data systems somewhat, major improvements are still needed. Both we and OIG reported in 1996 that the Department had not adequately tested the accuracy and validity of the loan data in NSLDS. During the past year, the Department has been developing a major reengineering project, Easy Access for Students and Institutions, to redesign the entire title IV student aid program delivery system to integrate the management and control functions for the title IV programs. Although activity on this project, which had waned in previous months, has recently been renewed, carrying out the project is expected to be a long-term undertaking. The Department also faces a challenge in improving its agencywide information resources management, not just that related to the student aid programs. The legislative framework, especially that provided by the Clinger-Cohen Act, offers guidance for achieving goals in this area. The Clinger-Cohen Act requires, among other things, that federal agencies improve the efficiency and effectiveness of operations through the use of information technology by (1) establishing goals to improve the delivery of services to the public through the effective use of information technology; (2) preparing an annual report on the progress in achieving goals as part of its budget submission to the Congress; and (3) ensuring that performance measures are prescribed for any information technology that agencies use or acquire and that they measure how well the information technology supports Department programs. The Department could benefit greatly from fully implementing the law. Full implementation of the Clinger-Cohen Act would provide another opportunity to correct many of the Department's student financial aid system weaknesses as well as to improve other information systems that support the Department's mission. The Clinger-Cohen Act also requires that a qualified senior-level chief information officer be appointed to guide all major information resource management activities. The Department has recently appointed an Acting Chief Information Officer and, according to OMB, is to be actively recruiting an individual to fill this position on a permanent basis. This individual is responsible for developing an information resources management plan and overseeing information technology investments. In addition, the Department has highlighted the use of information technology for improved dissemination and customer service in its fiscal year 1998 budget summary. New initiatives include (1) a data warehousing effort that would simplify the internal use of databases, (2) a data conversion effort needed to comply with year 2000 requirements, and (3) a modeling project to develop an architectural framework and uniform operating standards for all Department data systems to eliminate duplication in collection and storage of data. education, the Department can promote national standards for educational performance and teacher training--but not impose them. It is expected to provide state and local education agencies flexibility in using federal funds and freedom from unnecessary regulatory burden, yet it must have enough information about programs and how money is spent to be accountable to American taxpayers for the federal funds administered at the state and local levels. It is expected to monitor programs and provide technical assistance, but its resources may not be sufficient to provide reasonable coverage. Although the Department has made progress in improving many management functions, it still has a long way to go. Over the years, our work has shown that the Department has not done a good job of minimizing risks and managing the federal investment, especially in postsecondary student aid programs. We also have concerns about whether the Department knows how well new or newly modified programs, like title 1, are being implemented; to what extent established programs are working; or whether it has the resources to effectively and efficiently provide needed information and technical assistance. Like other departments, the Department of Education needs to focus more on the results of its activities and on obtaining the information it needs for a more focused, results-oriented management decision-making process. GPRA, the CFO Act, and the Paperwork Reduction and Clinger-Cohen Acts give the Department the statutory framework it needs to manage for results. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions that you or members of the Subcommittee might have. For more information on this testimony, call Harriet Ganson, Assistant Director, at (202) 512-9045; Jay Eglin, Assistant Director, at (202) 512-7009; or Eleanor Johnson, Assistant Director, at (202) 512-7209. Joan Denomme and Joel Marus also contributed to this statement. Managing for Results: Using GPRA to Assist Congressional and Executive Branch Decisionmaking (GAO/T-GGD-97-43, Feb. 12, 1997). School Finance: State Efforts to Reduce Funding Gaps Between Poor and Wealthy Districts (GAO/HEHS-97-31, Feb. 5, 1997). High-Risk Series: Student Financial Aid (GAO/HR-97-11, Feb. 1997). Information Technology Investment: Agencies Can Improve Performance, Reduce Costs, and Minimize Risks (GAO/AIMD-96-64, Sept. 30, 1996). Higher Education: Tuition Increasing Faster Than Household Income and Public Colleges' Costs (GAO/HEHS-96-154, Aug. 15, 1996). Information Management Reform: Effective Implementation Is Essential for Improving Federal Performance (GAO/T-AIMD-96-132, July 17, 1996). Department of Education: Status of Actions to Improve the Management of Student Financial Aid (GAO/HEHS-96-143, July 12, 1996). School Facilities: America's Schools Report Differing Conditions (GAO/HEHS-96-103, June 14, 1996). Financial Audit: Federal Family Education Loan Program's Financial Statements for Fiscal Years 1994 and 1996 (GAO/AIMD-96-22, Feb. 26, 1996). School Finance: Trends in U.S. Education Spending (GAO/HEHS-95-235, Sept. 15, 1995). Student Financial Aid: Data Not Fully Utilized to Identify Inappropriately Awarded Loans and Grants (GAO/HEHS-95-89, July 11, 1995). School Facilities: America's Schools Not Designed or Equipped for 21st Century (GAO/HEHS-95-95, Apr. 4, 1995). Higher Education: Restructuring Student Aid Could Reduce Low-Income Student Dropout Rate (GAO/HEHS-95-48, Mar. 23, 1995). Department of Education: Long-Standing Management Problems Hamper Reforms (GAO/HRD-93-47, May 28, 1993). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed the major challenges the Department of Education faces in achieving its mission to: (1) ensure access to postsecondary institutions, while at the same time protecting the financial interests of the government; and (2) promote access to and excellence in elementary, secondary, and adult education. GAO noted that: (1) although the Department has made progress in ensuring access to postsecondary education and in providing financial accountability, challenges remain, especially in providing educational access to low-income and minority students in an era of rising tuition costs and in protecting the financial interests of the federal government; (2) the student aid programs make available billions of dollars in loans and grants to promote access to education, but these programs continue to be hampered by problems with process complexity, structure, and program management; (3) the student aid process is a complicated one, it has several participants who play different roles as well as various processes for each of the grant or loan programs; (4) the federal government continues to bear a major portion of the risk for loan losses; (5) moreover, management shortcomings, especially inadequate management information systems that contain unreliable data, contribute to the Department's difficulties; (6) the Department also faces challenges in promoting access to and excellence in preschool, elementary, secondary, and adult education programs; (7) through leadership and leverage, the Department works with states and local education agencies to effect changes intended to improve the nation's educational system; (8) demonstrating accountability is dependent on having clearly defined objectives, valid assessment instruments, and accurate program data; (9) in addition, it is unclear whether the Department has the resources it needs to manage its funds, including funds for the proposed Partnership to Rebuild America's Schools Act of 1997 and for helping schools integrate technology into the curriculum to make students technologically literate; (10) similarly, the Department only has selected information on the implementation of the title 1 program, the largest single federal elementary and secondary grant program, for which $7.7 billion was appropriated in fiscal year 1997; (11) thus, the Department does not have the informational basis to determine whether mid-course changes are necessary; (12) in meeting these challenges, the Department will need to improve its management; (13) major pieces of recent legislation provide powerful tools in the form of a statutory framework for improving agency operations and accountability; and (14) the Department has made progress in implementing these laws, but work remains to be done before the goal of improved management can be reached.
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deductible as a business expense; this subsidy also is not considered taxable income for employees. In addition, tax benefits are available to individuals who purchase nongroup private insurance directly from insurers (referred to as "individual insurance") if the person is self- employed or has premium and medical expenses combined that exceed 7.5 percent of his or her adjusted gross income. However, private insurance is not accessible to everyone. Some workers, including those working for small firms or in certain industries such as agriculture or construction, are less likely to be offered employment-based health coverage. Health insurance may also be expensive and potentially unaffordable for those paying the entire premium individually rather than receiving employment-based coverage where employers typically contribute to some or all of the cost. In addition, while all members of a group plan typically pay the same premium for employment-based insurance regardless of age or health status, in most states individual insurance premiums are higher for older, sicker individuals than for young, healthy individuals, potentially making them unaffordable. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) provided several important protections to improve the availability of private health insurance, particularly for individuals changing jobs or with preexisting health conditions. HIPAA included guaranteed access to coverage for those leaving group coverage and for small employers; however, it did not address issues of affordability. In addition, many states have enacted reforms that guarantee access to health insurance for certain high-risk individuals and small groups and that sometimes limit the premiums these persons and groups pay. While these federal and state private insurance market reforms provide important protections for certain individuals and groups, recent research finds little, if any, effect from these reforms on overall private insurance coverage rates. higher eligibility standards as long as they are within federal guidelines. SCHIP was established in 1997 to give states the choice of receiving enhanced federal funding to cover additional low-income children who do not qualify for Medicaid, generally those in families whose incomes are up to 200 percent of the federal poverty level. Unlike Medicaid, SCHIP is not an entitlement program, and states can halt enrollment once budgeted funds are exhausted. As of September 2000, HCFA reported that 3.3 million children were enrolled in SCHIP. Although Medicare primarily insures most Americans 65 years or older, it also provides coverage for some nonelderly individuals who are disabled or have end-stage renal disease. Additional tax incentives proposed to encourage people to purchase health insurance vary in terms of who would be eligible, whether the tax incentive is provided to individuals or employers, and whether the incentive is a deduction that reduces taxable income or a credit that reduces total tax liability. The proposals share challenges that will affect their success in covering newly insured individuals. These challenges include (1) making the reduction in premiums large enough to induce uninsured persons to purchase health insurance or to encourage employers to offer coverage or increase their contributions to premiums, and (2) timing a subsidy to be available for low-income individuals at the time they pay their premiums, rather than after the end of the tax year. their taxable income--potentially important if the employee must pay most or a large share (more than half) of the plan's premium, since these employees are more likely to turn down employment-based coverage. A tax deduction may be limited in its ability to induce uninsured individuals to purchase private insurance because most uninsured individuals do not earn enough for a deduction to make any or a significant difference in their net health insurance costs. In 1999, about 40 percent of the uninsured either did not file income tax returns or were in the 0 percent marginal tax rate and would not benefit from the deduction if they purchased individual insurance. Nearly 50 percent of the uninsured were in the 15 percent marginal tax rate, which, if they purchased qualifying health insurance, would allow them a 15 percent net reduction in their insurance cost. Analysts have generally agreed that this level of reduction would encourage few additional uninsured individuals to purchase health insurance. The remaining 10 percent of the uninsured, based on their marginal tax rates, would be eligible for a 28 to nearly 40 percent net reduction in the cost of their health insurance. While this level of reduction in net premiums may induce some individuals in higher tax brackets to purchase health insurance, it is less than some analysts have concluded would be necessary to lead to a widespread increase in coverage. For example, the Congressional Budget Office (CBO) reported that tax subsidies "would have to be fairly large--approaching the full cost of the premium--to induce a large proportion of the uninsured population to buy insurance." higher-income individuals could be eligible for a partial credit or no credit. Because more than half of uninsured individuals would not have had enough income tax liabilities in 1999 to receive the full credit amount, some proposals would make the credit refundable so that more low- income tax filers and a number of those who would not otherwise file could receive a larger portion or all of the amount. The number of individuals eligible for a tax credit would vary depending on the income thresholds specified in a proposal. For example, we estimate that in 1999 22 million uninsured Americans were in families that potentially would have been eligible for a tax credit available to single tax filers with $30,000 in taxable income and joint or head-of-household tax filers with $50,000 in taxable income. A recent study estimated that a tax credit of $1,000 for single coverage and $2,000 for family coverage with these taxable income thresholds could enable about 4.2 million--or nearly 20 percent of eligible individuals--to become newly insured. If income eligibility levels were twice as high, we estimate that 3 million additional uninsured individuals would have been in families potentially eligible for the tax credit, and the study estimated that a credit at this higher income eligibility level would result in another 0.5 million newly insured. a high premium of $7,154 for a 60- to 64-year-old smoker in urban Illinois. Thus, in some states, a $1,000 tax credit could represent all or most of the premium for a young, healthy male or for someone purchasing a plan with a high deductible or limited benefits. On the other hand, a $1,000 credit could represent a small proportion of the premium for a comprehensive health plan for an older person or someone with existing health conditions. For many individuals, a $1,000 tax credit would likely represent less than half of a typical premium. A tax credit's ability to induce uninsured individuals to purchase coverage will also depend on the timing of the credit. Some low-income individuals who want to take advantage of a credit to purchase health insurance may find it difficult to do so if they must pay the premiums up front but cannot receive the credit until the following year after filing their tax return. To alleviate this problem, some proposals would allow advance funding of a credit, so that eligible individuals could receive the credit at the time they purchase the health insurance. There is limited experience with advance payments of tax credits for individuals, and establishing an effective mechanism could be administratively challenging. Procedures and resources to assess eligibility based on partial-year income information would need to be available nationwide. In addition, efficient and equitable procedures for end-of-year reconciliations and recovery of excess payments would be necessary. insurance because they are required to spend money up-front to get the tax credit, whereas EITC is an addition to income, not a reimbursement for an expense. To encourage more employers to offer coverage, some proposals would provide a tax subsidy to small firms or those with low-wage workers that often do not offer health insurance to their employees. Although at least 96 percent of private establishments with 50 or more employees offered coverage in 1998, only 36 percent of private establishments with fewer than 10 workers and about 67 percent of private establishments with 10 to 25 workers offered coverage. Also in 1998, among private establishments in which half or more of the workers were low-wage, only 31 percent offered health insurance to their employees, while other private establishments were nearly twice as likely to offer health insurance. that in 1996 37 percent of workers earning less than $7 per hour were offered coverage but turned it down, while only 14 percent of workers earning $15 or more per hour turned down coverage. Many proposed or already available state-offered tax credits for employers provide only a temporary subsidy for the first few years an employer offers coverage. This may limit their potential for inducing employers to initiate and keep offering coverage. Experts we have consulted in our private insurance work told us that small employers are not likely to begin offering health insurance if they do not believe they will be able to do so permanently. Some proposed employer tax credits are linked to small employers obtaining health insurance through a purchasing cooperative. We reported last year that several existing cooperatives gave small employers the ability to offer a choice of plans, but typically at premiums similar to those available outside of the cooperative. We also reported that most current cooperatives represented a small share of their local small group market (5 percent or less) and several had recently been discontinued or faced declining insurer or employer participation. Some analysts suggest that small employer purchasing cooperatives could be more effective in making coverage more affordable if they represented a larger share of the market. A significant employer tax credit linked to a small employer purchasing cooperative might stimulate participation and create larger market share, making them better able to secure lower-cost coverage for participants. not currently eligible (such as childless adults) or raise income and asset eligibility standards. Another proposal would allow some near-elderly persons to buy in to Medicare. But many low-income people who currently are eligible for these public programs have not enrolled. Therefore, state outreach efforts to low-income individuals are key to the success of current and proposed programs. Despite mandatory and optional state Medicaid expansions and the implementation of SCHIP in recent years, millions of low-income children and adults remain uninsured. Nearly 3 million children in households below the federal poverty level were uninsured in 1999 even though they would typically have been eligible for Medicaid. And although SCHIP now covers more than 3 million children, in 1999 there were nearly 6 million uninsured children in families with incomes below 200 percent of the federal poverty level (about $34,000 for a family of four)--the income threshold targeted by many SCHIP programs. Another 16.3 million adults with family incomes below 200 percent of the federal poverty level were uninsured, and nearly half of these had family incomes below the federal poverty level. use SCHIP funds to cover eligible children's parents--but few other states have sought to do so. Also, 30 states have expanded Medicaid eligibility under section 1931 of the Social Security Act to disregard portions of an applicant's income or assets when determining eligibility, which effectively increases the level of income and assets an eligible individual may have. States' willingness and ability to use additional federal flexibility will be key to efforts to expand public coverage. States with high uninsured rates typically have lower income eligibility thresholds for Medicaid than those with low uninsured rates. For example, the average Medicaid eligibility level for parents in the 13 states with high uninsured rates is 54 percent of the federal poverty level, compared with an average of 99 percent of the federal poverty level for the 29 states with low uninsured rates. Furthermore, states with low uninsured rates have been more likely to use available authority to expand coverage than states with high uninsured rates. Whereas 10 of the 29 states with uninsured rates significantly lower than the U.S. average have used section 1115 waivers to expand Medicaid eligibility, only 1 of the 13 states with uninsured rates significantly higher than the U.S. average has done so. Appendix I summarizes selected eligibility requirements and options that states have adopted for Medicaid and SCHIP. States' financial capacity may be a factor in what states have done to expand Medicaid and SCHIP to cover additional low-income individuals. States with high uninsured rates tend to be poorer and already cover a larger share of their population in Medicaid. On average, 16 percent of the nonelderly populations in the 13 states with high uninsured rates are in poverty compared with 10 percent in the 29 states with low uninsured rates. These high uninsured states also cover a higher proportion of their nonelderly residents through Medicaid (9 percent) than do states with low uninsured rates (7 percent). sponsored retiree health benefits in 1997 than in 1991. Recent employer surveys indicate that this decline has not reversed since 1997. Further, with the aging of the baby boom generation, over the next decade the number of near-elderly individuals not yet eligible for Medicare will grow, which likely will increase the number of uninsured persons in this age group. CBO estimates that few individuals would be able to afford the full premium that would be necessary to buy-in to Medicare--$300 to more than $400 per month initially. High-cost individuals who would face higher than average premiums in the individual insurance market would be most likely to opt for a Medicare buy-in, which would likely lead to premium increases over time. Subsidies to low-income individuals would encourage more lower-cost near-elderly individuals to buy in to Medicare. Many low-income individuals who are eligible for Medicaid and SCHIP do not enroll. Some may be unaware that they or their children may be eligible, while the administrative complexity of enrolling and other reasons may discourage other eligible individuals from participating. Thus, outreach to low-income individuals to enroll in existing or expanded public programs is key to the success of the programs. We reported in 1996 that 3.4 million Medicaid-eligible children--23 percent of those eligible under federal standards--were uninsured. Another study found that in 1998 16 percent of children under 200 percent of the federal poverty level were eligible for Medicaid or SCHIP but were uninsured. for federal-state assistance for paying Medicare premiums and/or other out-of-pocket expenses not covered by Medicare were not enrolled.Recognizing the low participation by these individuals eligible for the Qualified and Specified Low-Income Medicare Beneficiary programs, last year the Congress enacted requirements that the Social Security Administration identify and notify potentially eligible individuals, and that the Department of Health and Human Services develop and distribute to states a simplified uniform enrollment application. Efforts to expand private or public coverage to those currently uninsured can also provide new incentives to those already having private health insurance. Some currently insured individuals may drop employment- based coverage to get tax-subsidized individual insurance or enroll in Medicaid or SCHIP. While there was disagreement among analysts about the extent of crowd-out of private health insurance resulting from the Medicaid expansions in the late 1980s and early 1990s, concern led the Congress to include a requirement in SCHIP that states devise methods to avoid such crowd-out. While several approaches may offset the extent of crowd-out, some degree of crowd-out may be an unavoidable cost of expanding private or public coverage to insure those that are currently uninsured. For example, CBO analysts suggested that some displacement of private insurance is inevitable, particularly since some low-income families move in and out of private insurance coverage and public programs can allow these low-income families to achieve more stable insurance coverage. federal cost per newly insured person since much of the subsidy goes to those already covered. Moreover, some employers currently offering health insurance to their employees may discontinue offering coverage if their employees have tax preferences available for individually-purchased insurance. Similarly, even if employers continued sponsoring coverage, some employees--especially those who are young and healthy--may be able to purchase lower-cost insurance in the individual market, which could over the long-term increase the costs for some remaining in the group employment-based market. One study estimated that, among people electing a tax credit, nearly half would already be purchasing individual insurance, about one-quarter would shift from employment- based coverage, and another one-quarter would have previously been uninsured. Of those shifting from employment-based coverage, about one- fourth would be because the firm dropped coverage. Similarly, when eligibility for public programs is expanded, employers with many low-income individuals eligible for public coverage may decide to discontinue coverage or individuals offered employment-based coverage may shift to public programs where they have lower or no premiums or other out-of-pocket costs. The absence of measures to reduce crowd-out can be significant. For example, a recent report indicated that one state that extended Medicaid coverage to parents with eligible children without a waiting period found that nearly one-third of those that became newly enrolled had previously had private health insurance. periods requiring individuals not to have had employment-based coverage for a certain time before becoming eligible for SCHIP. Other states have established cost sharing requirements (premiums or copayments) for SCHIP, thereby providing less of a financial incentive for low-income workers to switch from an employment-based plan where cost sharing requirements are common. A variety of approaches have been proposed to increase private and public coverage among uninsured individuals. The success of these proposals in doing so for these diverse populations will depend on several key factors. The impact of tax subsidies on promoting private health insurance will depend on whether the subsidies reduce premiums enough to induce uninsured low-income individuals to purchase health insurance and on whether these subsidies can be made available at the time the person needs to pay premiums. The effectiveness of public program expansions will depend on states' ability and willingness to utilize any new flexibility to cover uninsured residents as well as develop effective outreach to enroll the targeted populations. While crowd-out is a concern with any of the approaches, private or public, some degree of public funds going to those currently with private health insurance may be inevitable to provide stable health coverage for some of the currently 42 million uninsured. Mr. Chairman, this concludes my statement. I would be happy to answer any questions that you or Members of the Committee may have. For more information regarding this testimony, please contact Kathryn G. Allen at (202) 512-7118 or John E. Dicken at (202) 512-7043. JoAnne R. Bailey, Paula Bonin, Randy DiRosa, Karen Doran, Betty Kirksey, Susanne Seagrave, and Mark Vinkenes also made key contributions to this statement. Medicaid upper income eligibility standard for parents, as of March 2000 (percentage of federal poverty level) SCHIP upper income eligibility standard, as of September 30, 2000 (percentage of federal poverty level) Medicaid upper income eligibility standard for parents, as of March 2000 (percentage of federal poverty level) SCHIP upper income eligibility standard, as of September 30, 2000 (percentage of federal poverty level) 140 Income eligibility level for parents assumes a family of three with one wage-earner, that all income is from earnings, and that only earned income disregards are taken. Health Insurance: Characteristics and Trends in the Uninsured Population (GAO-01-507T, Mar. 13, 2001). Federal Taxes: Information on Payroll Taxes and Earned Income Tax Credit Noncompliance (GAO-01-487T, Mar. 7, 2001). Private Health Insurance: Potential Tax Benefit of a Health Insurance Deduction Proposed in H.R. 2990 (GAO/HEHS-00-104R, Apr. 21, 2000). Medicaid and SCHIP: Comparisons of Outreach, Enrollment Practices, and Benefits(GAO/HEHS-00-86, Apr. 14, 2000). Private Health Insurance: Cooperatives Offer Small Employers Plan Choice and Market Prices (GAO/HEHS-00-49, Mar. 31, 2000). Private Health Insurance: Estimates of Effects of Health Insurance Tax Credits and Deductions as Proposed in H.R. 2261 (GAO/HEHS-99-188R, Sept. 13, 1999). Children's Health Insurance Program: State Implementation Approaches Are Evolving (GAO/HEHS-99-65, May 14, 1999). Private Health Insurance: Progress and Challenges in Implementing 1996 Federal Standards (GAO/HEHS-99-100, May 12, 1999). Low-Income Medicare Beneficiaries: Further Outreach and Administrative Simplification Could Increase Enrollment (GAO/HEHS-99-61, Apr. 9, 1999). Private Health Insurance: Estimates of a Proposed Health Insurance Tax Credit for Those Who Buy Individual Health Insurance (GAO/HEHS-98- 221R, July 22, 1998). Private Health Insurance: Estimates of Expanded Tax Deductibility of Premiums for Individually Purchased Health Insurance (GAO/HEHS-98- 190R, June 10, 1998). Private Health Insurance: Declining Employer Coverage May Affect Access for 55- to 64-Year-Olds (GAO/HEHS-98-133, June 1, 1998). Medicaid: Demographics of Nonenrolled Children Suggest State Outreach Strategies (GAO/HEHS-98-93, Mar. 20, 1998). (290044)
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Various approaches have been proposed to increase private and public health care coverage of uninsured persons. The success of these proposals will depend on several key factors. The impact of tax subsidies on promoting private health insurance will depend on whether the subsidies reduce premiums enough to induce uninsured low-income individuals to buy health insurance and on whether these subsidies can be made available at the time the person needs to pay premiums. The effectiveness of public program expansions will depend on states' ability and willingness to use any new flexibility to cover uninsured residents as well as develop effective outreach to enroll the targeted populations. Although crowd-out is a concern with any of the approaches, some degree of public funds going to those currently with private health insurance may be inevitable to provide stable health coverage for some of the 42 million uninsured Americans.
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In the past, the ICC regulated almost all of the rates that railroads charged shippers. The Railroad Revitalization and Regulatory Reform Act of 1976 and the Staggers Rail Act of 1980 greatly increased reliance on competition to set rates in the railroad industry. Specifically, these acts allowed railroads and shippers to enter into confidential contracts that set rates and prohibited ICC from regulating rates where railroads had either effective competition or rates negotiated between the railroad and the shipper. Furthermore, the ICC Termination Act of 1995 abolished ICC and transferred its regulatory functions to STB. Taken together, these acts anchor the federal government's role in the freight rail industry by establishing numerous goals for regulating the industry, including to allow, to the maximum extent possible, competition and demand for services to establish reasonable rates for transportation by rail; minimize the need for federal regulatory control over the rail transportation system and require fair and expeditious regulatory decisions when regulation is required; promote a safe and efficient rail transportation system by allowing rail carriers to earn adequate revenues, as determined by STB; ensure the development and continuation of a sound rail transportation system with effective competition among rail carriers and with other modes to meet the needs of the public and the national defense; foster sound economic conditions in transportation and ensure effective competition and coordination between rail carriers and other modes; maintain reasonable rates where there is an absence of effective competition and where rail rates provide revenues that exceed the amount necessary to maintain the rail system and attract capital; prohibit predatory pricing and practices to avoid undue concentrations of market power; and provide for the expeditious handling and resolution of all proceedings. While the Staggers Rail and ICC Termination Acts reduced regulation in the railroad industry, they maintained STB's role as the economic regulator of the industry. The federal courts have upheld STB's general powers to monitor the rail industry, including its ability to subpoena witnesses and records and to depose witnesses. In addition, STB can revisit its past decisions if it discovers a material error, or new evidence, or if circumstances have substantially changed. Two important components of the current regulatory structure for the railroad industry are the concepts of revenue adequacy and demand-based differential pricing. Congress established the concept of revenue adequacy as an indicator of the financial health of the industry. STB determines the revenue adequacy of a railroad by comparing the railroad's return on investment with the industrywide cost of capital. For instance, if a railroad's return on investment is greater than the industrywide cost of capital, STB determines that railroad to be revenue adequate. Historically, ICC and STB have rarely found railroads to be revenue adequate--a result that many observers relate to characteristics of the industry's cost structure. Railroads incur large fixed costs to build and operate networks that jointly serve many different shippers. Some fixed costs can be attributed to serving particular shippers, and some costs vary with particular movements, but other costs are not attributable to particular shippers or movements. Nonetheless, a railroad must recover these costs if the railroad is to continue to provide service over the long run. To the extent that railroads have not been revenue adequate, they may not have been fully recovering these costs. The Staggers Rail Act recognized the need for railroads to use demand- based differential pricing to promote a healthy rail industry and enable it to raise sufficient revenues to operate, maintain and, if necessary, expand the system in a deregulated environment. Demand-based differential pricing, in theory, permits a railroad to recover its joint and common costs--those costs that exist no matter how many shipments are transported, such as the cost of maintaining track-- across its entire traffic base by setting higher rates for traffic with fewer transportation alternatives than for traffic with more alternatives. Differential pricing recognizes that some customers may use rail if rates are low--and have other options if rail rates are too high or service is poor. Therefore, rail rates on these shipments generally cover the directly attributable (variable) costs, plus a relatively low contribution to fixed costs. In contrast, customers with little or no practical alternative to rail--"captive" shippers--generally pay a much larger portion of fixed costs. Moreover, even though a railroad might incur similar incremental costs while providing service to two different shippers that move similar volumes in similar car types traveling over similar distances, the railroad might charge the shippers different rates. Furthermore, if the railroad is able to offer lower rates to the shipper with more transportation alternatives, that shipper still pays some of the joint and common costs. By paying even a small part of total fixed cost, competitive traffic reduces the share of those costs that captive shippers would have to pay if the competitive traffic switched to truck or some other alternative. Consequently, while the shipper with fewer alternatives makes a greater contribution toward the railroad's joint and common costs, the contribution is less than if the shipper with more alternatives did not ship via rail. The Staggers Rail Act further requires that the railroads' need to obtain adequate revenues to be balanced with the rights of shippers to be free from, and to seek redress from, unreasonable rates. Railroads incur variable costs--that is, the costs of moving particular shipments--in providing service. The Staggers Rail Act stated that any rate that was found to be below 180 percent of a railroad's variable cost for a particular shipment could not be challenged as unreasonable and authorized ICC, and later STB, to establish a rate relief process for shippers to challenge the reasonableness of a rate. STB may consider the reasonableness of a rate only if it finds that the carrier has market dominance over the traffic at issue--that is, if (1) the railroad's revenue is equal to or above 180 percent of the railroad's variable cost (R/VC) and (2) the railroad does not face effective competition from other rail carriers or other modes of transportation. Rail rates have generally declined since 1985, but experienced a 9 percent annual increase between 2004 and 2005--the largest annual increase in 20 years. Although rates have generally declined, railroads have also shifted other costs to shippers, such as the cost of rail car ownership, and have increased the revenue they report as miscellaneous more than 10-fold between 2000 and 2005. Following a period of general decline since 1985, rates began to increase in 2001. Rates experienced a 9 percent annual increase from 2004-2005, which represents the largest annual increase in rates during the 20-year period from 1985 through 2005. This annual increase also outpaced inflation--about 3 percent in 2005. However, despite these increases, rates for 2005 remain below their 1985 levels and below the rate of inflation for the 1985 through 2005 period, and rates overall have declined since 1985. Because the set of rail rate indexes we used to examine trends in rail rates over time does not account for inflation we also included the price index for the gross domestic product (GDP) in figure 1. Similar to overall industry trends, rates for individual commodities have increased from 2004-2005. In 2005, rates increased for all 13 commodities that we reviewed. Rates for coal increased by 7.9 percent while rates for grain increased by 8.5 percent. In 2005, the largest rate increase (for fireboard and paperboard) exceeded 11 percent, while the smallest increase (for motor vehicles) was about 2.7 percent. Figure 2 depicts rate changes for coal, grain, miscellaneous mixed shipments, and motor vehicles from 1985 through 2005. In 2005, freight railroad companies continued a trend of shifting other costs to shippers. Our analysis shows a 20 percentage point increase shift in railcar ownership (measured in tons carried) since 1987. In 1987, railcars owned by freight railroad companies moved 60 percent of tons carried. In 2005, they moved 40 percent of tons carried, meaning that freight railroad company railcars no longer carry the majority of tonnage (see fig. 3). In 2005 the amount of industry revenue reported as miscellaneous increased ten-fold over 2000 levels, rising from about $141 million to over $1.7 billion (see fig. 4). Miscellaneous revenue is a category in the Carload Waybill Sample for reporting revenue outside the standard rate structure. This miscellaneous revenue can include some fuel surcharges, as well as revenues such as those derived from congestion fees and railcar auctions (in which the highest bidder is guaranteed a number of railcars at a specified date). In 2004, miscellaneous revenue accounted for 1.5 percent of freight railroad revenue reported. In 2005, this percentage had risen to 3.7 percent. Also, in 2005, 20 percent of all tonnage moved in the United States generated miscellaneous revenue. In October 2006 and August 2007, we reported that captive shippers are difficult to identify and STB's efforts to protect captive shippers have resulted in little effective relief for those shippers. We also reported that economists and shipper groups have proposed a number of alternatives to address remaining concerns about competition - however, each of these alternative approaches have costs and benefits and should be carefully considered to ensure the approach will achieve the important balance set out in the Staggers Act. It remains difficult to determine precisely how many shippers are "captive" to one railroad because the proxy measures that provide the best indication can overstate or understate captivity. One measure of potential captivity--traffic traveling at rates equal to or greater than 180 percent R/VC--is part of the statutory threshold for bringing a rate relief case before STB. STB regards traffic at or above this threshold as "potentially captive," but, like other measures, R/VC levels can understate or overstate captivity. Since 1985, tonnage and revenue from traffic traveling at rates over 180 percent R/VC have generally declined, while traffic traveling at rates substantially over the threshold for rate relief (greater than 300 percent R/VC) has generally increased. This trend continued in 2005, as industry revenue generated by traffic traveling at rates over 180 percent R/VC dropped by roughly half a percent. Tonnage traveling at rates over 180 percent R/VC dropped by a smaller percentage. Traffic traveling at rates substantially over the threshold for rate relief has generally increased from 1985 to 2005 (see fig. 6). In 2003 and 2004, the percentage of both tonnage and revenue traveling at rates above 300 percent R/VC declined from the previous year, but each increased again in 2005. For example, the share of tonnage traveling at rates over 300 percent R/VC increased from 6.1 percent in 2004 to 6.4 percent in 2005. Figure 6 shows tonnage traveling at rates above 300 percent R/VC from 1985 through 2005. Some areas with access to one Class I railroad also have more than half of their traffic traveling at rates that exceed the statutory threshold for rate relief. For example, parts of New Mexico and Idaho with access to one Class I railroad had more than half of all traffic originating in those same areas traveling at rates over 180 percent R/VC. However, we also found instances in which an economic area may have access to two or more Class I railroads and still have more than 75 percent of its traffic traveling at rates over 180 percent R/VC, as well as other instances in which an economic area may have access to one Class I railroad and have less than 25 percent of its traffic traveling at rates over 180 percent R/VC. STB has taken a number of actions to provide relief for captive shippers. While the Staggers Rail and ICC Termination Acts encourage competition as the preferred way to protect shippers and to promote the financial health of the railroad industry, they also give STB the authority to adjudicate rate cases to resolve disputes between captive shippers and railroads upon receiving a complaint from a shipper; approve rail transactions, such as mergers, consolidations, acquisitions, and trackage rights; prescribe new regulations, such as rules for competitive access and merger approvals; and inquire into and report on rail industry practices, including obtaining information from railroads on its own initiative and holding hearings to inquire into areas of concern, such as competition. Under its adjudicatory authority, STB has developed standard rate case guidelines, under which captive shippers can challenge a rail rate and appeal to STB for rate relief. Under the standard rate relief process, STB assesses whether the railroad dominates the shipper's transportation market and, if it finds market dominance, proceeds with further assessments to determine whether the actual rate the railroad charges the shipper is reasonable. STB requires that the shipper demonstrate how much an optimally efficient railroad would need to charge the shipper and construct a hypothetical, perfectly efficient railroad that would replace the shipper's current carrier. As part of the rate relief process, both the railroad and the shipper have the opportunity to present their facts and views to STB, as well as to present new evidence. STB also created alternatives to the standard rate relief process, developing simplified guidelines, as Congress required, for cases in which the standard rate guidelines would be too costly or infeasible given the value of the cases. Under these simplified guidelines, captive shippers who believe that their rate is unreasonable can appeal to STB for rate relief, even if the value of the disputed traffic makes it too costly or infeasible to apply the standard guidelines. Despite STB's efforts, we reported in 2006 that there was widespread agreement that STB's standard rate relief process was inaccessible to most shippers and did not provide for expeditious handling and resolution of complaints. The process remained expensive, time consuming, and complex. Specifically, shippers we interviewed agreed that the process could cost approximately $3 million per litigant. In addition, shippers said that they do not use the process because it takes so long for STB to reach a decision. Lastly, shippers stated that the process is both time consuming and difficult because it calls for them to develop a hypothetical competing railroad to show what the rate should be and to demonstrate that the existing rate is unreasonable. We also reported that the simplified guidelines also had not effectively provided relief for captive shippers. Although these simplified guidelines had been in place since 1997, a rate case had not been decided under the process set out by the guidelines when we issued our report in 2006. STB had held public hearings in April 2003 and July 2004 to examine why shippers have not used the guidelines and to explore ways to improve them. At these hearings, numerous organizations provided comments to STB on measures that could clarify the simplified guidelines, but no action was taken. STB observed that parties urged changes to make the process more workable, but disagreed on what those changes should be. We reported that several shipper organizations told us that shippers were concerned about using the simplified guidelines because they believe the guidelines will be challenged in court, resulting in lengthy litigation. STB officials told us that they--not the shippers--would be responsible for defending the guidelines in court. STB officials also said that if a shipper won a small rate case, STB could order reparations to the shipper before the case was appealed to the courts. Since our report in October 2006, STB has taken steps to refine the rate relief process. Specifically, in October 2006, STB revised procedures for deciding large rate relief cases. By placing restraints on the evidence and arguments allowed in these cases, STB predicted that the expense and delay in resolving these rate disputes would be reduced substantially. In September 2007, STB altered its simplified guidelines for small shippers to enable shippers who are seeking up to $1 million in rate relief over a 5- year period to receive a STB decision within 8 months of filing a complaint. STB also created a new rate relief process for medium size shipments to allow shippers who are seeking up to $5 million in rate relief over a 5-year period to receive a STB decision within 17 months of filing a complaint. Additionally, STB also stated that all rail rate disputes would require nonbinding mediation. Shipper groups, economists, and other experts in the rail industry have suggested several alternative approaches as remedies that could provide more competitive options to shippers in areas of inadequate competition or excessive market power. These groups view these approaches as more effective than the rate relief process in promoting a greater reliance on competition to protect shippers against unreasonable rates. Some proposals would require legislative change, or a reopening of past STB decisions. These approaches each have potential costs and benefits. On the one hand, they could expand competitive options, reduce rail rates, and decrease the number of captive shippers as well as reduce the need for both federal regulation and a rate relief process. On the other hand, reductions in rail rates could affect railroad revenues and limit the railroads' ability and potential willingness to invest in their infrastructure. In addition, some markets may not have the level of demand needed to support competition among railroads. It will be important for policymakers, in evaluating these alternative approaches, to carefully consider the impact of each approach on the balance set out in the Staggers Act. The targeted approaches frequently proposed by shipper groups and others include the following: Reciprocal switching: This approach would allow STB to require railroads serving shippers that are close to another railroad to transport cars of a competing railroad for a fee. The shippers would then have access to railroads that do not reach their facilities. This approach is similar to the mandatory interswitching in Canada, which enables a shipper to request a second railroad's service if that second railroad is within approximately 18 miles. Some Class I railroads already interchange traffic using these agreements, but they oppose being required to do so. Under this approach, STB would oversee the pricing of switching agreements. This approach could also reduce the number of captive shippers by providing a competitive option to shippers with access to a proximate but previously inaccessible railroad and thereby reduce traffic eligible for the rate relief process (see fig. 7). Terminal agreements: This approach would require one railroad to grant access to its terminal facilities or tracks to another railroad, enabling both railroads to interchange traffic or gain access to traffic coming from shippers off the other railroad's lines for a fee. Current regulation requires a shipper to demonstrate anticompetitive conduct by a railroad before STB will grant access to a terminal by a nonowning railroad unless there is an emergency or when a shipper can demonstrate poor service and a second railroad is willing and able to provide the service requested. This approach would require revisiting the current requirement that railroads or shippers demonstrate anticompetitive conduct in making a case to gain access to a railroad terminal in areas where there is inadequate competition. The approach would also make it easier for competing railroads to gain access to the terminal areas of other railroads and could increase competition between railroads. However, it could also reduce revenues to all railroads involved and adversely affect the financial condition of the rail industry. Also, shippers could benefit from increased competition but might see service decline (see fig. 8). to its tracks to another railroad, enabling railroads to interchange traffic beyond terminal facilities for a fee. In the past, STB has imposed conditions requiring that a merging railroad must grant another railroad trackage rights to preserve competition when a merger would reduce a shipper's access to railroads from two to one. While this approach could potentially increase rail competition and decrease rail rates, it could also discourage owning railroads from maintaining the track or providing high- quality service, since the value of lost use of track may not be compensated by the user fee and may decrease return on investment (see fig. 9). "Bottleneck" rates: This approach would require a railroad to establish a rate, and thereby offer to provide service, for any two points on the railroad's system where traffic originates, terminates, or can be interchanged. Some shippers have more than one railroad that serves them at their origin and/or destination points, but have at least one portion of a rail movement for which no alternative rail route is available. This portion is referred to as the "bottleneck segment." STB's decision that a railroad is not required to quote a rate for the bottleneck segment has been upheld in federal court. STB's rationale was that statute and case law precluded it from requiring a railroad to provide service on a portion of its route when the railroad serves both the origin and destination points and provides a rate for such movement. STB requires a railroad to provide service for the bottleneck segment only if the shipper had prior arrangements or a contract for the remaining portion of the shipment route. On the one hand, requiring railroads to establish bottleneck rates would force short-distance routes on railroads when they served an entire route and could result in loss of business and potentially subject the bottleneck segment to a rate complaint. On the other hand, this approach would give shippers access to a second railroad, even if a single railroad was the only railroad that served the shipper at its origin and/or destination points, and could potentially reduce rates (see fig. 10). Paper barriers: This approach would prevent or, put a time limit on, paper barriers, which are contractual agreements that can occur when a Class I railroad either sells or leases long term some of its track to other railroads (typically a short-line railroad and/or regional railroad). These agreements stipulate that virtually all traffic that originates on that line must interchange with the Class I railroad that originally leased the tracks or pay a penalty. Since the 1980s, approximately 500 short lines have been created by Class I railroads selling a portion of their lines; however, the extent to which paper barriers are a standard practice is unknown because they are part of confidential contracts. When this type of agreement exists, it can inhibit smaller railroads that connect with or cross two or more Class I rail systems from providing rail customers access to competitive service. Eliminating paper barriers could affect the railroad industry's overall capacity since Class I railroads may abandon lines instead of selling them to smaller railroads and thereby increase the cost of entering a market for a would-be competitor. In addition, an official from a railroad association told us that it is unclear if a federal agency could invalidate privately negotiated contracts (see fig. 11). STB has taken some actions to address our past recommendations, but it is too soon to determine the effect of these actions. In October 2006 we reported that the continued existence of pockets of potential captivity at a time when the railroads are, for the first time in decades, experiencing increasing economic health, raises the question whether rail rates in selected markets reflect justified and reasonable pricing practices, or an abuse of market power by the railroads. While our analysis provided an important first step, we noted that STB has the statutory authority and access to information to inquire into and report on railroad practices and to conduct a more rigorous analysis of competition in the freight rail industry. As a result, we recommended that the Board undertake a rigorous analysis of competitive markets to identify the state of competition nationwide and to determine in specific markets whether the inappropriate exercise of market power is occurring and, where appropriate, to consider the range of actions available to address such problems. STB initially disagreed with our recommendation because it believed the findings underlying the recommendation were inconclusive, their on-going efforts would address many of our concerns, and a rigorous analysis would divert resources from other efforts. However, in June 2007, STB stated that it intended to implement our recommendation using funding that was not available at the time of our October report to solicit proposals from analysts with no connection to the freight railroad industry or STB proceedings to conduct a rigorous analysis of competition in the freight railroad industry. On September 13, 2007, STB announced that it had awarded a contract for a comprehensive study on competition, capacity, and regulatory policy issues to be completed by the fall of 2008. We commend STB for taking this action. It will be important that these analysts have the ability that STB has through its statutory authority to inquire into railroad practices as well as sufficient access to information to determine whether rail rates in selected markets reflect justified and reasonable pricing practices, or an abuse of market power by the railroads. The Chairman of the STB has recently testified that these analysts would have that authority and access. We also recommended that STB review its method of data collection to ensure that all freight railroads are consistently and accurately reporting all revenues collected from shippers, including fuel surcharges and other costs not explicitly captured in all railroad rate structures. In January 2007, STB finalized rules that require railroads to ensure that fuel surcharges are based on factors directly affecting the amount of fuel consumed. In August 2007, STB finalized rules that require railroads to report their fuel costs and revenue from fuel surcharges. While these are positive steps, these rules did not address how surcharges are reported in the Carload Waybill Sample. In addition, STB has not taken steps to address collection and reporting of other miscellaneous revenues-- revenues deriving from sources other than fuel surcharges. As stated earlier, STB has also taken steps to refine the rate relief process since our 2006 report. STB has made changes to the rate relief process that it believes will reduce the expense and delay of obtaining rate relief. While these appear to be positive steps that could address longstanding concerns with the rate relief process, it is too soon to determine the effect of these changes to the process, and we have not evaluated the effect of these changes. Mr. Chairman, this concluded my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For questions regarding this testimony, please contact JayEtta Z. Hecker on (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony include Steve Cohen (Assistant Director), and Matt Cail. Freight Railroads: Updated Information on Rates and Competition Issues. GAO-07-1245T. Washington, D.C.: Sept. 25, 2007). Freight Railroads: Updated Information on Rates and Other Industry Trends. GAO-07-291R. Washington, D.C.: Aug. 15, 2007. Freight Railroads: Industry Health Has Improved, but Concerns About Competition and Capacity Should Be Addressed. GAO-07-94. Washington, D.C.: Oct. 6, 2006). Freight Railroads: Preliminary Observations on Rates, Competition, and Capacity Issues. GAO-06-898T. Washington, D.C.: June 21, 2006. Freight Transportation: Short Sea Shipping Option Shows Importance of Systematic Approach to Public Investment Decisions. GAO-05-768. Washington, D.C.: July 29, 2005. Freight Transportation: Strategies Needed to Address Planning and Financing Limitations. GAO-04-165. Washington, D.C.: December 19, 2003. Railroad Regulation: Changes in Freight Railroad Rates from 1997 through 2000. GAO-02-524. Washington, D.C.: June 7, 2002. Freight Railroad Regulation: Surface Transportation Board's Oversight Could Benefit from Evidence Better Identifying How Mergers Affect Rates. GAO-01-689. Washington, D.C.: July 5, 2001. Railroad Regulation: Current Issues Associated with the Rate Relief Process. GAO/RCED-99-46. Washington, D.C.: April 29, 1999. Railroad Regulation: Changes in Railroad Rates and Service Quality Since 1990. GAO/RCED-99-93. Washington, D.C.: April 6, 1999. Interstate Commerce Commission: Key Issues Need to Be Addressed in Determining Future of ICC's Regulatory Functions. GAO-T-RCED-94-261 Washington, D.C.: July 12, 1994. Railroad Competitiveness: Federal Laws and Policies Affect Railroad Competitiveness. GAO/RCED-92-16. Washington, D.C.: November 5, 1991. Railroad Regulation: Economic and Financial Impacts of the Staggers Rail Act of 1980. GAO/RCED-90-80. Washington, D.C.: May 16, 1990. Railroad Regulation: Shipper Experiences and Current Issues in ICC Regulation of Rail Rates. GAO/RCED-87-119. Washington, D.C.: September 9, 1987. Railroad Regulation: Competitive Access and Its Effects on Selected Railroads and Shippers. GAO/RCED-87-109, Washington, D.C.: June 18, 1987. Railroad Revenues: Analysis of Alternative Methods to Measure Revenue Adequacy. GAO/RCED-87-15BR. Washington, D.C.: October 2, 1986. Shipper Rail Rates: Interstate Commerce Commission's Handling of Complaints. GAO/RCED-86-54FS. Washington, D.C.: January 30, 1986. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The Staggers Rail Act of 1980 largely deregulated the freight railroad industry, encouraging greater reliance on competition to set rates. The act recognized the need for railroads to recover costs by setting higher rates for shippers with fewer transportation alternatives but also recognized that some shippers might be subject to unreasonably high rates. It established a threshold for rate relief and granted the Interstate Commerce Commission and the Surface Transportation Board (STB) the authority to develop a rate relief process for "captive" shippers. Since 1980 GAO has issued several reports on the freight railroad industry and issued the most recent report in October 2006 and, at the request of this Subcommittee, issued an updated report in August 2007. This statement is based on these recent reports and discusses (1) recent changes that have occurred in railroad rates and how those changes compare to changes in rail rates since 1985, (2) the extent of captivity in the industry and STB's efforts to protect captive shippers, and (3) STB's actions to address GAO's recent recommendations. While railroad rates have generally declined and declined for most shippers since 1985, in 2005 rates experienced a 9 percent annual increase over 2004 --the largest annual increase in twenty years--and rates increased for all 13 commodities that GAO reviewed. For example, rates for coal increased by nearly 8 percent while rates for grain increased by 8.5 percent. However, despite these increases, rates for 2005 remain below their 1985 levels and below the rate of inflation over the 1985 through 2005 period. Revenues that railroads report as "miscellaneous"--a category that includes some fuel surcharges--increased more than ten-fold from about $141 million in 2000 to over $1.7 billion in 2005. It is difficult to precisely determine how many shippers are "captive" because available proxy measures can overstate or understate captivity. However some data indicate that the extent of potentially captive traffic appears to have decreased, while at the same time, data also indicates that traffic traveling at rates significantly above the threshold for rate relief has increased. In October 2006, GAO reported that STB's rate relief process to protect captive shippers have resulted in little effective relief for those shippers. GAO also reported that economists and shipper groups have proposed a number of alternatives to address remaining concerns about competition--however, each of these alternative approaches have costs and benefits and should be carefully considered. STB has taken some actions to address our past recommendations, but it is too soon to determine the effect of these actions. Our October 2006 report noted that the continued existence of pockets of potentially "captive" shippers raised questions as to whether rail rates in selected markets reflected reasonable pricing practices, or an abuse of market power. GAO recommended that the Board undertake a rigorous analysis of competitive markets to identify the state of competition. STB has awarded a contract to conduct this study. It will be important that these analysts have STB's authority and access to information to determine whether rail rates in selected markets reflect reasonable pricing practices--the Chairman of the STB recently testified that these analysts would have that authority and access. GAO also recommended that STB ensure that freight railroads are consistently reporting all revenues, including miscellaneous revenues. While STB has revised its rules on fuel surcharges, these rules did not address how fuel surcharges are reported and STB has not yet taken steps to accurately collect data on other miscellaneous revenues. STB has also taken a number of steps to revise its rate relief process. While these appear to be promising steps, it is too soon to tell what effect these changes will have.
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SARS is a respiratory illness that has recently been reported principally in Asia, Europe, and North America. The World Health Organization reported on May 5, 2003, that there were an estimated 6,583 probable cases reported in 27 countries, including 61 cases in the United States. There have been 461 deaths worldwide, none of which have been in the United States. Of the 56 probable cases in the United States reported through April 30, 2003, 37 (66 percent) were hospitalized, and 2 (4 percent) required mechanical ventilation. Symptoms of the disease, which may be caused by a previously unrecognized coronavirus, can include a fever, chills, headache, other body aches, or a dry cough. A Canadian official recently reported that more than 60 percent of probable SARS cases in Canada, where the bulk of North American cases have occurred, resulted from transmission to health care workers and patients. Canada's experience with managing the SARS outbreak has shown that measures used to prevent and control emerging infectious diseases appear to have been useful in controlling this outbreak. One of the measures that it has undertaken to control the outbreak is isolating probable cases in hospitals, including closing two hospitals to new admissions. Other measures include isolating people, either in their homes or in a hospital, who have had close contact with a SARS patient and providing educational materials regarding SARS to people who have traveled to locations of concern. In order to be adequately prepared for a major public health threat such as SARS in the United States, state and local public health agencies need to have several basic capabilities, whether they possess them directly or have access to them through regional agreements. Public health departments need to have disease surveillance systems and epidemiologists to detect clusters of suspicious symptoms or diseases in order to facilitate early detection of disease and treatment of victims. Laboratories need to have adequate capacity and necessary staff to test clinical and environmental samples in order to identify an agent promptly so that proper treatment can be started and infectious diseases prevented from spreading. All organizations involved in the response must be able to communicate easily with one another as events unfold and critical information is acquired, especially in a large-scale infectious disease outbreak. In addition, plans that describe how state and local officials would manage and coordinate an emergency response need to be in place and to have been tested in an exercise, both at the state and local levels and at the regional level. Local health care organizations, including hospitals, are generally responsible for the initial response to a public health emergency. In the event of a large-scale infectious disease outbreak, hospitals and their emergency departments would be on the front line, and their personnel would take on the role of first responders. Because hospital emergency departments are open 24 hours a day, 7 days a week, exposed individuals would be likely to seek treatment from the medical staff on duty. Staff would need to be able to recognize and report any illness patterns or diagnostic clues that might indicate an unusual infectious disease outbreak to their state or local health department. Hospitals would need to have the capacity and staff necessary to treat severely ill patients and limit the spread of infectious disease. In addition, hospitals would need adequate stores of equipment and supplies, including medications, personal protective equipment, quarantine and isolation facilities, and air handling and filtration equipment. The federal government also has a role in preparedness for and response to major public health threats. It becomes involved in investigating the cause of the disease, as it is doing with SARS. In addition, the federal government provides funding and resources to state and local entities to support preparedness and response efforts. CDC's Public Health Preparedness and Response for Bioterrorism program provided funding through cooperative agreements in fiscal year 2002 totaling $918 million to states and municipalities to improve bioterrorism preparedness and response, as well as other public health emergency preparedness activities. HRSA's Bioterrorism Hospital Preparedness Program provided funding through cooperative agreements in fiscal year 2002 of approximately $125 million to states and municipalities to enhance the capacity of hospitals and associated health care entities to respond to bioterrorist attacks. In March 2003, HHS announced that the CDC and HRSA programs would provide funding of approximately $870 million and $498 million, respectively, for fiscal year 2003. Among the other public health emergency response resources that the federal government provides is the Strategic National Stockpile, which contains pharmaceuticals, antidotes, and medical supplies that can be delivered anywhere in the United States within 12 hours of the decision to deploy. Just as was true with the identification of the coronavirus as the likely causative agent in SARS, deciding which influenza viral strains are dominant depends on data collected from domestic and international surveillance systems that identify prevalent strains and characterize their effect on human health. Antiviral drugs and vaccines against influenza are expected to be in short supply if a pandemic occurs. Antiviral drugs, which can be used against all forms of viral diseases, have been as effective as vaccines in preventing illness from influenza and have the advantage of being available now. HHS assumes shortages of antiviral drugs and vaccines will occur in a pandemic because demand is expected to exceed current rates of production. For example, increasing production capacity of antiviral drugs can take at least 6 to 9 months, according to manufacturers. In the cities we visited, state and local officials reported varying levels of public health preparedness to respond to outbreaks of diseases such as SARS. They recognized gaps in preparedness elements such as communication and were beginning to address them. Gaps also remained in other preparedness elements that have been more difficult to address, including the disease surveillance and laboratory systems and the response capacity of the workforce. In addition, we found that the level of preparedness varied across the cities. Jurisdictions that had multiple prior experiences with public health emergencies were generally more prepared than those with little or no such experience prior to our site visits. We found that planning for regional coordination was lacking between states. In addition, states were working on plans for receiving and distributing the Strategic National Stockpile and for administering mass vaccinations. States and local areas were addressing gaps in public health preparedness elements, such as communication, but weaknesses remained in other preparedness elements, including the disease surveillance and laboratory systems and the response capacity of the workforce. Gaps in capacity often are not amenable to solution in the short term because either they require additional resources or the solution takes time to implement. We found that officials were beginning to address communication problems. For example, six of the seven cities we visited were examining how communication would take place in a public health emergency. Many cities had purchased communication systems that allow officials from different organizations to communicate with one another in real time. In addition, state and local health agencies were working with CDC to build the Health Alert Network (HAN), an information and communication system. The nationwide HAN program has provided funding to establish infrastructure at the local level to improve the collection and transmission of information related to public health preparedness. Goals of the HAN program include providing high-speed Internet connectivity, broadcast capacity for emergency communication, and distance-learning infrastructure for training. State and local officials for the cities we visited recognized and were attempting to address inadequacies in their surveillance systems and laboratory facilities. Local officials were concerned that their surveillance systems were inadequate to detect a bioterrorist event, and all of the states we visited were making efforts to improve their disease surveillance systems. Six of the cities we visited used a passive surveillance system to detect infectious disease outbreaks. However, passive systems may be inadequate to identify a rapidly spreading outbreak in its earliest and most manageable stage because, as officials in three states noted, there is chronic underreporting and a time lag between diagnosis of a condition and the health department's receipt of the report. To improve disease surveillance, six of the states and two of the cities we visited were developing surveillance systems using electronic databases. Several cities were also evaluating the use of nontraditional data sources, such as pharmacy sales, to conduct surveillance. Three of the cities we visited were attempting to improve their surveillance capabilities by incorporating active surveillance components into their systems. However, work to improve surveillance systems has proved challenging. For example, despite initiatives to develop active surveillance systems, the officials in one city considered event detection to be a weakness in their system, in part because they did not have authority to access hospital information systems. In addition, various local public health officials in other cities reported that they lacked the resources to sustain active surveillance. Officials from all of the states we visited reported problems with their public health laboratory systems and said that they needed to be upgraded. All states were planning to purchase the equipment necessary for rapidly identifying a biological agent. State and local officials in most of the areas that we visited told us that the public health laboratory systems in their states were stressed, in some cases severely, by the sudden and significant increases in workload during the anthrax incidents in the fall of 2001. During these incidents, the demand for laboratory testing was significant even in states where no anthrax was found and affected the ability of the laboratories to perform their routine public health functions. Following the incidents, over 70,000 suspected anthrax samples were tested in laboratories across the country. Officials in the states we visited were working on other solutions to their laboratory problems. States were examining various ways to manage peak loads, including entering into agreements with other states to provide surge capacity, incorporating clinical laboratories into cooperative laboratory systems, and purchasing new equipment. One state was working to alleviate its laboratory problems by upgrading two local public health laboratories to enable them to process samples of more dangerous pathogens and by establishing agreements with other states to provide backup capacity. Another state reported that it was using the funding from CDC to increase the number of pathogens the state laboratory could diagnose. The state also reported that it has worked to identify laboratories in adjacent states that are capable of being reached within 3 hours over surface roads. In addition, all of the states reported that their laboratory response plans had been revised to cover reporting and sharing laboratory results with local public health and law enforcement agencies. At the time of our site visits, shortages in personnel existed in state and local public health departments and laboratories and were difficult to remedy. Officials from state and local health departments told us that staffing shortages were a major concern. Two of the states and cities that we visited were particularly concerned that they did not have enough epidemiologists to do the appropriate investigations in an emergency. One state department of public health we visited had lost approximately one- third of its staff because of budget cuts over the past decade. This department had been attempting to hire more epidemiologists. Barriers to finding and hiring epidemiologists included noncompetitive salaries and a general shortage of people with the necessary skills. Shortages in laboratory personnel were also cited. Officials in one city noted that they had difficulty filling and maintaining laboratory positions. People that accepted the positions often left the health department for better-paying positions. Increased funding for hiring staff cannot necessarily solve these shortages in the near term because for many types of laboratory positions there are not enough trained individuals in the workforce. According to the Association of Public Health Laboratories, training laboratory personnel to provide them with the necessary skills will take time and require a strategy for building the needed workforce. We found that the overall level of public health preparedness varied by city. In the cities we visited, we observed that those cities that had recurring experience with public health emergencies, including those resulting from natural disasters, or with preparation for National Security Special Events, such as political conventions, were generally more prepared than cities with little or no such experience. Cities that had dealt with multiple public health emergencies in the past might have been further along because they had learned which organizations and officials need to be involved in preparedness and response efforts and moved to include all pertinent parties in the efforts. Experience with natural disasters raised the awareness of local officials regarding the level of public health emergency preparedness in their cities and the kinds of preparedness problems they needed to address. Even the cities that were better prepared were not strong in all elements. For example, one city reported that communications had been effective during public health emergencies and that the city had an active disease surveillance system. However, officials reported gaps in laboratory capacity. Another one of the better-prepared cities was connected to HAN and the Epidemic Information Exchange (Epi-X), and all county emergency management agencies in the state were linked. However, the state did not have written agreements with its neighboring states for responding to a public health emergency. Response organization officials were concerned about a lack of planning for regional coordination between states of the public health response to an infectious disease outbreak. As called for by the guidance for the CDC and HRSA funding, all of the states we visited organized their planning on the basis of regions within their states, assigning local areas to particular regions for planning purposes. A concern for response organization officials was the lack of planning for regional coordination between states. A hospital official in one city we visited said that state lines presented a "real wall" for planning purposes. Hospital officials in one state reported that they had no agreements with other states to share physicians. However, one local official reported that he had been discussing these issues and had drafted mutual aid agreements for hospitals and emergency medical services. Public health officials from several states reported developing working relationships with officials from other states to provide backup laboratory capacity. States have begun planning for use of the Strategic National Stockpile. To determine eligibility for the CDC funding, applicants were required to develop interim plans to receive and manage items from the stockpile, including mass distribution of antibiotics, vaccines, and medical materiel. However, having plans for the acceptance of the deliveries from the stockpile is not enough. Plans have to include details about dividing the materials that are delivered in large pallets and distributing the medications and vaccines. Of the seven states we visited, five states had completed plans for the receipt and distribution of items from the stockpile. One state that was working on its plan stated that it would be completed in January 2003. Only one state had conducted exercises of its stockpile distribution plan, while the other states were planning to conduct exercises or drills of their plans sometime in 2003. In addition, five states reported on their plans for mass vaccinations and seven states reported on their plans for large-scale administration of smallpox vaccine in response to an outbreak. Some states we visited had completed plans for mass vaccinations, whereas other states were still developing their plans. The mass vaccination plans were generally closely tied to the plans for receiving and administering the stockpile. In addition, two states had completed smallpox response plans, which include plans for administering mass smallpox vaccinations to the general population, whereas four of the other states were drafting plans. The remaining state was discussing such a plan. However, only one of the states we visited has tested in an exercise its plan for conducting mass smallpox vaccinations. We found that most hospitals lack the capacity to respond to large-scale infectious disease outbreaks. Persons with symptoms of infectious disease would potentially go to emergency departments for treatment. Most emergency departments across the country have experienced some degree of crowding and therefore in some cases may not be able to handle a large influx of patients during a potential SARS outbreak. In addition, although most hospitals across the country reported participating in basic planning activities for large-scale infectious disease outbreaks, few have acquired the medical equipment resources, such as ventilators, to handle large increases in the number of patients that may result from outbreaks of diseases such as SARS. Our survey found that most emergency departments have experienced some degree of overcrowding. Persons with symptoms of infectious disease would potentially go to emergency departments for treatment, further stressing these facilities. The problem of overcrowding is much more pronounced in some hospitals and areas than in others. In general, hospitals that reported the most problems with crowding were in the largest metropolitan statistical areas (MSA) and in the MSAs with high population growth. For example, in fiscal year 2001, hospitals in MSAs with populations of 2.5 million or more had about 162 hours of diversion (an indicator of crowding), compared with about 9 hours for hospitals in MSAs with populations of less than 1 million. Also the median number of hours of diversion in fiscal year 2001 for hospitals in MSAs with a high percentage population growth was about five times that for hospitals in MSAs with lower percentage population growth. Diversion varies greatly by MSA. Figure 1 shows each MSA and the share of hospitals within the MSA that reported being on diversion more than 10 percent of the time--or about 2.4 hours or more per day--in fiscal year 2001. Areas with the greatest diversion included Southern California and parts of the Northeast. Of the 248 MSAs for which data were available, 171 (69 percent) had no hospitals reporting being on diversion more than 10 percent of the time. By contrast, 53 MSAs (21 percent) had at least one- quarter of responding hospitals on diversion for more than 10 percent of the time. Hospitals in the largest MSAs and in MSAs with high population growth that have reported crowding in emergency departments may have difficulty handling a large influx of patients during a potential SARS outbreak, especially if this outbreak occurred in the winter months when the incidence of influenza is quite high. Thus far, the largest SARS outbreaks worldwide have primarily occurred in areas with dense populations. At the time of our site visits, we found that hospitals were beginning to coordinate with other local response organizations and collaborate with each other in local planning efforts. Hospital officials in one city we visited told us that until September 11, 2001, hospitals were not seen as part of a response to a terrorist event but that city officials had come to realize that the first responders to a bioterrorism incident could be a hospital's medical staff. Officials from the state began to emphasize the need for a local approach to hospital preparedness. They said, however, that it was difficult to impress the importance of cooperation on hospitals because hospitals had not seen themselves as part of a local response system. The local government officials were asking them to create plans that integrated the city's hospitals and addressed such issues as off-site triage of patients and off-site acute care. In our survey of over 2,000 hospitals, 4 out of 5 hospitals reported having a written emergency response plan for large-scale infectious disease outbreaks. Of the hospitals with emergency response plans, most include a description of how to achieve surge capacity for obtaining additional pharmaceuticals, other supplies, and staff. In addition, almost all hospitals reported participating in community interagency disaster preparedness committees. Our survey showed that hospitals have provided training to staff on biological agents, but fewer than half have participated in exercises related to bioterrorism. Most hospitals we surveyed reported providing training about identifying and diagnosing symptoms for the six biological agents identified by the CDC as most likely to be used in a bioterrorist attack. At least 90 percent of hospitals reported providing training for two of these agents--smallpox and anthrax--and approximately three-fourths of hospitals reported providing training about the other four--plague, botulism, tularemia, and hemorrhagic fever viruses. Most hospitals lack adequate equipment, isolation facilities, and staff to treat a large increase in the number of patients for an infectious disease such as SARS. To prevent transmission of SARS in health care settings, CDC recommends that health care workers use personal protective equipment, including gowns, gloves, respirators, and protective eyewear. SARS patients in the United States are being isolated until they are no longer infectious. CDC estimates that patients require mechanical ventilation in 10 to 20 percent of SARS cases. In the seven cities we visited, hospital, state, and local officials reported that hospitals needed additional equipment and capital improvements-- including medical stockpiles, personal protective equipment, quarantine and isolation facilities, and air handling and filtering equipment--to enhance preparedness. Five of the states we visited reported shortages of hospital medical staff, including nurses and physicians, necessary to increase response capacity in an emergency. One of the states we visited reported that only 11 percent of its hospitals could readily increase their capacity for treating patients with infectious diseases requiring isolation, such as smallpox and SARS. Another state reported that most of its hospitals have little or no capacity for isolating patients diagnosed with or being tested for infectious diseases. According to our hospital survey, availability of medical equipment varied greatly between hospitals, and few hospitals seemed to have adequate equipment and supplies to handle a large-scale infectious disease outbreak. While most hospitals had, for every 100 staffed beds, at least 1 ventilator, 1 personal protective equipment suit, or 1 isolation bed, half of the hospitals had, for every 100 staffed beds, fewer than 6 ventilators, 3 or fewer personal protective equipment suits, and fewer than 4 isolation beds. The completion of final federal influenza pandemic response plans that address the problems related to the purchase, distribution, and administration of supplies of vaccines and antiviral drugs during a pandemic could facilitate the public health response to emerging infectious disease outbreaks. CDC has provided interim draft guidance to facilitate state plans but has not made the final decisions on plan provisions necessary to mitigate the effects of potential shortages of vaccines and antiviral drugs. Until such decisions are made, the timeliness and adequacy of response efforts may be compromised. In the most recent version of its pandemic influenza planning guidance for states, CDC lists several key federal decisions related to vaccines and antiviral drugs that have not been made. These decisions include determining the amount of vaccines and antiviral drugs that will be purchased at the federal level; the division of responsibility between the public and the private sectors for the purchase, distribution, and administration of vaccines and drugs; and how population groups will be prioritized and targeted to receive limited supplies of vaccines and drugs. In each of these areas, until federal decisions are made, states will not be able to develop strategies consistent with federal action. The interim draft guidance for state pandemic plans says that resources can be expected to be available through federal contracts to purchase influenza vaccine and some antiviral agents, but some state funding may be required. The amounts of antiviral drugs to be purchased and stockpiled are yet to be determined, even though these drugs are available and can potentially be used for both treatment and prevention during a pandemic. CDC has indicated in its interim draft guidance that the policies for purchasing, distributing, and administering vaccines and drugs by the private and public sectors will change during a pandemic, but some decisions necessary to prepare for these expected changes have not been made. During a typical annual influenza response, influenza vaccine and antiviral drug distribution is primarily handled directly by manufacturers through private vendors and pharmacies to health care providers. During a pandemic, however, CDC interim draft guidance indicates that many of these private-sector responsibilities may be transferred to the public sector at the federal, state, or local levels and that priority groups within the population would need to be established for receiving limited supplies of vaccines and drugs. State officials are particularly concerned that a national plan has not been issued with final recommendations for how population groups should be prioritized to receive vaccines and antiviral drugs. In its interim draft guidance, CDC lists eight population groups that should be considered in establishing priorities among groups for receiving vaccines and drugs during a pandemic. The list includes such groups as health care workers and public health personnel involved in the pandemic response, persons traditionally considered to be at increased risk of severe influenza illness and mortality, and preschool and school-aged children. Although state officials acknowledge the need for flexibility in planning because many aspects of a pandemic cannot be known in advance, the absence of more detail leaves them uncertain about how to plan for the use of limited supplies of vaccine and drugs. In our 2000 report on the influenza pandemic, we recommended that HHS determine the capability of the private and public sectors to produce, distribute, and administer vaccines and drugs and complete the national response plan. To date, only limited progress has been made in addressing these recommendations. Many actions taken at the state and local level to prepare for a bioterrorist event have enhanced the ability of state and local response agencies and organizations to manage an outbreak of an infectious disease such as SARS. However, there are significant gaps in public health surveillance systems and laboratory capacity, and the number of personnel trained for disease detection is insufficient. Most emergency departments across the country have experienced some degree of overcrowding. Hospitals have begun planning and training efforts to respond to large-scale infectious disease outbreaks, but many hospitals lack adequate equipment, medical stockpiles, personal protective equipment, and quarantine and isolation facilities. Federal and state plans for the purchase, distribution, and administration of supplies of vaccines and drugs in response to an influenza pandemic have still not been finalized. The lack of these final plans has serious implications for efforts to mobilize the distribution of vaccines and drugs for other infectious disease outbreaks. 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) 512-7119. Robert Copeland, Marcia Crosse, Martin T. Gahart, Deborah Miller, Roseanne Price, and Ann Tynan also made key contributions to this statement. Smallpox Vaccination: Implementation of National Program Faces Challenges. GAO-03-578. Washington, D.C.: April 30, 2003. Infectious Disease Outbreaks: Bioterrorism Preparedness Efforts Have Improved Public Health Response Capacity, but Gaps Remain. GAO-03- 654T. Washington, D.C.: April 9, 2003. Bioterrorism: Preparedness Varied across State and Local Jurisdictions. GAO-03-373. Washington, D.C.: April 7, 2003. Hospital Emergency Departments: Crowded Conditions Vary among Hospitals and Communities. GAO-03-460. Washington, D.C.: March 14, 2003. Homeland Security: New Department Could Improve Coordination but Transferring Control of Certain Public Health Programs Raises Concerns. GAO-02-954T. Washington, D.C.: July 16, 2002. Homeland Security: New Department Could Improve Biomedical R&D Coordination but May Disrupt Dual-Purpose Efforts. GAO-02-924T. Washington, D.C.: July 9, 2002. Homeland Security: New Department Could Improve Coordination but May Complicate Priority Setting. GAO-02-893T. Washington, D.C.: June 28, 2002. Homeland Security: New Department Could Improve Coordination but May Complicate Public Health Priority Setting. GAO-02-883T. Washington, D.C.: June 25, 2002. Bioterrorism: The Centers for Disease Control and Prevention's Role in Public Health Protection. GAO-02-235T. Washington, D.C.: November 15, 2001. Bioterrorism: Review of Public Health Preparedness Programs. GAO-02- 149T. Washington, D.C.: October 10, 2001. Bioterrorism: Public Health and Medical Preparedness. GAO-02-141T. Washington, D.C.: October 9, 2001. Bioterrorism: Coordination and Preparedness. GAO-02-129T. Washington, D.C.: October 5, 2001. Bioterrorism: Federal Research and Preparedness Activities. GAO-01- 915. Washington, D.C.: September 28, 2001. West Nile Virus Outbreak: Lessons for Public Health Preparedness. GAO/HEHS-00-180. Washington, D.C.: September 11, 2000. Combating Terrorism: Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attacks. GAO/NSIAD-99-163. Washington, D.C.: September 14, 1999. Combating Terrorism: Observations on Biological Terrorism and Public Health Initiatives. GAO/T-NSIAD-99-112. Washington, D.C.: March 16, 1999. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. 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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SARS has infected relatively few people nationwide, but it has raised concerns about preparedness for large-scale infectious disease outbreaks. The initial response to an outbreak occurs in local agencies and hospitals, with support from state and federal agencies, and can involve disease surveillance, epidemiologic investigation, health care delivery, and quarantine management. Officials have learned lessons applicable to preparedness for such outbreaks from experiences with other major public health threats. GAO was asked to examine the preparedness of state and local public health agencies and hospitals for responding to a large-scale infectious disease outbreak and the relationship of federal and state planning for an influenza pandemic to preparedness for emerging infectious diseases. This testimony is based on Bioterrorism: Preparedness Varied across State and Local Jurisdictions, GAO-03-373 (Apr. 7, 2003); findings from a GAO survey on hospital emergency room capacity (in Hospital Emergency Departments: Crowded Conditions Vary among Hospitals and Communities, GAO-03-460 (Mar. 14, 2003)) and on hospital emergency preparedness; and information updating Influenza Pandemic: Plan Needed for Federal and State Response, GAO-01-4 (Oct. 27, 2000). The efforts of public health agencies and health care organizations to increase their preparedness for major public health threats such as bioterrorism and the worldwide influenza outbreaks known as pandemics have improved the nation's capacity to respond to SARS and other emerging infectious disease outbreaks, but gaps in preparedness remain. Specifically, GAO found that there are gaps in disease surveillance systems and laboratory facilities and that there are workforce shortages. The level of preparedness varied across seven cities GAO visited, with jurisdictions that have had multiple prior experiences with public health emergencies being generally more prepared than others. GAO found that planning for regional coordination was lacking between states. GAO also found that states were developing plans for receiving and distributing medical supplies for emergencies and for mass vaccinations in the event of a public health emergency. GAO found that most hospitals lack the capacity to respond to large-scale infectious disease outbreaks. Most emergency departments have experienced some degree of crowding and therefore in some cases may not be able to handle a large influx of patients during a potential SARS or other infectious disease outbreak. Most hospitals across the country reported participating in basic planning activities for such outbreaks. However, few hospitals have adequate medical equipment, such as the ventilators that are often needed for respiratory infections such as SARS, to handle the large increases in the number of patients that may result. The public health response to outbreaks of emerging infectious diseases such as SARS could be improved by the completion of federal and state influenza pandemic response plans that address problems related to the purchase, distribution, and administration of supplies of vaccines and antiviral drugs during an outbreak. The Centers for Disease Control and Prevention has provided interim draft guidance to facilitate state plans but has not made the final decisions on plan provisions necessary to mitigate the effects of potential shortages of vaccines and antiviral drugs in the event of an influenza pandemic.
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Today the Social Security program does not face an immediate crisis but rather a long-range and more fundamental financing problem driven largely by known demographic trends. The lack of an immediate solvency crisis changes the challenge, but it does not eliminate the need for action. Acting sooner rather than later 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." It is also important to put the overall federal budget on a sustainable footing over the long term, thereby promoting higher economic growth and more fiscal flexibility to finance other priorities. 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'd like to spend some time describing the nature, timing, and extent of the financing problem. Since Social Security will constitute claims on real resources in the future when it redeems assets to pay benefits, taking action now to increase the future pool of resources is important. As Federal Reserve Chairman Greenspan has said, 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 we can raise national saving is by increasing government saving. Saving a good portion of the surpluses would allow the federal government to reduce the debt overhang from past deficit spending, provide a strong foundation for future economic growth and enhance future budgetary flexibility. Correspondingly, taking action now on Social Security not only would promote increased budgetary flexibility in the future and stronger economic growth but would also require less dramatic action than if we wait. Perhaps the best way to show this is to compare what it would take to achieve actuarial balance at different points in time. Figure 6 shows this. If we did nothing until 2038--the year the Trust Funds are estimated to be exhausted--achieving actuarial balance would require benefit reductions of 30 percent or a tax increase of 39 percent. As figure 6 shows, earlier action shrinks the size of the necessary adjustment. Thus both sustainability concerns and solvency considerations must drive us to act sooner rather than later. Trust Fund exhaustion may be more than 30 years away, but the squeeze on the federal budget is only 15 years in our future. 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 is not the only consideration. Social Security remains the foundation of the nation's retirement system. Yet it is more than just a retirement program; it also pays benefits to disabled workers and their dependents, spouses and children of retired workers, and survivors of deceased workers. Last year, Social Security paid almost $408 billion in benefits to more than 45 million people. Since its inception, the program has successfully reduced poverty among the elderly. In 1959, 35 percent of the elderly were poor. In 1999, 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. Arguably, similar frameworks can also be applied to other programs like Medicare. 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 would 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. Any reforms to Social Security must ensure that program revenues continue to exceed the cost of benefit payments if the Social Security program is to achieve sustainable solvency. Historically, the program's solvency has generally been measured over a 75-year projection period. If projected revenues equal projected outlays over this time horizon, then the system is declared in actuarial balance. Unfortunately, this measure is itself unstable. Each year, the 75-year actuarial period changes, and a year with a surplus is replaced by a new 75th year that has a significant deficit. This means that changes that restore solvency only for the 75-year period will not hold. For example, if we were to raise payroll taxes by 1.86 percentage points of taxable payroll today--which, according to the 2001 Trustees Report, is the amount necessary to achieve 75-year balance--the system would be out of balance next year. Reforms that lead to sustainable solvency are those that avoid the automatic need to periodically revisit this issue. As I have already discussed, reducing the relative future burdens of Social Security and health programs is essential to a sustainable budget policy for the longer term. It is also critical if we are to avoid putting unsupportable financial pressures on future workers. Reforming Social Security and health programs is essential to reclaiming our future fiscal flexibility to address other national priorities. The current Social Security system's benefit structure strikes a balance between the goals of retirement income adequacy and individual equity. From the beginning, benefits were set in a way that focused especially on replacing some portion of workers' pre-retirement earnings, and 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 sub-populations, 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. After I finish this brief overview of our evaluation framework, I would like to come back to this criterion and share some results from our recent report on income adequacy. Program complexity can both make implementation and administration more difficult, and make it harder to explain to the public. Some degree of implementation and administrative complexity arises in virtually all proposed reforms 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. There is also the necessary and complex task of harmonizing any system of individual accounts with the extensive existing regulatory framework governing our nation's private pension system. In evaluating such proposals, the complexities of meshing these systems would have to be balanced against the opportunity of extending pension participation to millions of uncovered workers. 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 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. From a practical stand-point, the phase-in of any reform should reflect individual fairness and political feasibility. With regard to proposals that involve individual accounts, an essential challenge would be to help the American people understand the relationship between their individual accounts and traditional Social Security benefits, thereby ensuring that we avoid any gap in expectations about current or future benefits. Over the past few years, we have been developing a capacity at GAO to estimate the quantitative effects of Social Security reform on individuals. Such estimates speak directly to applying our adequacy/equity criterion to reform proposals. We have just issued a new report that includes such estimates to illustrate the varying effects of different policy scenarios on individuals. Today, I would like to share our findings regarding what measures can be used to examine income adequacy, defining appropriate benchmarks for assessing the future outlook for individuals' Social Security benefits, and how varying approaches to reducing benefits could have different effects on adequacy. Our recent report did not, however, present estimates of effects on individual equity. In addition to these points, our report looked at how concern over income adequacy has shaped the Social Security program over the years and how income adequacy has changed over time, especially for different groups of beneficiaries. Various measures help examine different aspects of income adequacy, but no single measure can provide a complete picture. Three examples illustrate the variety of approaches. Dependency rates measure what proportion of the population depends on others for income support or, more specifically, on government income support programs such as Supplemental Security Income (SSI). Such rates reflect one of Social Security's goals, reducing dependency on public assistance, which was articulated very early in the program's history. Poverty rates measure what proportion of the population have incomes below the official poverty threshold, which is just one of many adequacy standards used in similar rate calculations. The poverty threshold provides a minimal standard of adequacy; other standards reflect different outlooks on what adequacy means. Earnings replacement rates measure the extent to which retirement income replaces pre-retirement income for particular individuals and thereby helps them maintain a pre-retirement standard of living. When applied to Social Security benefits, this measure reflects the way the benefit formula is designed to replace earnings. For any of these measures, the meaning of a given value of the measure is not clear. For example, what value of a dependency or poverty rate is considered low enough and what replacement rate is considered high enough are quite subjective. Moreover, all of these types of measures depend significantly on what types of income are counted, such as before- or after-tax income or noncash benefits such as Medicare and Medicaid. As a result, the measures are most useful not for their estimated values in isolation but rather for making comparisons, whether over time, across different subpopulations, or across different policy scenarios. In the past, we have pointed out the importance of establishing the proper benchmarks against which reforms must be measured. Often reform proposals are compared to currently promised benefits, but currently promised benefits are not fully financed. It is also necessary to use a benchmark of a fully financed system to fairly evaluate reform proposals. To illustrate a full range of possible outcomes, our recent report on income adequacy used hypothetical benchmark scenarios that would restore 75-year solvency either by only increasing payroll taxes or by only reducing benefits. Our tax-increase-only benchmark simulated benefits at currently promised levels while our benefit-reduction-only benchmarks simulated benefits funded at current tax levels. These benchmarks used the program's current benefit structure and the 2001 OASDI Trustees' intermediate, or best-estimate, assumptions. The benefit reductions were phased in between 2005 and 2035 to strike a balance between the size of the incremental reductions each year and the size of the ultimate reduction. At our request, SSA actuaries scored our benchmark policies and determined the parameters for each that would achieve 75-year solvency. For our benefit reduction scenarios, the actuaries determined these parameters assuming that disabled and survivor benefits would be reduced on the same basis as retired worker and dependent benefits. If disabled and survivor benefits were not reduced at all, reductions in retired worker benefits would be deeper than shown in this analysis. Future benefit levels and income adequacy will depend considerably on how any benefit reductions are made. Figure 7 shows the percentage of retired workers with Social Security benefits that fall below the official poverty threshold for various benchmarks. Note that this graph does not show poverty rates, which would require projections of total income;instead, it focuses only on Social Security benefits. The percentage with total incomes below the poverty threshold would be lower if other forms of retirement income were included. The figure shows that the percentage with benefits below the poverty threshold would be greater under a proportional benefit reduction than under a progressive benefit reduction. The proportional benefit-reduction-only benchmark would reduce benefits by the same proportion for all beneficiaries born in the same year. The progressive benefit-reduction-only benchmark would reduce benefits by a smaller proportion for lower earners and a higher proportion for higher earners. The tax-increase-only (no benefit reduction) benchmark estimates are shown for reference. Percent of cohort with Social Security benefits below poverty 1955 (2017) 1970 (2032) 1985 (2047) Birth year (age 62 year) Different approaches to reducing benefits would have different effects on income adequacy because their effects would vary with earnings levels. Smaller reductions for lower earners, who are most at risk of poverty, would decrease the chances that their benefits would fall below poverty. Figure 8 illustrates how different approaches would have benefit reductions that would vary by benefit levels (which are directly related to earnings). The proportional benchmark would reduce benefits by an identical percentage for all earnings levels. In contrast, the two alternative, progressive benchmarks would reduce benefits less for lower earners than for higher earners. The so-called "limited-proportional" benefit-reduction benchmark would be even more progressive than the progressive benefit- reduction benchmark because a portion of benefits below a certain level are protected from any reductions while reductions above that level are proportional. Moreover, different benefit reduction approaches would have varying effects on different beneficiary groups according to the variation in the typical earnings levels of those subgroups. For example, women, minorities, and never married individuals all tend to have lower lifetime earnings than men, whites, and married individuals, respectively. Therefore, benefit reductions that favor lower earners would help minimize adequacy reductions for such groups that typically have lower earnings. As our report also showed, the effects of some reform options parallel those of benefit reductions made through the benefit formula, and those parallels provide insights into the distributional effects of those reform options. For example, if workers were to retire at a given age, an increase in Social Security's full retirement age results in a reduction in monthly benefits; moreover, that benefit reduction would be a proportional, not a progressive reduction. Another example would be indexing the benefit formula to prices instead of wages. Such a revision would also be a proportional reduction, in effect, because all earnings levels would be treated the same under such an approach. In addition, indexing the benefit formula to prices would implicitly affect future poverty rates. Since the official poverty threshold increases each year to reflect price increases and benefits would also be indexed to prices, poverty rates would not be expected to change notably, holding all else equal. In contrast, under the current benefit formula, initial benefit levels would grow faster on average than the poverty threshold and poverty rates would fall, assuming that wages increase faster than prices on average, as the Social Security trustees' report assumes they will. Changes to the Social Security system should be made sooner rather than later--both because earlier action yields the highest fiscal dividends for the federal budget and because it provides a longer period for future beneficiaries to make adjustments in their own planning. The events of September 11 and the need to respond to them do not change this. It remains true that the longer we wait to take action on the programs driving long-term deficits, the more painful and difficult the choices will become. Today I have described GAO's three basic criteria against which Social Security reform proposals may be measured: financing sustainable solvency, balancing adequacy and equity, and implementing and administering reforms. These may not be the same criteria every analyst would suggest, and certainly how policymakers weight the various elements may vary. But if comprehensive proposals are evaluated as to (1) their financing and economic effects, (2) their effects on individuals, and (3) their feasibility, we will have a good foundation for devising agreeable solutions, perhaps not in every detail, but as an overall reform package that will meet the most important of our objectives. Our recent report on Social Security and income adequacy showed that more progressive approaches to reducing monthly benefits would have a smaller effect on poverty, for example, than less progressive approaches. Also, reductions that protect benefits for survivors, disabled workers, and the very old would help minimize reductions to income adequacy, though they would place other beneficiaries at greater risk of poverty. More broadly, the choices the Congress will make to restore Social Security's long-term solvency and sustainability will critically determine the distributional effects of the program, both within and across generations. In turn, those distributional effects will determine how well Social Security continues to help ensure income adequacy across the population. Still, such adequacy effects then need to be balanced against an assessment of the effects on individual equity. In addition, all adequacy measures depend significantly on what types of income are counted. In particular, noncash benefits such as Medicare play a major role in sustaining standards of living for their beneficiaries. Any examination of income adequacy should acknowledge the major role of noncash benefits and the needs they help support. In finding ways to restore Social Security's long-term solvency and sustainability, the Congress will address a key question, whether explicitly or implicitly: What purpose does it want Social Security to serve in the future? to minimize the need for means-tested public assistance programs; to minimize poverty; using what standard of poverty; to replace pre-retirement earnings; to maintain a certain standard of living; or to preserve purchasing power? The answer to this question will help identify which measures of income adequacy are most relevant to examine. It will also help focus how options for reform should be shaped and evaluated. Our work has illustrated how the future outlook depends on both the measures used and the shape of reform. While the Congress must ultimately define Social Security's purpose, our work has provided tools that inform its deliberations. Still, Social Security is only one part of a much larger picture. Reform proposals should be evaluated as packages that strike a balance among their component parts. Furthermore, Social Security is only one source of income and only one of several programs that help support the standard of living of our retired and disabled populations. All sources of income and all of these programs should be considered together in confronting the demographic challenges we face. In addition to Social Security, employer- sponsored pensions, individual savings, Medicare, employer-provided health benefits, earnings from continued employment, and means-tested programs such as SSI and Medicaid all should be considered, along with any interactions among them. In particular, compared to addressing our long-range health care financing problem, reforming Social Security is easy lifting. We at GAO look forward to continuing to work with this Committee and the Congress in addressing these important issues. Mr. Chairman, members of the Committee, that concludes my statement. I'd be happy to answer any questions you may have. For information regarding this testimony, please contact me at (202) 512-7215. Individuals making key contributions to this testimony include Ken Stockbridge, Charles Jeszeck, Alicia Cackley, Jay McTigue, Linda Baker, and Melissa Wolf. Social Security: Program's Role in Helping Ensure Income Adequacy (GAO-02-62, Nov. 30, 2001). Social Security Reform: Potential Effects on SSA's Disability Programs and Beneficiaries (GAO-01-35, Jan. 24, 2001). Social Security Reform: Evaluation of the Nick Smith Proposal. (GAO-AIMD/HEHS-00-102R, Feb. 29, 2000). Social Security Reform: Evaluation of the Gramm Proposal (GAO/AIMD/HEHS-00-71R, Feb. 1, 2000). Social Security Reform: Information on the Archer-Shaw Proposal (GAO/AIMD/HEHS-00-56, Jan. 18, 2000). Social Security: The President's Proposal (GAO/T-HEHS/AIMD-00-43, Nov. 9, 1999). Social Security: Evaluating Reform Proposals (GAO/AIMD/HEHS-00-29, Nov. 4, 1999). Social Security Reform: Implications of Raising the Retirement Age (GAO/HEHS-99-112, Aug. 27, 1999). Social Security: Issues in Comparing Rates of Return With Market Investments (GAO/HEHS-99-110, Aug. 5, 1999). Social Security: Implications of Private Annuities for Individual Accounts (GAO/HEHS-99-160, July 30, 1999). Social Security: Capital Markets and Educational Issues Associated with Individual Accounts (GAO/GGD-99-115, June 28, 1999). Social Security Reform: Administrative Costs for Individual Accounts Depend on System Design (GAO/HEHS-99-131, June 18, 1999). Social Security Reform: Implementation Issues for Individual Accounts (GAO/HEHS-99-122, June 18, 1999). Social Security: Criteria for Evaluating Social Security Reform Proposals (GAO/T-HEHS-99-94, Mar. 25, 1999).
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This testimony discusses the long-term viability of the Social Security program. Social Security's Trust Funds will not be exhausted until 2038, but the trustees now project that the program's cash demands on the rest of the federal government will begin much sooner. Aiming for sustainable solvency would increase the chance that future policymakers would not have to face these difficult questions on a recurring basis. GAO has developed the following criteria for evaluating Social Security reform proposals: financing sustainable solvency, balancing adequacy and equity, and implementing and administering reforms. These criteria seek to balance financial and economic considerations with benefit adequacy and equity issues and the administrative challenges associated with various proposals. GAO's recent report on Social Security and income adequacy (GAO-02-62) makes three key points. First, no single measure of adequacy provides a complete picture; each measure reflects a different outlook on what adequacy means. Second, given the projected long-term financial shortfall of the program, it is important to compare proposals to both benefits at currently promised levels and benefits funded at current tax levels. Third, various approaches to benefit reductions would have differing effects on adequacy.
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Four components within FDA have primary responsibility for ensuring the safety and effectiveness of generic drugs. Among other activities, these components evaluate the safety and effectiveness of generic drugs prior to marketing, monitor the safety and effectiveness of marketed products, oversee the advertising and promotion of marketed products, formulate regulations and guidance, set research priorities, and communicate information to industry and the public. The Center for Drug Evaluation and Research (CDER) is responsible for overseeing drugs and certain therapeutic biologics. It coordinates federal government efforts to ensure the safety and efficacy of generic drugs as well as new and over-the-counter drugs. The Center for Biologics Evaluation and Research (CBER) is responsible for overseeing generic drug applications for biologics, which are products such as blood, vaccines, and human tissues. These products make up a smaller proportion of the generic drug applications than those reviewed by CDER. The Office of Regulatory Affairs (ORA) is responsible for conducting field activities for all of FDA's medical product centers, which include CDER and CBER, such as inspections of domestic and foreign establishments involved in manufacturing medical products. FDA headquarters (HQ), specifically the Office of the Commissioner, includes several offices that perform a variety of activities that contribute to indirect costs related to the GDUFA program. FDA HQ provides agency level shared services; policy, financial, and legal support; and other overhead support that is provided to all FDA programs and activities. Within CDER, the Office of Generic Drugs (OGD) is responsible for providing regulatory oversight and strategic direction for FDA's generic drug program to expedite the availability of safe, effective, and high- quality generic drugs to patients. These activities include reviewing generic drug applications, which comprises such actions as examining bioequivalence data and evaluating proposed drug labeling. In addition, the Office of Pharmaceutical Quality, also within CDER, is responsible for examining chemistry-related data and providing quality control across all manufacturing sites, whether domestic or foreign, across all drug product areas. FDA begins review of a generic drug when a generic drug applicant submits an Abbreviated New Drug Application (ANDA). Generic drug applications are termed "abbreviated" by FDA because they are generally not required to include preclinical study data (studies involving animals) and clinical trial data (studies involving humans) to establish safety and effectiveness. Because generic drugs must be bioequivalent to a brand- name drug already approved by the FDA, and because animal studies and clinical trials have already been conducted for the brand-name drug, generic drug applicants do not need to repeat these animal or human studies. FDA's approval of a drug's application is required before a generic drug can be marketed for sale in the United States. FDA will meet the performance goals outlined in its Commitment Letter when it completes its review and issues an action letter for a specified percentage of applications within a designated period of time. An action letter is an official statement informing a drug applicant of the agency's decision about an application review. FDA can issue four types of action letters: Refuse to receive letter: FDA issues a refusal to receive letter when it determines that an application is not sufficiently complete to permit a substantive review. Approval letter: FDA issues an approval letter to an applicant when the agency has concluded its review of a generic drug application and the applicant is authorized to commercially market the drug. Tentative approval letter: FDA issues a tentative approval letter when the agency has completed its review of an application, but patents or other exclusivities for the original, brand-name product prevent approval. A tentative approval letter does not allow the applicant to market the generic drug product until the related patents and other exclusivities no longer prevent approval. Complete response letter: FDA issues a complete response letter to an applicant at the completion of a full application review where deficiencies are found--the complete response letter describes any deficiencies that must be corrected in order for an application to be approved. In order to close the review cycle, FDA must complete its review and issue an approval, tentative approval, or a complete response letter. If the agency has not issued one of these letters, the application is considered a pending application. (See fig. 1 for a summary of the generic drug application review process.) Once an ANDA is filed, an FDA review team--medical doctors, chemists, statisticians, microbiologists, pharmacologists, and other experts-- evaluates whether scientific data in the application demonstrates that the drug product meets the statutory and regulatory standards for approval. For example, applicants must, in most cases, demonstrate that the generic product, in relation to an already-approved brand-name drug contains the same active ingredient(s); is identical in strength, dosage form, and route of administration; is labeled for conditions of use approved for the brand-name drug; is bioequivalent to an already-approved brand-name drug; meets the same requirements for identity, strength, purity, and quality; is manufactured under the same strict standards of FDA's good manufacturing practice regulations required for brand-name products. The application must also contain information to show that, with permitted deviations, it has the same labeling as the brand-name product. FDA communicates with applicants when issues arise during its review of an application that may prevent the agency from approving the application. In response, applicants can submit additional information to FDA in the form of amendments to the original application. FDA review time for an original application (i.e., the first review cycle) is calculated as the time elapsed from the date FDA receives the application and associated user fee to the date it issues an action letter. The application review process will also be closed if the application is withdrawn by the applicant. The date on which one of these actions occurs is used to determine whether the review cycle was completed within FDA's committed time frames. If FDA issues a complete response letter listing the deficiencies in the application that were encountered by FDA's reviewers, the applicant may choose to submit a revised application to FDA. Resubmissions and their review are covered under the user fee paid with the original submission, but a new review cycle with its own performance goals is started. If an applicant wants to change any part of its original ANDA after its approval--such as changes to the manufacturing location or process, the type or source of active ingredients, or the labeling--it must submit an application supplement to notify FDA of the change. If the change has a substantial potential to adversely affect factors such as the identity, quality, purity, or potency of the drug, the applicant must obtain FDA approval for the change through submission of a Prior Approval Supplement (PAS). Outside of the application review process, FDA also responds to correspondence submitted to the agency by, or on behalf of, an applicant requesting information on a specific element of generic drug product development. This communication between FDA and applicants, known as controlled correspondence, allows applicants to submit formal questions seeking the agency's input on issues capable of affecting the review of a product prior to their submission of an ANDA. The generic drug program is supported by both regular appropriations and generic drug user fee appropriations. Generic drug user fees provide funds to FDA to support its efforts to review applications for generic drugs in a timely manner. GDUFA authorizes FDA to collect from the generic drug industry $299 million in user fees annually through September 30, 2017, adjusted for inflation, to supplement the regular appropriations the agency receives to support the generic drug program. GDUFA established several types of fees associated with generic drug products that together generate the annual collections. These include fees for (1) ANDAs in the backlog as of October 1, 2012 (assessed in fiscal year 2013 only); (2) ANDAs and PASs submitted after October 1, 2012; (3) facilities where active pharmaceutical ingredients and finished dosage forms are produced; and (4) Drug Master Files that are associated with generic drug products. Although GDUFA authorizes FDA to collect user fees, the law specifies that the total amount of user fees collected for a fiscal year be provided in appropriations acts. FDA establishes the generic drug user fee collection amounts annually to generate revenue levels as specified in appropriations acts. Once appropriated and collected, user fees are available for obligation by FDA until expended. As a result, any user fees not obligated in the fiscal year in which they were appropriated and collected may be carried over into subsequent fiscal years (referred to as a carryover). In addition, GDUFA specifies that user fees may be spent only for generic drug activities, including the costs of reviewing and approving generic drug applications. Each year as part of the annual appropriations process, FDA develops and submits supporting information for its funding request, which includes user fee and non-user fee funds, in the budget justification that is submitted to the congressional appropriations committees. This information reflects how FDA proposes to meet its mission, goals, and objectives, and it assists Congress in determining how much funding to appropriate for FDA. This information also includes an estimate of how many generic drug applications are likely to be received in the coming year. Authority for the generic drug user fee program established under GDUFA expires at the end of fiscal year 2017. During the 5-year period of the current authorization, FDA has been required to submit two annual reports to its oversight committees: (1) a report on the progress made and future plans toward achieving the performance goals identified in its Commitment Letter, and (2) a report on the financial aspects of FDA's implementation efforts. These reports contain descriptions of relevant oversight activities over the previous year, data on FDA's performance toward meeting the commitments, and information about how FDA addressed the implementation and use of the user fees over the previous year. In addition, to facilitate Congress's reauthorization of the program, GDUFA requires FDA to develop recommendations to present to Congress with respect to the goals, and plans for meeting those goals, during fiscal year 2017 through fiscal year 2022. FDA is to develop these recommendations in consultation with various stakeholders, including the generic drug industry. FDA and generic drug industry stakeholders conducted negotiations regarding the program's reauthorization, which is referred to as GDUFA II, in October 2015 through August 2016. According to FDA, the negotiated objectives of GDUFA II differ from the objectives of the original GDUFA agreement (i.e., GDUFA I). While the primary objective of GDUFA I was to restructure FDA's generic drug program to improve the speed and predictability of reviews, the primary objective for GDUFA II, as outlined in the proposed Commitment Letter negotiated by FDA and the generic drug industry, is to improve the completeness of drug application submissions and reduce the number of review cycles. Other features include enhanced review pathways for complex drugs, enhanced accountability and reporting, and modifications to the user fee structure. GDUFA supported an 85 percent increase in total FDA obligations for its generic drug program in the first 4 years of implementation. User fees primarily supported generic drug application evaluation and review activities. FDA has accumulated carryover balances from unobligated user fee collections, but it lacks a plan for administering the carryover, which is inconsistent with best practices identified in our prior work on the management of user fees and federal internal control standards. Total obligations for FDA's generic drug program (from both regular appropriations and generic drug user fee appropriations) increased by about 85 percent in the 4 years following GDUFA's implementation, from about $267 million in fiscal year 2013 to about $494 million in fiscal year 2016. (See table 1.) FDA's reliance on generic drug user fees increased throughout this period. Obligations from generic drug user fees grew in both absolute terms and as a share of total program obligations, from about $121 million (45 percent of total obligations) in fiscal year 2013 to about $373 million (76 percent of total obligations) in fiscal year 2016. In contrast, obligations from regular appropriations decreased as a share of total program obligations during this period, and while these regular appropriations increased in absolute terms from fiscal years 2013 to 2014, they declined afterwards. In the first 4 years of the generic drug user fee program, FDA obligated over $1 billion (about 70 percent) of the anticipated 5-year, $1.5 billion in user fee collections. CDER, the office with responsibility for drug evaluations and generic drug submission reviews, obligated the largest share of user fees--almost 70 percent--while the three other FDA components with responsibility for the generic drug program obligated smaller shares. Figure 2 shows cumulative user fee obligations by each FDA component and account in fiscal years 2013 through 2016. According to FDA officials, the percentage of user fees allocated to each of these four components did not vary much from year to year. However, FDA officials also reported that each year the agency allocated a percentage of the user fees to centrally managed accounts that are used for rent, utility costs, telecommunications, and other support costs such as information technology (IT) investments that support FDA programs and activities, but which do not necessarily align with the four offices supporting the generic drug program. User fee obligations from the centrally managed account were the second largest component of such obligations each fiscal year since the implementation of GDUFA, trailing only CDER. In addition, approximately 60 percent of cumulative user fee obligations supported non-personnel activities and about 40 percent supported personnel-related activities, such as employee salaries and benefits, in the first 4 years of GDUFA's implementation (see table 2). In addition to IT investments and capital asset purchases, CDER also obligated funds for non-personnel activities such as consulting services to integrate GDUFA requirements into its new IT system and regulatory science projects with the potential to improve the development of generic drugs. (See Appendix I for more information on GDUFA-supported regulatory science projects.) User fee obligations for personnel-related activities increased from fiscal year 2013 to fiscal year 2016, both in absolute numbers and as a percentage of total user fee obligations. Personnel-related obligations increased sharply in the first 4 years of GDUFA, from about $18 million (14 percent) of all user fees obligated in fiscal year 2013, to about $181 million (49 percent) in fiscal year 2016. According to FDA officials, the increase in personnel-related spending was due, in part, to hiring for the generic drug program consistent with the agency's GDUFA goals. FDA has accumulated a large unobligated user fee carryover balance, which it uses as an operating reserve. At the beginning of fiscal year 2017, FDA had a carryover of approximately $174 million. During the first two years of GDUFA's implementation, FDA had obligated about half of the user fees it had collected and thereby amassed a cumulative carryover of about $278 million by the end of fiscal year 2014--an amount nearly as great as the annual, inflation-adjusted user fee collection amount of $299 million. In fiscal years 2015 and 2016, FDA's program obligations from user fees exceeded the amount collected and FDA used part of the carryover to make up for the gap. (See table 3.) In fiscal year 2015, FDA obligated about $47 million from its carryover in addition to its total generic drug user fee appropriation for that year, and in fiscal year 2016, the agency obligated about $58 million from its carryover in addition to its total generic drug user fee appropriation for that year, yielding a carryover balance of about $174 million. Despite the large carryover amounts, FDA has not developed a planning document on how it will administer its carryover--one that includes a fully documented analysis of program costs and risks to ensure that its carryover reflects expected operational needs and probable contingencies. Although FDA uses an internal management report to show GDUFA collection amounts, obligations, and end-of-year carryover amounts, the agency was unable to produce evidence describing whether the carryover of $174 million at the beginning of fiscal year 2017 (or carryover amounts in other years) was within a targeted goal, and it does not have targets for future years in general. We have previously found that when unobligated balances are used as carryover, it is important for entities to establish a target range for the carryover to ensure user fee resources are used efficiently and responsibly and that the amounts carried over into the following year are reasonable to meet program needs, risks, and probable contingencies. In addition, the lack of such a planning document is inconsistent with federal internal control standards, which state that management should have a control system in place to communicate necessary quality information externally to help the agency achieve its objectives and address related risks. During GDUFA II negotiations, FDA officials acknowledged the need for more fiscal transparency and accountability and announced plans to build financial systems to facilitate operational and fiscal efficiency and reporting. However, agency officials also stated that their internal management report, which is used to report its user fee cash flows, was sufficient to analyze the program's needs. By not developing a planning document FDA cannot effectively communicate to external stakeholders the amount of its carryover balance and its plans for using it. These external stakeholders include Congress, which determines the total amount of generic drug user fees FDA is to collect through the annual appropriations process. Likewise, Congress also considers GDUFA reauthorization levels based on recommendations that FDA is to develop in consultation with other external stakeholders, who do not have access to FDA's internal reports. FDA has made changes to the generic drug program since the enactment of GDUFA in order to establish a better-managed drug application review process. In response to stakeholder input, FDA incorporated additional changes to the application review process. Key changes to FDA's generic drug review process have included revising its organizational infrastructure, upgrading IT, and formalizing external communication processes. To enable FDA to meet the evolving needs of application review and GDUFA performance goals, the agency undertook steps to reorganize OGD in December 2013. Specifically, under this reorganization OGD was elevated to the status of a "super office" within CDER, providing OGD with centralized administrative support and its own governance structure. Under the reorganization, OGD was given the responsibility to coordinate and manage the application review process; provide safety, surveillance, clinical, and bioequivalence reviews for generic products; and develop policy and regulatory science for generic drugs. Four subordinate offices within OGD were created to fulfill these responsibilities: the Office of Research and Standards, the Office of Bioequivalence, the Office of Regulatory Operations, and the Office of Generic Drug Policy. Additionally, in January 2015 FDA established a new Office of Pharmaceutical Quality--another "super office" within CDER--to provide better alignment among all drug quality review functions, including application reviews, inspections, and research. As part of its GDUFA hiring goals, FDA planned to hire approximately 923 new staff by the end of fiscal year 2015 and to this end established incremental goals to hire 231 (25 percent), 462 (50 percent), and 231 (25 percent) of the 923 total new staff during the first 3 fiscal years of the program, respectively. However, FDA surpassed the targeted goal in total, hiring nearly 1,200 new staff over the 3 year period (227, 562, and 387 in each fiscal year, respectively). (See fig. 3.) Additionally, in fiscal year 2016 FDA hired 346 new staff to support the GDUFA program, although there was no associated GDUFA hiring goal for that fiscal year. The majority of these new hires support generic drug program evaluation activities within CDER, with additional hires distributed across other FDA offices. To fulfill its GDUFA commitments, FDA established a new Informatics Platform to improve the efficiency of application reviews and to support the agency's ability to track its performance. Prior to rolling out this platform in fiscal year 2015, FDA officials said that the agency used many disparate and disconnected databases, systems, and spreadsheets to manage different aspects of the generic drug review program. Officials said that the new platform integrates all these review functions, tracking the work flow from the time FDA receives an application until a decision is made on it. Furthermore, officials told us the platform can provide information on an application as it proceeds through the review process, and agency officials can also track when each assignment related to this process has been completed. Backlog applications are also tracked by the platform. During the initial launch, officials said that the platform was able to track the application review process and its related work flow, including analytics and metrics reporting. Since then, FDA has also incorporated data about facility inspection decisions as well as provided access to historical reviews and actions taken by FDA on generic drug applications submitted prior to fiscal year 2015. FDA officials said that the agency has plans to expand the use of the platform in the future to track additional incoming submissions, such as reports of drug shortages and applications for brand-name drugs. According to FDA officials, the launch of the platform has provided the following benefits to FDA and to stakeholders: (1) faster review times, (2) easier collaboration and communication with industry, (3) improved application review consistency, and (4) more predictable application review times and target completion dates due to having all pertinent information regarding an application in one location that is accessible to all FDA reviewers. As part of FDA's GDUFA commitments to streamline the review process, the agency took steps to change how it communicates with generic drug applicants. According to FDA officials, prior to GDUFA, deficiency letters were sent to applicants by specific types of reviewers within CDER--such as labeling reviewers or chemistry reviewers--in an uncoordinated fashion, making it difficult for applicants to obtain a comprehensive picture of their application's status. Starting in fiscal year 2013, FDA committed to consolidating all application deficiencies into one letter to the applicant, called a complete response letter. According to FDA officials, this systemic approach to provide a single deficiency letter was one of the biggest changes the agency made to the review process since the enactment of GDUFA. Additionally, in September 2013, OGD issued guidance that established regulatory project managers as the central point of contact for each application throughout its lifecycle. FDA officials said that regulatory project managers are also responsible for overseeing the review of each application across all disciplines. Prior to GDUFA, FDA officials said that no one individual at the agency had responsibility for an application throughout its entire lifecycle. FDA has also issued new and revised guidance documents to educate applicants about changes to the generic drug application review process made in response to GDUFA. According to FDA officials, since fiscal year 2013 FDA has issued 31 new and revised draft or final guidance documents related to the application review process. Additionally, officials said that FDA has also issued almost 600 new or revised product-specific recommendations to assist the applicants with identifying the most appropriate methodology for developing generic drugs and generating evidence needed to support application approval. FDA has made additional refinements to its application review program in response to applicant concerns about program changes. Specifically, to provide more timely communication on individual applications, FDA instituted a mechanism known as real time communication in late 2014. As described above, as one of its initial changes, FDA identified all deficiencies found in its review of an application in a single, complete response letter to the applicant. However, applicants told us that they found that only providing information in the complete response letters resulted in fewer informal communication opportunities with FDA and requested that FDA send information concerning individual application deficiencies on a rolling basis so that they could address deficiencies in real time. FDA acknowledged that the initial changes to how it communicated to applicants made it harder for applicants to assess the status of their applications and to plan the market launch of generic medicines. To remedy applicants' concerns and to enhance the review process by increasing transparency and decreasing the number of review cycles, FDA implemented real-time communications--specifically "information requests" and "easily correctible deficiencies." According to FDA officials, information requests are used by application reviewers to informally notify applicants of any preliminary application concerns as well as to seek resolution and clarification on some of the minor issues related to the application. Similarly, application reviewers communicate easily correctible deficiencies to applicants to obtain missing information that should be readily available, to seek clarification of data already submitted, or to request final resolution of technical issues. FDA data show that the numbers of information requests and easily correctible deficiencies substantially increased in the first 9 months following their inception in early 2015 and have decreased somewhat since then, suggesting that both FDA and applicants have found these new forms of communication useful. (See fig. 4.) FDA also revised its policy outlining the roles and responsibilities of various FDA staff in communicating with applicants during the application review process in August 2015. FDA made this revision to address stakeholder concerns that establishing regulatory project managers as the primary point of contact for all communication with applicants limited the opportunities for informal communication with FDA staff directly responsible for reviewing applications. The revised policy expanded and set forth responsibilities and procedures for communications between FDA staff and applicants concerning the review status of applications. Specifically, OGD's regulatory project managers would remain responsible for communicating the review status of applications they manage, including transmitting complete response letters, while discipline project managers and Office of Pharmaceutical Quality regulatory business process managers--both of whom are more directly involved in an application's review--would be responsible for issuing all information requests and easily correctible deficiencies. According to FDA officials, these changes were made as part of a broader effort to bring communications between the agency and applicants closer to "real-time." Lastly, FDA has communicated target action dates to applicants since 2015 at the request of industry stakeholders. Target action dates are the agency's internal deadlines for taking action on generic drug applications pending with the agency on October 1, 2012, and those submitted in fiscal years 2013 and 2014 (years for which there were no GDUFA performance goals established). According to FDA, although GDUFA did not require the agency to establish and communicate target action dates to applicants, these dates help applicants plan product launches, which promotes timely access to generic drugs. FDA's review times for generic drug applications have decreased since the implementation of GDUFA, with FDA surpassing multiple fiscal year 2015 GDUFA performance goals as described in table 4. With respect to ANDA review times, the average time for FDA to complete the first review cycle decreased from 26 months for ANDAs submitted in fiscal year 2013 to about 14 months for those submitted in fiscal year 2015. Additionally, the dispersion in review times has decreased. (See fig. 5.) However, as of December 31, 2016, 929 ANDAs (34 percent) submitted since the start of the generic drug user fee program in fiscal year 2013 were still pending review. As these applications are reviewed, the average review time and the dispersion of review times for each fiscal year will increase since all of the applications that remained to be acted on are at least 15 months old. As of December 31, 2016, FDA had also acted on 89 percent of all ANDAs submitted in fiscal year 2015 within 15 months of receipt, exceeding its GDUFA goal of acting on 60 percent of ANDAs received in fiscal year 2015 within 15 months. For PASs, the average time for FDA to complete the first review cycle also declined from 12 months in fiscal year 2013 to 4.5 months in fiscal year 2015. Additionally, the dispersion in review times decreased, as shown in figure 6. FDA acted within 6 months on 95 percent of the PASs it received in fiscal year 2015 not requiring a facility inspection, exceeding its GDUFA goal of acting on 60 percent of PASs received within 6 months of receipt. For PASs received in fiscal year 2015 that required a facility inspection, FDA acted on 92 percent within 10 months, again exceeding its GDUFA goal of acting on 60 percent within 10 months of receipt. FDA has also met performance goals related to controlled correspondences and its review of backlogged applications. As of December 31, 2016, FDA acted on 97 percent of the 1,519 controlled correspondences it received in fiscal year 2015 within 4 months, exceeding its GDUFA goal of acting on 70 percent within 4 months of receipt. FDA was unable to provide more detailed information on the review times for controlled correspondences submitted in the first 2 years of the program; however, according to FDA officials, 2,027 of the 2,040 correspondences submitted in that period have been reviewed as of August 2016. In addition, as of December 31, 2016, FDA had acted on 92 percent of the 4,743 applications in the backlog pending review as of October 1, 2012, exceeding its GDUFA goal of acting on 90 percent of such applications before the end of fiscal year 2017. Fifty-eight percent of these applications were approved; approximately 20 percent were withdrawn by the applicant; and the applicants for the remaining 12 percent received a complete response letter. As with any appropriations, the user fee funding provided to FDA brings with it a great responsibility to manage funds in a way that demonstrates prudent stewardship of resources. FDA has used its user fee funding to enhance OGD's ability to increase hiring, and undertake numerous activities to improve and speed-up the review of generic drug applications. However, at the end of each fiscal year FDA has had large GDUFA carryover balances, and FDA has not fully documented the underlying assumptions for the size of the carryover, including anticipated obligations. Such a documented plan could aid Congress in determining the appropriate amount of user fees to be collected by the agency during the annual appropriations process and when considering a reauthorization of the user fee program. Making this information publicly available would also help to ensure that FDA's recommendations to Congress are fully informed by the views of external stakeholders with whom FDA has an obligation to consult. To ensure efficient use of generic drug user fees, facilitate oversight and transparency, and plan for risks, we recommend that the Commissioner of FDA develop a plan for administering user fee carryover that includes analyses of program costs and risks and reflects actual operational needs and contingencies. We provided a draft of this report to HHS for comment. In its written comments, which are reproduced in appendix II, HHS concurred with our recommendation. HHS agreed that it should incorporate an analysis of program risks and contingencies into its existing 5-year financial planning process and that it will review appropriate actions. HHS also provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of HHS, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact John E. Dicken at (202) 512-7114 or [email protected]. Contact points for our Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. Other major contributors to this report are listed in appendix III. Regulatory science projects support the development of generic drugs in part by helping to address gaps the agency faces between rapid changes in science and technology and the agency's capacity to regulate those technologies. We previously reported that the Food and Drug Administration (FDA) traditionally funds regulatory science projects with resources from the agency's regular appropriations, but projects funded within the Center for Drug Evaluation and Research (CDER) have also been supplemented by funds collected from user fee acts, such as the Prescription Drug User Fee Act and the Generic Drug User Fee Amendments of 2012 (GDUFA). GDUFA funds accounted for approximately $20 million in annual obligations for regulatory science projects from fiscal years 2013 through 2016. The Office of Generic Drugs (OGD), located within CDER, established the GDUFA Regulatory Science Research Program to support projects that could potentially enhance the development of generic drugs. In fiscal year 2013, OGD created a list of GDUFA Regulatory Science Priorities that includes five broad priority areas (see table 5). The list is based in part on discussions with stakeholders during annual public meetings on GDUFA and in part on stakeholder comments to FDA's GDUFA regulatory science funding announcements. However, generic drug industry stakeholders have raised concerns about the need for more meaningful scientific dialogue about FDA's requirements for the development of generic drugs, and for more clarity on how the agency develops its regulatory science priorities list. FDA officials we interviewed were cognizant of stakeholders' concerns and noted that they have reconsidered the five broad categories each year. However, officials told us they have not made changes to the priority areas since they were established in fiscal year 2013 and do not envision annual changes to the broad categories, though the sub-priority areas in each category have been revised from year to year. The officials acknowledged that while some information about their process for judging the merit of regulatory science proposals is public, details about how proposals are scored is not public in order to promote a process whereby applications submitted are evaluated free of bias from stakeholders. The officials explained that the priorities list is created internally at FDA in part to protect the privacy of applicants that submitted proposals, to avoid potential conflicts of interest from stakeholders who may want to steer research away from competitors, and to incorporate internal FDA capabilities to conduct research at lower costs. Although the officials said that decisions about which projects to fund is an inherently governmental function and should be made internally to support public health, they noted plans to improve communications with industry about the priorities list and plan to more clearly announce the sub-priority areas available for research on the OGD webpage. In the first 4 years following GDUFA's implementation, OGD obligated a cumulative amount of about $77 million from generic drug user fee collections for 103 regulatory science projects. Data provided by FDA showed that 15 of these projects supported research into post-market evaluation of generic drugs, 30 projects supported the equivalence of complex drug products, 20 projects supported the equivalence of locally acting products, 20 supported therapeutic equivalence evaluation and standards, and 18 supported cross-cutting computational and analytical tools. Obligations from user fees for regulatory science projects remained relatively stable each year, from a low of $16 million in fiscal year 2016 to a high of $24 million in fiscal year 2015. (See table 6). According to FDA officials, the agency is not required by law or otherwise committed to spend a certain amount on regulatory science projects, but agency officials anticipate funding projects at similar levels in future years. John E. Dicken, (202) 512-7114 or [email protected]. In addition to the contact named above, individuals making key contributions to this report include Robert Copeland (Assistant Director); Carolina Morgan (Analyst-in-Charge); Enyinnaya David Aja; Nick Bartine; Taylor Dunn; Sandra George; Laurie Pachter; and Said Sariolghalam. Muriel Brown and Laurel Plume also made contributions to this report.
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Nearly 90 percent of prescription drugs dispensed in the United States are generic drugs. According to FDA, an increasing volume of generic drug applications over the past decades stressed its ability to review applications efficiently. GDUFA granted FDA the authority to collect user fees from the generic drug industry to supplement resources for the generic drug program. In return, FDA committed to meeting certain performance goals related to the timely review of generic drug applications and to implementing review process improvements. GAO was asked to examine FDA's implementation of GDUFA. In this report, GAO (1) examines how user fees supported the generic drug program, (2) describes FDA's improvements to the generic drug application review process, and (3) analyzes changes in generic drug application review times. GAO reviewed laws and regulations; FDA policy, guidance, the GDUFA Commitment Letter, and GDUFA financial reports from fiscal years 2013 through 2016; FDA data on application review times from fiscal years 2012 through 2015; and interviewed officials from FDA, generic drug manufacturers, and trade associations. Since the enactment of the Generic Drug User Fee Amendments of 2012 (GDUFA), the Food and Drug Administration's (FDA) reliance on user fees has increased from $121 million in fiscal year 2013 to $373 million in fiscal year 2016, or 45 percent of total program obligations in fiscal year 2013 to 76 percent in fiscal year 2016. FDA carried over $174 million in unobligated user fees at the end of the fourth year of the GDUFA 5-year period. GAO found that although FDA uses an internal management report to track user fee cash flows for internal purposes, it lacks a plan for administering its carryover--one that includes a fully-documented analysis of program costs and risks to ensure that program operations can be sustained in case of unexpected changes in collections or costs. GAO previously found that it is important for entities with carryover to establish appropriate target amounts based on program needs, risks, and contingencies. FDA's approach is inconsistent with best practices for managing federal user fees. Without a carryover plan, FDA lacks reasonable assurance that the size of its carryover is appropriate to ensure the efficient and responsible use of resources. Dollars in millions FDA took steps to improve the timeliness and predictability of generic drug application reviews. FDA restructured the generic drug program by building a more robust organizational infrastructure, upgrading information technology systems, and implementing communication reforms. As FDA implemented these changes, it made additional refinements in response to applicants' feedback. Generic drug application review times have improved under GDUFA. FDA's review time for a new generic drug application (known as an Abbreviated New Drug Application (ANDA)) decreased from 28 months for applications submitted in fiscal year to 2012 to about 14 months for those submitted in fiscal year 2015. FDA also surpassed multiple GDUFA performance goals. For example, FDA committed to reviewing 60 percent of ANDAs submitted in fiscal year 2015 within 15 months of their receipt. GAO found that FDA had taken action on 89 percent of such ANDAs for which it committed to conducting a substantive review by December 31, 2016, thereby surpassing this goal. GAO recommends that FDA develop a plan for administering user fee carryover that includes analyses of program costs and risks and reflects operational needs and contingencies. HHS agreed with GAO's recommendation.
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Freight rail is an important component of our nation's economy. Approximately 42 percent of all inter-city freight in the United States, measured in ton miles, moves on rail lines. Freight rail is particularly important to producers and users of certain commodities. For example, about 70 percent of automobiles manufactured domestically, about 70 percent of coal delivered to power plants, and about 32 percent of grain moves on freight rail. Beginning in 1887, the Interstate Commerce Commission (ICC) regulated almost all of the rates that railroads charged shippers. Congress passed the Railroad Revitalization and Regulatory Reform Act in 1976 and the Staggers Rail Act in 1980, and these acts greatly increased the reliance on competition in the railroad industry. Specifically, these acts allowed railroads and shippers to enter into confidential contracts which set rates and prohibited the ICC from regulating rates where railroads had effective competition or if the rates had been negotiated between the railroad and the shipper. The ICC Termination Act of 1995 abolished the ICC and transferred its regulatory functions to STB. Taken together, these acts anchor the federal government's role in the freight rail industry and have established numerous goals for regulating the industry, including the following: to allow, to the maximum extent possible, competition and demand for services to establish reasonable rates for transportation by rail. to minimize the need for federal regulatory control over the rail transportation system and to require fair and expeditious regulatory decisions when regulation is required. to promote a safe and efficient rail transportation system by allowing rail carriers to earn adequate revenues, as determined by STB. to ensure effective competition among rail carriers and with other modes to meet the needs of the public. to maintain reasonable rates where there is an absence of effective competition and where rail rates provide revenues which exceed the amount necessary to maintain the rail system and to attract capital. to prohibit predatory pricing and practices, to avoid undue concentrations of market power; and to provide for the expeditious handling and resolution of all proceedings. Two important components of the current regulatory structure are the concepts of revenue adequacy and demand-based differential pricing. Congress established the concept of revenue adequacy as an indicator of the financial health of the industry. STB determines the revenue adequacy of a railroad by comparing the railroad's return on investment with the industrywide cost of capital. If a railroad's return on investment is greater than the industry-wide cost of capital, STB determines that railroad to be revenue adequate. Historically, the ICC and STB have rarely found railroads to be revenue adequate, which many observers relate to characteristics of the industry's cost structure. Railroads incur large fixed costs to build and operate networks that jointly serve many different shippers. While some fixed costs can be attributed to serving particular shippers, and some costs vary with particular movements, other costs are not attributable to particular shippers or movements. Nonetheless, a railroad must recover these costs if the railroad is to continue to provide service over the long run, and, to the extent that railroads have not been revenue adequate, this may indicate that they are not fully recovering these costs. Consequently, the Staggers Rail Act recognized the need for railroads to use demand-based differential pricing in the deregulated environment. Demand-based differential pricing in theory permits a railroad to recover their joint and common costs across its entire traffic base by setting higher rates for traffic with fewer transportation alternatives than for traffic with more alternatives. This means that a railroad might incur similar incremental costs in providing service to two different shippers that ship similar tonnages in similar car types traveling over similar distances, but that the railroad may charge quite different rates. In this way, the railroad recovers a greater portion of its joint and common costs from the shipper that is more dependent on railroad transportation, but, to the extent that the railroad is able to offer lower rates to the shipper with more transportation alternatives, the other shipper makes a contribution toward those costs. The Staggers Rail Act further required that the railroads' need to differentially price its services be balanced with the rights of shippers to be free from, and to seek redress from unreasonable rates. Railroads incur variable costs--that is the costs of moving particular shipments--in providing service. The Staggers Rail Act stated that any rate that was found to be above 180 percent of a railroad's variable cost for a particular shipment was potentially an unreasonable rate and granted the ICC, and later the STB, the authority to establish a rate relief process. In response, the ICC established two criteria for allowing a rail rate case. First, as stated in law, the rate had to be above 180 percent of the revenue-to- variable-cost (R/VC) ratio. Second, the shipper had to demonstrate that it had no other reasonable transportation alternative. Such a shipper is referred to as a "captive shipper." The changes that have occurred in the railroad industry since the enactment of the Staggers Rail Act are widely viewed as positive. The railroad industry's financial health improved substantially as it cut costs, boosted productivity, and "right-sized" its networks. Rates generally declined between 1985 and 2000 but increased slightly from 2001 through 2004. Concerns about competition and captivity in the industry remain because traffic is concentrated in fewer railroads and, although rates have declined for most shippers, some shippers are paying significantly higher rates than others. While it is difficult to precisely determine the number of shippers who are "captive" to one railroad, our preliminary analysis indicates that while the extent of potential captivity may be dropping, the share of potentially captive shippers who are paying the highest rates-- those substantially above the threshold for rate relief--has increased. There is widespread consensus that the freight rail industry has benefited from the Staggers Rail Act. Specifically, various measures indicate an increasingly strong freight railroad industry. Freight railroads' improved financial health is illustrated by increases in productivity, volume of shipments, and stock prices. Freight railroads have also cut costs by streamlining their workforce and "right-sizing" their rail network, through which the railroads have reduced track, equipment, and facilities to more closely match demand. These measures are shown in figure 1. Freight railroads have also expanded their business into new markets - such as the intermodal market - and implemented new technologies, including larger cars, and are currently developing new scheduling and train control systems. Some observers believe that the competition faced by railroads from other modes of transportation has created incentives for innovative practices, and that the ability to enter into confidential contracts with shippers has permitted railroads to make specific investments and to develop service arrangements tailored to the requirements of different shippers. Rail rates across the industry have generally declined since enactment of the Staggers Rail Act. Because changes in traffic patterns over time (for example, hauls over longer distance) can result in increases in lower priced traffic and a decrease in average revenue per ton mile, it can present misleading rate trends. Therefore, we developed a rail rate index to examine trends in rail rates over the 1985-2004 period. These indexes account for changes in traffic patterns over time which could affect revenue statistics but do not account for inflation. As a result, we have also included the price index for the gross domestic product. Although there has been a slight upturn in rates from 2001 through 2004, the industry continues to experience rates that are generally lower than they were in 1985. During this time some costs have also been passed on to shippers, such as having shippers provide equipment. There was a steep decline in rates from 1985 to 1987 when rates dropped by 10 percent. Rates continued to decline, although not as steeply, through 1998. Rates increased in 1999, then dropped again in 2000. In 2001 and 2002 rates rose again. Rates were nearly flat in 2003 and 2004, finishing approximately 3 percent above rates in 2000, but 20 percent below 1985 rates. This is shown in figure 2. These data include rates through 2004. According to freight railroad officials, shippers, and financial analysts, since 2004 rates have continued to increase as the demand for freight rail service has increased, rail capacity has become more limited, and as a result, freight railroad companies have gained increased pricing power. A number of factors may have contributed to recent rate increases. Ongoing industry and economic changes have influenced how railroads have set their rates. Since the Staggers Rail Act was enacted, the railroad industry and the economic environment in which it operates have changed considerably. Not only has the rail industry continued to consolidate, potentially increasing market power by the largest railroads, but after years of reducing the number of its employees and shedding track capacity, the industry is increasingly operating in a capacity-constrained environment where demand for their services exceeds their capacity. In addition, the industry has more recently increased employment and invested in increased capacity in key traffic corridors. Additionally, changes in broader domestic and world economic conditions have led to changes in the mix and profitability of traffic carried by railroads. Concerns about competition and captivity in the railroad industry remain because traffic is concentrated in fewer railroads and even though rates have declined for most shippers since the enactment of the Staggers Rail Act, some shippers are paying significantly higher rates than other shippers--a reflection of differential pricing. There is significant disagreement on the state of competition in the rail industry. In 1976, there were 63 Class I railroads operating in the United States compared with 7 Class I railroads in 2004. As figure 3 shows, 4 of these Class I railroads accounted for over 89 percent of the industry's revenues in 2004. While some experts view this concentration as a sign that the industry has become less competitive over time, others believe that the railroad mergers and acquisitions actually increased competition in the rail industry because STB placed conditions on the mergers intended to maintain competition. These experts also point to the hundreds of short line railroads that have come into being since the enactment of the Staggers Rail Act, as well as other increased competitive options for shippers from other modes such as trucks and barges. According to our preliminary analysis, some commodities and shippers are paying significantly higher rates than other shippers. This can be seen in rates charged to commodities and at specific routes. Figure 4 compares commodity rates for coal and grain prices from 1985 through 2004 using our rail rate index. As figure 4 shows, all rate changes were below the rate of inflation and thus all rates declined in real terms. However during that period, coal rates dropped even more sharply than industrywide rates, declining 35 percent. Grain rates initially declined from 1985 to 1987, but then diverged from industry trends and increased, resulting in a net 9 percent nominal increase by 2004. It is difficult to precisely determine the number of shippers who are "captive" to one railroad because proxy measures that provide the best indication can overstate or understate captivity. One way of determining potential captivity in our preliminary analysis was to identify which Bureau of Economic Analysis (BEA) economic areas were served by only one Class I railroad. In 2004, 27 of the 177 BEA economic areas were served by only one Class I railroad. As shown in figure 5, these areas include parts of Montana, North Dakota, New Mexico, Maine, and other states. We also examined specific origin and destination pairs and found that in 2004, origin and destination routes with access to only one Class I railroad carried 12 percent of industry revenue. This represents a decline from 1994, when 22 percent of industry revenue moved on routes served by one Class I railroad. This decline suggests that more railroad traffic is traveling on routes with access to more than one Class I railroad. While examining BEA areas provides a proxy measure for captivity, a number of factors may understate or overstate whether shippers are actually captive. The first two of these factors may work to understate the extent of captivity among shippers. First, routes originating within economic areas served by multiple Class I railroads may still be captive if only one Class I railroad serves their destination, meaning the shipper can use only that one railroad for that particular route. Second, some BEA areas are quite large, so a shipper within the area may have access to only one railroad even though there are two or more railroads within the broader area. Two additional limitations may work to overstate the number of locations captive to one railroad. First, this analysis accounts for Class I railroads only and does not account for competitive rail options that might be offered by Class II or III railroads such as the Guilford Rail System, which operates in northern New England. Second, this analysis considers only competition among rail carriers and does not examine competition between rail and other transportation modes such as trucks and barges. To determine potential captivity during our preliminary analysis, we applied another proxy measure--the definition of potentially captive traffic used in the Staggers Rail Act. The act defines potentially captive traffic as any that pays over 180 percent of the revenue-to-variable cost (R/VC) ratio. As a percentage of all rail traffic, the amount of potentially captive traffic traveling over 180 percent R/VC and the revenue generated from that traffic have both declined since 1985. However, our preliminary analysis indicates the share of potentially captive shippers who are paying the highest rates--those substantially above the threshold for rate relief--has increased. While total tons have increased significantly (from about 1.37 billion in 1985 to about 2.14 billion in 2004), figure 6 shows that tons traveling between 180 and 300 percent R/VC but have remained fairly constant--an increase from about 497 million tons in 1985 to about 527 million tons in 2004. However tons traveling above 300 percent R/VC have more than doubled--from about 53 million tons in 1985 to over 130 million tons in 2004. This pattern can also be seen in the share of traffic traveling above and below 180 percent R/VC between 1985 and 2004. As figure 7 illustrates, the percent of all traffic traveling between 180 and 300 percent R/VC decreased from 36 percent in 1985 to 25 percent in 2004. In contrast, the percent of all traffic traveling above 300 percent R/VC increased from 4 percent in 1985 to 6 percent in 2004. Our preliminary analysis indicates that this overall change in traffic traveling over 300 percent R/VC can be seen in certain states and commodities. For example, 39 percent of grain originating in Montana and 20 percent of coal in West Virginia traveled over 300 percent R/VC in 2004. As shown in figure 8, this represents a significant increase from 1985, when 14 percent of grain in Montana and 4 percent of coal in West Virginia traveled over 300 percent R/VC. As with BEA areas, examining R/VC levels as a proxy measure for captivity can also understate or overstate captivity. For example, it is possible for the R/VC ratio to increase while the rate paid by a shipper is declining. Assume that in Year 1, a shipper is paying a rate of $20 and the railroad's variable cost is $12. The R/VC ratio--a division of the rate and the variable cost--would be 167 percent. If in Year 2 the variable costs decline by $2.00 from $12 to $10, and the railroad passes this cost savings directly on the shipper in the form of a reduced rate, the shipper would pay $18 instead of $20. However, as shown in table 1, because both revenue and variable cost decline, the R/VC ratio increases to 180 percent. Although proxy measures have inherent limitations, they can serve as useful indicators of trends in railroad pricing, how the railroads may be exercising their market power to set rates, and where competition and captivity concerns remain. Whether these trends reflect an exercise or possible abuse of market power or is simply a reflection of rational economic practices by the railroads in an environment of excess demand remains uncertain. A number of alternative approaches have been suggested by shipper groups, economists, and other experts in the rail industry to address remaining concerns about competition and captivity--however, any alternative approaches should be carefully considered. Two areas--an assessment of competition and addressing problems with the rate relief process--are particularly integral to further improvement. Any alternative approaches to address competition and captivity should be carefully considered to ensure that the approach achieves the important balance set out in the Staggers Act of allowing the railroads to earn adequate revenues and invest in its infrastructure while assuring protection for captive shippers from unreasonable rates. Our preliminary work shows there has been little assessment by the federal government of where areas of inadequate competition might exist or how changes in industry concentration might be resulting in the inappropriate exercise of market power. Although the STB has broad legislative authority to investigate industry practices, it has generally limited its reviews of competition to merger cases. STB is responsible for reviewing railroad merger proposals, approving those that it finds consistent with the public interest, and ensuring that any potential merger- related harm to competition is mitigated. STB's mitigation efforts have focused on preserving competition, such as granting the authority for one railroad to operate over the tracks of another railroad (called trackage rights). As we reported in 2001, STB found little competition-related harm during its oversight of recent mergers. However, rail mergers can have different effects on rail rates. For example, using an econometric approach that isolated the specific effects of the Union Pacific/Southern Pacific merger on rail rates for certain commodities in two geographic areas-- Reno, Nevada, and Salt Lake City, Utah--we found that the merger reduced rates for four of six commodities, placed upward pressure on rates for one commodity, and left rates relatively unchanged for one commodity. In analyzing rail rates as part of merger oversight, STB examines the merger oversight record, which generally focuses on the overall direction and magnitude of rate changes, rather than specific commodities or geographic areas. According to STB officials, in general, the records have not permitted STB to reliably and precisely isolate the effects of mergers on rates from the effects of other factors (such as the price of diesel fuel). STB is not unaware of concerns about competition. In addition to reviewing competition in terms of mergers, STB has also instituted proceedings to review rail access and competition issues. For example, in April 1998, STB commenced a review at the request of Congress to review access and competition issues in the rail industry. In an April 1998 decision on these issues, STB agreed to consider revising its competitive access rules. However, in its December 1998 report to Congress, STB declined to take further action on this issue because it had adopted new rules allowing shippers temporary access to alternative routing options during periods of poor service. In addition, STB observed that the competitive access issue raises basic policy questions that are more appropriately resolved by Congress. Furthermore, in a December 1998 ruling on a Houston/Gulf Coast oversight proceeding, STB recognized the possibility that opening up access could fundamentally change the nation's rail system, possibly benefiting some shippers with high-volume traffic while reducing investment elsewhere in the system and ultimately reducing or eliminating service for small, lower-volume shippers in rural areas. Finally, STB adopted new regulations for rail mergers in 2001. These new regulations require the applicant to demonstrate that the merger would enhance, not just preserve, competition. Given the disagreement about the adequacy of competition in the industry and the fact that proxy measures can understate or overstate captivity, an assessment of competition and how changes in industry concentration might be resulting in the inappropriate exercise of market power would allow decisionmakers to identify areas where competition is lacking and to assess the need for and merits of targeted approaches to address it. The targeted approaches most frequently proposed by shipper groups and others include reciprocal switching arrangements, which allow one railroad to switch railcars of another railroad, and terminal access agreements, which permits one railroad to use another's terminals. We will discuss the potential costs and benefits of these approaches further in our final report. Use of these approaches should be carefully considered to ensure that the approach achieves the important goals set out in the Staggers Rail Act. For example, if these approaches expand competitive options and decrease the number of captive shippers, which could decrease the need for federal regulation and the need for a rate relief process. On the other hand these approaches could also reduce rail rates and thus railroad revenues and affect the ability of the railroads to earn adequate revenues and invest in its infrastructure. The principal vehicle through which shippers seek relief from unreasonable rates is the rate relief process. The Staggers Rail Act recognized that some shippers may not have access to competitive alternatives and may therefore be subject to unreasonably high rates. For these shippers, the act gave ICC, and later STB, the authority to establish a rate relief process so that shippers could obtain relief from unreasonably high rates, as well as more general powers to monitor the railroad industry. Under the standard rate relief process, the Board requires a shipper to demonstrate how much an optimally efficient railroad would need to charge that shipper. Therefore, the shipper must construct a hypothetical, perfectly efficient railroad that would replace its current carrier. There is widespread agreement the rate relief process is inaccessible to most shippers and does not provide expeditious handling and resolution of complaints. The process is expensive, time consuming and complex, and, as a result, several shipper's organizations told us that it is unlikely they would ever file a rate case. Since 2001, only 10 cases have been filed, and these cases took between 2.6 and 3.6 years--an average of 3.3 years per case--to complete. In addition, while STB does not keep records of the cost of a rate case, shippers we interviewed agreed that the process can cost approximately $3 million per litigant. As a result, shippers told us that, for them to bring a case, the case would need to involve several million dollars so that it was worthwhile to spend $3 million on a case that they could possibly lose. The process is complex because the legal procedures requires that (1) the shipper construct a model of a hypothetical, perfectly efficient railroad and (2) the railroad and shipper have opportunities to present their facts and viewpoints as well to present new evidence. Congress and STB have recognized the problems with the rate relief process and taken actions to address them. First, Congress required STB to develop simplified guidelines. STB developed guidelines to streamline the process when the value of traffic at stake did not make it feasible to incur the costs of conducting a full rate case. Under these simplified guidelines, shippers do not have to construct a hypothetical railroad and can instead rely on industry averages to try to prove that their rate is unreasonable. Although these simplified guidelines have been in place since 1997, the process set out by the guidelines has not been used. Second, STB worked to improve the standard rate relief process. Specifically, STB now holds oral arguments to begin cases and, according to STB officials, these oral arguments help to clarify disagreements without adding any time to the process. In addition, STB has added staff to process cases. According to shippers and railroad officials we spoke with, the simplified guidelines are confusing regarding who is eligible to use the process and how it would work. In addition, several shippers' organizations told us that shippers are concerned about using the simplified guidelines because since they have never been used, they believe it will be challenged in court and result in lengthy litigation. STB officials told us that they - not the shippers - would be responsible for defending the guidelines in court. STB officials also said that, if a shipper won a small rate case, STB could order reparations to the shipper before the case was appealed to the courts. During our preliminary work we identified a number of different approaches that have been suggested by shipper organizations and others that could make the rate relief process less expensive and more expeditious, and therefore potentially more accessible. Each of the proposed approaches has both advantages and drawbacks. These approaches included the following: Increased use of arbitration: Under arbitration, the two parties would present their case before an arbitrator, who would then determine the rate. This approach would replace the shipper's requirement to create a hypothetical railroad. Proponents of this system argue that it provides both the railroads and the shippers with an incentive to suggest a reasonable rate (because otherwise the arbitrator could select the other's offer) and that the threat of arbitration can induce the parties to resolve their own problems and limit the need for federal regulation. However, critics of this approach suggest that arbitration decisions may not be based on economic principles such as the revenue and cost structure of the railroad and that arbitrators may not be knowledgeable about the railroad industry. Increased use of simplified guidelines: The simplified guidelines use standard industry average figures for revenue data instead of requiring the shipper to create a hypothetical railroad. This approach would reduce the time and complexity of the process; however, it may not provide as accurate and precise a measure as the current process. However, as noted above, the use of STB's simplified guidelines has not been fully reviewed by the courts, and many railroad industry experts believe the first use of the guidelines will result in lengthy litigation. Increased use of alternative cost approaches: For example, STB could use the long-run incremental cost approach to evaluate and decide rate cases. This process, which is used for regulating pipelines, bases rates on the actual incremental cost of moving a particular shipment, plus a reasonable rate of return. This approach allows for a quick, standard method for setting prices, but does not take into account the need for differential pricing or the railroad's need to charge higher rates in order to become revenue adequate. Structuring rate regulation around actual costs can also create potential disincentives for the regulated entity to control its costs. Again, these alternative approaches should be carefully considered to ensure that the approach achieves the important balance set out in the Staggers Act. A significant factor in evaluating each of these alternatives is the revenue adequacy of the railroads. The Staggers Rail Act established revenue adequacy as a goal for the industry and allowed the railroads to use differential pricing to increase their revenues. The act further gave the ICC (and later STB) the authority to determine the revenue adequacy of the railroads each year. While the specific method for determining revenue adequacy has been controversial, the overall trend in revenue adequacy may be more important. In its last report in 2004, STB determined that one railroad is revenue adequate and that others are approaching revenue adequacy. While it is too early to determine that the industry as a whole is achieving revenue adequacy, this is a significant shift in the rail industry because for decades after enactment of the Staggers Rail Act, the railroads were all considered revenue inadequate. Different approaches to addressing remaining competition and captivity concerns will likely recognize to some degree the railroads' continued need to more consistently recover their cost of capital and become revenue adequate. The railroads need additional revenue for infrastructure investment to keep pace with increased demand. On the other hand, different approaches also raise the question as to what degree the railroads should continue to rely on obtaining significantly higher prices from those with greater reliance on rail transportation in a revenue adequate environment where total railroad revenues are increasingly sufficient to meet the railroad's investment needs. The demand for freight and freight rail is forecast to increase significantly in the future, although many factors can affect the accuracy of these forecasts. Freight markets are volatile and unpredictable and thus freight demand forecasts may prove to be off the mark. For example, much freight demand is determined by trade that originates outside the United States. Many of the data used to develop these freight demand forecasts are proprietary and a result, we could not assess the validity or reasonableness of the assumptions used to develop the predictions. However, forecasts of freight and freight rail demand are useful as one possible scenario of the future. As the Congressional Budget Office (CBO) observed in a January 2006 report, forecasts of future demand can be viewed as more illustrative than quantitatively accurate. Major freight railroads have reported that they expect to invest about $8 billion in infrastructure during 2006--a 21 percent increase over 2005-- and have told us that they plan to continue making infrastructure investments. Although railroads are sufficiently profitable to be investing at record levels today, it is not certain whether in the future investments will keep pace with the projected demand. Railroads secure private benefits by investing in their infrastructure and have many considerations in making new infrastructure investments such as the need to obtain the highest return on their investment, optimize the performance of their network, and respond to other significant capital needs of rail operations. The railroads we interviewed were generally unwilling to discuss their future investment plans with us as this is business proprietary information. We are therefore unable to comment on how companies are likely to choose among their competing investment priorities for the future. In addition to securing private benefits for railroad networks, investments in rail projects can produce benefits for the public--some of these public benefits are, as CBO's report pointed out, large in comparison to anticipated private railroad benefits. For example, shifting truck freight traffic to railroads can reduce highway congestion and reduce or avoid public expenditures that otherwise would be needed to build additional highway capacity or provide additional maintenance to accommodate growth in truck traffic. These and other public benefits can be realized at the national, state, and local levels. For example, rail investment may generate benefits to the national economy by lowering the costs of producing and distributing goods. Since rail uses less fuel than trucks, energy use and emissions may be reduced. In contrast, a rail project that eliminates or improves a highway-rail crossing could deliver primarily local public safety benefits by reducing accidents, time lost waiting for trains to pass, and pollution and noise from idling trains and lessening the risk of delays for emergency vehicles at crossings. In pursuit of these public gains, the federal and state governments have been increasingly participating in freight rail improvement projects. For example, the State of Delaware spent about $14 million to rehabilitate a bridge in exchange for receiving a fee for each railroad car that crosses the bridge. The federal government has also become more involved in freight rail partnerships. Specifically, in 1997 the U.S. Department of Transportation provided a $400 million loan to the Alameda Corridor Transportation Authority for the Alameda Corridor project, which included a number of rail and road improvements to consolidate freight traveling to and from the ports of Los Angeles and Long Beach. These ports are a significant gateway for freight that is imported from Asia and distributed throughout the U.S. In addition, in 2005, Congress provided $100 million to the Chicago CREATE project to improve the rail infrastructure and ease congestion in and around Chicago-- the busiest freight rail center in the U.S. In the years ahead Congress is likely to face additional decisions regarding potential federal policy responses and the federal role in the nation's freight railroad infrastructure. Based on our ongoing and past work, I would like to make three observations. First, any potential federal policy response should recognize that subsidies can potentially distort the performance of markets and that the federal fiscal environment is highly constrained. Second, any such response should occur in the context of a comprehensive National Freight Policy that reflects system performance based goals and a framework for intergovernmental and public-private cooperation. DOT initiated this effort by publishing a draft Framework for a National Freight Policy this year for comment. Third, federal involvement should only occur where demonstrable wide-ranging public benefits and a mechanism to appropriately allocate the cost of financing these benefits between the public and private sectors exists and, to the extent possible, focuses on benefits that are more national than local in scope. Although new freight rail investment tax credits have been suggested, our past work has pointed out that it is difficult to target this approach to desired activities and outcomes and ensure that it generates the desired new investments as opposed to subsidizing investment that would have been undertaken at some point anyway. This approach can also have problematic fiscal impacts because it either lowers tax revenues or leads to higher overall tax rates to offset revenue losses. We will be discussing these areas in greater detail when we issue our report. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For questions regarding this testimony, please contact JayEtta Z. Hecker on (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony include Ashley Alley, Steve Brown, Matthew T. Cail, Sheranda S. Campbell, Steve Cohen, Elizabeth Eisenstadt, Libby Halperin, Richard Jorgenson, Tom McCool, John Mingus, Josh H. Ormond, and John W. Shumann. Regulation: Changes in Freight Railroad Rates from 1997 through 2000. GAO-02-524. Washington, D.C.: June 7, 2002. Freight Railroad Regulation: Surface Transportation Board's Oversight Could Benefit From Evidence Better Identifying How Mergers Affect Rates. GAO-01-689. Washington, D.C.: July 5, 2001. Railroad Regulation: Current Issues Associated With the Rate Relief Process. GAO/RCED-99-46. Washington, D.C.: April 29, 1999. Railroad Regulation: Changes in Railroad Rates and Service Quality Since 1990. GAO/RCED-99-93. Washington, D.C.: April 6, 1999. Railroad Competitiveness: Federal Laws and Policies Affect Railroad Competitiveness. GAO/RCED-92-16. Washington, D.C.: November 5, 1991. Railroad Regulation: Economic and Financial Impacts of the Staggers Rail Act of 1980. GAO/RCED-90-80. Washington, D.C.: May 16, 1990. Railroad Regulation: Shipper Experiences and Current Issues in ICC Regulation of Rail Rates. GAO/RCED-87-119. Washington, D.C.: September 9, 1987. Railroad Regulation: Competitive Access and Its Effects on Selected Railroads and Shippers. GAO/RCED-87-109. Washington, D.C.: June 18, 1987. Railroad Revenues: Analysis of Alternative Methods To Measure Revenue Adequacy. GAO/RCED-87-15BR. Washington, D.C.: October 2, 1986. Shipper Rail Rates: Interstate Commerce Commission's Handling of Complaints. GAO/RCED-86-54FS. Washington, D.C.: January 30, 1986. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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 Staggers Rail Act of 1980 largely deregulated the freight railroad industry, giving the railroads freedom to price their services according to market conditions and encouraging greater reliance on competition to set rates. The act recognized the need for railroads to use demand-based differential pricing in the deregulated environment and to recover costs by setting higher rates for shippers with fewer transportation alternatives. The act also recognized that some shippers might not have access to competitive alternatives and might be subject to unreasonably high rates. It established a threshold for rate relief and granted the Interstate Commerce Commission and the Surface Transportation Board (STB) the authority to develop a rate relief process for those "captive" shippers. This testimony provides preliminary results on GAO's ongoing work and addresses (1) the changes that have occurred in the freight railroad industry since the enactment of the Staggers Rail Act, including changes in rail rates and competition in the industry, (2) the alternative approaches that have been proposed and could be considered to address remaining competition and captivity concerns, and (3) the projections for freight traffic demand over the next 15 to 25 years, the freight railroad industry's projected ability to meet that demand, and potential federal policy responses. To fulfill these objectives, GAO examined STB data, interviewed affected parties, and held an expert panel. The changes that have occurred in the railroad industry since the enactment of the Staggers Rail Act are widely viewed as positive. Railroad industry financial health improved substantially and rates generally declined between 1985 and 2000, but increased slightly from 2001 through 2004. Concerns about competition and captivity remain because traffic is concentrated in fewer railroads and some shippers are paying significantly higher rates than others. It is difficult to precisely determine the number of shippers that are "captive" because proxy measures can overstate or understate captivity. However, GAO's preliminary analysis indicates that while captivity may be dropping, the share of potentially captive shippers that are paying the highest rates--those substantially above the threshold for rate relief--has increased. A number of alternative approaches have been suggested by shipper groups and others to address remaining concerns about competition and captivity; however, any alternative approaches should be carefully considered. Two areas are particularly integral to further improvement. First, while STB has broad authority to investigate industry practices and has assessed competition--generally in railroad merger cases--there has been little assessment by any federal agency of the state of competition and of where specific areas of inadequate competition and the inappropriate exercise of market power might exist. Such an assessment would allow decisionmakers to identify areas where competition is lacking and to assess the need for and merits of targeted approaches to address this situation. These approaches include requiring reciprocal switching arrangements, which allow one railroad to switch railcars of another railroad, and/or terminal access agreements, which permit one railroad to use another's terminals. Second, a number of different approaches have been suggested that could make the rate relief process less expensive and more expeditious, and thus potentially more accessible, such as arbitration and increased use of simplified guidelines. Each of the proposed approaches has both advantages and drawbacks. Any alternative approach to address competition and captivity should be carefully considered to ensure that the approach will achieve the important balance set out in the Staggers Rail Act of allowing the railroads to earn adequate revenues while assuring protection for captive shippers from unreasonable rates. Significant increases in freight traffic over the next 15 to 25 years are forecasted, and the railroad industry's ability to meet future demand is largely uncertain. Investments in rail projects can produce benefits for the public--for example, shifting truck freight traffic to railroads can reduce highway congestion. As a result, the federal and state governments have been increasingly participating in freight rail improvement projects--for example, Congress provided $100 million to the CREATE project in 2005 to improve the rail network in Chicago. Congress is likely to face additional decisions in the years ahead regarding federal policy toward the nation's freight railroad system. GAO would note, based on past work, that federal involvement should occur only where demonstrable public benefits exist, and where a mechanism is in place to appropriately allocate the cost of financing these benefits between the private and public sectors, and between national, state, and local interests.
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The Implementing Recommendations of the 9/11 Commission Act of 2007 (9/11 Commission Act) directed DHS to create a plan for sharing transportation security-related information among public and private entities that have a stake in protecting the nation's transportation system, including passenger and freight rail. This plan--first issued in July 2008-- is now called the Transportation Security Information Sharing Environment (TSISE). The TSISE describes, among other things, the information-sharing process. TSA disseminates security information through several information products, including reports, assessments, and briefings, among others. These products are distributed through mechanisms including the Homeland Security Information Network and mechanisms sponsored by industry, such as the Association of American Railroads' Railway Alert Network, among others. TSA is also specifically responsible for receiving, assessing, and distributing intelligence information related to potential threats and significant security concerns (rail security incidents) related to the nation's rail system. Specifically, in 2008, TSA issued a regulation requiring U.S. rail systems to report all rail security incidents to TSA's Transportation Security Operations Center (TSOC), among other things. The TSOC is an operations center open 24 hours a day, 7 days a week, that serves as TSA's main point of contact for monitoring security-related incidents or crises in all modes of transportation. The regulation also authorizes TSA officials to view, inspect, and copy rail agencies' records as necessary to enforce the rail security incident reporting requirements. This regulation is supported by TSA policies and guidance, including the Transportation Security Inspector Inspections Handbook, the National Investigations and Enforcement Manual, and the Compliance Work Plan for Transportation Security Inspectors. TSA's regulation is intended to provide the agency with essential information on rail security incidents so that TSA can conduct comprehensive intelligence analysis, threat assessment, and allocation of security resources, among other things. According to the regulation, potential threats and significant security concerns that must be reported to the TSOC include bomb threats, suspicious items, or indications of tampering with rail cars, among others. Within TSA, different offices are responsible for sharing transportation security-related information and for implementing and enforcing the rail security incident reporting requirement. For instance, TSA's Office of Security Policy and Industry Engagement (OSPIE) is the primary point of contact for sharing information with private sector stakeholders, and is responsible for using incident reports and analyses, among other things, to develop strategies, policies, and programs for rail security, including operational security activities, training exercises, public awareness, and technology. TSA's Office of Intelligence and Analysis (OIA) receives intelligence information regarding threats to transportation and designs intelligence products intended for officials in TSA, other parts of the federal government, state and local officials, and industry officials, including rail agency security coordinators and law enforcement officials. The TSOC, managed by TSA's Office of Law Enforcement/Federal Air Marshal Service, is the TSA entity primarily responsible for collecting and disseminating information about rail security incidents. Once notified of a rail security incident, TSOC officials are responsible for inputting the incident information into their incident management database known as WebEOC, and for disseminating incident reports that they deem high priority or significant to selected TSA officials; other federal, state, and local government officials; and selected rail agencies' law enforcement officials. Figure 1 shows the intended steps and responsibilities of TSA components involved in the rail security incident reporting process. TSA's Office of Security Operations (OSO) is responsible for overseeing and enforcing the incident reporting requirement. Responsible for managing TSA's inspection program for the aviation and surface modes of transportation, the Office of Security Operations' Surface Compliance Branch deploys approximately 270 transportation security inspectors- surface (TSI-S) nationwide. The TSI-Ss are responsible for, among other things, providing clarification to rail agencies regarding the incident reporting process and for overseeing rail agencies' compliance with the reporting requirement by conducting inspections to ensure that incidents were properly reported to the TSOC. Six regional security inspectors- surface (RSI-S) within the Compliance Programs Division are responsible for providing national oversight of local surface inspection, assessment, and operational activities. In June 2014, we found that TSA had some mechanisms in place to collect stakeholder feedback on the products it disseminates containing security-related information and had initiated efforts to improve how it obtains customer feedback, but had not developed a systematic process for collecting and integrating such feedback. Specifically, in February 2014, TSA reconvened its Information Sharing Integrated Project Team (IPT), whose charter included, among other things, milestones and time frames for developing a centralized management framework to capture stakeholder satisfaction survey data on all of TSA's security-related products and the systems used to distribute these products. However, at the time of our June 2014 report, the IPT Charter did not specify how TSA planned to systematically collect, document, and incorporate informal feedback--a key mechanism used by the majority of the stakeholders we surveyed, and a mechanism TSA officials told us they utilize to improve information sharing. For instance, the rail industry provided TSA with a list of areas for emphasis in intelligence analysis in December 2012, and TSA subsequently initiated a product line focusing on indications and warnings associated with disrupted or successful terrorist attacks. TSA officials stated that they further refined one of the products as a result of a stakeholder requesting information on tactics used in foreign rail attacks. In 2013, one TSA component built a system to track informal information sharing with stakeholders at meetings and conferences, and through e-mail, but TSA officials stated that the data were not used for operational purposes, and TSA had no plans to incorporate this system into its centralized management framework because the IPT had decided to focus its initial efforts on developing a survey mechanism. According to our June 2014 survey results, surface transportation stakeholders were generally satisfied with TSA's security-related products and the mechanisms used to disseminate them. In particular, 63 percent of rail stakeholders (70 of 111) reported that they were satisfied with the products they received in 2013, and 54 percent (59 of 110) reported that they were satisfied with security-related information sharing mechanisms. However, because TSA lacked specific plans and documentation related to improving its efforts to incorporate all of its stakeholder feedback, it was unclear how, or if, TSA planned to use stakeholder feedback to improve information sharing. As a result of these findings, we recommended that TSA include in its planned customer feedback framework a systematic process to document informal feedback, and how it incorporates all of the feedback TSA receives, both formal and informal. TSA concurred, and in response, by April 2015, had taken actions to develop these processes. Specifically, TSA developed a standard operating procedure to organize how its offices solicit, receive, respond to, and document both formal and informal customer feedback on its information-sharing efforts, which delineates a systematic process for doing so. TSA also developed a TSA-wide standard survey for its offices to use to obtain formal and informal feedback on specific products, and created an information-sharing e-mail inbox to which all survey responses will be sent, evaluated, and distributed to the appropriate office for action. We have not evaluated these actions, but if implemented effectively, we believe that TSA will now be better positioned to meet stakeholder needs for security-related information. In December 2012, we found TSA had made limited use of the rail security incident information it had collected from rail agencies, in part because it did not have a systematic process for conducting trend analysis. TSA's stated purpose for collecting rail security incident information was to allow TSA to "connect the dots" by conducting trend analysis that could help TSA and rail agencies develop targeted security measures. However, the incident information provided to rail agencies by TSA was generally limited to descriptions of specific incidents with minimal accompanying analysis. As a result, officials from passenger rail agencies we spoke with generally found little value in TSA's incident reporting process, because it was unclear to them how, if at all, the information was being used by TSA to identify trends or threats that could help TSA and rail agencies develop appropriate security measures. However, as we reported in December 2012, opportunities for more sophisticated trend analysis existed. For example, the freight industry, through the Railway Alert Network--which is managed by the Association of American Railroads, a rail industry group--identified a trend where individuals were reportedly impersonating federal officials. In coordination with TSA, the Railway Alert Network subsequently issued guidance to its member organizations designed to increase awareness of this trend among freight rail employees and provide descriptive information on steps to take in response. The Railway Alert Network identified this trend through analysis of incident reporting from multiple freight railroads. In each case, the incident had been reported by a railroad employee and was contained in TSA's incident management system, WebEOC. On the basis of these findings, in December 2012, we recommended that TSA establish a systematic process for regularly conducting trend analysis of the rail security incident data, in an effort to identify potential security trends that could help the agency anticipate or prevent an attack against passenger rail and develop recommended security measures. TSA concurred with this recommendation and by August 2013 had developed a new capability for identifying trends in the rail security incident data, known as the Surface Compliance Trend Analysis Network (SCAN). SCAN is designed to identify linkages between incidents captured in various sources of data, assemble detailed information about these incidents, and accurately analyze the data to enhance the agency's ability to detect impending threats. According to TSA officials, SCAN consists of three elements: two OSO surface detailees located at TSOC, enhanced IT capabilities, and a new rail security incident analysis product for stakeholders. According to TSA, one of the key functions of the surface detailees is to continuously look for trends and patterns in the rail security incident data that are reported to TSOC, and to coordinate with OSPIE and OIA to conduct further investigations into potential trends. As I will discuss later in this statement, TSA has also made improvements to WebEOC, including steps to improve the completeness and accuracy of the data and the ability to produce basic summary reports, which we believe should facilitate this type of continuous trend analysis. TSA generates a Trend Analysis Report for any potential security trends the surface detailees identify from the rail security incident data. The Trend Analysis Report integrates incident information from WebEOC with information from multiple other sources, including TSA's compliance database and media reports, and provides rail agencies and other stakeholders with analysis of possible security issues that could affect operations as a result of these trends. According to TSA officials, since SCAN was established, approximately 13 Trend Analysis Reports have been produced and disseminated to local TSA inspection officials and rail agencies. Although we have not assessed the effectiveness of these efforts to better utilize rail security information, we believe these actions address the intent of our recommendation. Further, if implemented effectively, they should better position TSA to provide valuable analysis on rail security incidents and to develop recommended security measures for rail agencies, as appropriate. In December 2012, we found that TSA had not provided consistent oversight of the implementation of the rail security reporting requirement, which led to considerable variation in the types and number of passenger rail security incidents reported. Specifically, we found that TSA headquarters had not provided guidance to local TSA inspection officials, the primary TSA points of contact for rail agencies, about the types of rail security incidents that must be reported, a fact that contributed to inconsistent interpretation of the regulation by local TSA inspection officials. While some variation was expected in the number of rail security incidents that rail agencies reported because of differences in agency size, geographic location, and ridership, passenger rail agencies we spoke with at the time reported receiving inconsistent feedback from their local TSA officials regarding certain types of incidents, such as those involving weapons. As a result, we found that, for 7 of the 19 passenger rail agencies included in our review, the number of incidents reported per million riders ranged from 0.25 to 23.15. This variation we identified was compounded by inconsistencies in compliance inspections and enforcement actions, in part because of limited utilization of oversight mechanisms at the headquarters level. For example, in December 2012, we found that TSA established the RSI-S position as a primary oversight mechanism at the headquarters level for monitoring rail security compliance inspections and enforcement actions to help ensure consistency across field offices. However, at the time of our report, the RSI-S was not part of the formal inspection process and had no authority to ensure that inspections were conducted consistently. We also found that the RSI-S had limited visibility over when and where inspections were completed or enforcement actions were taken because TSA lacked a process to systematically provide the RSI-S with this information during the course of normal operations. As a result, our analysis of inspection data from January 1, 2011, through June 30, 2012, showed that average monthly inspections for the 19 rail agencies in our review ranged from about eight inspections to no inspections, and there was variation in the regularity with which inspections occurred. We also found that TSA inconsistently applied enforcement actions against passenger rail agencies for not complying with the reporting requirement. For example, TSA took enforcement action against an agency for not reporting an incident involving a knife, but did not take action against another agency for not reporting similar incidents, despite having been inspected. On the basis of these findings, in December 2012, we recommended that TSA: (1) develop and disseminate written guidance for local TSA inspection officials and rail agencies that clarifies the types of incidents that should be reported to the TSOC and (2) enhance and utilize existing oversight mechanisms at the headquarters level, as intended, to provide management oversight of local compliance inspections and enforcement actions. TSA concurred with both of these recommendations and has taken actions to implement them. Specifically, in September 2013, TSA disseminated written guidance to local TSA inspection officials and passenger and freight rail agencies that provides clarification about the requirements of the rail security incident reporting process. This guidance includes examples and descriptions of the types of incidents that should be reported under the regulatory criteria, as well as details about the type of information that should be included in the incident report provided to the TSOC. Further, as of August 2013, TSA had established an RSI- dashboard report that provides weekly, monthly, and quarterly information about the number of inspection reports that have been reviewed, accepted, and rejected. According to TSA officials, this helps ensure that rail agencies are inspected regularly, by providing the RSI-Ss with greater insight into inspection activities. TSA has also enhanced the utilization of the RSI-Ss by providing them with the ability to review both passenger and freight rail inspections before the inspection reports are finalized and enforcement action is taken. According to TSA officials, this allows the RSI-Ss to ensure that enforcement actions are applied consistently by local TSA inspection officials. TSA also developed a mechanism for tracking the recommendations RSI-Ss make to local TSA inspection officials regarding changes to local compliance inspections, as well as any actions that are taken in response. Collectively, we believe that these changes should allow the RSI-Ss to provide better management oversight of passenger and freight rail regulatory inspections and enforcement actions, though we have not assessed whether they have done so. We also believe these actions, if implemented effectively, will help ensure that the rail security incident reporting process is consistently implemented and enforced, and will address the intent of our recommendations. In December 2012, we also found that TSA's incident management data system, known as WebEOC, had incomplete information, was prone to data entry errors, and had other limitations that inhibited TSA's ability to search and extract basic information. These weaknesses in WebEOC hindered TSA's ability to use rail security incident data to identify security trends or potential threats. Specifically, at the time of our 2012 report, TSA did not have an established process for ensuring that WebEOC was updated to include information about rail security incidents that had not been properly reported to the TSOC. As a result, of the 18 findings of noncompliance we reviewed that were a result of failure to report an incident, 13 were never entered into WebEOC, and consequently could not be used by TSA to identify potential security trends. In addition, in December 2012, we found that TSA's guidance for officials responsible for entering incident data was insufficient, a fact that may have contributed to data entry errors in key fields, including the incident type and the mode of transportation (such as mass transit or freight rail). At the time of our report, because of data errors and technical limitations in WebEOC, TSA also could not provide us with basic summary information about the rail security incident data contained in WebEOC, such as the number of incidents reported by incident type (e.g., suspicious item or bomb threat), by a particular rail agency, or the total number of rail security incidents that have been reported to the TSOC. Without the ability to identify this information on the number of incidents by type or the total number of incidents, we concluded that TSA faced challenges determining if patterns or trends exist in the data, as the reporting system was intended to do. On the basis of these findings, in December 2012 we recommended that TSA (1) establish a process for updating WebEOC when incidents that had not previously been reported are discovered through compliance activities, and (2) develop guidance for TSOC officials that includes definitions of data entry options to reduce errors resulting from data entry problems. TSA concurred with both of these recommendations and has taken actions to implement them. Specifically, in March 2013, TSA established a process for the surface detailee position, discussed earlier in this statement, to update WebEOC when previously unreported incidents are discovered through compliance activities. Additionally, in October 2014, TSA officials reported they have updated the guidance used by TSOC officials responsible for entering incident data into WebEOC to include definitions of incident types. TSA has also made changes to WebEOC that will allow for officials to search for basic information, such as the total number of certain types of incidents, required to facilitate analysis. We have not reevaluated the data contained in WebEOC, but we believe that the changes TSA has made should allow the agency to conduct continuous analysis of the rail security incident data to identify potential trends. We believe these actions address the intent of our recommendations and, if implemented effectively, should improve the accuracy and completeness of the incident data in WebEOC. This should provide TSA with a more comprehensive picture of security incidents as well as allow it to better identify any trends or patterns. Chairmen Katko and King, Ranking Members Rice and Higgins, and members of the subcommittees this concludes my prepared statement. I would be happy to respond to any questions you may have at this time. For questions about this statement, please contact Jennifer Grover at (202) 512-7141 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include Chris Ferencik (Assistant Director), Michele Fejfar, Paul Hobart, Adam Hoffman, Tracey King, Elizabeth Kowalewski, Brendan Kretzschmar, Kelly Rubin, and Christopher Yun. Key contributors to the previous work that this testimony is based on are listed in those reports. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The U.S. surface transportation system's size and importance to the country's safety, security, and economic well-being make it an attractive target for terrorists. Within the federal government, TSA-a component of the Department of Homeland Security-is the primary federal agency responsible for overseeing and enhancing the security of the surface transportation system. A key component of this responsibility is ensuring that security-related information is collected, analyzed, and shared effectively across all modes, including rail. In 2008, TSA issued a regulation requiring U.S. passenger rail agencies to report all potential threats and significant security concerns to TSA, among other things. This testimony addresses the extent to which TSA has (1) developed systematic processes for integrating stakeholder feedback about security-related information it provides and analyzing trends in reported rail security incidents and (2) ensured consistent implementation of rail security incident reporting requirements. This statement is based on related GAO reports issued in June 2014 and December 2012, including selected updates on TSA's efforts to implement GAO's prior recommendations related to rail security and information sharing. For the selected updates, GAO reviewed related documentation, including tools TSA developed to provide oversight. GAO also interviewed TSA officials. In June 2014, GAO found that the Transportation Security Administration (TSA) did not have a systematic process for incorporating stakeholder feedback to improve security-related information sharing and recommended that TSA systematically document and incorporate stakeholder feedback. TSA concurred with this recommendation and, in April 2015, TSA developed a standard operating procedure to help ensure proper evaluation and consideration of all feedback TSA receives. In December 2012, GAO found TSA had made limited use of the rail security incident information it had collected from rail agencies, in part because it did not have a systematic process for conducting trend analysis. TSA's purpose for collecting this information was to allow TSA to "connect the dots" through trend analysis. However, the incident information provided to rail agencies by TSA was generally limited to descriptions of specific incidents. As a result, officials from passenger rail agencies GAO spoke with reported that they generally found little value in TSA's incident reporting requirement. On the basis of these findings, GAO recommended that TSA establish a systematic process for regularly conducting trend analysis of the rail security incident data. Although GAO has not assessed the effectiveness of TSA's efforts, by August 2013, TSA had developed a new analysis capability that, among other things, produces Trend Analysis Reports from the incident data. In December 2012, GAO found that TSA had not provided consistent oversight of its rail security reporting requirement, which led to variation in the types and number of passenger rail security incidents reported. Specifically, GAO found that TSA headquarters had not provided guidance to local TSA inspection officials, the primary TSA points of contact for rail agencies, about the types of rail security incidents that must be reported, which contributed to inconsistent interpretation of the regulation. The variation in reporting was compounded by inconsistencies in compliance inspections and enforcement actions, in part because of limited utilization of oversight mechanisms at the headquarters level. GAO also found that TSA's incident management data system, WebEOC, had incomplete information, was prone to data entry errors, and had other limitations that inhibited TSA's ability to search and extract basic information. On the basis of these findings, GAO recommended that TSA (1) develop and disseminate written guidance on the types of incidents that should be reported, (2) enhance existing oversight mechanisms for compliance inspections and enforcement actions, (3) establish a process for updating WebEOC with previously unreported incidents, and (4) develop guidance to reduce data entry errors. TSA concurred with these recommendations and has taken actions to implement them. Specifically, in September 2013, TSA disseminated written guidance to local TSA inspection officials and passenger and freight rail agencies that provides clarification about the rail security incident reporting requirement. In August 2013, TSA enhanced existing oversight mechanisms by creating an inspection review mechanism, among other things. TSA also established a process for updating WebEOC in March 2013, and in October 2014, officials reported that they have updated the guidance used by officials responsible for entering incident data to reduce data entry errors associated with incident types. Although GAO has not assessed the effectiveness of these efforts, they address the intent of the recommendations. GAO is making no new recommendations in this statement.
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Before turning to enforcement in particular, I will discuss some broad principles of budget process since it is the framework within which enforcement mechanisms exist. No process can force choices Congress and the President are unwilling to make. Having an agreed-upon goal justifies and frames the choices that must be made. A budget process can facilitate or hamper substantive decisions, but it cannot replace them. While no process can substitute for making the difficult choices, it can help structure the debate. The budget structure can make clear information necessary for important decisions or the structure can make some information harder to find. The process can highlight trade-offs and set rules for action. In our past work, we have identified four broad principles or criteria for a budget process that can help Congress consider the design and structure of future budget enforcement mechanisms. A process should 1. provide information about the long-term effect of decisions, both macro--linking fiscal policy to the long-term economic outlook--and micro--providing recognition of the long-term spending implications of government commitments 2. provide information and be structured to focus on important trade-offs such as the trade-off between investment and consumption spending. 3. provide information necessary to make informed trade-offs between the different policy tools of government (such as tax provisions, grants, and credit programs), and 4. be enforceable, provide for control and accountability, and be transparent, using clear, consistent definitions. Since my comments about enforcement will be related in part to these four principles, let me touch briefly on each of them. First, selecting the appropriate time horizon in which the budgetary impact of policy decisions should be measured is not just an abstract question for analysts. If the time horizon is too short, Congress may have insufficient information about the potential cost of a program. In addition, too short a time horizon may create incentives to artificially shift costs into the future rather than find a sustainable solution. The move from a focus on a single year to 5 and then 10-year horizons represented a major step forward. At the same time, we need to also understand the longer- term effects of policy decisions. As the first agency to do long-term simulations for the federal budget as a whole, we are well aware of the fact that the further out estimates go, the less certain are the numbers. But policymakers should be given information on the direction and order of magnitude of looming challenges. This is especially important where the short-term snapshot may be misleading. This concern has led us to propose improved recognition of the government's long-term "fiscal exposures"--which may not be explicit liabilities. Second, the structure and rules can determine the nature of the trade-offs surfaced during the budget process. Consumption may be favored over investment because the initial cost of an infrastructure project looks high in comparison to support for consumption. Distinguishing between support for current consumption and investing in economic growth in the budget would help eliminate a perceived bias against investments requiring large up-front spending. We have previously proposed establishing an investment component within the unified budget to permit a focus on federal spending on infrastructure, research and development, and human capital--spending intended to promote the nation's long-term economic growth. This proposal focuses on the allocation of spending within an agreed-upon amount. For example, we identified several options such as establishing investment targets within a framework similar to that contained in the Budget Enforcement Act of 1990. Under such an approach, and the Administration would agree on the appropriate level of investment spending within an overall target and create targets or "fire walls" to limit infringement from other activities. The third principle focuses on the method through which the federal government provides support for any federal goal or objective. The renewed interest in overlap and duplication has highlighted the different ways in which such support is provided: direct federal provision, grants, loans or loan guarantees and tax preferences or tax incentives. These vary in design and in how effective they might be for a given mission. In addition, they vary in the timing of cash flows. The budget and budget process should provide the information necessary to permit looking across federal agencies and policy tools--which means across committee jurisdictions--to make an informed choice. Such comparisons also require that their budgetary costs be measured on a comparable basis. The Federal Credit Reform Act of 1990 addressed this issue for loans and loan guarantees; the budget now reflects the estimated size of the government's commitment, regardless of the timing of the cash flows. For federal insurance programs, however, the budget offers a misleading picture about the nature and size of the government's exposure. The cash-based treatment of these programs distorts choice on several dimensions. First, at the time the insurance program is created or insurance is offered, there is no discussion of the subsidy being provided to those obtaining insurance, and second, there need not be an estimate of the likely budgetary impact over the insurance period. This means decisions about insurance programs are not made based on their likely cost to the federal government--nor is the amount of the subsidy ever recognized in the budget. Given our concerns that long-term costs of programs be understood and that programs or policies be considered on a comparable- cost basis, we recommended that the budget record the "missing premium" for insurance programs. Lastly, and perhaps of most interest given the focus of this hearing, the budget process should be enforceable, provide for control and accountability, and be transparent. These three elements are closely related and achieving one has implications for the others. Further, the way these are interpreted has implications for the design of any enforcement mechanism. By enforcement I mean not a mechanism to force a decision but rather a mechanism to enforce decisions once they are made. Accountability has at least two dimensions: accountability for the full costs of commitments that are to be made, and targeting enforcement to actions taken. It can also encompass the broader issue of taking responsibility for responding to unexpected events. For example, Congress and the President may want to consider periodically looking back and assessing the progress toward reducing the deficit. Such a process would be valuable because economic and technical factors driving direct spending program costs above anticipated levels have remained outside policymakers' control. Finally, the process should be transparent, that is, understandable to those outside the process. I will turn now to the issue of enforcement. In considering any new enforcement mechanisms going forward, it is helpful to draw on the lessons learned from the past. Therefore, I will start with a brief history of budget enforcement mechanisms and a summary of the key lessons learned before turning to the design and implementation of budget enforcement mechanisms for today's challenges. The process created in the Congressional Budget and Impoundment Act of 1974 Act was not created to produce a specific result in terms of the deficit. Rather, it sought to assert the Congress's role in setting overall federal fiscal policy and establishing spending priorities and to impose a structure and a timetable on the budget debate. Underlying the1974 Act was the belief that Congress could become an equal player only if it--like the executive branch--could offer a single "budget statement" with an overall fiscal policy and an allocation across priorities. This was an important step. It was not until the Balanced Budget and Emergency Deficit Control Act of 1985--commonly known as Gramm-Rudman-Hollings or GRH--that the focus of the process changed from increasing congressional control over the budget to reducing the deficit. Both the original GRH and the 1987 amendments to it sought to achieve a balanced budget by establishing annual deficit targets to be enforced by automatic across-the-board "sequesters" if legislation failed to achieve the targets. GRH sought to hold Congress responsible for the deficit regardless of what drove the deficit. If the deficit grew because of the economy or demographics--factors not directly controllable by Congress--the sequester response dictated by GRH was the same as if the deficit grew because of congressional action or inaction. If a sequester was necessary, GRH did not differentiate between those programs where Congress had made cuts and those where there had been no cuts or even some increases. Finally, the timing of the annual "snapshot" determining the deficit and the size of the sequester and the fact that progress was measured 1 year at a time created a great incentive for achieving annual targets through short-term actions such as shifting the timing of outlays. GRH demonstrated that no process change can force agreement where one does not exist. However, the experiences gained led to the Budget Enforcement Act (BEA) of 1990. This act was designed to enforce substantive agreement on the discretionary caps and pay-as-you-go (PAYGO) neutrality reached by the President and Congress. BEA sought to influence the result by limiting congressional action. Unlike GRH, BEA held Congress accountable for what it could directly control through its actions, and not for the impact of the economy or demographics, which are beyond its direct control. BEA did this by dividing spending into two parts: PAYGO and discretionary. It imposed caps on the discretionary part that succeeded in holding down discretionary spending and through PAYGO it constrained congressional actions to create new entitlements (whether through direct spending or tax preferences) or tax cuts. What then do I believe we have learned from GRH and BEA? Enforcing an agreement is more successful than forcing an agreement. Covering the full range of federal programs and activities--rather than exempting large portions of the budget--can strengthen the effectiveness of the controls and enforcement. Targeting sequestration to those areas that exceed their agreed-upon level creates better incentives than punishing all areas of the budget if only one fails to achieve its deficit reduction goal. Focusing on a longer time horizon can help Congress find a sustainable fiscal path rather than artificially shifting costs into the future. Incorporating a provision under which Congress would periodically look back at progress toward reducing the deficit can prompt action to bring the deficit path closer to the original goal. Budget process helped once to achieve a goal that had consensus; it could work again. While BEA's focus on actions offered advantages for enforcement, it did not go far enough to meet today's needs. BEA specified that Congress must appropriate only so much money each year for discretionary programs and that any legislated changes in entitlements and/or taxes during a session of Congress were to be deficit-neutral. The effect of this control on discretionary programs and on entitlements was quite different. Spending for discretionary programs is controlled by the appropriations process. Congress provides budget authority and specifies a period of availability. Controlling legislative action is the same as controlling spending. The amount appropriated can be specified and measured against a cap. For mandatory programs and revenues, controlling legislative actions is not the same as controlling spending or revenues. For an entitlement program, spending in any given year is the result of the interaction between the formula that governs that program and demographics or services provided. Similarly, for a tax provision, the revenue impact is not directly determined by Congress. Under BEA legislated changes in entitlements and taxes were to be deficit-neutral over multiyear periods. However, BEA did not seek to control changes in direct spending or in revenues (including tax expenditures) that resulted from other sources-- whether from changes in the economy, changes in population, or changes in costs. Moving forward this is a major gap: it is the underlying structure of the budget that is driving the long-term fiscal imbalance. BEA succeeded as far as its reach. It controlled discretionary spending and prevented legislative expansion of entitlement programs and new tax cuts unless they were offset. However, it did nothing to deal with expansions built into the design of mandatory programs and the allocation of resources within the discretionary budget. Congress enacted a return to a statutory PAYGO process in 2010. As with the previous iteration, this can help prevent further deterioration of the fiscal position, but it does not deal with the existing imbalance. The problem confronting us today requires going beyond the "do no harm" or "stop digging" framework of BEA. Going forward, the budget process will need to encourage savings in all areas of the budget and contain mechanisms for automatic actions (whether spending cuts, reductions in tax expenditures, or surcharges) if agreed-upon targets are not met. Caps on discretionary spending--and Congress's compliance with the caps--are relatively easy to measure because discretionary spending totals flow directly from legislative actions (i.e., appropriations laws). However, there are other issues in the design of any new caps. For example, what categories should be established within or in lieu of an overall cap? Categories define the range of what is permissible. By design they limit trade-offs and so constrain both Congress and the President. As I previously discussed, a category could be established for investment spending. Such a category could help Congress focus on spending that promotes economic growth within a framework that still constrains overall spending. Should these caps be ceilings, or should they--as was the case for highways and violent crime reduction--provide for "guaranteed" levels of funding? Because caps are defined in specific dollar amounts, it is important to address the question of when and for what reasons the caps should be adjusted. Without some provision for emergencies, no cap regime can be successful. The design of any provision for emergencies can be important. How easy will it be to label something an "emergency?" If the emergency is something like a natural disaster, at what point should the related spending be incorporated into the regular budget process rather than remain an emergency exception? The regular budget and appropriations process provides for greater legislative deliberation, procedural hurdles, and funding trade-offs which may be bypassed through the use of emergency supplementals. If appropriations committee oversight and procedural controls over the enactment of supplementals--whether all spending is designated emergency or not--are less than that applied to the regular process, there may be an incentive to expand the use of supplementals. In the past we have recommended a number of steps to improve budgeting for emergencies--both in terms of how much is provided in the budget for yet unknown emergencies and in terms of procedures and mechanisms to ensure that emergency supplementals do not become the vehicle for other items. It is worth noting that discretionary spending caps leave the decision about how to comply with the caps to the committees of jurisdiction. Budget control legislation has set the level of the caps, but it has not specified how much should be spent on each department or activity under the cap. Unlike discretionary spending, mandatory spending programs and tax expenditures are not amenable to simple "caps." Further, even if a cap on mandatory programs were to be designed and imposed, it would not deal with the underlying structure of these programs and hence would not address the longer-term growth trends. An alternative that would be more consistent with the design of these programs would be to set savings targets or specify a downward trend. Under the current budget process, if Congress wishes reductions in mandatory programs or increases in revenues, it may use reconciliation instructions to assign targets to the committees of jurisdiction; it does not generally direct those committees as to the specific nature of the change to meet such targets. While changing our long-term fiscal path requires looking down the road, we should start now. If Congress were to agree on a fiscal goal and set targets along a multiyear path, then enforcement would be tied to those targets and that path. The lessons of GRH and BEA could be applied: tie enforcement to actions. A look-back provision would create a mechanism to reconcile results with intent. The growth of some mandatory programs might be slowed by creating program-specific triggers which, when tripped, prompt a response. A trigger could result in a "hard" or automatic response, unless Congress and the President acted to override or alter it. By identifying significant increases in the spending path of a mandatory program relatively early and acting to constrain it, Congress and the President could avert larger financial challenges in the future. A similar approach might be applied to tax expenditures, which operate like mandatory programs but do not compete in the annual appropriations process. Since the growing deficit and debt is a function of the structural and growing imbalance between spending and revenues, we have said that both sides of the equation should be covered by whatever enforcement mechanism is selected. At the same time, the design of the mechanism must recognize the differences in design and hence in control of discretionary spending, mandatory spending, spending through the tax code in the form of tax expenditures, and revenues. As a general rule, incentives or penalties--which are what enforcement mechanisms often serve as--are most successful if they are plausible and tied to a failure to act rather than imposed too broadly. As I noted, we have said that enforcement is an important part of any budget process; in designing enforcement mechanisms it is important to pay attention not only to their interaction with the design of different parts of the budget but also to any perverse incentives or unintended consequences that are likely to result. Finally, I would like to comment about one measure that does not serve as an enforcement mechanism but is often misunderstood as one: the debt limit. The debt limit does not control or limit the ability of the federal government to run deficits or incur obligations. Debt reflects previously enacted tax and spending decisions. The debt limit, therefore, is a limit on the ability to pay obligations already legally incurred. If the level of debt-- or debt as a share of GDP--is to serve as a fiscal policy goal or limit, then it must constrain the decisions that lead to debt increases when those decisions are made. Our recent work highlights some options for better linking spending and revenue decisions to the decisions about the debt limit at the time that those decisions are made. For example, many have suggested that since the Congress's annual budget resolution reflects aggregate fiscal policy decisions including levels of federal debt, this would be the appropriate point in the budget process to make the necessary adjustments to the debt limit. If that were done, then Congress might also adopt a process whereby any legislation that would increase federal debt beyond that envisioned in the resolution would also contain a separate title raising the debt limit by the appropriate amount. Congress took this approach with three pieces of legislation enacted in 2008 and 2009: the Housing and Economic Recovery Act of 2008, the Emergency Economic Stabilization Act of 2008, and the American Recovery and Reinvestment Act of 2009 each included a separate provision increasing the debt limit. The budget process is the source of a great deal of frustration. The public finds it hard to understand. Members of Congress complain that it is time- consuming and duplicative, requiring frequent votes on the same thing. And, too often, the results are not what was expected or desired. It is inevitable that, given the nature of today's budget challenge, there will be frustration. It is important, however, to try to separate frustration with process from frustration over policy. To change the fiscal path requires hard decisions about what government will and will not do and how it will be funded. A process may facilitate the debate, but it cannot make the decision. Enforcement mechanisms are not terribly successful in forcing actions when there is little agreement on those actions. Carefully designed mechanisms, however, can enforce agreements that have already been made and ensure compliance. Chairman Baucus, Senator Hatch, Members of the Committee, this concludes my statement. I am happy to answer any questions and provide any assistance as you move forward in this important endeavor. We conducted our work from April to May 2011 in accordance with all sections of GAO's Quality Assurance Framework that are relevant to our objectives. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objectives and to discuss any limitations in our work. We believe that the information and data obtained, and the analysis conducted, provide a reasonable basis for any findings and conclusions in this statement. For further information regarding this testimony, please contact Susan J. Irving, Director for Federal Budget Issues, Strategic Issues, on (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. Individuals making key contributions to this testimony include Carol Henn, James McTigue, and Thomas McCabe. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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As Congress considers the role and design of appropriate budget enforcement mechanisms in changing the government's fiscal path, this testimony outlines some elements that could facilitate debate and contribute to efforts to place the government on a more sustainable long-term fiscal path. Budgeting is the process by which we as a nation resolve the large number of often conflicting objectives that citizens seek to achieve through government action. The budget determines the fiscal policy stance of the government--that is, the relationship between spending and revenues. And it is through the budget process that Congress and the President reach agreement about the areas in which the federal government will be involved and in what way. Because these decisions are so important, we expect a great deal from our budget and budget process. We want the budget to be clear and understandable. We want the process to be simple--or at least not too complex. But at the same time we want a process that presents Congress and the American people with a framework to understand the significant choices and the information necessary to make the best-informed decisions about federal tax and spending policy. This is not easy. Since our first simulations in 1992, we have continued to report on the nature and drivers of the long-term imbalance and on mechanisms to help address the challenge. Focusing on the long term does not mean ignoring the near term. While concerns about the strength of the economy may argue for phasing in policy changes over time, the longer action to change the government's long-term fiscal path is delayed, the greater the risk that the eventual changes will be more disruptive and more destabilizing. Starting on the path to sustainability now offers many advantages. Our increased awareness of the dangers presented by the long-term fiscal outlook leads to a focus on enforcement provisions within the budget process that can facilitate the debate and contribute to efforts to put the government on a more sustainable long-term fiscal path. The budget process is the framework within which enforcement mechanisms exist. No process can force choices Congress and the President are unwilling to make. Having an agreed-upon goal justifies and frames the choices that must be made. A budget process can facilitate or hamper substantive decisions, but it cannot replace them. While no process can substitute for making the difficult choices, it can help structure the debate. The budget structure can make clear information necessary for important decisions or the structure can make some information harder to find. The process can highlight trade-offs and set rules for action. In our past work, we have identified four broad principles or criteria for a budget process that can help Congress consider the design and structure of future budget enforcement mechanisms. A process should 1. provide information about the long-term effect of decisions, both macro--linking fiscal policy to the long-term economic outlook--and micro--providing recognition of the long-term spending implications of government commitments, 2. provide information and be structured to focus on important trade-offs such as the trade-off between investment and consumption spending, 3. provide information necessary to make informed trade-offs between the different policy tools of government (such as tax provisions, grants, and credit programs), and 4. be enforceable, provide for control and accountability, and be transparent, using clear, consistent definitions. First, selecting the appropriate time horizon in which the budgetary impact of policy decisions should be measured is not just an abstract question for analysts. If the time horizon is too short, Congress may have insufficient information about the potential cost of a program. In addition, too short a time horizon may create incentives to artificially shift costs into the future rather than find a sustainable solution. Second, the structure and rules can determine the nature of the trade-offs surfaced during the budget process. Consumption may be favored over investment because the initial cost of an infrastructure project looks high in comparison to support for consumption. Distinguishing between support for current consumption and investing in economic growth in the budget would help eliminate a perceived bias against investments requiring large up-front spending. The third principle focuses on the method through which the federal government provides support for any federal goal or objective. The budget and budget process should provide the information necessary to permit looking across federal agencies and policy tools--which means across committee jurisdictions--to make an informed choice. Lastly, the budget process should be enforceable, provide for control and accountability, and be transparent.
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DOD annually spends about $15 billion for depot maintenance work that includes repairing, overhauling, modifying, and upgrading aircraft, ships, tracked and wheeled vehicles, and other systems and equipment. It also includes limited manufacture of parts, technical support, modifications, testing, and reclamation as well as software maintenance. DOD estimates that about 60 percent of its expenditures for depot maintenance work is performed in its 24 maintenance depots and the remaining 40 percent in the private sector. We have reported that the public-private mix is closer to 50-50 when it includes interim contractor support services and public depot purchases of parts, supplies, and maintenance services from the private sector. Historically public depots have served to provide a ready and controlled source of repair and maintenance. Reductions in military force structure and related weapon system procurement, changes in military operational requirements due to the end of the Cold War, and increased reliability, maintainability, and durability of military systems have decreased the need for depot-level maintenance support. Efforts to downsize and reshape DOD's maintenance system have addressed depot efficiency and the workload mix between the public and private sectors. A key issue currently being debated within Congress and DOD is the extent to which the private sector should be relied on for meeting DOD's requirements for depot-level maintenance. Congress, in the National Defense Authorization Act for Fiscal Year 1994, established the Commission on Roles and Missions of the Armed Forces to (1) review the appropriateness of the current allocations of roles, missions, and functions among the armed forces; (2) evaluate and report on alternate allocations; and (3) make recommendations for changes in the current definition and distribution of those roles, missions, and functions. The Commission's May 24, 1995, report, Directions for Defense, identified a number of commercial activities performed by DOD that could be performed by the private sector. Depot-level maintenance was one of these activities. The Commission concluded that privatizing such commercial activities through meaningful competition was the primary path to more efficient support. It noted that such competition typically lowers costs by 20 percent. Based on its conclusions, the Commission recommended that DOD transition to a depot maintenance system relying on the private sector by, (1) directing support of all new systems to private contractors, (2) establishing a time-phased plan to privatize essentially all existing depot-level maintenance, and (3) creating an office under the Assistant Secretary of Defense (Economic Security) to oversee privatization of depots. In his August 24, 1995, letter to Congress forwarding the Commission report, the Secretary of Defense agreed with the Commission's recommendations but expressed a need for DOD to retain a limited organic core capability to meet essential wartime surge demands, promote competition, and sustain institutional expertise. DOD's January 1996 report, Plan for Increasing Depot Maintenance Privatization and Outsourcing, provides for substantially increasing reliance on the private sector for depot maintenance. The CORM, in support of its depot privatization savings assumption, cites reported savings from public-private competitions under OMB Circular A-76. These competitions were for various non-depot maintenance commercial activities, in which there was generally a highly competitive private market. Projected savings were greater for competitions having larger numbers of private sector competitors. The public sector won about half of these competitions. Our analysis indicates that private sector competition for depot maintenance may be much less than found in the A-76 activities. The data also suggests that little or no savings would result from privatizing depot maintenance in the absence of competition. The CORM report cites two studies supporting its savings assumption--one by OMB and one by the Center for Naval Analysis (CNA). Both reports are evaluations of numerous public-private competitions for commercial activities under OMB Circular A-76 guidelines. The commercial activities included base operating support functions such as family housing, real property maintenance, civilian personnel administration, food service, security, and other support services. These activities are characterized by highly competitive markets with low-skill labor, little capital investment, and simple, routine and repetitive tasks that can readily be identified in a contract statement-of-work. None of the competitions studied were for depot maintenance, which generally has dissimilar characteristics. Both reports show that substantial savings occurred when competition was introduced into the noncompetitive environment. However, the reported savings are based on the difference between the precompetition cost and the price proposed and do not reflect subsequent contract cost overruns, modifications, or add-ons. Based on a limited number of audits, projected A-76 privatization savings were often reduced or eliminated as a result of subsequent contract cost growth. The OMB study of commercial activities competed from 1981 to 1988 cited average savings of 30 percent from original government cost with an average 20-percent savings when the government won the competition and 35 percent when the private sector won. About 40 percent of competitions were won by government, 60 percent by the private sector. The CNA study cites a previous CNA review of the Navy's Commercial Activities Program in which both the public and private sectors each won about half the roughly 1,000 competitions reviewed. The offers where the public sector won were roughly 20 percent lower than the precompetition cost baseline, whereas winning offers from private firms averaged 40 percent below earlier costs. The report noted that larger private sector savings occurred when activities were performed predominately by military personnel. Nearly all depot maintenance work is performed by DOD civilians. In 29 percent of the cost studies reviewed, there were no cost savings. These studies did not specifically address outsourcing to the private sector when the public sector did not participate in the competition. Since the government's costs were lower in about half the cases, these savings would not have been realized without public competition. Further, in limited situations where audits have been conducted, projected savings have not been verified. For example, a 1989 Army Audit Agency report summarizing the results of prior commercial activities reviews stated that for 10 functions converted to contractor performance, only $9.9 million of $22 million in projected savings were realized. Performance work statement deficiencies, mandatory wage rate increases received by contractor personnel, and higher-than-estimated contract administration costs accounted for about 90 percent of the reduction in estimated savings. Our 1990 report on OMB Circular A-76 savings projections found (1) costs of conducting the competitions were not considered in estimating savings, (2) savings figures were projections and were not based on actual experience, (3) DOD lacked information regarding modifications made after the cost study, (4) DOD's A-76 database contained inaccuracies and incomplete savings data, and (5) an error in design resulted in a computer program that miscalculated program savings. A July 1995 Congressional Budget Office report entitled Public and Private Roles in Maintaining Military Equipment at the Depot Level stated that contracting out was most likely to outperform public depots if competition existed among private firms. The report noted, however, that without competition, the private sector's ability to provide service for the least cost could be reduced and the risk of poor-quality or nonresponsive support could increase. The CORM report also states that savings occur when meaningful competition is obtained in a previously sole-source area and public-private competitions are preferable to noncompetitive awards to the private sector. The CORM recognized that privatizing essentially all depot maintenance would require a time phased approach. Under current conditions, privatizing essentially all depot workloads (1) would not likely achieve expected savings and could prove more costly, (2) could adversely impact readiness, and (3) would be difficult if not impossible under existing laws. These conditions are discussed below. Limited competition and excess depot capacity could negate expected savings. The CORM assumed depot workload privatization savings would result from private sector competition. We found that much of the depot work contracted to the private sector is awarded noncompetitively and that obtaining competition for remaining non-core depot workloads may be difficult and costly. In addition, privatizing depot workloads without reducing excess depot capacity could significantly increase the cost of work performed by the depots. The CORM's recommendation to privatize essentially all depot maintenance assumed that meaningful competition would be obtained for most of the work. The Commission generally defined meaningful competition as that generated by a competitive market, including significant numbers of both buyers and sellers. Our review of selected DOD depot maintenance contracts found that a large portion of the awards were not made under these conditions. To determine the extent of competition in awarding depot maintenance contracts, we reviewed 240 such contracts totaling $4.3 billion at 12 DOD buying activities. We selected high-dollar value contracts from a total of 8,452 open 1995 depot-level maintenance contracts that were valued at $7.3 billion. As shown in table 1, 182 of the 240 contracts--76 percent--were awarded on a sole-source basis. These contracts accounted for 45 percent of the total dollar value. In nine other contracts accounting for about 4 percent of the total, competition was limited to only two offerors. The remaining 49 contracts were classified as awarded through full and open competition. These awards accounted for 51 percent of the total dollar value. However, some had only limited responses. For example, the number of offerors was 2 in each of 5 contracts totaling $525.8 million--24 percent of the total award value for the 49 competed contracts. Original equipment manufacturers were awarded 158 of the 182 noncompetitive contracts. The remaining 24 were awarded on a sole-source basis for reasons such as peculiar requirements, national emergencies, and international agreements. Where competition was limited, the OEMs won eight of the nine workloads. The OEMs also won 9 of the 49 contracts that DOD classified as awarded pursuant to full and open competition. Table 2 shows the number of offers received for the contracts classified as awarded pursuant to full and open competition. The buying activities awarded the maintenance contracts to 71 different contractors but 13 of these contractors had received workloads valued at $3.3 billion--76 percent of the total amount awarded. Table 3 shows the distribution of the workload to the 71 contractors. Although DOD plans to privatize non-core workloads currently in the public depots, it has not assessed the extent that such workloads will attract private sector competition. Factors that resulted in noncompetitive awards for much of the depot work currently performed by the private sector, may apply to much of the work currently performed by public depots. The types of existing public workloads where private sector competition may be limited include: (1) workloads where data rights necessary for competition have not been acquired, (2) small workloads that do not justify large private sector capital investment costs, (3) workloads for older and/or highly specialized systems, (4) workloads with erratic requirements where DOD cannot guarantee a stable workload, and (5) workloads that would be costly to move from one source of repair to another. These factors could further limit cost-effective privatization of existing workloads. For example, our review of 95 non-ship depot maintenance public-private competitions found that 22 did not receive any private sector offers and 33 only had 1. DOD may have to acquire the technical data rights to compete many of its weapon systems. The most-often-cited justification for the 182 sole-source awards was that competition was not possible because DOD did not own the technical data rights for the items to be repaired. Command officials stated that DOD will have to make costly investments in order to promote full and open competition for many of its weapon systems. For example, in its justification for less than full and open competition for the repair and testing of the AN/URQ-33 Joint Tactical Information Distribution System, the Warner Robins Air Logistics Center noted that the technical data was not procured from the original equipment manufacturer and estimated that $1 million and a minimum of 6 months would be required to start up a new contractor. Similarly, the Army Missile Command's justification for a sole-source maintenance and repair award to the original equipment manufacturer for the AH-58D Kiowa Warrior helicopter, noted that the program manager had not procured the technical data package due to funding and cost restraints. The command estimated that technical data suitable for full and open competition would cost about $18 million. The difficulty of accurately describing or quantifying depot maintenance requirements may impact privatization savings. Under fixed-price contracts, more of the risks are incurred by the contractor. If costs are greater than expected, then the contractor incurs the loss. The government incurs more risk under a cost reimbursable contract. Under such contracts, the government generally reimburses the contractor for the costs incurred. Accordingly, the contractor's incentive to maximize efficiency and minimize cost is generally greater under a fixed-price contract. Cost reimbursable contracts are often used when contract requirements cannot be adequately described and/or costs accurately estimated. Such contracts are used for many depot maintenance workloads. Our analysis of the 240 contracts showed that the commands used fixed-price contracts in 151 (or 63 percent ) of the 240 contracts, cost-reimbursable type contracts in 61 contracts, and a combination of the 2 types in 28 contracts. Table 4 shows the types of contracts the commands were using to acquire depot-level maintenance. The buying activities said they used fixed pricing in the 151 contracts because adequate repair histories were available to establish a price range for the maintenance work. In using 61 cost-reimbursement type contracts, DOD officials stated that the maintenance requirements could not be predetermined for the contract period or that no adequate repair history existed to establish reasonable price ranges. Non-core workloads that may be good candidates for privatization--that is, a competitive private market exists--may not be cost-effective to privatize if it results in increased excess capacity and other inefficiencies in the public depots. Given the requirement to preserve public depot capabilities, DOD must manage depot maintenance workloads to assure efficient operations. In some cases where privatizing a particular workload could produce some level of savings, the savings could be more than offset by creating inefficiencies in the remaining public depots. For example, the Air Force's Oklahoma City Air Logistics Center currently has about 43 percent excess capacity. Had DOD decided to reallocate the engine workload from the closing San Antonio Center to Oklahoma City instead of privatizing the workload in place, the labor hour rate for all of the Oklahoma City Center's work would be reduced by $10 an hour. Such a reduction could save about $70 million a year. Our analysis of depot maintenance work currently contracted with the private sector found that contractors, for the most part, were responsive to DOD's needs in terms of meeting contractual requirements for delivery and performance. However, service officials stated that historically, the flexibility and responsiveness of DOD depots had significantly influenced decisions to select a DOD depot rather than a contractor for most critical military systems. The military services have considered the readiness and sustainability risks of privatizing existing depot workloads and determined that the risks for privatizing most workloads were too high. In the past, these assessments provide the primary justification for maintaining a large organic depot maintenance core capability. DOD is implementing a new depot maintenance policy that is likely to significantly increase the depot maintenance workloads performed by the private sector. Based on the policy preference for contractor maintenance, DOD is now conducting risk assessments on workloads previously designated as core. In many cases, the services are redesignating mission essential core workloads as non-core. DOD's March 1996 depot workload report to Congress, which reflects its latest "core" workload determinations, projects that the fiscal year 1997 depot workload mix of about 60 percent public and 40 percent private will shift to about a 50/50 mix by fiscal year 2001. However, these projections were not developed using the DOD's new risk assessment process. We recently reported that DOD's ongoing risk assessment process will likely result in an even greater shift of depot maintenance workload to the private sector. As required by the fiscal year 1996 Defense Authorization Act, we analyzed and reported on DOD's March 1996 depot workload report. We noted that the DOD's risk assessment process is based to a large extent on subjective judgements. Further, DOD's methodology for assessing workload privatization risks does not include guidance or criteria for the services to use in making such assessments. As a result, the services individual risk assessments may not be consistent within the services or uniform among the services. The CORM report stated that DOD core depot requirements exceed the real needs of the national security strategy and that with proper oversight private contractors could provide essentially all of the depot-level maintenance services now conducted in government facilities. To evaluate contractor support and responsiveness for the workloads currently in the private sector, we analyzed contract modifications to 195 of the 240 contacts reviewed. We only found indications of contractor performance problems in four of these contracts. These involved extensions to the period of performance due to the contractors not meeting the required delivery dates. However, DOD materiel managers noted that DOD depots provide greater flexibility than contractors and can more quickly respond to nonprogrammed, quick-turnaround requirements. Further, DOD contracting personnel stated that contract files may or may not provide a reasonable assessment of readiness impacts. For example, these files would provide no indication of the impacts of cost growth on DOD's ability to procure required depot maintenance services. In recommending that essentially all depot maintenance work be privatized, the Commission recognized that privatization could be limited or precluded by a collection of laws, regulations, and historic practices developed to protect the government's depot maintenance capability. Among the barriers cited were 10 U.S.C. 2469, which requires public-private competitions before any workload over $3 million can be moved to the private sector from a public depot, and 10 U.S.C. 2466, which sets the amount of depot-level maintenance workload that must be performed in public depots to not less than 60 percent, that is, the 60/40 rule. Since the concept of core requirements centers around the determination of acceptable levels of risks, the size and extent of core capability and requirements can become somewhat subjective. Accordingly, the amount of depot work subject to privatization may be driven in part by the 60/40 rule. DOD is seeking repeal of these and other laws in order to fully implement its depot privatization plans. For example, in May 1996, DOD proposed a provision that would allow the Secretary of Defense to acquire by contract from the private sector or any nonfederal government entities those commercial or industrial type supplies and services necessary or beneficial to the accomplishment of DOD's authorized functions, notwithstanding any provision of title 10 or any statute authorizing appropriation for or making DOD appropriations. This proposal was not supported by the DOD authorization committees during deliberations over the fiscal year 1997 DOD authorization bill. The CORM recognized that there are instances where establishing competition within the private sector would be too costly. In these cases, the Commission stated that public-private competition, however imperfect, was generally preferable to noncompetitive contracts. The CORM assumed, however, that there were only a few cases in which such competitions would be required. We found that requirements for and benefits of such competitions may be greater than assumed. As noted earlier in this report, most depot workloads currently contracted to the private sector are noncompetitive and obtaining private sector competition for those workloads currently in the public depots could prove difficult and costly. In examining DOD's experience with public-private competition for depot-level maintenance, we found that the competitions generally resulted in savings, but precisely quantifying the savings is difficult because many other variables affect maintenance costs. We also found that some workloads are not well suited for competing--either private-private or public-private. DOD's experience with public-private competition for depot-level maintenance began in 1985 when Congress authorized the Navy to compete shipyard workloads. In 1991, with DOD's push to promote efficiency in depot maintenance operations and the Navy's assertion that competition encouraged public shipyards to become more efficient, Congress permitted the Air Force and the Army to conduct public-private competitions for depot-level maintenance workloads. DOD had planned to use the program for allocating maintenance workloads to the most cost-efficient providers and to save $1.7 billion as part of its strategy to achieve an overall $6.3 billion reduction in depot maintenance costs from fiscal years 1991 to 1997. However, DOD suspended the program in May 1994 and reported to Congress in February 1995 that competition could not be reinstituted until its cost accounting and data systems permitted actual cost accounting for specific workloads. During our review of the Navy's public-private competition program for aviation maintenance, Navy officials stated that such competitions had been beneficial to the government and resulted in maintenance savings for the involved workloads. They stated that competitions for workloads that had previously been assigned to Navy depots resulted in the Navy depots streamlining overhead, improving work processes, reducing labor and material requirements, and instituting other cost-saving initiatives in order to submit the lowest bids and avoid job losses. For example, the public-private competition for F-14 aircraft airframe overhauls--a competition won by a Navy depot--resulted in the depot reducing the average cost per overhaul from $1.69 million the year preceding the competition to $1.29 million, in inflation adjusted dollars, the year following the competition, a 24-percent decrease. A number of factors have limited DOD public-private competitions. They include: (1) private sector concerns regarding the fairness of competitions; (2) the time and cost of contract solicitation, award, and administration; (3) declining depot requirements and the inability to guarantee stable workloads; (4) lack of government-owned technical data packages; and (5) limited sources of repair, and low-dollar value workloads that generate little or no interest from the private sector. An April 1994 DOD task force report on depot-level activities identified several concerns with continuing public-private competitions. For example, efficiencies achieved would not be as likely in the future because the costs of conducting competitions were high and the payoffs would be progressively smaller as workloads were recompeted. Critics of public-private competitions charge that such competitions are inherently unfair because DOD's accounting and financial management systems do not capture and reflect all the costs. In February 1995, DOD reported to the House and Senate Appropriations Committees that its automated financial management systems and databases did not provide an accurate basis for determining the actual cost of specific competition workloads. To remedy this situation, DOD was developing policies, procedures, and automated processes that would permit actual cost accounting for specific workloads accomplished in public depots. Our January 1996 report to the Ranking Minority Member, Subcommittee on Defense, Senate Committee on Appropriations, summarized many actions DOD had taken to improve public-private competitions. Among these actions were (1) the development of a cost comparability handbook that, among other things, identified adjustments that should be made to public depots' offers as a result of differences in the military services' accounting systems and (2) having the Defense Contract Audit Agency certify that successful offers included comparable estimates of all direct and indirect costs. We noted that the incentive to continue with some of the initiatives was lost after DOD terminated public-private competitions. We also identified additional actions that DOD could take to further improve competitions, for example, provide the Defense Contract Audit Agency the technical support needed to properly evaluate depot offers and to conduct an incurred cost audit to assess whether depots are able to perform work as offered. Our report also summarized the Navy's suggestions for addressing concerns regarding public depot cost overruns and administration costs resulting from competitions. These included establish fixed prices for the competed work based on offer amounts, execute the work like normal workload using existing control systems with no separate contract administration, and assess penalties for cost overruns to make the depot less competitive in future competitions. DOD officials declined to comment on this report. They noted that the draft report we provided for comment included no recommendations and did not require a response. Further, the report addresses assumptions of the Commission on Roles and Missions of the Armed Forces, a group established by Congress that no longer exists. While the Commission on Roles and Missions was not a DOD entity, in forwarding the Commission's report to Congress, the Secretary of Defense stated that DOD agreed with the Commission's recommendation to outsource a significant portion of DOD's depot maintenance work. Further, DOD's January 1996 report on outsourcing depot maintenance cited the Commission's savings projections as its rationale for its depot privatization initiative. Appendix I sets forth our scope and methodology. We will continue evaluating DOD's actions on its plans to privatize depot-level maintenance to complete our response to issues raised by the National Security Committee. We are sending copies of this report to the Secretaries of Defense, the Army, the Navy, and the Air Force; the Director of the Office of Management and Budget; and interested congressional committees. Copies will be made available to others upon request. If you or your staff have any questions concerning this report, please contact me on (202) 512-8412. Major contributors to this report are listed in appendix II. The Chairman of the House Committee on National Security asked us to comment on the May 1995 report by the Commission on Roles and Missions of the Armed Forces that recommended the Department of Defense (DOD) privatize its depot-level maintenance activities. The Chairman requested that we review a number of issues related to the Commission's report; this report provides information on the Commission's assumptions that privatization could reduce maintenance costs by 20 percent and the potential impact of privatization on military readiness and sustainability. It also identifies some areas DOD may need to improve if it moves toward total privatization of depot-level maintenance. To evaluate the Commission's assumptions about cost savings from privatization and the impact that it might have on readiness and sustainability, we reviewed its report, discussed the assumptions with former staff members of the Commission, and reviewed supporting data that the Commission had maintained. We made extensive use of our prior work and the work of others on issues related to DOD's depot-level maintenance operations to determine how consistent the Commission's work was with prior findings, conclusions, and recommendations. In addition, we analyzed selected depot-level contracts to evaluate (1) the extent to which DOD used competitive procedures in awarding the contracts and (2) how well the contractor performance responded to DOD's depot-level maintenance needs. We performed our review at the following: Four Army buying activities: the Aviation and Troop Support Command (ATCOM), St. Louis, Missouri; the Communications-Electronics Command (CECOM), Fort Monmouth, New Jersey; the Missile Command (MICOM), Redstone Arsenal, Alabama; and the Tank-Automotive and Armaments Command (TACOM), Warren, Michigan. Five Air Force buying activities: Odgen Air Logistics Center (OO-ALC), Hill Air Force Base, Utah; Oklahoma City Air Logistics Center (OC-ALC), Tinker Air Force Base, Oklahoma; Sacramento Air Logistics Center (SM-ALC), McClellan Air Force Base, California; San Antonio Air Logistics Center (SA-ALC), Kelly Air Force Base, Texas; Warner Robins Air Logistics Center (WR-ALC), Robins Air Force Base, Georgia. Three Navy buying activities: the Naval Inventory Control Point (NICP), Mechanicsburg, Pennsylvania; Naval Inventory Control Point (NICP), Philadelphia, Pennsylvania; and Naval Air Systems Command (NAVAIR), Arlington, Virginia. DOD maintains a database on all contract awards that contains data on awards made by competition and awards that are made by other than competition. We did not use this database to evaluate DOD's use of competitive procedures for depot-level maintenance because a test at one Army command showed coding errors and difficulty in identifying maintenance contracts. Therefore, we asked each buying activity to identify all depot-level maintenance contracts that were open at a given point during 1995 for use in evaluating the extent they had used competitive procedures and contractor performance. Each buying activity provided a list of contracts from their database. We did not attempt to verify the accuracy of the buying activities' databases. The data contained a large number of small contracts. For timeliness, we chose to cover dollar value rather than numbers of contracts. We arranged the dollar value of the contracts from highest to lowest and selected high-dollar value contracts that would provide us at least 50-percent coverage of the total dollar value awarded by each service. Table I.1 presents the universe of contracts identified and our sample size. At the buying activities we visited, we reviewed the files of selected contracts to identify cost, schedule, and performance issues. We also discussed the contracting process and contractor performance with contracting officers, negotiators, and specialists. To identify contract types and contracting methods suitable for depot-level maintenance, we reviewed the Federal Acquisition Regulation and DOD supplements and talked to personnel from the Defense Contract Audit Agency and Defense Contract Management Command. We conducted our review between February 1995 and April 1996 in accordance with generally accepted government auditing standards. Julia C. Denman Karl J. Gustafson M. Glenn Knoepfle Frank T. Lawson John M. Ortiz Enemencio Sanchez Jacqueline E. Snead Edward A. Waytel James F. Wiggins Bobby R. Worrell Cleofas Zapata, Jr. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO examined the Commission on Roles and Missions' (CORM) privatization assumptions to determine whether privatization would adversely affect military readiness and sustainability. GAO found that: (1) the CORM's depot privatization savings and readiness assumptions are based on conditions that do not currently exist for many depot workloads; (2) privatizing essentially all depot maintenance under current conditions would not likely achieve expected savings and, according to the military services, would result in unacceptable readiness and sustainability risks; (3) the extent to which DOD's long-term privatization plans and market forces will effectively create more favorable conditions for outsourcing is uncertain; (4) the CORM assumed a highly competitive and capable private market exists or would develop for most depot workloads; (5) however, GAO found that most of the depot workloads contracted to the private sector are awarded noncompetitively, mostly to the original equipment manufacturer; (6) additionally, a number of factors would likely limit private sector competition for many workloads currently in the public depots; (7) the CORM data does not support its depot privatization savings assumption; (8) the CORM's assumption is based primarily on reported savings from public-private competitions for commercial activities under Office of Management and Budget (OMB) Circular A-76, but these commercial activities were generally dissimilar to depot maintenance activities because they involved relatively simple, routine, and repetitive tasks that did not generally require large capital investment or highly skilled and trained personnel; (9) GAO's analysis of depot maintenance workloads currently contracted to the private sector found, for the most part, that the contractors were responsive to contract requirements for delivery and performance; (10) however, DOD officials noted that DOD depots provide greater flexibility than contractors and can more quickly respond to nonprogrammed, quick-turnaround requirements; (11) the military services periodically assess the readiness and sustainability risks of privatizing depot workloads, and if the risks are determined to be too high, the workloads are retained in the public depots; (12) the CORM assumed that public-private competitions would only be used in the absence of private sector competition and would be limited to only a few cases; (13) public-private depot maintenance competitions have resulted in savings and benefits and can provide a cost-effective way of making depot workload allocation decisions for certain workloads; and (14) the beneficial use of such competitions could have significantly more applicability than the Commission assumed.
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The Cayman Islands is a United Kingdom Overseas Territory located in the Caribbean Sea south of Cuba and northwest of Jamaica, with a total land area approximately 1.5 times the size of Washington, D.C., and a population of 47,862. While geographically small, the Cayman Islands is a major offshore financial center (OFC) with no direct taxes that attracts a high volume of U.S.-related financial activity, often involving institutions rather than individuals. Although not easily defined, OFCs are generally described as jurisdictions that have a high level of nonresident financial activity, and may have characteristics including low or no taxes, light and flexible regulation, and a high level of client confidentiality. The Cayman Islands reports that in 2008 it had 277 licensed banks, over 80,000 registered companies, more than 9,000 registered investment funds, and 760 captive insurance companies. According to the Department of the Treasury, U.S. investors held approximately $376 billion in Cayman-issued securities at the end of 2006, making it the fifth most common location for U.S. investment in foreign securities. As of September 2007, U.S. banking liabilities to the Cayman Islands were the highest of any foreign jurisdiction, at nearly $1.5 trillion. As of June 2007, U.S. banking claims on the Cayman Islands stood at $940 billion, second only to the United Kingdom. The international law firm of Maples and Calder, with its associated businesses - Maples Corporate Services Limited and Maples Finance Limited - is the sole occupant of Ugland House. Its business is to facilitate Cayman Islands-based international financial and commercial activity for a clientele of primarily international financial institutions, institutional investors, and corporations. Similar to corporate service providers in the United States, Maples Corporate Services Limited provides registered- office services, using Ugland House as a registered address, to entities it establishes. Registered-office services include activities such as maintenance of certain entity records and filing of statutory forms, resolutions, notices, returns, and fees. Cayman Islands law requires company-service providers like Maples and Calder to adhere to specific Anti-Money Laundering (AML) and Know-Your-Customer (KYC) requirements. For example, they must verify and keep records on the beneficial owners of entities to which they provide services, the purpose of the entities, and the sources of the funds involved. Very few Ugland House registered entities have a significant physical presence in the Cayman Islands or carry out business in the Cayman Islands. According to Maples and Calder partners, the persons establishing these entities are typically referred to Maples by counsel from outside the Cayman Islands, fund managers, and investment banks. As of March 2008 the Cayman Islands Registrar reported that 18,857 entities were registered at the Ugland House address. Approximately 96 percent of these entities were classified as exempted entities under Cayman Islands law, and were thus generally prohibited from carrying out domestic business within the Cayman Islands. Maples and Calder senior partners told us that approximately 5 percent of the entities registered at Ugland House were wholly owned by U.S. persons, while 40 to 50 percent were related to the U.S. in that they had a billing address in the United States. A U.S. billing address does not necessarily imply ownership or control. According to the partners, U.S. persons associated with Ugland House registered entities are often participants in investment and structured-finance activities, including those related to hedge funds and securitization. Entities associated with these activities are not generally directly owned or controlled. For instance, investment-fund entities are often established as partnerships and are essentially owned by the fund's investors. Structured-finance entities are not typically carried on a company's balance sheet, and ownership can be through a party other than the person directing the establishment of the entity, such as a charitable trust, or spread across many noteholders or investors, such as in deals involving securitization. The entities created by Maples and Calder that are directly owned or controlled include corporate subsidiaries, such as those used by multinational corporations to conduct international business. U.S. persons who conduct financial activity in the Cayman Islands commonly do so to gain business advantages, including tax advantages under U.S. law. Although such activity is typically legal, some persons have engaged in activity in the Cayman Islands, like other jurisdictions, in an attempt to avoid detection and prosecution of illegal activity by U.S. authorities. The Cayman Islands may attract U.S-related financial activity because of characteristics including its reputation for stability and compliance with international standards, its business-friendly regulatory environment, and its prominence as an international financial center. For instance, because the Cayman Islands' legal and regulatory system is generally regarded as stable and compliant with international standards, U.S. persons looking for a safe jurisdiction in which to place funds and assets may choose to carry out financial transactions there. Additionally, establishing a Cayman Islands entity can be relatively inexpensive--an exempted company can be created for less than $600, not taking into account service-provider fees. Further, U.S. persons may also be attracted to the Cayman Islands because it is proximate to the United States, operates in the same time zone as New York, and is English speaking. Another frequent reason for doing business in the Cayman Islands is to obtain tax advantages, such as through reduction or deferral of U.S. taxes. For instance, U.S. tax-exempt entities, such as university endowments and pension funds, may invest in hedge funds organized in the Cayman Islands in order to avoid the unrelated business income tax (UBIT). The investment income of U.S. tax-exempts may be subject to UBIT if earned by an investment vehicle organized as a U.S. partnership, a formation common among U.S.-based hedge funds. However, tax-exempts that invest in hedge funds organized as foreign corporations in jurisdictions like the Cayman Islands can be paid in dividends, which are not subject to UBIT. Additionally, some U.S. persons may use Cayman Islands entities to defer U.S. taxes. For example, a U.S.-based multinational business may create a Cayman Islands subsidiary to hold foreign earnings, which are not generally taxed in the United States unless or until repatriated. Because the Cayman Islands, like some other OFCs, has no direct taxes, Cayman subsidiaries do not incur additional taxes owed to the Cayman Islands government. One indication of the extent to which U.S. companies use Cayman entities to defer taxes is their reaction to a recent tax law. In 2004, Congress approved a received dividend reduction for certain earnings of foreign subsidiaries of U.S. companies repatriated for a limited time. Approximately 5.5 percent of the nearly $362 billion repatriated between 2004 and 2006 came from Cayman Island controlled foreign corporations. Lastly, as with other offshore jurisdictions, some U.S. persons may establish entities in the Cayman Islands to illegally evade taxes or avoid detection and prosecution of illegal activities. The full extent of illegal offshore financial activity is unknown, but risk factors include limited transparency related to foreign transactions, and difficulties faced by U.S. regulators and the courts in successfully prosecuting foreign criminal activity. Voluntary compliance with U.S. tax obligations is substantially lower when income is not subject to withholding or third-party-reporting requirements. Because U.S.-related financial activity carried out in foreign jurisdictions is not subject to these requirements in many cases, persons who intend to evade U.S. taxes are better able to avoid detection. Persons intent on illegally evading U.S. taxes may be more likely to carry out financial activity in jurisdictions with no direct taxes, such as the Cayman Islands, because income associated with that activity will not be taxed within those jurisdictions. Individual U.S. taxpayers and corporations are generally required to self- report their taxable income to the Internal Revenue Service (IRS). Similarly, publicly owned corporations traded on U.S. markets are required to file annual or quarterly statements with the Securities and Exchange Commission (SEC). When an individual or corporation conducts business in the Cayman Islands, there is often no third-party reporting of transactions, so disclosures to IRS and U.S. regulators are dependent on the accuracy and completeness of the self-disclosure. Cayman Islands financial institutions are often not required to file reports with IRS concerning U.S. taxpayers. This makes it more likely that there would be inaccurate reporting by U.S. taxpayers on their annual tax returns and SEC required filings. In addition to the information that both IRS and SEC receive from filers of annual or quarterly reports, the U.S. government also has formal information-sharing mechanisms by which it can receive information from foreign governments and financial institutions. In November of 2001, the United States signed a Tax Information Exchange Agreement (TIEA) with the government of the United Kingdom with regard to the Cayman Islands. The TIEA provides a process for IRS to request specific information related to taxpayers. IRS sends TIEA requests to the Cayman Islands based on requests from inside the agency. In addition to the TIEA, the U.S. government and the Cayman Islands also entered into a Mutual Legal Assistance Treaty (MLAT) in 1986. The MLAT enables activities such as extraditions, searches and seizures, transfer of accused persons, and general criminal information exchange, including in relation to specified tax matters. Since the TIEA began to go into effect, IRS has made a small number of requests for information to the Cayman Islands. An IRS official told us that those requests have been for either bank records of taxpayers or for ownership records of corporations. The IRS official also told us that the Cayman Islands government has provided the requested information in a timely manner for all TIEA requests. Since the MLAT went into effect and through the end of 2007, the Department of Justice told us that the U.S. government has made over 200 requests for information regarding criminal cases to the Cayman Islands. Some financial intelligence information on U.S. persons' Cayman activities is available to U.S. regulators. The U.S. government's financial intelligence unit, FinCEN, works to gather information about suspected financial crimes both offshore and domestic. As part of its research and analysis, FinCEN can make requests of its counterpart in the Cayman Islands, the Cayman Islands Financial Reporting Authority (CAYFIN). CAYFIN can and does make requests to FinCEN as well. FinCEN and CAYFIN routinely share suspicious activity information. In fiscal year 2007 CAYFIN made 25 suspicious activity information requests to FinCEN to follow up on potential new as well as existing Cayman Islands-generated suspicious activity reports (SARs), while FinCEN made 6 requests to CAYFIN. According to CAYFIN, financial institutions primarily filed suspicious activity reports on U.S. persons for suspicion of fraud related offenses. Other offenses leading to the filing of suspicious activity reports included drug trafficking, money laundering, and securities fraud, which mostly consisted of insider trading. In addition to the formal information sharing codified into law between the U.S. government and Cayman Islands government and financial institutions represented by TIEA and MLAT requests and SARs, Cayman Islands officials reported sharing with and receiving information from federal agencies, state regulators, and financial institutions. To address the challenges posed by offshore illegal activity, IRS has targeted abusive transactions in areas related to transfer pricing, hedge funds, offshore credit cards, and promoters of offshore shelters. IRS officials said that some abusive transactions identified through these initiatives involved Cayman Islands entities, although the exact extent of this involvement was unclear because it does not maintain jurisdiction- specific statistics regarding abusive transactions. While the full extent of Cayman involvement in offshore illegal activity is unclear, U.S. officials were able to point to specific criminal investigations and prosecutions involving the Cayman Islands. Over the past five years IRS field agents have requested information regarding suspected criminal activity by U.S. persons in 45 instances pertaining to taxpayers or subjects in the Cayman Islands. We analyzed 21 criminal and civil cases to identify common characteristics of legal violations related to the Cayman Islands. Among these cases, the large majority involved individuals, small businesses, and promoters, rather than large multinational corporations. While they were most frequently related to tax evasion, other cases involved securities fraud, money laundering, and various other types of fraud. In most instances, Cayman Islands bank accounts had been used, and several cases involved Cayman Islands companies or credit-card accounts. IRS and Department of Justice (DOJ) officials stated that particular aspects of offshore activity present challenges related to oversight and enforcement. Specifically, these challenges include lack of jurisdictional authority to pursue information, difficulty in identifying beneficial owners due to the complexity of offshore financial transactions and relationships among entities, and lengthy processes involved with completing offshore examinations. Despite these challenges, U.S. officials consistently report that cooperation by the Cayman Islands government in enforcement matters has been good. Further, both the International Monetary Fund (IMF) and the Caribbean Financial Action Taskforce (CFATF) have cited the Cayman Islands for its efforts to comply with international standards, such as those related to anti-money-laundering and terrorist-financing activities. However, Cayman Islands government officials and senior partners from Maples and Calder stated that their role in helping the U.S. ensure compliance with U.S. tax laws is necessarily limited. Cayman Islands government officials stated that they cannot administer other nations' tax laws and are not aware of any jurisdiction that undertakes such an obligation as a general matter. Senior partners from Maples and Calder stated that complying with U.S. tax obligations is the responsibility of the U.S. persons controlling the offshore entities, and that they require all U.S. clients to obtain onshore counsel regarding tax matters before they will act on their behalf. Cayman officials told us that until a request is made by the U.S. for tax-related assistance, the Cayman Islands government is "neutral" and does not act for or against U.S. tax interests. Ugland House provides an instructive case example of the tremendous challenges facing the U.S. tax system in an increasingly global economy. Although the Maples and Calder law firm provides services that even U.S. government-affiliated entities have found useful for international transactions and the Cayman Islands government has taken affirmative steps to meet international standards, the ability of U.S. persons to establish entities with relatively little expense in the Cayman Islands and similar jurisdictions facilitates both legal tax minimization and illegal tax evasion. Despite the Cayman Islands' adherence to international standards and the international commerce benefits gained through U.S. activities in the Cayman Islands, Cayman entities nevertheless can be used to obscure legal ownership of assets and associated income and to exploit grey areas of U.S. tax law to minimize U.S. tax obligations. Further, while the Cayman Islands government has cooperated in sharing information through established channels, as long as the U.S. government is chiefly reliant on information gained from specific inquiries and self-reporting, the Cayman Islands and other similar jurisdictions will remain attractive locations for persons intent on legally minimizing their U.S. taxes and illegally avoiding their obligations. Balancing the need to ensure compliance with our tax and other laws while not harming U.S. business interests and also respecting the sovereignty of the Cayman Islands and similar jurisdictions undoubtedly will be a continuing challenge for our nation. Chairman Baucus, Senator Grassley, and members of the committee, this concludes my testimony. I would be happy to answer any questions you may have at this time. For further information regarding this testimony, please contact Michael Brostek, Director, Strategic Issues, on (202) 512-9110 or [email protected]. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include David Lewis, Assistant Director; Perry Datwyler; S. Mike Davis; Robyn Howard; Brian James; Danielle Novak; Melanie Papasian; Ellen Phelps Ranen; Ellen Rominger; Jeffrey Schmerling; Shellee Soliday; Andrew Stephens; Jessica Thomsen; and Jonda VanPelt. 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. 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 Cayman Islands is a major offshore financial center and the registered home of thousands of corporations and financial entities. Financial activity there is in the trillions of dollars annually. One Cayman building--Ugland House--has been the subject of public attention as the listed address of thousands of companies. To help Congress better understand the nature of U.S. persons' business activities in the Cayman Islands, GAO was asked to study (1) the nature and extent of U.S. persons' involvement with Ugland House registered entities and the nature of such business; (2) the reasons why U.S. persons conduct business in the Cayman Islands; (3) information available to the U.S. government regarding U.S. persons' Cayman activities; and (4) the U.S. government's compliance and enforcement efforts. GAO interviewed U.S. and Cayman government officials and representatives of the law firm housed in Ugland House, and reviewed relevant documents. The full report on GAO's review is GAO-08-778 , being released at the same time as this testimony. The sole occupant of Ugland House is Maples and Calder, a law firm and company-services provider that serves as registered office for the 18,857 entities it created as of March 2008, on behalf of a largely international clientele. According to Maples partners, about 5 percent of these entities were wholly U.S.-owned and 40 to 50 percent had a U.S. billing address. Ugland House registered entities are often participants in investment and structured-finance activities, including those related to hedge funds and securitization. Gaining business advantages, such as facilitating U.S.-foreign transactions or minimizing taxes, are key reasons for U.S. persons' financial activity in the Cayman Islands. The Cayman Islands' reputation as a stable, business-friendly regulatory environment also attracts business. This activity is typically legal, such as when pension funds and other U.S. tax-exempt entities invest in Cayman hedge funds to maximize their investment return by minimizing U.S. taxes. Nevertheless, as with other offshore jurisdictions, some U.S. persons may use Cayman Island entities to illegally evade income taxes or hide illegal activity. Information about U.S. persons' Cayman activities comes from self-reporting, international agreements, and less formal sharing with the Cayman government. Because there is often no third-party reporting, self-reported information may be vulnerable to being inaccurate or incomplete. U.S. officials said the Cayman government has been responsive to taxpayer-specific information requests. The Internal Revenue Service has several initiatives that target offshore tax evasion, including cases involving Cayman entities, but oversight and enforcement challenges related to offshore financial activity exist. U.S. officials said that cooperation with the Cayman Islands government has been good. Also, Maples partners said that ultimate responsibility for compliance with U.S. tax laws lies with U.S. taxpayers.
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To determine the validity of DOD's conclusion--that U.S. troops' exposures to chemical warfare agents were as DOD estimates suggested-- based on its plume-modeling analysis, we examined the meteorological and dispersion models DOD used to model chemical warfare agent releases from the U.S. demolition of Khamisiyah and Coalition bombings of Al Muthanna, Muhammadiyat, and other sites in Iraq during the Gulf War deployment period. We evaluated the basis for the technical and operational assumptions DOD made in (1) conducting the modeling for the bombing and demolition of Iraqi sites and (2) estimating the specific data and information used in the modeling, relating to source term, meteorological conditions, and other key parameters. We also evaluated the efforts of the CIA and DOD to collect and develop data on source term and other key parameters used in the modeling efforts. We interviewed DOD and CIA modelers and officials involved with the modeling and obtained documents and reports from DOD's Deployment Health Support Directorate. We also interviewed and received documents from DOE officials who were involved with the modeling at LLNL. In addition, we interviewed officials and obtained documents from the Institute for Defense Analyses (IDA) concerning the IDA expert panel assessment of CIA's modeling of Khamisiyah. We also interviewed U.S. Army officials at Dugway Proving Ground, Utah, to determine how chemical warfare agents might have been released during the Khamisiyah pit area demolitions. Finally, we interviewed officials at the U.S. Army Center for Health Promotion and Preventive Medicine, to determine how specific troop unit exposures were identified, and officials of the United Nations Monitoring, Verification, and Inspection Commission (UNMOVIC), to obtain information on source term data from the United Nations Special Commission's (UNSCOM) analyses and inspections of the Khamisiyah, Al Muthanna, Muhammadiyat, and other sites. To determine the validity of DOD's and the Department of Veterans Affairs' (VA) conclusions--based on epidemiological studies--that there was no association between Khamisiyah exposure and the rates of hospitalization or mortality, we reviewed published epidemiological studies in which hospitalization and mortality among exposed and nonexposed U.S. troops were analyzed. We also interviewed the study authors and researchers and examined the Gulf War population databases provided to the researchers by DOD in support of these studies. We interviewed Veterans Benefits Administration officials and obtained documents and reports on their analyses of DOD's population databases. We did not examine whether plume modeling data were being used by VA to determine eligibility for treatment or compensation. In an effort to identify the total costs associated with modeling and related analyses of chemical warfare agent releases during the Gulf War; we interviewed relevant officials and collected cost data from various DOD agencies and DOD contractors who supported the modeling efforts. To determine the extent of British troops' exposure to chemical warfare agent-related releases during the Gulf War, we interviewed British Ministry of Defense (MOD) officials in London and at Porton Down, and reviewed U.K. Ministry of Defense reports concerning the potential effects of exposure to chemical warfare agent-related releases on British forces. We conducted our work from May 2002 through May 2004 in accordance with generally accepted government auditing standards. According to the CIA, modeling is the art and science of using interconnected mathematical equations to predict the activities of an actual event. In this case, modeling was used to determine the direction and extent of the plume from chemical warfare agents. In environmental hazard modeling, simulations recreate or predict the size and path (that is, the direction) of the plume, including the potential hazard area, and potential exposure levels are generated. In addition to identifying the appropriate event to model, modeling requires several components of accurate information: the characteristics or properties of the material that was released and its rate of release (for example, quantity and purity; the vapor pressure; the temperature at which the material burns; particle size; and persistency and toxicity); temporal information (for example, whether chemical agent was initially released during daylight hours, when it might rapidly disperse into the surface air, or at night, when a different set of breakdown and dispersion characteristics would pertain, depending on terrain, plume height, and rate of agent degradation); data that drive meteorological models during the modeled period (for example, temperature, humidity, barometric pressure, dew point, wind velocity and direction at varying altitudes, and other related measures of weather conditions); data from global weather models, to simulate large-scale weather patterns, and from regional and local weather models, to simulate the weather in the area of the chemical agent release and throughout the area of dispersion; and information on the potentially exposed populations, animals, crops, and other assets that may be affected by the agent's release. Various plumes during the 1991 Gulf War were estimated using global- scale meteorological models, such as the National Centers for Environmental Prediction Global Data Assimilation System (GDAS) and the Naval Operational Global Atmospheric Prediction System (NOGAPS). Regional and local weather models were also used, including the Coupled Ocean-Atmosphere Mesoscale Prediction System (COAMPS), the Operational Multiscale Environmental Model with Grid Adaptivity (OMEGA), and the Mesoscale Model Version 5 (MM5). Transport and diffusion models were also used during the 1991 Persian Gulf War plume simulation efforts. These models estimate both the path of a plume and the degree of potential hazard posed by the chemical warfare agents. Dispersion models used during the Gulf War included the Hazard Prediction and Assessment Capability (HPAC) along with its component, the Second-order Closure Integrated Puff (SCIPUFF) model; the Vapor, Liquid, and Solid Tracking (VLSTRACK) model; the Non- Uniform Simple Surface Evaporation (NUSSE) model; and the Atmospheric Dispersion by Particle-in-Cell (ADPIC) model. DOD's conclusion about the extent of U.S. troops' exposure to chemical warfare agents during and immediately after the Gulf War, based upon DOD and CIA plume model estimates, cannot be adequately supported. This is because of uncertainty associated with the source term data and meteorological data. Further, the models themselves are neither sufficiently certain nor precise to draw reasonable conclusions about the size or path (that is, the direction) of the plumes. In particular, we found five reasons to question DOD's conclusion. First, the models DOD and the CIA selected were in house models not fully developed for analyzing long-range dispersion of chemical warfare agents as environmental hazards. DOD and CIA officials selected several in-house models to run plume simulations. For Khamisiyah and the other Iraqi sites selected for examination, DOD selected the COAMPS and OMEGA meteorological models and the HPAC/SCIPUFF and VLSTRACK dispersion models. However, these models were not at the time fully developed for modeling long-range environmental hazards. Second, the assumptions about the source term data used in the models are inaccurate. The source term data DOD used in the modeling for sites at Khamisiyah, as well as Al Muthanna and Muhammadiyat, contain significant unreliable assumptions. DOD and the CIA based assumptions on field testing, intelligence information, imagery, UNSCOM inspections, and Iraqi declarations to UNSCOM. However, these assumptions were based on limited, nonvalidated, and unconfirmed data concerning (1) the nature of the Khamisiyah pit demolition, (2) meteorology, (3) agent purity, (4) amount of agent released, and (5) other chemical warfare agent data. In addition, DOD and the CIA excluded from their modeling efforts many other sites and potential hazards associated with the destruction of binary chemical weapons, vast stores of chemical warfare agent precursor materials, and the potential release of toxic byproducts and chemical warfare agents from other sites. Third, in most of the modeling performed, the plume heights were significantly underestimated. Actual plume height would have been significantly higher than the height DOD estimated in its modeling of demolition operations and bombings. The plume height estimates that the CIA provided for demolition operations at the Khamisiyah pit were 0 to 100 meters. However, neither DOD nor the CIA conducted testing to support estimated plume height associated with the bombings of Al Muthanna, Muhammadiyat, or Ukhaydir. According to DOD modelers, neither plume height nor any other heat or blast effects associated with these bombings were calculated from the models; instead, these data were taken from DOD's Office of the Special Assistant for Gulf War Illnesses. In addition, according to a principal Defense Threat Reduction Agency modeler, DOD's data on plume height were inconsistent with other test data for the types of facilities bombed. Fourth, postwar field testing at the U.S. Army Dugway Proving Ground, in Utah, to estimate the source term data did not realistically simulate the actual conditions of the demolition operations at Khamisiyah or the effects of the bombings at any of the other sites in Iraq. For field testing to be effective, conditions have to be as close to the actual event as possible, but these tests did not provide more definitive data for DOD and CIA's models. The tests did not realistically simulate the conditions of the demolition of 122 mm chemical-filled rockets in Khamisiyah. The simulations took place under conditions that were not comparable with those at Khamisiyah. There were differences in meteorological and soil conditions; the construction material of munitions crates; rocket construction (including the use of concrete-filled pipes as rocket replacements to provide inert filler to simulate larger stacks); and the number of rockets, with far fewer rockets and, therefore, less explosive materials. In addition, in the tests, the agent stimulant used had physical properties different from those of the actual agent. Finally, there are wide divergences--with regard to the size and path of the plume and the extent to which troops were exposed--among the individual models DOD selected. The models DOD used to predict the fallout from Khamisiyah and the other sites showed great divergence, even with the same source term data. While the models' divergences included plume size and paths, DOD made no effort to reconcile them. The IDA expert panel observed that the results were so divergent that it would not be possible to choose the most exposed areas or which U.S. troops might potentially have been exposed. IDA therefore recommended a composite model, which DOD adopted. However, this approach only masked differences in individual model projections with respect to divergences in plume size and path. In addition, DOD chose not to include in the composite model the results of the LLNL simulation, performed at the IDA expert panel's request. The LLNL simulation estimated a larger plume size and different path from DOD's models. The IDA panel regarded the LLNL model as less capable than other models because it modeled atmospheric phenomena with less fidelity. A modeling simulation done by the Air Force Technical Applications Center (AFTAC) also showed significant divergences from DOD's composite model. According to British officials, the MOD did not collect any source term or meteorological data during the 1991 Persian Gulf War. It also did not independently model the plume from Khamisiyah, relying instead on the 1997 DOD and CIA modeling of Khamisiyah. However, according to British MOD officials, they were reassessing the extent of British troops' exposure, based on DOD's revised 2000 remodeling of Khamisiyah. We requested from the British MOD, but did not receive, information on the findings from this reassessment. The MOD also determined that a number of British troops were within the boundary of the plume in the DOD and CIA composite model. The MOD estimated that the total number of British troops potentially exposed was about 9,000 and the total number of troops as "definitely" within the path of the plume, however, was about 3,800. In addition, of 53,500 British troops deployed, at least 44,000 were estimated as "definitely not" within the path of the plume. However, since the MOD relied exclusively on DOD's modeling and since we found that DOD could not know who was and who was not exposed, the MOD cannot know the extent of British troops' exposure. The DOD and CIA were the primary agencies involved in the modeling and analysis of U.S. troops' exposure from the demolition at Khamisiyah and bombing of chemical facilities at Al Muthanna, Muhammadiyat, and Ukhaydir, but several other agencies and contractors also participated. Funding to support the modeling efforts was provided to various DOD agencies and organizations, the military services, and non-DOD agencies and contractors. We collected data on the direct costs these agencies incurred or funds they spent. As shown in table 1, direct costs to the United States for modeling the Gulf War were about $13.7 million. DOD and VA each funded an epidemiological study on chemical warfare agent exposure--DOD's on hospitalization rates and VA's on mortality rates. From the hospitalization study, conducted by DOD researchers, and the mortality study, conducted by VA researchers, on exposed and nonexposed troops, DOD concluded that there was no significant difference in the rates of hospitalization and VA concluded no significant difference in the rates of mortality. These conclusions, however, cannot be supported by the available evidence. These studies contained two inherent weaknesses: (1) flawed criteria for classifying exposure, resulting in classification bias, and (2) an insensitive outcome measure, resulting in outcome bias. In addition, in several other published studies of 1991 Persian Gulf War veterans, suggest an associations between chemical warfare exposure and illnesses and symptoms have been established. In the two epidemiological studies, DOD and VA researchers used DOD's 1997 plume model for determining which troops were under the path of the plume--who were estimated to be exposed--and which troops were not--those who were estimated to be nonexposed. However, this classification is flawed, given the inappropriate criteria for inclusion and exclusion. In the hospitalization study, the DOD researchers included 349,291 Army troops "coded" as being in the Army on February 21, 1991. However, the researchers did not report cutoff dates for inclusion in the study--that is, they did not indicate whether these troops were in the Persian Gulf between January 17, 1991, and March 13, 1991, the period during which the bombings and the Khamisiyah demolition took place. Although we requested this information, DOD researchers failed to provide it. Finally, the total number of 349,291 troops is misleading because many troops left the service soon after returning from the Persian Gulf and therefore would not have been hospitalized after the war in a military hospital--another criterion for inclusion in the study. Moreover, the researchers did not conduct any analyses to determine what number or percentage of those who left active duty were in the exposed or nonexposed group (including uncertain low-dose exposure or estimated subclinical exposure). Given all the methodological problems in this study, it is not possible to accurately estimate the total size or makeup of the exposed and nonexposed population that may have sought or may have been eligible for care leading to military hospitalization. In the mortality study, the VA researchers included 621,902 Gulf War veterans who arrived in the Persian Gulf before March 1, 1991. Troops who left before January 17, 1991--the beginning of the bombing of Iraqi research, production, and storage facilities for chemical warfare agents-- were included in the study. This group was not likely to have been exposed. Therefore, including them resulted in VA's overestimation of the nonexposed group. Troops who came after March 1, 1991--the period during which Khamisiyah demolition took place--were excluded from the VA study. The Defense Manpower Data Center (DMDC) identified 696,000 troops deployed to the Persian Gulf, but the mortality study included only the 621,902 troops deployed there before March 1, 1991. This decision excluded more than 74,000 troops, approximately 11 percent of the total deployed. In addition, 693 troops who were in the exposed group were excluded because identifying data, such as Social Security numbers, did not match the DMDC database. VA researchers did not conduct follow-up analysis to determine whether those who were excluded differed from those who were included in ways that would affect the classification. Hospitalization rates--the outcome measure used in the hospitalization study--were insensitive because they failed to capture the chronic illnesses that 1991 Persian Gulf War veterans commonly report, but that typically do not lead to hospitalization. Studies that rely on this type of outcome as an end point are predetermined to overlook any association between exposure and illness. Based on DOD's 1997 plume model, DOD's hospitalization study compared the rates for 1991 Persian Gulf War veterans who were exposed with the rates for those who were nonexposed. This study included 349,291 active duty Army troops who were deployed to the Persian Gulf. However, DOD researchers did not determine the resulting bias in their analyses, because they did not account for those who left the service. The Institute of Medicine noted that the hospitalization study was limited to Army troops remaining on active duty and to events occurring in military hospitals. Conceivably, those who suffered from Gulf War-related symptoms might leave active duty voluntarily or might take a medical discharge. Hospitalization for this group would be reflected in VA or private sector databases, but not in DOD databases. The health or other characteristics of active duty troops could differ from those of troops who left active duty and were treated in nonmilitary hospitals. Moreover, economic and other factors not related to health are likely to affect the use of nonmilitary hospitals and health care services. This limiting of the study to troops remaining on active duty produced a type of selection bias known as the healthy warrior effect. It strongly biased the study toward finding no excess hospitalization among the active duty Army troops compared with those who left the service after the war. We found some studies that suggest an association between chemical warfare agent exposure and Gulf War illnesses. Each of these studies has both strengths and limitations. In one privately funded study of Gulf War veterans, Haley and colleagues reported an association between a syndromic case definition of Gulf War illnesses, based upon the ill veterans' symptomatic complaints, with exposure to chemical warfare agents. Factor analysis of the data on symptoms was used to derive a case definition identifying six syndrome factors. Three syndrome factor variants found to be the most significant were (1) impaired cognition, (2) confusion-ataxia, and (3) arthro-myo-neuropathy. In evaluating the plume models used, the results from the DOD and CIA modeling can never be definitive. Plume models can allow only estimates of what happens when chemical warfare agents are released in the environment. Such estimates are based on mathematical equations, which are used to predict an actual event--in this case, the direction and extent of the plume. However, in order to predict precisely what happens, one needs to have accurate data on relative to both source term and meteorological conditions. DOD had neither of these. Given the unreliability of the input data, the lack of individual troop location information, and the widely divergent results of the simulations conducted based on varying models, DOD's analyses cannot adequately estimate the extent of U.S. troops' exposure to chemical warfare agents and other related releases. In particular, the models selected were not fully developed for projecting long-range environmental fallout, and the assumptions used to provide the source term data were inaccurate or flawed. Even when models with the same source term data were used, the results diverged. In addition, the models did not include many potential exposure events and exposures to some key materials--for example, binary chemical weapons, mustard agent combustion by-products, and chemical warfare agent precursor materials. It is likely that if models were more fully developed and more credible data for source term and meteorological conditions were included in them, particularly with respect to plume height as well as level and duration of exposure, the hazard area would be much larger and most likely would cover most of the areas where U.S. troops and Coalition forces were deployed. However, given the lack of verifiable data for analyses, it is unlikely that any further modeling efforts would be more accurate or helpful. The results of DOD's modeling efforts were, nonetheless, used in epidemiological studies to determine the troops' chemical warfare agent exposure classification--i.e., exposed versus nonexposed. As we noted in 1997, to ascertain the causes of veterans' illnesses, it is imperative that investigators have valid and reliable data on exposure, especially for low- level or intermittent exposures to chemical warfare agents. To the extent that veterans are misclassified as to exposure, relationships will be obscured and conclusions misleading. In addition, DOD combined the results of individual models that showed smaller plume size and ignored the results of the LLNL which showed much larger plume size and divergent plume path. Given the uncertainties in source term data and divergences in model results, DOD cannot determine or estimate--with any degree of certainty--the size and path of the plumes or who was or who was not exposed. In our report, we are recommending that the Secretary of Defense and the Secretary of Veterans Affairs not use the plume-modeling data for future epidemiological studies of the 1991 Gulf War, since VA and DOD cannot know from the flawed plume modeling who was and who was not exposed. We are also recommending that the Secretary of Defense require no further plume-modeling of Khamisiyah and the other sites bombed during the 1991 Persian Gulf War in order to determine troops' exposure. Given the uncertainties in the source term and meteorological data, additional modeling of the various sites bombed would most likely result in additional cost, while still not providing DOD with any definitive data on estimating who was or was not exposed. We obtained comments on a draft of this report from VA, DOD, and CIA. VA concurred with the recommendation that VA and DOD not use the plume-modeling data for future epidemiological studies, since VA and DOD cannot know from the flawed plume modeling who was and who was not exposed. DOD did not concur with the recommendation, indicating that to them it called for a blanket prohibition of plume modeling in the future, where the limitations of the 1991 Gulf War may not apply. The intent of our recommendation is only directed at epidemiological studies involving the DOD and CIA plume modeling data from the 1991 Gulf War and not a blanket prohibition of plume modeling in the future. We have clarified the recommendation along these lines. DOD concurred with our second recommendation, indicating that despite enhancements in the models, uncertainties will remain. CIA did not concur with our report, indicating that it could not complete its review in the time allotted. If you or your staff have any questions about this testimony or would like additional information, please contact me at (202) 512-6412 or Sushil Sharma, Ph.D., Dr.PH., at (202) 512-3460. We can also be reached by e-mail at [email protected] and [email protected]. Individuals who made key contributions to this testimony were Venkareddy Chennareddy, Susan Conlon, Neil Doherty, Jason Fong, Penny Pickett, Laurel Rabin, and Katherine Raheb. James J. Tuite III, a GAO consultant, provided technical expertise. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Since the end of the Gulf War in 1991, many of the approximately 700,000 U.S. veterans have experienced undiagnosed illnesses. They attribute these illnesses to exposure to chemical warfare (CW) agents in plumes--clouds released from bombing of Iraqi sites. But in 2000, the Department of Defense (DOD) estimated that of the 700,000 veterans, 101,752 troops were potentially exposed. GAO was asked to evaluate the validity of DOD, the Department of Veterans Affairs (VA), and British Ministry of Defense (MOD) conclusions about troops' exposure. DOD's and MOD's conclusion about troops' exposure to CW agents, based on DOD and CIA plume modeling, cannot be adequately supported. The models were not fully developed for analyzing long-range dispersion of CW agents as an environmental hazard. The modeling assumptions as to source term data--quantity and purity of the agent--were inaccurate because they were uncertain, incomplete, and nonvalidated. The plume heights used in the modeling were underestimated and so were the hazard area. Postwar field testing used to estimate the source term did not realistically simulate the actual conditions of bombings or demolitions. Finally, the results of all models--DOD and non-DOD models--showed wide divergences as to the plume size and path. DOD's and VA's conclusion about no association between exposure to CW agents and rates of hospitalization and mortality, based on two epidemiological studies conducted and funded by DOD and VA, also cannot be adequately supported because of study weaknesses. In both studies, flawed criteria--DOD's plume model and DOD's estimation of potentially exposed troops based on this model--were used to determine exposure. This may have resulted in large-scale misclassification. Troops under the path of the plume were classified as exposed; those not under the path, as nonexposed. But troops classified as not exposed under one DOD model could be classified as exposed under another DOD model. Under non-DOD models, however, a larger number of troops could be classified as exposed. Finally, as an outcome measure, hospitalization rate failed to capture the types of chronic illnesses that Gulf War veterans report but that typically do not lead to hospitalization.
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Individuals who are eligible for Medicare automatically receive Hospital Insurance (HI), known as part A, which helps pay for inpatient hospital, skilled nursing facility, hospice, and certain home health care services. Beneficiaries pay no premium for this coverage but are liable for required deductibles, coinsurance, and copayment amounts. (See table 1.) Medicare eligible beneficiaries may elect to purchase Supplementary Medical Insurance (SMI), known as part B, which helps pay for selected physician, outpatient hospital, laboratory, and other services. Beneficiaries must pay a premium for part B coverage, currently $50 per month. Beneficiaries are also responsible for part B deductibles, coinsurance, and copayments. Most Medicare beneficiaries have some type of supplemental coverage to help pay for Medicare cost-sharing requirements as well as some benefits not covered by Medicare. They obtain this coverage either through employers, Medicare+Choice plans, state Medicaid programs, or Medigap policies sold by private insurers. About one-third of Medicare's 39 million beneficiaries have employer- sponsored supplemental coverage. These benefits typically pay for some or all of the costs not covered by Medicare, such as coinsurance, deductibles, and prescription drugs. However, many beneficiaries do not have access to employer-sponsored coverage. A recent survey found that more than 70 percent of large employers with at least 500 employees did not offer these health benefits to Medicare-eligible retirees. Small employers are even less likely to offer retiree health benefits. Approximately 15 percent of Medicare beneficiaries enroll in Medicare+Choice plans, which include health maintenance organizations and other private insurers who are paid a set amount each month to provide all Medicare-covered services. These plans typically offer lower cost-sharing requirements and additional benefits compared to Medicare's traditional fee-for-service program, in exchange for a restricted choice of providers. However, Medicare+Choice plans are not available in all parts of the country. As of February 2001, about a third of all beneficiaries lived in counties where no Medicare+Choice plans were offered. About 17 percent of Medicare beneficiaries receive assistance from Medicaid, the federal-state health financing program for low-income aged and disabled individuals. All Medicare beneficiaries with incomes below the federal poverty level can have their Medicare premiums and cost sharing paid for by Medicaid. Beneficiaries with incomes slightly above the poverty level may have all or part of their Medicare premium paid for by Medicaid. Also, some low-income individuals may be entitled to full Medicaid benefits (so called "dual eligibles"), which include coverage for certain services not available through Medicare, such as outpatient prescription drugs. However, the income level at which beneficiaries qualify for full Medicaid benefits varies, as determined by each state, and many Medicare beneficiaries with low incomes may not qualify. Medigap is the only supplemental coverage option available to all beneficiaries when they initially enroll in Medicare at age 65 or older. Medigap policies are offered by private insurance companies in accordance with state and federal insurance regulations. In 1999, more than 10 million individuals--more than one-fourth of all beneficiaries-- were covered by Medigap policies. The Omnibus Budget Reconciliation Act (OBRA) of 1990 required that Medigap policies be standardized and allowed a maximum of 10 different benefit packages offering varying levels of supplemental coverage to be provided. All policies sold since July 31, 1992 have offered one of the 10 standardized packages, known as plans A through J. (See table 2.) Policies sold prior to this time were not required to comply with the standard benefit package requirements. Under OBRA 1990, Medicare beneficiaries are guaranteed access to Medigap policies within 6 months of enrolling in part B regardless of their health status. Subsequent laws have added guarantees for certain other beneficiaries. Beneficiaries who enrolled in a Medicare+Choice plan when first becoming eligible for Medicare and then leave the plan within one year are also guaranteed access to any Medigap policy; those who terminated their Medigap policy to join a Medicare+Choice plan can return to their previous policy or, if the original policy is not available, be guaranteed access to plans A, B, C, or F. Also, individuals whose employers eliminate retiree benefits or whose Medicare+Choice plans leave the program or stop serving their areas are guaranteed access to these 4 standardized Medigap policies. However, none of these 4 guaranteed policies include prescription drug coverage. Otherwise, insurers can either deny coverage or charge higher premiums to beneficiaries who are older or in poorer health. Medicare's design has changed little since its inception 35 years ago, and in many ways has not kept pace with changing health care needs and private sector insurance practices. Medicare cost-sharing requirements are not well designed to discourage unnecessary use of services. At the same time, they can create financial barriers to care. In addition, the lack of a cost-sharing limit can leave some beneficiaries with extensive health care needs liable for very large Medicare expenses. Moreover, gaps in Medicare's benefit package can contribute to substantial financial burdens on beneficiaries who lack supplemental insurance or Medicaid coverage. Health insurers commonly design cost-sharing provisions--in the form of deductibles, coinsurance, and copayments--to ensure that beneficiaries are aware there is a cost associated with the provision of services and to encourage them to use services prudently. Ideally, cost sharing should encourage beneficiaries to evaluate the need for discretionary care but not discourage necessary care. Optimal cost-sharing designs would generally require coinsurance or copayments for services that may be discretionary and could potentially be overused, and would also aim to steer patients to lower cost or better treatment options. Care must be taken, however, to avoid setting cost-sharing amounts so high as to create financial barriers to necessary care. The benefit packages of Medicare+Choice plans illustrate cost-sharing arrangements that have been designed to reinforce cost containment and treatment goals. Most Medicare+Choice plans charge a small copayment for physician visits ($10 or less) and emergency room services (less than $50). Relatively few Medicare+Choice plans charge copayments for hospital admissions. Plans that offer prescription drug benefits typically design cost-sharing provisions that encourage beneficiaries to use cheaper generic drugs or brand name drugs for which the plan has negotiated a discount. Medicare fee-for-service cost-sharing rules diverge from these common insurance industry practices in important ways. For example, as indicated in table 1, Medicare imposes a relatively high deductible for hospital admissions, which are rarely optional. In contrast, Medicare requires no cost sharing for home health care services, even though historically high utilization growth and wide geographic disparities in the use of such services have raised concerns about the potentially discretionary nature of some services. Medicare also has not increased the part B deductible since 1991. For the last 10 years the deductible has remained constant at $100 and has thus steadily decreased as a proportion of beneficiaries' real income. Also unlike most employer-sponsored plans for active workers, Medicare does not limit beneficiaries' cost-sharing liability, which can represent a significant share of their personal resources. Premiums, deductibles, coinsurance, and copayments that beneficiaries are required to pay for services that Medicare covers equaled an estimated 23 percent of total Medicare expenditures in 2000. The average beneficiary who obtained services in 1997 had a total liability of $1,451, consisting of $925 in Medicare copayments and deductibles in addition to the $526 in annual part B premiums required that year. The burden of Medicare cost sharing can be much higher, however, for beneficiaries with extensive health care needs. In 1997, the most current year of available data on the distribution of these costs, slightly more than 3.4 million beneficiaries (11.4 percent of beneficiaries who obtained services) were liable for more than $2,000. Approximately 750,000 of these beneficiaries (2.5 percent) were liable for more than $5,000, and about 173,000 beneficiaries (0.6 percent) were liable for more than $10,000. In contrast, private employer-sponsored health plans typically limit maximum annual out-of-pocket costs for covered services to less than $2,000 per year for single coverage. Medicare does not cover some services that are commonly included in private insurers' benefit packages. The most notable omission in Medicare's benefit package is coverage for outpatient prescription drugs. This benefit is available to most active workers enrolled in employer- sponsored plans. More than 95 percent of private employer-sponsored health plans for active workers cover prescription drugs, typically providing comprehensive coverage with relatively low cost-sharing requirements. Current estimates suggest that the combination of Medicare's cost-sharing requirements and limited benefits leaves about 45 percent of beneficiaries' health care costs uncovered. The average beneficiary in 2000 is estimated to have incurred about $3,100 in out-of-pocket expenses for health care-- an amount equal to about 22 percent of the average beneficiary's income. Some beneficiaries potentially face much greater financial burdens for health care expenses. For example, elderly beneficiaries in poor health and with no Medicaid or supplemental insurance coverage are estimated to have spent 44 percent of their incomes on health care in 2000. Low- income single women over age 85 in poor health and not covered by Medicaid are estimated to have spent more than half (about 52 percent) of their incomes on health care services. These percentages are expected to increase over time as Medicare premiums and costs for prescription drugs and other health care goods and services rise faster than incomes. While more than one-fourth of beneficiaries have Medigap policies to fill Medicare coverage gaps, these policies can be expensive and provide only limited protection from catastrophic expenses. Medigap drug coverage in particular offers only limited protection because of high cost sharing and low coverage caps. More than 10 million Medicare beneficiaries have Medigap policies to cover some potentially high costs that Medicare does not pay, including cost-sharing requirements, extended hospitalizations, and some prescription drug expenses. By offering a choice among standardized plans, beneficiaries can match their coverage needs and financial resources with plan coverage. Medigap policies are widely available to beneficiaries including those who are not eligible for or do not have access to other insurance to supplement Medicare, such as Medicaid or employer- sponsored retiree benefits. In fact, most Medicare beneficiaries who do not otherwise have employer-sponsored supplemental coverage, Medicaid, or Medicare+Choice plans purchase a Medigap policy, demonstrating the value of this coverage to the Medicare population. Medigap policies can be expensive. The average annual Medigap premium was more than $1,300 in 1999. Premiums varied widely based on the level of coverage purchased. Plan A, which provides the fewest benefits, was the least expensive with average premiums paid of nearly $900 per year. The most popular plans--C and F--had average premiums paid of about $1,200. The most comprehensive plans--I and J--were the most expensive, with average premiums around $1,700. (See table 3.) Premiums also vary widely across geographic areas and insurers. For example, average annual premiums in Massachusetts ($1,915) were 45 percent higher than the national average. While varying average premiums may reflect geographic differences in terms of use of Medicare and supplemental services and costs, beneficiaries in the same state may face widely varying premiums for a given plan type offered by different insurers. For example, in Nevada, plan A premiums for a 65-year-old ranged from $446 to as much as $1,004, depending on the insurer. Similarly, in Florida, plan F premiums for a 65-year-old male ranged from $1,548 to $2,123; and in Maine, plan J premiums ranged from $2,697 to $3,612. Medigap policies are becoming more expensive. One recent study reports that premiums for the three Medigap plan types offering prescription drug coverage (H, I, and J) have increased the most rapidly--by 17 to 34 percent in 2000. Medigap plans without prescription drug coverage rose by 4 to 10 percent in 2000. A major reason premiums are high is that a large share of premium dollars are used for administrative costs rather than benefits. More than 20 cents from each Medigap premium dollar is spent for costs other than medical expenses, including administration. Administrative costs are high, in part, because nearly three-quarters of policies are sold to individuals rather than groups. The share of premiums spent on benefits varies significantly among carriers. The 15 largest sellers of Medigap policies spent between 64 and 88 percent of premiums on benefits in 1999. The share of premiums spent on benefits is lower for Medigap plans than either typical Medicare+Choice plans or health benefits for employees of large employers. Also, 98 percent of Medicare fee-for-service funds are used for benefits. While Medigap policies cover some costs beneficiaries would otherwise pay out of pocket, Medigap policies have limits and can still leave beneficiaries exposed to significant out-of-pocket costs. Medigap prescription drug coverage in particular leaves beneficiaries exposed to substantial financial liability. Prescription drugs are of growing importance in medical treatment and one of the fastest growing components of health care costs. Medigap policies with a drug benefit are the most expensive yet the benefit offered can be of limited value to many beneficiaries. For example, Medigap policies offering drug coverage typically cost much more than policies without drug coverage--the most popular plan with prescription drug coverage (plan J) costs on average $450 more than the most popular plan without drug coverage (plan F)--although the benefit is at most $1,250 or $3,000, depending on plan type, and under the Medigap plan with the most comprehensive drug coverage, type J, a beneficiary would have to incur $6,250 in prescription drug costs to get the full $3,000 benefit, because of the plan's deductible and coinsurance requirements. The high cost and limited benefit may explain why more than 90 percent of beneficiaries with one of the standardized Medigap plans purchased standard Medigap plans that do not include drug benefits. Further, Medicare beneficiaries who do not purchase Medigap policies when they initially enroll in part B at age 65 or older are not guaranteed access to the Medigap policies with prescription drug coverage in most states. Insurers may then either deny coverage or charge higher premiums, especially to Medicare beneficiaries with any adverse health conditions. The Medigap standard prescription drug benefit differs greatly from that typically offered by employer-sponsored plans for active employees or Medicare-eligible retirees. The Medigap prescription drug benefit has a $250 deductible, requires 50 percent coinsurance, and is limited to $1,250 or $3,000 depending on the plan purchased. In contrast, employer- sponsored plans typically require small copayments of $8 to $20 or coinsurance of about 20 to 25 percent, depending on whether the enrollees purchase generic brands, those for which the plan has negotiated a price discount, or other drugs. Further, few employer-sponsored health plans have separate deductibles or maximum annual benefits for prescription drugs. These plans may also offer enrollees access to discounted prices the plans have negotiated even when the beneficiary is paying the entire cost. Even though Medicare's original design has been criticized as outmoded, it included various cost-sharing requirements intended to encourage prudent use of services. These requirements have also traditionally been features of private insurance. However, Medigap's first-dollar coverage--the elimination of any deductibles or coinsurance associated with the use of specific services--undermines this objective. All standard Medigap plans cover hospital and physician coinsurance, while nearly all beneficiaries with standardized Medigap plans purchase plans covering the full hospital deductible, and most purchase plans covering the full skilled nursing home coinsurance and part B deductible. First-dollar coverage reduces financial barriers to health care, but it also diminishes beneficiaries' sensitivity to costs and could thus increase unnecessary service utilization and total Medicare program costs. A substantial body of research clearly indicates that Medicare spends more on beneficiaries with supplemental insurance relative to beneficiaries who have Medicare coverage only. For example, an analysis of 1993 and 1995 data found that Medicare per capita expenditures for beneficiaries with Medigap insurance were from $1,000 to $1,400 higher than for beneficiaries with Medicare only. Medicare per capita spending on beneficiaries with employer-sponsored plans was $700 to $900 higher than for beneficiaries with Medicare only. Some evidence suggests that first-dollar, or near first-dollar, coverage may partially be responsible for the higher spending. For example, one study found that beneficiaries with Medigap insurance use 28 percent more medical services (outpatient visits and inpatient hospital days) relative to beneficiaries who did not have supplemental insurance, but were otherwise similar in terms of age, sex, income, education, and health status. Service use among beneficiaries with employer-sponsored supplemental insurance (which often reduces, but does not eliminate, cost sharing) was approximately 17 percent higher than the service use of beneficiaries with Medicare coverage only. Unlike Medigap policies, employer-sponsored supplemental insurance policies and Medicare+Choice plans typically reduce beneficiaries' financial liabilities but do not offer first-dollar coverage. Although there is a wide variety in design of employer-sponsored insurance plans, many retain cost-sharing provisions. Medicare+Choice plans also typically require copayments for most services. Moreover, unlike the traditional fee- for-service program, Medicare+Choice plans require referrals or prior authorization for certain services to minimize unnecessary utilization.
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Medicare provides valuable and extensive health care coverage for beneficiaries. Nevertheless, significant gaps leave some beneficiaries vulnerable to sizeable financial burdens from out-of-pocket expenses. Medigap is a widely available source of supplemental coverage. This testimony discusses (1) beneficiaries' potential financial liability under Medicare's current benefit structure and cost-sharing requirements, (2) the cost of Medigap policies and the extent to which they provide additional coverage, and (3) concerns that Medigap's so-called "first dollar" coverage undermines the cost control incentives of Medicare's cost-sharing requirements. GAO found that Medicare's benefits package and cost-sharing requirements leave beneficiaries liable for high out-of-pocket costs. Medigap policies pay for some or all Medicare cost-sharing requirements but do not fully protect beneficiaries from potentially significant out-of-pocket costs such as prescription drug coverage. Medigap first-dollar coverage eliminates the ability of Medicare's cost-sharing requirements to promote prudent use of services.
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Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to discuss the results of our review of the Credit Research Center (the Center) report on personal bankruptcy debtors' ability to pay their debts and share with you our observations on the February 1998 Ernst & Young report that also examines debtors' ability to pay. Both reports represent a useful first step in addressing a major public policy issue--whether some proportion of those debtors who file for personal bankruptcy under chapter 7 of the bankruptcy code have sufficient income, after expenses, to pay a "substantial" portion of their outstanding debts. On February 9, 1998, we reported the results of our more extensive review of the Center report and selected data to the Chairman and Ranking Minority Member of the Subcommittee on Administrative Oversight and the Courts, Senate Committee on the Judiciary. Debtors who file for personal bankruptcy usually file under chapter 7 or chapter 13 of the bankruptcy code. Generally, debtors who file under chapter 7 of the bankruptcy code seek a discharge of all their eligible dischargeable debts. Debtors who file under chapter 13 submit a repayment plan, which must be confirmed by the bankruptcy court, for paying all or a portion of their debts over a 3-year period unless for cause the court approves a period not to exceed 5 years. report concluded, however, that no one explanation is likely to capture the variety of reasons that families fail and file for bankruptcy. Nor is there agreement on (1) the number of debtors who seek relief through the bankruptcy process who have the ability to pay at least some of their debts and (2) the amount of debt such debtors could repay. One reason for the lack of agreement is that there is little reliable data on which to assess such important questions as the extent to which debtors have an ability to pay their eligible dischargeable debts; the amount and types of debts that debtors have voluntarily repaid under chapters 7 and 13; the characteristics of chapter 13 repayment plans that were and were not successfully completed; and the reasons for the variations among bankruptcy districts in such measures as the percentage of chapter 13 repayment plans that were successfully completed. Several bills have been introduced in Congress that would implement some form of "needs-based" bankruptcy. These include S.1301, H.R. 2500, and H.R. 3150. All of these bills include provisions for determining when a debtor could be required to file under chapter 13, rather than chapter 7. Currently, the debtor generally determines whether to file under chapter 7 or chapter 13. Each bill would generally establish a "needs-based" test, whose specific provisions vary among the bills, that would require a debtor to file under chapter 13 if the debtor's net income after allowable expenses would be sufficient to pay about 20 percent of the debtor's unsecured nonpriority debt over a 5-year period. If the debtor were determined to be unable to pay at least 20 percent of his or her unsecured nonpriority debt over 5 years, the debtor could file under chapter 7 and have his or her eligible debts discharged. Another bill, H.R. 3146, focuses largely on changes to the existing "substantial abuse" provisions under section 707(b) of the bankruptcy code as the means of identifying debtors who should be required to file under chapter 13 rather than chapter 7. The Center report and Ernst & Young reports attempted to estimate (1) how many debtors who filed for chapter 7 may have had sufficient income, after expenses, to repay at "a substantial portion" of their debts and (2) what proportion of their debts could potentially be repaid. The Center report was based on data from 3,798 personal bankruptcy petitions filed principally in May and June 1996 in 13 of the more than 180 bankruptcy court locations. The petitions included 2,441 chapter 7 and 1,357 chapter 13 petitions. On the basis of the Center report's assumptions and the formula used to determine income available for repayment of nonpriority, nonhousing debt, the report estimated that 5 percent of the chapter 7 debtors in the 13 locations combined could, after expenses, repay all of their nonpriority, nonhousing debt over 5 years; 10 percent could repay at least 78 percent; and 25 percent could repay at least 30 percent. The Center report also estimated that about 11 percent of chapter 13 debtors and about 56 percent of chapter 7 debtors were expected to have no income available to repay nonhousing debts. Ernst & Young's report was based on a sample of 5,722 chapter 7 petitions in four cities--Los Angeles, Chicago, Boston, and Nashville--that were filed mainly in 1992 and 1993. Ernst & Young concluded that, under the needs-based provisions of H.R. 3150, from 8 to 14 percent (average 12 percent) of the chapter 7 filers in these four cities would have been required to file under chapter 13 rather than chapter 7, and could have repaid 63 to 85 percent (average 74 percent) of their unsecured nonpriority debts over a 5 year repayment period. The report concluded that its findings corroborated the Center report's findings that "a sizeable minority of chapter 7 debtors could make a significant contribution toward repayment of their non-housing debt over a 5-year period." discussed our observations about the report with the Ernst & Young study author. It is important to note that the findings of both the Center report and Ernst & Young report rest on fundamental assumptions that have not been validated. Both studies share two fundamental assumptions: (1) that the information found on debtors' initial schedules of estimated income, estimated expenses, and debts was accurate; and (2) that this information could be used to satisfactorily forecast debtors' income and expenses for a 5-year period. These assumptions have been the subject of considerable debate, and the researchers did not test their validity. With regard to the first assumption, the accuracy of the data in bankruptcy petitioners' initial schedules of estimated income, estimated expenses, and debts is unknown. Both reports assumed that the data in these schedules are accurate. However, both reports also stated that to the extent the data in the schedules were not accurate, the data would probably understate the income debtors have available for debt repayment. This reflected the researchers' shared belief that debtors have an incentive in the bankruptcy process to understate income, overstate expenses, and thereby understate their net income available for debt repayment. However, there have been no studies to validate this belief. It is plausible that, to the extent there are errors in the schedules, debtors could report information that would have the effect of either overstating or understating their capacity to repay their debts, with a net unknown bias in the aggregate data reported by all debtors. One cause of such errors could be that the schedules are not easily interpreted by debtors who proceed without legal assistance. In Los Angeles, a location whose data contributed significantly to the findings of both reports, Center data showed that about one-third of debtors reported they had not used a lawyer. repayment. Neither report allowed for situations in which the debtor's income decreases or expenses increase during the 5-year period. Past experience suggest that not all future chapter 13 debtors will successfully complete their repayment plans. To the extent this occurs, it would reduce the amount of debt that future debtors repay under required chapter 13 repayment plans. A 1994 report by the Administrative Office of the U.S. Courts found that only about 36 percent of the 953,180 chapter 13 cases terminated during a 10-year period ending September 30, 1993, had been successfully completed. The remaining 64 percent were either dismissed or converted to chapter 7 liquidation, in which all eligible debts were discharged. The reasons for this low completion rate are unknown, but this illustrates the high level of discrepancy between the amount that debtors could potentially repay, based on the data and assumptions used in the two reports, and what has occurred over a 10-year period. Another assumption made in both reports is that 100 percent of debtors' income available for debt repayment will be used to repay debt for a 5-year period. This assumption does not reflect actual bankruptcy practice. Chapter 13 repayment plans require greater administrative oversight, and thus cost more than chapter 7 cases, including periodic review of the debtors progress in implementing the plan and review of debtors' or creditors' requests to alter the plan. In fiscal year 1996, for example, creditors received about 86 percent of chapter 13 debtor payments. The remaining 14 percent of chapter 13 debtor payments were used to pay administrative costs, such as statutory trustee fees and debtor attorneys' fees. Neither study addressed the additional costs for judges and administrative support requirements that would be borne by the government should more debtors file under chapter 13. nation as a whole or of each location for the year from which the samples were drawn. Therefore, the data on which the reports were based may not reflect all bankruptcy filings nationally or in each of the 15 locations for the years from which the petitions were drawn. One difference between the two reports involves the calculation of debtor expenses. The Center's estimates of debtor repayment capacity are based on the data reported in debtors' initial schedules of estimated income, estimated expenses, and debts. The Center report calculated debtor expenses using the data reported on debtors' estimated income and estimated expense schedules. The Ernst & Young report, whose purpose was to estimate the effect of implementing the provisions of H.R. 3150, adjusted debtors' expenses using the provisions of H.R. 3150. Following these provisions, Ernst & Young used the expenses debtors reported on their schedules of estimated expenses for alimony payments, mortgage debt payments, charitable expenses, child care, and medical expenses. For all other expenses, including transportation and rent, Ernst & Young used Internal Revenue Service (IRS) standard expense allowances, based on both family size and geographic location. The impact of these adjustments on debtors' reported expenses was not discussed in the report. However, to the extent these adjustments lowered debtors expenses, they would have increased the report's estimates of debtors' repayment capacity when compared to the methodology used in the Center report. To the extent the adjustments increased debtors' reported expenses, they would have decreased the report's estimates of debtor repayment capacity. Also, to the extent that these adjustments reduced debtors' reported expenses, the adjustments would have corrected, at least in part, for what the report assumed was debtors' probable overstatement of expenses on their schedules of estimated expenses. pay. Conversely, to the extent that actual family size was smaller than these averages, the report overstated allowable expenses, and thus understated the debtors' ability to pay. A third difference between the reports involves assumptions about repayment of secured, nonhousing debt. The Center report assumed that debtors would continue payments on their mortgage debt and pay their unsecured priority debt. Unlike the Center report, the Ernst & Young report appears to have assumed that debtors will repay, over a 5-year period, all of their secured nonhousing debt and all of their unsecured priority debt. The purpose of this assumption was to estimate the amount of unsecured nonpriority debt that debtors' could potentially repay after paying their secured nonhousing debt and unsecured priority debt. On March 10, 1998 we received an Ernst & Young report that used a national sample of chapter 7 petitions from calendar year 1997 to estimate debtors' ability to pay. Although we have not had an opportunity to examine this report in detail, the report appears to have addressed many of the sampling issues we raised regarding the Center report and February 1998 Ernst & Young report. However, the March 1998 Ernst & Young report shares the fundamental unvalidated assumptions of the Credit Center report and the February 1998 Ernst & Young report. These assumptions include (1) the data reported on debtors' schedules of estimated income, estimated expenses, and debts are accurate; (2) the data in these schedules can be used to satisfactorily forecast debtors' income and expenses for a 5-year period; (3) that 100 percent of debtors' net income after expenses, as determined in the report, will be used for debt repayment over a 5-year repayment period; and (4) that all debtors will satisfactorily complete their 5-year repayment plans. or less than the estimates in these two studies. Similarly, the amount of debt these debtors could potentially repay could also be more or less than the reports estimated. Finally, although the March 1998 Ernst & Young report is based on what is apparently a national representative sample of chapter 7 petitions, to the extent that the report is based on the same basic data (petitioners financial schedules) and assumptions as the Center report and the February 1998 Ernst & Young report, it shares the same limitations as these two earlier reports. This concludes my prepared statement, Mr. Chairman. I would be pleased to answer any questions you or other members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed the results of its review of the Credit Research Center report on personal bankruptcy debtors' ability to pay their debts and observations on the February 1998 Ernst & Young report that also examines debtors' ability to pay. GAO noted that: (1) both studies share two fundamental assumptions that: (a) the information found in debtors' initial schedules of estimated income, estimated expenses, and debts is accurate; and (b) this information could be used to satisfactorily forecast debtors' income and expenses for a 5-year period; (2) these assumptions have been subject of considerable debate, and the researchers did not test their validity; (3) with regard to the first assumption, the accuracy of the data in bankruptcy petitioners' initial schedules of estimated income, estimated expenses, and debt is unknown; (4) however, both reports also stated that to the extent the data in the schedules were not accurate, the data would probably understate the income debtors have available for debt repayment; (5) with regard to the second assumption, there is also no empirical basis for assuming that debtors' income and expenses, as stated in their initial schedules, would remain stable for a 5-year period following the filing of their bankruptcy petitions; (6) these two assumption--debtors' income and expenses remain stable and all repayment plans would be successfully completed--could result in a somewhat optimistic estimate of debt repayment; (7) neither report allowed for situations in which the debtor's income decreases or expenses increase during the 5-year period; (8) one difference between the two reports involve the calculation of debtor expenses; (9) a second difference between the two reports involves the calculation of mortgage debt and family size; (10) a third difference between the reports involves assumptions about repayment of secured, nonhousing debt; (11) on March 10, 1998, GAO received an Ernst & Young report that used a national sample of chapter 7 petitions from calendar year 1997 to estimate debtors' ability to pay; (12) the report appears to have addressed many of the sampling issues GAO raised regarding the Center report and February 1998 Ernst & Young report; and (13) however, the March 1998 Ernst & Young report shares the fundamental unvalidated assumptions of the Credit Center report and the February 1998 Ernst & Young report.
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Commercial airlines normally carry commercial insurance to cover losses caused by such things as mechanical failure, weather, and pilot error. In addition, they carry war-risk insurance to cover losses resulting from war, terrorism, or other hostile acts. Commercial war-risk insurance, however, can be canceled or restricted in the event of a major war, its geographical coverage can be restricted, and its rates can be raised without limit. Therefore, to provide the insurance necessary to enable air commerce to continue in the event of war, the Aviation Insurance Program was established in 1951. The program authorized FAA to provide war-risk insurance for those commercial aircraft operations deemed essential to the foreign policy of the United States when such insurance is not available commercially or is available only on unreasonable terms. In 1977, the Congress authorized the program to provide aviation insurance due to any risk, not just war risk, under the above conditions. To date FAA has issued only war-risk insurance. The fundamental premise underlying the program, according to FAA, is that the government should not provide insurance on a regular or routine basis; rather, the government should be the insurer of last resort. Consequently, FAA is not statutorily required to issue insurance to air carriers. Rather, FAA may issue aviation insurance only when certain conditions are met: (1) The President must determine that the continuation of specified air services, whether American or foreign flag, is necessary to carry out the foreign policy of the United States and (2) the Administrator of the FAA must find that insurance for the particular operation cannot be obtained on reasonable terms from the commercial insurance market. FAA issues two types of aviation insurance: nonpremium and premium. FAA issues nonpremium insurance for airlines performing contract services for federal agencies that have indemnification agreements with the Department of Transportation (DOT). Under the indemnification agreements, the federal agencies that contract for aircraft reimburse FAA for the insurance claims it pays to the airlines. This insurance is provided at no cost to the airlines, except for a one-time registration fee of $200 per aircraft. At present, only DOD and the State Department have such indemnification agreements with DOT. Nonpremium insurance accounts for about 99 percent of the aviation insurance issued by FAA. Since 1975, about 5,400 flights have been covered. For example, in 1990 and 1991, during Operation Desert Storm/Shield, FAA issued nonpremium insurance for over 5,000 flights of commercial airlines that provided airlift services as part of the Civil Reserve Air Fleet (CRAF).The commercial insurers had canceled war-risk coverage for those airlines that had clauses in their policies excluding CRAF activities. In addition to the CRAF program, the commercial air carriers insured under the program have flown many other important airlift missions for the United States, such as 111 flights to Tuzla, Bosnia, in 1996. For other regularly scheduled commercial or charter service, FAA issues premium insurance. With premium insurance, airlines pay premiums commensurate with the risks involved, and FAA assumes the financial liability for claims. As a condition for obtaining premium insurance, the aircraft must be operating in foreign air commerce, or between two or more points both of which are outside of the United States. In total FAA has provided this insurance for 67 flights since 1975. For example, FAA provided premium insurance in 1991 for flights operated by Tower Air to evacuate U.S. citizens from Tel Aviv. Both forms of FAA's insurance cover loss of or damage to the aircraft (hull insurance), along with coverage for bodily injury or death, property damage, and baggage and personal effects (liability coverage). The maximum amount of hull and liability coverage that FAA provides under its policies is limited to the amounts insured by an airline's commercial policy. The program is self-financed through the Aviation Insurance Revolving Fund (the Fund). Moneys deposited into the Fund to pay claims are generated from insurance premiums, the one-time registration fee charged for nonpremium insurance, and interest on investments in U.S. Treasury securities. From fiscal year 1959 through March 1997, the Fund accumulated approximately $65 million in revenues and paid out net claims totaling only about $151,000. Appendix I summarizes the major attributes of the program. In 1994, we reported that the Fund's balance was insufficient to pay many potential claims and that delays in the payment of claims could cause a financial hardship for affected airlines. Since then, however, the National Defense Authorization Act for Fiscal Year 1997 (P.L. 104-201) has addressed these problems for DOD-sponsored flights. When we reported on this issue in 1994, about 20 percent of the aircraft registered for nonpremium insurance had hull values--the value of the aircraft itself--that exceeded the Fund's balance of $56 million. According to FAA's most currently available information, about 15 percent of the aircraft registered for nonpremium insurance have hull values that exceed the Fund's March 31, 1997, balance of about $65.2 million. In other words, the loss of any one of those aircraft would liquidate the entire balance and leave the liability portion on any claim unpaid. FAA estimates that the average contingent liability per incident for each registered aircraft is about $350 million. Clearly, the Fund's balance is inadequate to settle claims of this magnitude. We also reported in 1994 on a related problem with the timeliness with which the government could reimburse an airline for a major loss. Because the FAA would have needed to seek supplemental funding to pay any claims that exceeded the Fund's balance, airline officials had expressed concern that untimely reimbursements could cause severe financial hardships and possible bankruptcy. The National Defense Authorization Act directed that the Secretary of Defense promptly indemnify the Secretary of Transportation for any loss covered by defense-related aviation insurance within 30 days. Second, the act authorized the Secretary of Defense to use any available operations and maintenance funds for that indemnification. The appropriations made to the Defense Department's operations and maintenance accounts for fiscal year 1997 totaled approximately $91 billion. The unobligated balance remaining at the end of fiscal year 1997 is estimated to be $0.9 billion. Thus, sufficient funds appear to be available to reimburse the airlines for defense-related aviation hull losses, and there is a legislative requirement to do so in a timely manner. According to the FAA, industry, and airline officials with whom we spoke, these provisions generally resolve much of the uncertainty that they had earlier expressed about the Fund's insufficient balance. We have two remaining concerns about the program. The first is making sure that the program has sufficient funds available to pay potential insurance claims for non-Defense-related flights in a timely manner. The second involves clarifying whether an explicit presidential determination of the foreign policy interests of the United States is needed before FAA can issue insurance. For the relatively rare flights for which FAA may extend nonpremium insurance at the request of the State Department (one flight since the program's inception) and for the flights for which FAA provides premium insurance (67 flights since 1975), the Fund may still be undercapitalized in the event of a catastrophic loss. The insured State Department flight occurred in January 1991, when U.S. personnel were flown from Oman to Frankfurt because of the increasing unrest in Somalia. FAA also has extended premium insurance relatively infrequently. Most recently, premium insurance was issued for 37 flights to or from the Middle East between August 1990 and March 1991, which included evacuating U.S. citizens from Tel Aviv and ferrying cargo to Dhahran. While FAA has paid no claims for premium insurance flights in the history of the program, if there should be a catastrophe, the Fund may not have sufficient money to pay the claim in a timely manner. Not counting the liability associated with the loss of a flight, a claim for the loss of a single aircraft--which can cost $100 million--could liquidate the Fund's entire balance and still leave a substantial portion of the claim unpaid for an indeterminate period of time. In 1994, FAA proposed alternative financing sources to make additional funds available for the reimbursement of major claims. Those alternatives included obtaining a permanent indefinite appropriation from the Congress and the authority to borrow funds from the U.S. Treasury to pay claims that exceed the Fund's balance. FAA proposed using the permanent appropriations to pay claims under premium insurance, and the borrowing authority to pay claims under nonpremium insurance while awaiting a supplemental appropriation from the Congress or reimbursement from the indemnifying agency. However, the Office of Management and Budget did not approve the proposal, and the administration therefore did not forward the proposal to the Congress. Thus, the Fund remains potentially undercapitalized. FAA is proposing to raise the one-time fee that the airlines pay to register each aircraft for nonpremium insurance. FAA published a notice of proposed rulemaking in the Federal Register on April 17, 1997, that would raise the registration fee from $200 to $550; the increase is based on the changes in the consumer price index since the fee was set in 1975. However, such an increase would have a limited impact on the Fund's balance in comparison with the potential costs resulting from a major loss of a non-DOD flight. In our 1994 report, we recommended that the program's authorizing legislation be clarified because there were ambiguities in the legislation and in FAA's implementing regulations about the need for FAA to obtain a presidential determination that a flight is in the foreign policy interests of the United States before issuing nonpremium insurance. No clarification in the legislation nor in the current FAA regulations have been made, and we believe that ambiguities still exist. FAA does not see this situation as a problem. FAA considers presidential approval of the indemnity agreement between DOT and other government agencies to constitute the President's having determined that the flights covered by these agreements are in the foreign policy interests of the United States. This position is based on FAA's Acting Chief Counsel's 1984 review of the legislation and its accompanying legislative history. He concluded that the requirement for a presidential determination applied only to premium insurance and that the President's signature on an interagency indemnification agreement was all that was required to issue nonpremium insurance. FAA published a proposed rulemaking in the Federal Register on April 17, 1997, that would revise its regulations to point out specifically that the presidential approval required for the issuance of nonpremium insurance is demonstrated by the standing presidential approval of the indemnification agreements with other government agencies. We disagree with FAA's position. We believe that while FAA's current practice has the advantage of being easier to administer, it lacks sufficient foundation in the authorizing legislation and current implementing regulations. We believe that the act, as currently written, requires that a presidential determination be made as a condition for issuing both nonpremium and premium insurance. In our 1994 report, we recommended that the Congress consider legislative changes that would address the Fund's capitalization and the ambiguities about presidential determination. During this reauthorization process, we continue to believe that the Congress should consider providing a mechanism by which DOT can obtain access to financial resources so that it can pay claims that exceed the Fund's balance within the normal time frames for commercial insurance for those few flights not sponsored by DOD. The source of funds could include (1) a permanent indefinite appropriation to cover the potential losses incurred during premium-insured flights and (2) the authority to borrow sufficient funds from the U.S. Treasury to pay the losses incurred during nonpremium flights made for qualifying government agencies other than DOD. DOT would repay the Treasury after it was reimbursed by the indemnifying agency. According to an analyst in the Congressional Budget Office, such changes would have no perceptible effect on the federal budget. We also continue to believe that the Congress should clarify the issue of whether or not a presidential determination is required before FAA can issue nonpremium insurance. This concludes our prepared statement. I would be happy to respond to any questions that you or members of the Subcommittee might have. Military Airlift: Observations on the Civil Reserve Air Fleet Program (GAO/NSIAD-96-125), March 29, 1996. Aviation Insurance: Federal Insurance Program Needs Improvements to Ensure Success (GAO/RCED-94-151), July 15, 1994. Military Airlift: Changes Underway to Ensure Continued Success of Civil Reserve Air Fleet (GAO/NSIAD-93-12), December 31, 1992. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO discussed the reauthorization of the Federal Aviation Administration's (FAA) Aviation Insurance Program, focusing on changes made to the program since GAO last reported on it in 1994. GAO noted that: (1) in its 1994 report, GAO found that the program did not have sufficient funds available to pay potential insurance claims in the unlikely event of a catastrophic loss; (2) progress has been made in addressing this matter; specifically, the National Defense Authorization Act for Fiscal Year 1997 made funds available to indemnify the program for losses incurred under Department of Defense (DOD)-sponsored flights, which account for the majority of flights insured; (3) while GAO's major concern has been addressed, two other concerns that it raised in the 1994 report remain unresolved; (4) gaps remain in the program's ability to pay claims for non-DOD flights; (5) although these flights account for a relatively small percentage of the flights that have been insured by the program, a single major loss could liquidate the program's available funds and leave a substantial portion of the claim unpaid; (6) FAA would need to seek supplemental funding to pay the claim, but the delay could cause financial hardship for the affected airline; and (7) GAO believes that some uncertainty about the program continues to be caused by ambiguity in the statutory language and FAA's current implementing regulations about whether the President must make a determination that a flight is in the foreign policy interests of the United States before issuing insurance.
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The goal of the Army's MCS program is to develop and field a computer system that provides automated critical battlefield assistance to maneuver commanders and their battle staff at the corps-to-battalion level. MCS is intended to enable the command staff to collect, store, process, display, and disseminate critical data to produce and communicate battle plans, orders, and enemy and friendly situational reports. It is a key component of the Army Tactical Command and Control System, which is also intended to enhance the coordination and control of combat forces through automated management of five key battlefield areas, including maneuver control. Given its role to communicate battle plans, orders, and enemy and friendly situation reports, MCS is also a key component of the Army's ongoing efforts to digitize (automate) its battlefield operations. In 1980, the Army fielded the first MCS system--with limited command, control, and communications capabilities--to VII Corps in Europe. In 1982, the Army awarded a 5-year contract to continue MCS development, and by 1986 MCS software had evolved to version 9, also fielded in Europe. In 1987, the Army performed post-deployment tests on version 9 in Germany. The results of those tests led the Army Materiel Systems Analysis Activity to conclude that MCS did not exhibit adequate readiness for field use and recommend that further fielding not occur until the system's problems were resolved. However, the Army awarded a second 5-year contract that resulted in version 10, which was fielded by April 1989 and remains in the field today. In November 1989, the Army Materiel Systems Analysis Activity reported that MCS had met only 30 percent of its required operational capabilities and again recommended that the system not be released for field use. In May 1990, operational testers again questioned the system's functional ability and effectiveness because it could not produce timely, accurate, and useful information in a battle environment. While earlier versions of MCS were being fielded and withdrawn, the development of software continued. In 1988, the Army awarded a contract for the development of version 11. By February 1993, the Army stopped development of version 11 software due to multiple program slips, serious design flaws, and cost growth concerns. The program was then reorganized with a plan approved by the Office of the Secretary of Defense in April 1993. Under the reorganized program, a group of contractors and government software experts have been working to develop the next version of MCS software--version 12.01--utilizing software segments that could be salvaged from the failed version 11 effort. In addition to software, the MCS system consists of computers procured under the Army's Common Hardware and Software (CHS) effort, which was undertaken to reverse the proliferation of program-unique computers and software. The Army planned to acquire 288 of the CHS computers in fiscal years 1997 and 1998 to support the MCS training base, and has already acquired 81. Those computers were used in a training base assessment to support a decision to acquire the remaining 207 computers. Since its reorganization in 1993, MCS program experience indicates continuing problems in the system's development. Specifically, (1) the MCS initial operational test and evaluation of version 12.01 has slipped twice, (2) interim developmental level tests and a customer test done to support a decision to award a contract to develop follow-on software show that significant problems continue, and (3) development of follow-on version 12.1 was begun despite the results of the customer test and prior program history. After the 1993 program reorganization, version 12.01 was scheduled to undergo initial operational testing and evaluation in November 1995. The test slipped to November 1996 and is now scheduled for March 1998. Program officials stated that the test date slipped initially because the CHS computers to be used were not yet available. During August and September 1996, version 12.01 underwent a system confidence demonstration to determine whether it was ready for the November 1996 initial operational test and evaluation. Because the software was not ready, further work and two additional system confidence demonstrations followed in August and September 1996. Both demonstrations indicated that the system was not ready for operational testing. Additionally, the software still had an open priority one software deficiency and priority three and four deficiencies that would have negatively impacted the conduct of the operational test. Both the Army's Operational Test and Evaluation Command and the Department of Defense's (DOD) Director of Operational Test and Evaluation (DOT&E) had stated that there could be no open priority one or two software deficiencies before the operational test. They had also stated that there could not be any open priority three and four deficiencies that, in combination, were likely to have a detrimental effect on the system's performance. DOT&E staff told us that there were a number of open priority three and four software deficiencies that they believe would have had a detrimental effect. When MCS program officials realized that these deficiencies would not be resolved in time for the initial operational test, they downgraded the test 3 weeks before it was to occur to a limited user test, utilizing $8.5 million appropriated for the MCS operational test in fiscal years 1996 and 1997. That test was conducted in November 1996. While the test report has not been finalized, a draft version states that MCS--in the tested configuration--is not operationally effective or suitable. Throughout the development of version 12.01, interim software builds have undergone numerous performance tests to determine the current state of software development, and build 4 was subjected to a customer test. The results of those tests identified continuing problems as the number of builds proceeded. For example, a December 1995 performance test report on build 3.0 stated that, if the problems found during the test were not quickly corrected in build 3.1, then the risk to the program might be unmanageable. The follow-on April 1996 performance test report of build 3.1 stated that significant problems in system stability prevented proper testing of several requirements. The report further stated that messaging between battlefield functional areas was extremely difficult and problematic and that the system had other stability problems. A September 1996 performance test report stated that of 568 previously open deficiency reports from builds 5.1 through 5.2c, 165, almost 29 percent, still remained open. This report, the last published on an MCS performance test, reflected the state of the MCS software shortly before the downgraded limited user test, in which MCS failed to demonstrate either operational effectiveness or suitability. More recent performance tests of later builds have been done; however, separate reports on those test events have not been issued. Rather, the program office plans to prepare an integrated test report in October or November 1997. "developed by a confederation of contractors who have built this current version of MCS on the salvaged 'good' portions of the abruptly terminated development of MCS Version 11, it needs to stand the rigor of an Independent Operational Test and Evaluation . . . before a MCS Block IV contract is awarded." To help determine the level of risk in proceeding under the Army's development strategy, DOT&E stated in a June 1995 memorandum that an operational test of version 12.01 be conducted to measure the software's maturity before the award of a contract for the development of follow-on versions. As a result, an operational assessment--called the MCS customer test--was conducted on version 12.01 in April 1996 to support the award of a $63.1 million contract for the development of MCS Block IV software--MCS versions 12.1, 12.2, and 12.3. No pass/fail criteria were set for the customer test. However, DOT&E directed that four operational issues be tested. Those issues related to (1) the capacity of the system to store and process required types and amounts of data, including the ability of the staff users to frequently update the information database; (2) the capabilities of the MCS network to process and distribute current and accurate data using the existing communications systems; (3) the impact of computer server outages on continuity of operations; and (4) the system administration and control capabilities to initialize the system, become fully operational, and sustain operations. In its report on the customer test, the Army's Test and Experimentation Command stated that, at the time of the test, MCS was evolving from a prototype system to one ready for initial operational test and evaluation and, as such, possessed known limitations that were described to the system users during training. The Command reported that the test's major limitations included (1) software that did not contain the full functional capability planned for the initial operational test and evaluation; (2) a need to reboot the system after crashes caused by the use of the computer's alternate function key; (3) two changes in software versions during training; and (4) the fact that 65 percent of the system manager functions had not been implemented or trained. Table 1 provides more detail on the customer test results. In addition to these findings, the MCS test officer stated the following: "System performance degraded over time causing message backlogs, loss of data, and numerous system reboots. Over a period of 12 operational hours the slowed down and created message backlogs of up to 4 hours. To remain functional, the entire network of [MCS] systems must be shut down and reinitialized in proper sequence." "The staff users had great difficulty using ... applications." "The software pertaining to system management functions was immature, incomplete and lacked documentation. This capability is critical to the effective use and operation of the [MCS] system." Even though the customer test did not involve pass/fail criteria, based on our review of the test report and the test officer's comments, we believe that only the third operational issue--impact of computer server outages on continuity of operations--was met. Despite the results of the customer test and the program's prior history, the Under Secretary of Defense for Acquisition and Technology approved the Army's plan to award a concurrent contract for MCS Block IV software development--MCS versions 12.1, 12.2 and 12.3. In September 1996, the Army awarded a contract for the development of MCS software versions 12.1, 12.2, and 12.3 to a different contractor than the developers of MCS version 12.01. At that time, version 12.01 was still scheduled to undergo its initial operational testing in November 1996. The start of the follow-on development could have been timed to occur after version 12.01 had completed that operational testing. At most, this action would have delayed the contract award 2 months, assuming that the initial operational test had occurred in November 1996 as scheduled. However, the contract was awarded before the initial operational test, and the planned 5 month concurrency in the development of versions 12.01 and 12.1 became 18 months when the operational test slipped to March 1998. The current program schedule indicates that (1) version 12.1 is expected to undergo its operational assessment/test about 1 year after the fielding of version 12.01 is started and (2) version 12.1 fielding is to be done 5 months after initial operational capability of version 12.01 is achieved. If the scheduled version 12.01 operational test and evaluation slips again and the version 12.1 contractor is able to maintain its development schedule, version 12.1 could become available before version 12.01. By May 1997, the Army requested DOD approval of a revised acquisition program baseline that changes the planned follow-on operational test and evaluation of versions 12.1, 12.2, and 12.3 to operational assessments/operational tests. Program officials said that, although the name of the tests had changed, the planned scope of the tests had not. However, the officials said that the name change complies with guidance from DOT&E, which lists multiple levels of operational test and evaluation (from an abbreviated assessment to full operational test) and outlines a risk assessment methodology to be used to determine the level of testing to be performed. The officials further stated that the use of the generic term operational test/operational assessment permits possible changes to the level of testing for version 12.1 and follow-on software increments based on the risk assessment process. The contractors competing for the MCS Block IV (MCS versions 12.1, 12.2, and 12.3) development were given access to the government's 12.01 code and allowed to reuse as much of it as they chose. The Block IV developer is not required to reuse any of version 12.01. Rather, the Block IV contract requires the development of software to provide specific functions. Given that (1) version 12.01 software has not passed or even undergone an initial operational test and evaluation and (2) the MCS Block IV contractor building version 12.1 is not the contractor that is building version 12.01 and is only required to develop the version 12.1 to provide specified functions, we believe that the version 12.1 development effort should not be viewed as building upon a proven baseline. Instead, it should be viewed as a new effort. The Army's current development plan for version 12.1 and beyond, as shown in figure 1, continues an approach of building a follow-on version of software on an incomplete and unstable baseline--the uncompleted preceding version of software. Additionally, according to an official in the DOD's Office of the Director of Test, Systems Engineering, and Evaluation, the Army's development process allows requirements that are planned for one software version, which cannot be accomplished in that version's development as planned, to be deferred to a later version's development. As a result, this process makes judging program risk and total cost very difficult. The MCS program has previously demonstrated the problem of deferring requirements. For example, during MCS version 11 development, we reported that the Army had deferred seven MCS functions that were to have been developed by June 1992 and included in the software version to undergo operational testing. Even though the version 11 operational test had slipped twice, from May 1992 to September 1992 and then to May 1993, the Army continued to defer those functions, and the operational test was planned for less than the complete software package originally scheduled to be tested. In commenting on a draft of this report, DOD said that they had made progress not reflected in that draft. Specifically, they noted that there were no priority one or two, and only 22 priority three software deficiencies open as of September 11, 1997, as compared with 10 priority one, 47 priority two, and 67 priority three deficiencies open on August 16, 1996. While we agree these results indicate that some known problems have been fixed, they provide no indication of the number or severity of still unknown problems. For example, MCS version 12.01 development showed enough progress entering the November 1996 scheduled initial operational test and evaluation to reach a commitment of resources and personnel. However, that test was later downgraded to a limited user test because of software immaturity. Successful completion of an initial operational test and evaluation should provide a more definitive indication of the MCS program's progress. Before the slip of the MCS initial operational test and evaluation from November 1996 to March 1998, the Army planned to acquire 288 computers--150 in fiscal year 1997 and 138 in fiscal year 1998--for the MCS training base. These computers were to be acquired after a full-rate production decision at a total cost of about $34.8 million--$19.1 million in fiscal year 1997 and $15.7 million in fiscal year 1998. After the initial operational test and evaluation slipped, DOD approved the Army's acquisition of a low-rate initial production of 81 computers in fiscal year 1997 for a training base operational assessment. The purpose of the assessment, which was performed from February to May 1997, was to judge the merits of allowing the Army to procure the remaining computers prior to successful completion of the slipped operational test. On the basis of the results of that assessment, the Acting Under Secretary of Defense for Acquisition and Technology authorized the Army in July 1997 to proceed with its acquisition plans. The Acting Under Secretary noted that the DOT&E had reviewed the assessment and agreed that version 12.01 was adequate for use in the training base. The Acting Under Secretary also authorized the Army to move the training base computer funds from the MCS budget to the Army's automated data processing equipment program budget line. This action was necessary because, according to both Army and DOD officials, it was determined that the computers to be acquired do not meet the legislated reasons in 10 U.S.C. 2400 for low-rate initial production. That legislation allows the early acquisition of systems to (1) establish an initial production base, (2) permit an orderly increase in the production rate for the system that is sufficient to lead to full-rate production upon successful completion of operational test and evaluation, and (3) provide production-representative items for operational test and evaluation. Even though the Army now plans to acquire the computers under a different budget line, the intended use of the computers remains unchanged. MCS program officials said that the computers are needed in the MCS training base before operational testing to adequately support future fielding of MCS and the larger Army Battle Command System, of which the Army Tactical Command and Control System and MCS are key components. This rationale is the same one the Acting Under Secretary cited in his July 1997 memorandum. In that memorandum, he stated that the "requirement to train Army-wide on commercial equipment is a recognized requirement not only for MCS but for a host of other digital . . . systems." The Acting Under Secretary further noted that the funds to be moved were for equipment needed to support integrated training of multiple systems throughout the Army and concluded that "training on a digital system, even if it is not the system that is ultimately fielded, is important to the Army in order to assist in making the cultural change from current maneuver control practice to a digitized approach." MCS program officials stated that the MCS course curriculum needs to be developed and that equipping the training base before the completion of operational testing avoids a 2-year lag between the completion of operational testing and the graduation of trained students. The officials also commented that the computers could be used elsewhere, since they would be compatible with other Army programs. The legislated requirement that major systems, such as MCS, undergo initial operational test and evaluation before full-rate production serves to limit or avoid premature acquisitions. The Army has had previous experience acquiring ineffective MCS equipment, which is indicative of the need for adequate testing before systems are fielded. In July 1990, the Army began withdrawing over $100 million of militarized MCS hardware from the field due to both hardware and software deficiencies. Additionally, the Army subsequently decided not to deploy other MCS equipment it had procured for light divisions at a cost of about $29 million because the equipment was too bulky and heavy. The MCS program's troubled development and acquisition history has continued since the program's 1993 reorganization. However, the Army awarded a new contract to develop future software versions and plans to procure computers without fully resolving the problems of earlier versions. This strategy does not minimize the possibility of future development problems and ensure that the Army will ultimately field a capable system. Also, since MCS software version 12.1 is being developed concurrently by a different contractor to functional specifications, it would be prudent to subject the version 12.1 software to the level of operational testing required to support a full-rate production decision, as planned for version 12.01. Accordingly, we believe a more appropriate strategy would require that future software versions be developed using only fully tested baselines, and that each version be judged against specific pre-established criteria. We recommend that you direct the Secretary of the Army to set specific required capabilities for each software version beyond version 12.01, test those versions against specific pass/fail criteria for those capabilities, and only award further development contracts once problems highlighted in that testing are resolved; perform a full operational test and evaluation of MCS software version 12.1 to ensure that it provides the full capabilities of version 12.01; and procure additional MCS computers only after an initial operational test and evaluation and a full-rate production decision have been completed. In commenting on a draft of this report, DOD agreed with our recommendation that specific required capabilities for each MCS software version beyond version 12.01 are needed, that those versions should be tested against specific pass/fail criteria for those capabilities, and that the Army should not award further development contracts until problems highlighted in prior tests are resolved. DOD noted that the Army has already set specific required capabilities for those software versions and will test those versions against specific pass/fail criteria to ensure system maturity and determine that the system remains operationally effective and suitable. DOD further stated that it will not support the award of further development contracts until the Army has successfully resolved any problems identified during the testing of related, preceding versions. DOD partially agreed with our recommendation that the Army be directed to perform a full-operational test and evaluation of MCS software version 12.1 to ensure that it provides the full capabilities of version 12.01. DOD stated that the Army will comply with DOD regulation 5000.2R and will follow guidance from Director of Operational Test and Evaluation, which lists multiple levels of operational test and evaluation (from an abbreviated assessment to full operational test) and outlines a risk assessment methodology to be used to determine the level of testing to be performed. DOD did not, however, indicate whether it would require the Army to conduct a full operational test. We continue to believe that the version 12.1 development effort should not be viewed as building upon a proven baseline. Instead, version 12.1 development should be viewed as a new effort. As a result, we still believe that the prudent action is to require that version 12.1 be subjected to the same level of operational test and evaluation as version 12.01, the level required to support a full-rate production decision. DOD agreed with our recommendation that it direct the Army to not procure more MCS computers until the completion of an initial operational test and evaluation and a full-rate production decision. It stated, however, that no further direction to the Army is needed as it had already provided direction to the Army on this issue. Specifically, the Department stated that it has directed the Army to extract the training base computers from the MCS program and to not procure or field more MCS hardware to operational units until successfully completing an initial operational test and evaluation. Our recommendation, however, is not limited to the hardware for operational units, but also encompasses the computers the Army plans to buy for the training base. Given the program's prior history and the fact that the training base computers are not needed to satisfy any of the legislated reasons for low-rate initial production, we continue to believe that the Army should not be allowed to buy those computers until MCS has successfully completed its initial operational test and evaluation--the original plan prior to the MCS initial operational test and evaluation's multiple schedule slips. DOD's comments are reprinted in their entirety in appendix I, along with our evaluation. In addition to those comments, we have revised our report where appropriate to reflect the technical changes that DOD provided in a separate letter. To determine whether the current MCS software development strategy is appropriate to overcome prior problems and to determine whether the Army should procure 207 new computers for the expansion of the MCS training base, we interviewed responsible officials and analyzed pertinent documents in the following DOD offices, all in Washington, D.C.: Director of Operational Test and Evaluation; Director of Test, Systems Engineering, and Evaluation; Assistant Secretary of Defense for Command, Control, Communications, and Intelligence; Under Secretary of Defense (Comptroller); and Defense Procurement. In addition, we interviewed responsible officials and analyzed test reports from the office of the Army's Project Manager, Operations Tactical Data Systems, Fort Monmouth, New Jersey; and the Army's Operational Test and Evaluation Command, Alexandria, Virginia. To meet our second objective, we also interviewed responsible officials and analyzed pertinent documents from the Army's Combined Arms Center, Fort Leavenworth, Kansas. We conducted our review from March to September 1997 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairman and Ranking Minority Members, Senate and House Committees on Appropriations, Senate Committee on Armed Services, and House Committee on National Security; the Director, Office of Management and Budget; and the Secretary of the Army. We will also make copies available to others on request. As you know, the head of a federal agency is required by 31 U.S.C. 720 to submit a written statement on actions taken our recommendations to the Senate Committee on Governmental Affairs and the House Committee on Government Reform and Oversight not later than 60 days after the date of this report. A written statement must also be submitted to the Senate and House Committees on Appropriations with the agency's first request for appropriations made more than 60 days after the date of the report. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Major contributors to this report were Charles F. Rey, Bruce H. Thomas, and Gregory K. Harmon. The following are GAO's comments on the Department of Defense's (DOD) letter dated October 2, 1997. 1. In partially agreeing with this recommendation, DOD states that the Army will comply with DOD regulation 5000.2R and will follow guidance from Director of Operational Test and Evaluation--guidance which lists multiple levels of operational test and evaluation (from an abbreviated assessment to full operational test) and outlines a risk assessment methodology to be used to determine the level of testing to be performed. DOD does not, however, indicate how they agree or disagree with our recommendation or state whether they will implement the recommendation. As we stated in the body of this report, given that a different contractor is building version 12.1 under a requirement to provide specific functionality, we believe that this development effort should not be viewed as building upon a proven baseline. Instead, version 12.1 development should be considered a new effort. As a result, we continue to believe that it is prudent to require that version 12.1 be subjected to the level of operational test and evaluation required to support a full-rate production decision. 2. DOD's direction to the Army only partially implements our recommendation. Our recommendation is not limited to the hardware for operational units, but also encompasses the computers the Army plans to buy for the training base. We continue to believe that the Army should not be allowed to buy the planned training base computers until MCS has successfully completed its initial operational test and evaluation--the original plan prior to the MCS initial operational test and evaluation's schedule slips. The training base computers are not required to satisfy any of the three purposes the law indicates for low-rate initial production--to (1) establish an initial production base, (2) permit an orderly increase in the production rate for the system sufficient to lead to full-rate production upon successful completion of operational test and evaluation, and (3) provide production-representative items for operational test and evaluation. Since the training base computers are not needed to satisfy one of the above legislated conditions, we continue to believe that the Army should refrain from buying any additional MCS computers prior to a full-rate production decision. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO reviewed the Army's developmental and acquisition plans for the Maneuver Control System (MCS), focusing on whether: (1) the current MCS software development strategy is appropriate to overcome prior development problems; and (2) 207 new computers for MCS-related training should be procured as planned. GAO noted that: (1) since its 1993 reorganization, the MCS has continued to experience development problems; (2) the initial operational test and evaluation of version 12.01 software has slipped 28 months, from November 1995 to March 1998, and interim tests have shown that significant software problems continue; (3) despite these problems, the Army awarded a contract in September 1996 for the concurrent development of the next software versions--12.1, 12.2, and 12.3--which are being developed by a new contractor and may involve substantially different software; (4) if the Army's current development strategy for the MCS is not strengthened, development problems may continue to occur; (5) currently, the Army's strategy allows: (a) less than full operational testing of version 12.1; and (b) development of follow-on versions 12.2 and 12.3 to start about 18 months before the operational testing of each version's predecessor; (6) despite the fact that the MCS has yet to undergo an initial operational test and evaluation or be approved for production, the Army plans to acquire 207 computers in fiscal years 1997 and 1998 to increase the number of computers available for system training; (7) program officials stated that they need to acquire the computers before operational testing to provide not only MCS specific training but also training for the larger Army Battle Command System, of which the Army Tactical Command and Control System and the MCS are major components; and (8) the 207 computers, however, are not needed to satisfy any of the three legislated reasons for low-rate initial production before an initial operational test and evaluation.
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In our 2009 testimony, we reported that the Forest Service, working with the Department of the Interior, had taken steps to help manage perhaps the agency's most daunting challenge--protecting lives, private property, and federal resources from the threat of wildland fire--but that it continued to lack key strategies needed to use its wildland fire funds effectively. Over the past decade, our nation's wildland fire problem has worsened dramatically. Since 2000, wildland fires burned more than double the acres annually, on average, than during the 1990s, and the Forest Service's wildland fire-related appropriations have also grown substantially, averaging approximately $2.3 billion over the past 5 years, up from about $722 million in fiscal year 1999. As we have previously reported, a number of factors have contributed to worsening fire seasons and increased firefighting expenditures, including an accumulation of flammable vegetation due to past land management practices; drought and other stresses, in part related to climate change; and increased human development in or near wildlands. The Forest Service shares federal responsibility for wildland fire management with four Interior agencies-- the Bureau of Indian Affairs, Bureau of Land Management, Fish and Wildlife Service, and National Park Service. In our 2009 testimony we noted four primary areas we believed the Forest Service, in conjunction with Interior, needed to address to better respond to the nation's wildland fire problems. The agencies have taken steps to improve these areas, but work remains to be done in each. As a result, we continue to believe that these areas remain major management challenges for the Forest Service: Developing a cohesive strategy that identifies options and associated funding to reduce potentially hazardous vegetation and address wildland fire problems. In a series of reports dating to 1999, we have recommended that the Forest Service and Interior agencies develop a cohesive wildland fire strategy identifying potential long-term options for reducing fuels and responding to fires, as well as the funding requirements associated with the various options. By laying out various potential approaches, their estimated costs, and the accompanying trade-offs, we reported that such a strategy would help Congress and the agencies make informed decisions about effective and affordable long-term approaches to addressing the nation's wildland fire problems. Congress echoed our call for a cohesive strategy in the Federal Land Assistance, Management, and Enhancement Act of 2009, which requires the agencies to produce a cohesive strategy consistent with our recommendations. In response, the agencies have prepared "Phase I" of the cohesive strategy, which, according to a Forest Service official, provides a general description of the agencies' approach to the wildland fire problem and establishes a framework for collecting and analyzing the information needed to assess the problem and make decisions about how to address it. The Phase I document has not yet been made final or formally submitted to Congress, even though the act requires the strategy to be submitted within 1 year of the act's 2009 passage. Once the document has been made final, according to this official, the agencies expect to begin drafting Phase II of the strategy, which will involve actual collection and analysis of data and assessment of different options. Establishing clear goals and a strategy to help contain wildland fire costs. The agencies have taken steps intended to help contain wildland fire costs, but they have not yet clearly defined their cost-containment goals or developed a strategy for achieving those goals--steps we first recommended in 2007. Without such fundamental steps, we continue to believe that the agencies cannot be assured that they are taking the most important steps first, nor can they be certain of whether or to what extent the steps they are taking will help contain costs. Agency officials identified several agency documents that they stated clearly define goals and objectives and that make up their strategy to contain costs. However, these documents lack the clarity and specificity needed by officials in the field to help manage and contain wildland fire costs. We therefore continue to believe that the agencies will be challenged in managing their cost-containment efforts and improving their ability to contain wildland fire costs. Continuing to improve processes for allocating fuel reduction funds and selecting fuel reduction projects. The Forest Service has continued to improve its processes for allocating funds to reduce fuels and select fuel reduction projects but has yet to fully implement the steps we recommended in 2007. These improvements, which we reported on in 2009 and which the agency has continued to build upon, include (1) the use of a computer model to assist in making allocation decisions, rather than relying primarily on historical funding patterns and professional judgment, and (2) taking into consideration when making allocation decisions information on wildland fire risk and the effectiveness of fuel treatments. Even with these improvements, we believe the Forest Service will continue to face challenges in more effectively using its limited fuel reduction dollars unless it takes the additional steps that we have previously recommended. The agency, for example, still lacks a measure of the effectiveness of fuel reduction treatments and therefore lacks information needed to ensure that fuel reduction funds are directed to the areas where they can best minimize risk to communities and natural and cultural resources. And while Forest Service officials told us that they, in conjunction with Interior, had begun a comprehensive effort to evaluate the effectiveness of different types of fuel treatments, including the longevity of those treatments and their effects on ecosystems and natural resources, this endeavor is likely to be a long term effort and require considerable research investment. Taking steps to improve the use of an interagency budgeting and planning tool. Since 2008, we have been concerned about the Forest Service's and Interior's development of a planning tool known as fire program analysis, or FPA. FPA is designed to allow the agencies to analyze potential combinations of firefighting assets, and potential strategies for reducing fuels and fighting fires, to identify the most cost- effective among them. By identifying cost-effective combinations of assets and strategies within the agencies, FPA was also designed to help the agencies develop their wildland fire budget requests and allocate resources across the country. FPA's development continues to be characterized by delays and revisions, however, and the agencies are several years behind their initially projected timeline for using it to help develop their budget requests. The agencies collected nationwide data on available assets and strategies in fiscal years 2009 and 2010, but in neither case did the agencies have sufficient confidence in the quality of the data to use them to help develop their budget requests. FPA program officials told us that they are currently analyzing data collected early in fiscal year 2011 to determine the extent to which the data can be used to help develop the agencies' fiscal year 2013 budget requests. The officials also told us they expect an independent external peer review of the science underlying FPA--a step we recommended in our 2008 report--to begin in May 2011. The agencies continue to take steps to improve FPA, but it is not clear how effective these steps will be in correcting the problems we have identified, and therefore we believe that the agencies will continue to face challenges in this area. Our 2009 testimony noted shortcomings in the completeness and accuracy of Forest Service data on activities and costs. Although we have not comprehensively reviewed the quality of all Forest Service data, we have encountered shortcomings during several recent reviews that reinforce our concerns. For example, during our review of appeals and litigation of Forest Service decisions related to fuel reduction projects, we sought to use the agency's Planning, Appeals, and Litigation System, which was designed to track planning, appeals, and litigation information for all Forest Service decisions. During our review, however, we determined that the system did not contain all the information we believed was pertinent to decisions that had been appealed or litigated and that the information the system did contain was not always complete or accurate. As a result, we conducted our own survey of Forest Service field unit employees. Likewise, during our recent testimony on hardrock mining, we noted that the Forest Service had difficulty determining the number of abandoned hardrock mines on its land, and we were concerned about the accuracy of the data that the agency maintained. Further, we recently reported that the Forest Service does not track all costs associated with activities under its land exchange program--another area of concern in our 2009 testimony. One area that is expected to see improvements in the future is the completeness and accuracy of cost data, because in 2012 Agriculture is scheduled to replace its current Foundation Financial Information System with a new Financial Management Modernization Initiative system that includes managerial cost-accounting capabilities. Managerial cost accounting, rather than measuring only the cost of "inputs" such as labor and materials, integrates financial and nonfinancial data, such as the number of hours worked or number of acres treated, to measure the cost of outputs and the activities that produce them. Such an approach allows managers to routinely analyze cost information and use it in making decisions about agency operations and supports a focus on managing costs, rather than simply managing budgets. Such information is crucial for the Forest Service, as for all federal agencies, to make difficult funding decisions in this era of limited budgets and competing program priorities. According to Agriculture's 2010 Performance and Accountability Report, the Forest Service has assessed its managerial cost accounting needs, and the cost-accounting module in the new system should allow the Forest Service to collect more-relevant managerial cost-accounting information. In 2009, we testified that the Forest Service had made sufficient progress resolving problems we identified with its financial management for us to remove the agency from our high-risk list in 2005 but that concerns about financial accountability remained. While we have not reexamined these issues in detail since that time, recent reports from Agriculture, including from the Office of the Inspector General, continue to identify concerns in this area. For example, in 2010 Agriculture's Office of Inspector General reported six significant deficiencies--including poor coordination of efforts to address financial reporting requirements and weaknesses in internal controls for revenue-related transactions--although it did not find any of the deficiencies to be material weaknesses. Echoing these concerns about internal control weaknesses, Agriculture reported in its 2010 Performance and Accountability Report that the Forest Service needed to improve controls over its expenditures for wildland fire management and identified the wildland fire suppression program as susceptible to significant improper payments. The Forest Service likewise has not fully resolved the performance accountability concerns that we raised in our 2009 testimony. As we noted at that time, the agency's long-standing performance accountability problems included an inability to link planning, budgeting, and results reporting. This concern was also raised by a 2010 Inspector General report, which stated that the major goals cited in the agency's strategic plan did not match the categories in its Foundation Financial Information System. In other words, the Forest Service could not meaningfully compare its cost information with its performance measures. In addition to the management challenges we discussed in our 2009 testimony, several of our recent reviews have identified additional challenges facing the Forest Service--challenges that highlight the need for more effective program oversight and better strategic planning. In light of potential funding constraints resulting from our nation's long-term fiscal condition, it is essential that the Forest Service be able to maximize the impact of its limited budget resources by exercising effective program oversight and appropriate strategic planning. Some recent concerns we have noted in this area include the following: Oversight of the land exchange process. As part of its land management responsibilities, the Forest Service acquires and disposes of lands through land exchanges--trading federal lands for lands owned by willing private entities, individuals, or state or local governments. In the past, we and others identified problems in the Forest Service's land exchange program and made recommendations to correct them. However, in our 2009 report on the Forest Service's land exchange program, we found that, although the agency had taken action to address most of the problems we had previously identified, it needed to take additional action to better oversee and manage the land exchange process so as to ensure that land exchanges serve the public interest and return fair value to taxpayers. In that report we made recommendations for the agency to, among other things, strengthen its oversight of the land exchange process, develop a national land tenure strategy, track costs, make certain training mandatory, and develop a formal system to track staff training. The Forest Service generally agreed with our recommendations, but as of October 2010, the agency had yet to develop a national land tenure strategy, track land exchange costs, require specific training for staff working on land exchanges, or fully implement a system to track attendance at training. Workforce planning. In recent reports, we and Agriculture's Inspector General have raised concerns about the Forest Service's ability to maintain an effective workforce through strategic workforce planning. In a 2010 report, we noted that the Forest Service (like Interior and the Environmental Protection Agency) had fallen short with respect to two of the six leading principles that we and others have identified as important to effective workforce planning: (1) aligning the agency's workforce plan with its strategic plan and (2) monitoring and evaluating its workforce- planning efforts. Without more clearly aligning its workforce plans with its strategic plan, and monitoring and evaluating its progress in workforce planning, as we recommended in that report, the Forest Service remains at risk of not having the appropriately skilled workforce it needs to effectively achieve its mission. In addition, we reported that the Forest Service developed and issued annual workforce plans containing information on emerging workforce issues and that the agency had identified recommendations to address these issues but did not communicate its recommendations, nor assign responsibility for implementing recommendations. For the Forest Service to further capitalize on its existing workforce-planning efforts, we recommended that the agency communicate its recommendations in its annual 5-year workforce plan, assign responsibility and establish time frames for implementing the recommendations, and track implementation progress. As of November 2010, the Forest Service had begun several actions to address our recommendations, although they had not yet been fully implemented. Workforce planning is of particular concern in the area of wildland firefighting. In March 2010, Agriculture's Inspector General reported that the Forest Service lacked a workforce plan specific to firefighters, despite the relatively high number of staff eligible to retire among those in positions critical to firefighting and the agency's own expectations of an increase in the size and number of fires it will be responsible for suppressing. As the Inspector General noted, a lack of qualified firefighters due to retirements and inadequate planning could jeopardize the Forest Service's ability to accomplish its wildland fire suppression mission, resulting in the loss of more property and natural resources and increased safety risks to fire suppression personnel. Strategic approaches for protecting and securing federal lands. In 2010, we issued reports examining different aspects of the Forest Service's response to illegal activities occurring on the lands it manages, including human and drug smuggling into the United States. For example, we reported that the Forest Service, like other federal land management agencies, lacks a risk-based approach to managing its law enforcement resources and concluded that without a more systematic method to assess risks posed by illegal activities, the Forest Service could not be assured that it was allocating scarce resources effectively. For federal lands along the United States border, we reported that communication and coordination between Border Patrol and federal land management agencies, including the Forest Service, had not been effective in certain areas, including the sharing of intelligence and threat information, deployment plans, and radio communications between the agencies. In light of these shortcomings, and to better protect resources and the public, we recommended that the Forest Service adopt a risk-based approach to better manage its law enforcement resources and, in conjunction with the Department of the Interior and the Department of Homeland Security, take steps to improve communication and coordination between the agencies. The Forest Service concurred with our recommendations. Management strategies for the use of off-highway vehicles (OHV). Over the past few decades, the use of OHVs on federal lands has become a popular form of recreation, although questions have been raised about the effects of OHV use on natural resources and on other visitors. In 2009, we reported that the Forest Service's plans for OHV management lacked key elements of strategic planning, such as results-oriented goals, strategies to achieve the goals, time frames for implementing strategies, and performance measures to monitor incremental progress. We recommended that the Forest Service take a number of steps to provide quality OHV recreational opportunities while protecting natural and cultural resources on federal lands, including identifying additional strategies to improve OHV management, time frames for carrying out the strategies, and performance measures for monitoring progress. As of June 2010, the Forest Service had several actions under way to address our recommendations, but none were yet complete. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this testimony include Steve Gaty, Assistant Director; Andrea Wamstad Brown; Ellen W. Chu; Jonathan Dent; Griffin Glatt-Dowd; and Richard P. Johnson. Federal Lands: Adopting a Formal, Risk-Based Approach Could Help Land Management Agencies Better Manage Their Law Enforcement Resources. GAO-11-144. Washington, D.C.: December 17, 2010. Border Security: Additional Actions Needed to Better Ensure a Coordinated Federal Response to Illegal Activity on Federal Lands. GAO-11-177. Washington, D.C.: November 18, 2010. Workforce Planning: Interior, EPA, and the Forest Service Should Strengthen Linkages to Their Strategic Plans and Improve Evaluation. GAO-10-413. Washington, D.C.: March 31, 2010. Forest Service: Information on Appeals, Objections, and Litigation Involving Fuel Reduction Activities, Fiscal Years 2006 through 2008. GAO-10-337. Washington, D.C: March 4, 2010. Wildland Fire Management: Federal Agencies Have Taken Important Steps Forward, but Additional, Strategic Action Is Needed to Capitalize on Those Steps. GAO-09-877. Washington, D.C.: September 9, 2009. Hardrock Mining: Information on State Royalties and the Number of Abandoned Mine Sites and Hazards. GAO-09-854T. Washington, D.C: July 14, 2009. Federal Lands: Enhanced Planning Could Assist Agencies in Managing Increased Use of Off-Highway Vehicles. GAO-09-509. Washington, D.C.: June 30, 2009. Federal Land Management: BLM and the Forest Service Have Improved Oversight of the Land Exchange Process, but Additional Actions Are Needed. GAO-09-611. Washington, D.C: June 12, 2009. Forest Service: Emerging Issues Highlight the Need to Address Persistent Management Challenges. GAO-09-443T. Washington, D.C: March 11, 2009. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The Forest Service, within the Department of Agriculture, manages over 190 million acres of national forest and grasslands. The agency is responsible for managing its lands for various purposes--including recreation, grazing, timber harvesting, and others--while ensuring that such activities do not impair the lands' long-term productivity. Numerous GAO reports examining different aspects of Forest Service programs--including a testimony before this Subcommittee in 2009--have identified persistent management challenges facing the agency. In light of the federal deficit and long-term fiscal challenges facing the nation, the Forest Service cannot ensure that it is spending its limited budget effectively and efficiently without addressing these challenges. This testimony highlights some of the management challenges facing the Forest Service today and is based on recent reports GAO has issued on a variety of the agency's activities. In 2009, GAO highlighted management challenges that the Forest Service faced in three key areas--wildland fire management, data on program activities and costs, and financial and performance accountability. The Forest Service has made some improvements, but challenges persist in each of these three areas. In addition, recent GAO reports have identified additional challenges related to program oversight and strategic planning. Strategies are still needed to ensure effective use of wildland fire management funds. In numerous previous reports, GAO has highlighted the challenges the Forest Service faces in protecting the nation against the threat of wildland fire. The agency continues to take steps to improve its approach, but it has yet to take several key steps--including developing a cohesive wildland fire strategy that identifies potential long-term options for reducing hazardous fuels and responding to fires--that, if completed, would substantially strengthen wildland fire management. Incomplete data on program activities remain a concern. In 2009, GAO concluded that long-standing data problems plagued the Forest Service, hampering its ability to manage its programs and account for its costs. While GAO has not comprehensively reviewed the quality of all Forest Service data, shortcomings identified during several recent reviews reinforce these concerns. For example, GAO recently identified data gaps in the agency's system for tracking appeals and litigation of Forest Service projects and in the number of abandoned hardrock mines on its lands. Even with improvements, financial and performance accountability shortcomings persist. Although its financial accountability has improved, the Forest Service continues to struggle to implement adequate internal controls over its funds and to demonstrate how its expenditures relate to the goals in the agency's strategic plan. For example, in 2010 Agriculture reported that the agency needed to improve controls over its expenditures for wildland fire management and identified the wildland fire suppression program as susceptible to significant improper payments. Additional challenges related to program oversight and strategic planning have been identified. Several recent GAO reviews have identified additional challenges facing the Forest Service, which the agency must address if it is to effectively and efficiently fulfill its mission. Specifically, the agency has yet to develop a national land tenure strategy that would protect the public's interest in land exchanges and return fair value to taxpayers from such exchanges. In addition, it has yet to take recommended steps to align its workforce planning with its strategic plan, which may compromise its ability to carry out its mission; for example, it has not adequately planned for the likely retirement of firefighters, which may reduce the agency's ability to protect the safety of both people and property. Finally, the Forest Service needs a more systematic, risk-based approach to allocate its law-enforcement resources. Without such an approach it cannot be assured that it is deploying its resources effectively against illegal activities on the lands it manages. GAO has made a number of recommendations intended to improve the Forest Service's management of wildland fires, strengthen its collection of data, increase accountability, and improve program management. The Forest Service has taken steps to implement many of these recommendations, but additional action is needed if the agency is to make further progress in rectifying identified shortcomings.
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Our objectives were to (1) identify those Defense long-haul telecommunications networks operating outside of the common-user DISN, (2) evaluate the Department of Defense's progress in implementing its policies for managing telecommunications services, which include: developing a comprehensive inventory of telecommunications equipment and services, reporting on telecommunications services acquired, trends, and costs, mandating the use of common-user networks, and developing a waiver process to grant exceptions from using common-user networks, and (3) evaluate Defense's progress in developing performance measures for DISN to ensure effective and efficient use of the department's telecommunications resources. To determine what long-haul telecommunications networks were planned or operating in Defense, we reviewed applicable Defense directives, instructions, and memorandums regarding the use of common-user networks. We met with officials from DISA and OASD/C3I to assess Defense's progress in developing a comprehensive inventory of telecommunications equipment and services. We met with representatives of the Joint Staff for Command, Control, Communication and Computers (J-6); the Department of Defense's Office of Inspector General; the Army, the Navy, the Marines, the Air Force, the Defense Logistics Agency, and the Defense Commissary Agency to assess component efforts to develop inventories. When we learned that no comprehensive inventories of networks exist at the department or component level, we sent a questionnaire to the four military services requesting that, for every non-DISN long-haul network, they report: the name of the network; functional description; types of telecommunications services supported; estimated annual costs; whether the network was planned or operational, and if planned, its status, life-cycle costs, and whether it was scheduled to be replaced by DISN, and when. We did not independently verify the information provided by the Services. However, we consulted with them to confirm our understanding of their responses and to discuss and ask questions we had about information they provided. Appendix I details the results of our survey. To assess progress in reporting on telecommunications services acquired, trends, and costs, we reviewed applicable Defense directives, instructions, and memorandums and discussed Defense's implementation of these requirements with officials from ASD/C3I and DISA. We analyzed information on costs maintained by DISA and reviewed a recent contractor evaluation of DISA business processes. To assess Defense's progress in enforcing its policy mandate that Defense components acquire services from common-user networks, we reviewed applicable Defense directives, instructions, and memorandums and met with officials from ASD/C3I, DISA, and the Defense components. During these interviews we asked for documentation showing that existing policies on telecommunications management and the use of common-user networks were being implemented and enforced. We obtained and analyzed network plans, requirements, and other acquisition documentation to determine if Defense components were complying with telecommunications management policies. To assess Defense's progress in developing a waiver process to grant exceptions from using common-user networks, we reviewed applicable Defense directives, instructions, and memorandums. We met with officials from ASD/C3I and DISA to discuss their plans to implement an interim waiver process and to develop a strategy detailing how and when independent networks will be replaced by their common-user counterparts. Because the interim process began during our review, we met again with DISA officials in April 1998 to assess the agency's progress to date in granting waivers. To assess Defense's progress in developing performance measures for DISN, we met with officials from DISA and reviewed DISA's draft documentation on the issue, which consisted of draft performance measures for information technology acquisitions. We reviewed the Clinger-Cohen Act of 1996, the Federal Acquisition Streamlining Act of 1994, the Chief Financial Officers Act of 1990, the Government Performance and Results Act of 1993, and the Paperwork Reduction Act of 1995 to determine applicable legislative requirements for developing performance measures. We relied on work we performed in developing our recent guide on performance measurement, Executive Guide: Measuring Performance and Demonstrating Results of Information Technology Investments (GAO/AIMD-98-89, March 1998). In addition, we examined network performance measurements used in the private sector. Our review was conducted from December 1996 through April 1998 in accordance with generally accepted government auditing standards. We obtained written comments from Defense on a draft of this report. These comments are discussed in the "Agency Comments and Our Evaluation" section of this letter and are reprinted in appendix II. The military services, Defense agencies, and other Defense components have traditionally acquired and operated many unique telecommunications networks to support a range of mission requirements. As a result, Defense components operate many stovepiped telecommunications systems that are not interoperable and cannot share information across functional and organizational boundaries. For example, between 1988 and 1992 Defense reported several interoperability problems including some arising during the Persian Gulf War. Defense components were unable to use their telecommunications networks and information systems to coordinate the issuance of air tasking orders, the use of air space, and the use of fire support for joint operations. To improve the interoperability of its military communications services as well as to reduce costs associated with operating redundant systems, Defense began in 1991 to plan and implement DISN to serve as the department's primary worldwide telecommunications and information transfer network. The DISN strategy focuses on replacing older data communications systems, using emerging technologies and cost-effective acquisition strategies that provide secure and interoperable voice, data, video, and imagery communications services. Under the DISN program, the military services and Defense agencies are still responsible for acquiring telecommunications services for their local bases and installations as well as deployed communications networks. DISA is responsible for acquiring the long-haul services that will interconnect these base-level and deployed networks within and between the continental United States, Europe, and the Pacific. Defense issued a number of policies and directives in 1991 aimed at ensuring that the department could identify and replace redundant networks with DISN and manage DISN efficiently and effectively. These policies directed components to develop comprehensive inventories of their telecommunications equipment and services, and DISA to develop a comprehensive Defense-wide inventory; directed DISA to report annually on telecommunications equipment acquisitions, trends, and associated costs; mandated the use of common-user networks; and directed DISA to develop a waiver process to grant exceptions from using common-user networks when these networks could not satisfy Defense components' requirements. In a previous review of the DISN program, we found that Defense was not doing enough to ensure that the program would be managed efficiently and effectively. Specifically, the department lacked performance measures that would help Defense track whether DISA was meeting its objectives, efficiently allocating resources, and learning from mistakes. In response, Defense agreed to establish measures for the program. In order for the DISN program to work, Defense needs to know how many networks are operating in the department and what functions they support. This is the foundation for identifying redundant and stovepiped networks and ensuring that they are replaced by DISN. However, Defense lacks the basic information necessary to determine how many networks are operating in the department, what functions they support, or what they cost. In order to estimate the number and cost of networks that are operating outside of DISN, we conducted our own survey, which identified 87 such networks operated by the military services alone. DISA initiated a similar data call to the military services and Defense agencies after we began our survey and identified 153 networks planned or operating throughout Defense. The results of our survey are presented in appendix I and summarized in table 1. To manage telecommunications cost effectively, Defense must know what networks are operating in the department. In 1991, Defense directed DISA to establish a central inventory of all long-haul telecommunications equipment and services in Defense, and directed the heads of Defense components to do likewise. However, the central inventory was never established and DISA staff are still discovering new networks as they process new telecommunications service requests from Defense components. Defense components have also failed to develop inventories of their own networks. During our initial meetings, Army, Navy, and Air Force officials stated that they could not readily identify all of their networks or describe what their functions are because they do not centrally manage their telecommunications resources. Our experience with the Navy illustrates the depth of this problem. The Navy's initial response to our survey only identified three independent long-haul networks. Other Navy networks known to exist, such as the Naval Aviation Systems Team Wide Area Network (NAVWAN), were not reported in the survey. Navy's headquarters telecommunication staff acknowledged that they were unable to identify all of the Navy's long-haul networks. Careful analysis is needed to determine whether any of the independent networks identified in our survey can or should be replaced by DISN common user services. However, on the basis of our interviews with the military services and our survey results, we were able to determine that overlaps exist between telecommunications services offered by independent networks and services offered by DISN. For example: NAVWAN offers its users data communications services using Internet Protocol (IP); similar services are provided by DISA on DISN's Unclassified but Sensitive (N-Level) IP Router Network (NIPRNET). The Army's Installation Transition Processing (ITP) Network also offers IP router services similar to those provided by DISN's NIPRNET. The Navy Sea Systems Command's Enterprisewide Network (NEWNET, now known as Smart Link) relies on asynchronous transfer mode-based data communications services; similar services are now offered by DISA on a limited basis. The Army's planned Regional Transition Network (ARTNET, now known as the Circuit Bundling Initiative) also relies on asynchronous transfer mode-based data services, similar to services offered by DISA. To ensure that a common-user network is efficiently and effectively managed, it is essential to closely monitor its acquisitions of telecommunications services, costs, and trends in usage, that is, the volumes and types of traffic it carries. This monitoring helps an agency ensure that the network is properly sized (i.e., neither oversized nor undersized) and offers cost-effective services. Since 1991, DISA has been required to report annually on telecommunications services acquired, trends (volumes and types of traffic), and associated costs throughout Defense. However, it has not done so, and it lacks the data needed to begin developing such reports. For example, as noted previously, DISA lacks a comprehensive inventory of telecommunications equipment and services across the department. Therefore, it cannot effectively report annually on acquisitions. In addition, DISA has not collected data that would help it identify trends in network traffic throughout Defense, which in turn would help it plan for future growth and identify the need for new telecommunications services. This would include data on the number of anticipated users, the nature of business functions requiring telecommunications support, and the potential costs and benefits of new technologies. Further, Defense managers lack reliable cost information on their networks. For example, senior Defense managers rely on Defense components to voluntarily report telecommunications resource requirements during annual budget preparations. But because communications resources are embedded in noncommunications budget items, this process does not allow Defense to identify costs by network or to identify costs for services obtained by users outside of DISA channels. In addition, DISA does not have a cost accounting system or any other effective means of determining DISN's actual operating costs. Until Defense managers have good data on status and trends in telecommunications equipment and services, acquisitions, and costs, they will not have a sound basis for making decisions on reducing telecommunications costs across the department, improving network operations, and reliably determining how efficiently and cost effectively to meet user needs. Under Title 10 of the United States Code, the military services have wide latitude to expend resources to train and sustain their forces. Because the mandate to use DISN restricts this latitude, compliance will only be achieved if Defense institutes an effective enforcement process. Since it began the DISN program in 1991, Defense has never effectively enforced the use of common-user networks. While OASD/C3I staff stated that financial pressure could be brought to bear in the budget process to enforce the mandate, they were unable to articulate how this enforcement would occur. Further, even though the military services have implemented several major long-haul networks during the past 5 years, OASD/C3I staff were unable to identify a single instance in which they formally analyzed the military services' plans for acquiring long-haul networks and insisted that common-user networks be used instead. In May 1997, ASD/C3I issued a memorandum that reiterated Defense policy mandating the use of common-user networks for long-haul telecommunications and reaffirming DISA's role as the manager and sole provider of long-haul telecommunications. Defense is now preparing an update to this memorandum that it states will reflect the department's changing organization and mission, and changes in telecommunications technology. However, unless Defense defines and implements a process to enforce this policy, it will remain ineffective. In August 1997, DISA began implementing an interim waiver process which outlined the steps that Defense components must follow to operate independent networks: First, operators of all independent long-haul networks must, as of August 1997, request a waiver to policy mandating common-user networks. Second, DISA must assess the request and issue a waiver in those cases where telecommunications requirements cannot currently be technically or economically satisfied by DISN or another common-user system such as FTS 2000/2001. Neither of these steps, however, is well-defined. For example, the guidance does not describe data that the required justifications should include or criteria DISA will use in evaluating them. In addition, it does not specify how DISA will determine if components' requirements can be cost effectively satisfied by DISN or FTS 2000/2001. To date, the Services and Defense agencies have largely ignored the interim waiver process. Only 9 percent of the operators of the 131 non-DISA-managed independent networks that DISA identified in its survey has requested a waiver from use of DISN services. Performance measures are central to effectively managing any significant information system undertaking and are required by several federal statutes, including the Federal Acquisition Streamlining Act (FASA) of 1994 and the Clinger-Cohen Act of 1996. For example, under FASA, the Secretary of Defense is required to establish and approve the cost, performance, and schedule goals for major defense acquisition programs and for each phase of the acquisition cycle. Under Clinger-Cohen, agencies must define mission-related performance measures before making information technology investments, and must determine actual mission-related benefits achieved from this information technology, to help ensure an adequate return on investment. For the DISN program, appropriate performance measures would be those that facilitate comparisons between DISN and the independent networks, as well as those that identify potential problems (for example, network reliability, network availability, and measures of customer service, including responsiveness to customer requests for maintenance or for new services). In our 1996 report on the DISN program, we recommended that Defense establish performance measures for DISN. Although it agreed to develop performance measures in response to that review, Defense has never developed measures for the DISN program. Until it does so, Defense will not be able to demonstrate to the Services and other components that DISN is a better choice than their various independent networks, nor will it be able to target and direct management attention to problem areas. In the 7 years that it has been implementing the DISN program and striving to improve telecommunications management in the department, Defense has done very little to implement the basic management controls it believed were needed to ensure success. Numerous independent networks continue to exist without DISA's knowledge; Defense does not have a comprehensive inventory of telecommunications equipment and services; DISA does not collect data and report on acquisitions, trends, and costs; Defense does not enforce the use of common-user networks; Defense has not implemented an effective waiver process that includes the objective evaluation of alternative telecommunications solutions; and Defense has not established good performance measures. As a result, Defense has not achieved its goals for an interoperable telecommunications environment, cannot support any claims that the long-haul networks it operates are cost-effective, and cannot determine which independent long-haul networks should be replaced by common user networks such as DISN or FTS 2000/2001. We recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence to ensure that existing policies are clearly defined, documented, and enforced. Specifically, ASD/C3I should develop and maintain a comprehensive inventory of Defense's telecommunications equipment and services; track acquisitions of telecommunications services throughout Defense, the actual costs of those services, and trends in usage (that is, the volumes and types of traffic that networks carry); define and institute an effective process for evaluating the cost-effectiveness of Defense networks and mandating the use of common-user networks for long-haul telecommunications where appropriate. As part of this process, define the criteria that DISA will use to make waiver determinations, including how DISA will measure technical, economic, and customer service factors in granting waivers. In addition, we recommend that the Secretary direct the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence to develop and adopt user-based provisioning, pricing, and performance metrics as minimum performance measures for DISN. The Senior Civilian Official for the Office of the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence (ASD/C3I) provided written comments on a draft of this report. Defense concurred with all of our recommendations. However, Defense expressed concern that the body of the draft report may lead the reader to believe that Defense has done nothing to implement or enforce its own long-haul telecommunications policies. In its response, the department notes that it has: (1) established the Defense Information Systems Database (DISD) as a comprehensive inventory of long-haul telecommunications networks throughout Defense, (2) clarified existing policy by issuing an ASD/C3I memorandum dated May 5, 1997, that reaffirms DISA's role as the sole manager and provider of long-haul telecommunications systems and services, (3) developed a process for determining how individual telecommunications requirements can best be satisfied, (4) developed a process for granting temporary waivers, and (5) begun the process of establishing performance metrics for DISN. We incorporated additional information in the report to more clearly reflect actions DISA has initiated. However, while these plans are a necessary first step, they must be effectively implemented to bring about real improvements in telecommunications management, which is the focus of the body of our report. Defense recognizes this in its discussion and expresses its commitment to effectively implementing our recommendations. Defense's comments are presented in appendix II. Detailed GAO responses follow in the same appendix. We will send copies of this report to the Chairman of your Committee; the Chairmen and Ranking Minority Members of the House Committee on Government Reform and Oversight, the House and Senate Appropriations Committees, the House National Security Committee, the Senate Armed Services Committee, and other interested congressional committees; the Secretary of Defense; and the Director of the Office of Management and Budget. Copies will be made available to others upon request. Please contact me at (202) 512-6240 if you or your staff have any questions. Major contributors to this report are listed in appendix III. Naval Education & Training Management Systems Network (NETMSN) NAVSEA Enterprise Wide Area Network (NEWNET/Smart Link) Puget Sound Metropolitan Area Network (MAN) Tidewater Metropolitan Area Network (MAN) Naval Facilities Engineering Command Wide Area Network (NAVFAC WAN) Pensacola Metropolitan Area Network (MAN) Corpus Christi Metropolitan Area Network (MAN) NCTAMS LANT Det. Video Teleconferencing NCTAMS LANT Det. Advanced Digital Multiplexer System (ADMS) NCTAMS LANT Det. U.S. Atlantic Command Net (USACONNET) NCTAMS LANT Det. Navy C2 System (NCCS) Guam Unclassified Metropolitan Area Network (MAN) Guam Administrative Telephone Switching System Planned -- San Diego Metropolitan Area Network (MAN) Information on these networks came from DISA's survey which does not include cost data. The Marine Corps did not provide this information or provided insufficient information to determine costs by fiscal year. The Air Force did not provide this information or provided insufficient information to determine costs by fiscal year. The following are GAO's comments on the Department of Defense letter dated July 16, 1998. 1. We acknowledge in this report that ASD/C3I has clarified existing long-haul telecommunications policy by issuing a May 5, 1997, memorandum. We have added information regarding Defense's update of 1991 policy that will reflect changes in technology, organization, and mission. Nevertheless, Defense's actions remain preliminary, and unless that policy is properly implemented and enforced it will remain ineffective. 2. As indicated in the reply, Defense does not maintain a comprehensive inventory of independent long-haul telecommunications networks, and therefore does not know how many networks are operating throughout the department or what functions they support. As Defense notes in its comments, additional guidance and procedures are needed to ensure that all requirements for long-haul telecommunications equipment and services are identified and placed in the Defense Information Systems Database. 3. Defense affirms in its comment what we state in this report, that DISA currently lacks well-defined steps for determining whether a long-haul telecommunications requirement can be most effectively satisfied by a common-user network. We note Defense's plan to develop and employ a standard requirements evaluation model. This model, if properly developed and implemented, could assist Defense in making cost-effective decisions on individual telecommunications requirements. However, the model may not be effective without the cooperation of Defense components, which may choose not to submit their requirements through DISA. The model may also not be effective if other steps mentioned in this report, such as adequate data gathering on telecommunications trends and costs, and use of performance measures, are not taken. 4. Two years ago we highlighted the need for DISN performance measures in a report on the DISN program (GAO/AIMD-97-9, November 27, 1996). We recognize that Defense now intends to take action on our recommendation that it implement user-based performance measures for DISN, and we agree that such metrics should be applied to all long-haul telecommunications. We are unable to make further comment, however, until Defense takes concrete steps to implement these performance measures. Franklin W. Deffer, Assistant Director Kevin E. Conway, Assistant Director Mary T. Marshall, Senior Information Systems Analyst Cristina T. Chaplain, Communications Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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 Department of Defense's (DOD) efforts to implement the Defense Information Systems Network (DISN), focusing on: (1) those DOD long-haul telecommunications networks operating outside of the common-user DISN; (2) DOD's progress in implementing its policies for managing DISN; and (3) DOD's progress in developing performance measures for DISN, which DOD agreed to do in response to GAO's previous review of the DISN program. GAO noted that: (1) although DOD has been implementing the DISN program for 7 years, numerous networks continue to exist without the Defense Information Systems Agency's (DISA) knowledge; (2) GAO's survey found that the military services are operating at least 87 independent networks that support a variety of long-haul telecommunications requirements; (3) the services reported costs on 68 of these networks totalling more than $89 million annually; (4) DOD's inability to restrict the number of networks operating across the department stems from its failure to implement basic telecommunications management policies established at the beginning of the DISN program and its failure to develop objective performance measures for the program; (5) DISA has not developed a comprehensive inventory of telecommunications networks throughout DOD nor have the military services developed inventories of their own networks; (6) DISA has not reported on telecommunications acquisitions, trends (volumes and types of traffic) and costs throughout DOD, and it lacks the data to develop such reports; (7) DOD has not effectively enforced the use of common-user services, nor were Assistant Secretary of Defense for Command, Control, Communications, and Intelligence (ASD/C3I) officials clear on how enforcement would occur; (8) DOD has only recently begun to implement an interim waiver process to exempt DOD components from using common-user networks--a final process has yet to be implemented; (9) DOD has not developed performance measures for the DISN program even though it agreed with GAO's previous report that these measures were essential to ensuring DISN was efficiently and effectively managed; (10) by not implementing the above, DOD lacks the basic management controls to ensure that it can achieve its goal for an interoperable and cost-effective telecommunications environment; (11) specifically, it lacks a foundation for identifying stovepiped and redundant networks that are not interoperable and cannot share information, and replacing them with mandated common-user services; it lacks a basis for maximizing the efficiency and cost-effectiveness of DISN; it cannot quantify problems; and it cannot learn from mistakes; and (12) as a result, DOD's stated goals for DISN are at risk, and DOD cannot ensure that DISN is the most cost-effective solution to DOD's telecommunications service requirements.
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A cookie is a short string of text that is sent from a Web server to a Web browser when the browser accesses a Web page. The information stored in a cookie includes, among other things, the name of the cookie, its unique identification number, its expiration date, and its domain. When a browser requests a page from the server that sent it a cookie, the browser sends a copy of that cookie back to the server. In general, most cookies are placed by the visited Web site. However, some Web sites also allow the placement of a third-party cookie--that is, a cookie placed on a visitor's computer by a domain other than the site being visited. Cookies--whether placed by the visited Web site or a third-party--may be further classified as either session cookies or persistent cookies. Session cookies are short-lived, are used only during the current on-line session, and expire when the user exits the browser. For example, session cookies could be used to support an interactive opinion survey. Persistent cookies remain stored on the user's computer until a specified expiration date and can be used by a Web site to track a user's browsing behavior, through potential linkage to other data and whenever the user returns to a site. Although cookies help enable electronic commerce and other Web applications, persistent cookies also pose privacy risks even if they do not themselves gather personally identifiable information because the data contained in persistent cookies may be linked to persons after the fact, even when that was not the original intent of the operating Web site. For example, links may be established when persons accessing the Web site give out personal information, such as their names or e-mail addresses, which can uniquely identify them to the organization operating the Web site. Once a persistent cookie is linked to personally identifiable information, it is relatively easy to learn visitors' browsing habits and keep track of viewed or downloaded Web pages. This practice raises concerns about the privacy of visitors to federal Web sites. Concerned about the protection of the privacy of visitors to federal Web sites, OMB directed--in Memorandum 99-18, issued in June 1999--every agency to post clear privacy policies on its principal Web site, other major entry points to agency Web sites, and any Web page where the agency collects substantial personal information from the public. Further, the memorandum stated that such polices must inform Web site visitors what information the agency collects about individuals, why it is collected, and how it is used, and that the policies must be clearly labeled and easily accessed when someone visits the site. In addition to these specific requirements, the memorandum was accompanied by an attachment entitled "Guidance and Model Language for Federal Web Site Privacy Policies." OMB attached the guidance and model language for agencies to use, depending on their needs. For example, the discussion in the attachment states that in the course of operating a Web site, certain information may be collected automatically or by cookies, and that in some instances, sites may have the technical ability to collect information and later take additional steps to identify people. The discussion further states that agency privacy policies should make clear whether or not they are collecting this type of information and whether they will take further steps to collect additional information. In June 2000, OMB issued further guidance specifically concerning the use of cookies on federal Web sites. Memorandum 00-13 had two major objectives. First, it reminded agencies that they are required by law and policy to establish clear privacy policies for their Web activities and to comply with those policies. To this end, the memorandum reiterated the requirement of Memorandum 99-18 for agencies to post privacy policies on their principal Web sites, major entry points, and other Web pages where substantial amounts of personal information are posted. Second, Memorandum 00-13 established a new federal policy regarding cookies by stating that "particular privacy concerns may be raised when uses of Web technology can track the activities of users over time and across Web sites." This guidance established a presumption that cookies would not be used on federal Web sites. Further, it provided that cookies could be used only when agencies (1) provide clear and conspicuous notice of their use, (2) have a compelling need to gather the data on the Web site, (3) have appropriate and publicly disclosed privacy safeguards for handling information derived from cookies, and (4) have personal approval by the head of the agency. The memorandum also directed agencies to provide a description of their privacy practices and the steps they have taken to ensure compliance with this memorandum as part of their information technology budget submission package. Concerned about the impact of Memorandum 00-13 on federal Web sites, the Chairman of the CIO Council's Subcommittee on Privacy subsequently sent a letter to the Administrator of OMB's OIRA recommending that session cookies be exempt from the requirements of the memorandum. The Chairman noted that the term "cookie" covers a number of techniques used to track information about Web site use, and that there is an important distinction between session and persistent cookies. Although supporting the application of the new policy to persistent cookies, the Chairman recommended that session cookies, which are discarded on completion of a session or expire within a short time frame and are not used to track personal information, not be subject to the requirements of the memorandum. He added that the use of these cookies should, however, continue to be disclosed in the Web sites' privacy statements. In a September 2000 letter responding to the Chairman, the Administrator agreed that persistent cookies are a principal example of a technique for tracking the activities of users over time and across different Web sites, and, thus, agencies should not use persistent cookies unless they have met the four conditions provided in the guidance. Further, the Administrator noted that Web sites could gather information from visitors in ways that do not raise privacy concerns, such as retaining the information only during the session or for the purpose of completing a particular on-line transaction, without the capacity to track the user over time and across different Web sites. The letter concluded that such activities would not fall within the scope of the new policy. As of January 2001, most federal Web sites we reviewed followed OMB's guidance on the use of cookies. Of the 65 federal Web sites reviewed, 57 did not use persistent cookies. However, of the eight Web sites using persistent cookies, four did so without disclosing this in their privacy policies, as required by OMB. Two of these four were allowing commercial, third-party sites to place these cookies on the computers of individuals visiting the sites. The four remaining sites using persistent cookies disclosed this use but did not meet OMB's other conditions. In addition, four sites that did not use persistent cookies did not post privacy policies on their home pages. After we brought these findings to their attention, all 12 agencies either took corrective action or stated that they planned to take such action, as follows: The four sites using persistent cookies without disclosing such use have removed those cookies from their Web sites. Two of the four sites using persistent cookies with disclosure have now removed them. Regarding the other two sites, one has recently met all of OMB's conditions in order to use persistent cookies. Agency officials responsible for the remaining site have revised their privacy policy to disclose the use of persistent cookies and have stated that they are in the process of seeking approval from the head of the agency to use such cookies. All four sites lacking privacy policy notices have now installed such statement hyperlinks on their respective home pages. Although OMB's guidance has proved useful in ensuring that federal Web sites address privacy issues, the guidance is fragmented, with multiple documents addressing various aspects of Web site privacy and cookie issues. Guidance concerning cookies is currently contained in two official policy memorandums. These documents, taken together, prompted the CIO Council to recommend clarification of OMB's cookie policy. Although OMB's response provided useful clarification on the requirements for using persistent cookies, OMB has not yet revised the guidance memorandums themselves. Further, the letter to the CIO Council does not appear on OMB's Web site with the two guidance memorandums. As a result, federal agencies may not have ready access to the clarifying letter and may be confused as to requirements on the use of cookies. OMB's guidance documents also do not provide clear direction on the disclosure requirements for session cookies. Memorandum 99-18 stated that agency privacy policies should make clear whether information is collected automatically through cookies or other techniques, but it did not distinguish between session and persistent cookies. Memorandum 00-13 established the four conditions for cookie use but, again, did not clearly distinguish between session and persistent cookies. This prompted the CIO Council's letter recommending clarification. OIRA's letter in response clarified that Memorandum 00-13 applied only to persistent cookies but did not directly respond to the Council's recommendation that session cookies continue to be disclosed in Web site privacy policies. This left unresolved questions as to what extent the notice requirements from Memorandum 99-18 apply to session cookies. When we asked OMB to clarify the disclosure requirements for session cookies, OIRA officials stated that session cookies do not present a privacy issue; therefore, no disclosure is required. This position, however, may confuse and mislead federal Web site visitors. For example, under this policy, a federal Web site may state in its privacy policy that it is not using cookies, while it continues to give session cookies. If a site visitor has enabled a browser to detect the presence of cookies, it may not be apparent to the visitor whether the cookies they see are session or persistent. This could raise questions about the practices of the Web site that would not be resolved by viewing the privacy policy. The Chair of the CIO Council's Subcommittee on Privacy agreed that the issue is one of clarity rather than privacy. Further, he stated that it is better for agencies to choose full disclosure rather than partial, and that it constitutes good customer service to provide such disclosure. Most federal Web sites we reviewed were following OMB's guidance on the use of cookies. The sites that were not following the guidance either have taken or plan to take corrective action. The OMB guidance, while helpful, leaves agencies to implement fragmented directives contained in multiple documents. In addition, the guidance itself is not clear on the disclosure requirements for techniques that do not track users over time and across Web sites, such as session cookies. Further, OMB's stated position on the disclosure requirements for session cookies could lead to confusion on the part of visitors to federal Web sites. To clarify agency requirements on the use of automatic collections of information, including the use of cookies on their Web sites, we recommend that the Director, OMB, in consultation with other parties, such as agency officials and the CIO Council, unify OMB's guidance on Web site privacy policies and the use of cookies, clarify the resulting guidance to provide comprehensive direction on the use of cookies by federal agencies on their Web sites, and consider directing federal agencies to disclose the use of session cookies in their Web site privacy notices. We provided a draft of this report for review and comment to the Director, OMB, on March 26, 2001. OMB did not provide comments. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. At that time we will provide copies of the report to Senator Joseph Lieberman, Ranking Member, Senate Committee on Governmental Affairs; Representative Dan Burton, Chairman, and Representative Henry A. Waxman, Ranking Minority Member, House Committee on Government Reform; the Honorable Mitchell E. Daniels, Jr., Director, Office of Management and Budget; and other interested parties. Copies will also be available on GAO's Web site at www.gao.gov. If you have any questions, please contact me at (202) 512-6240 or Mike Dolak, Assistant Director, at (202) 512-6362. We can also be reached by e- mail at [email protected] and [email protected], respectively. Key contributors to this report were Scott A. Binder, Michael P. Fruitman, and David F. Plocher. To determine the use of cookies by federal agencies, we reviewed 65 federal Web sites--the same sites we reviewed in our October 2000 report. These Web sites consisted of (1) the sites operated by the 33 high- impact agencies, which handle the majority of the government's contact with the public, and (2) 32 sites randomly selected from the General Services Administration's government domain registry database. We reviewed each Web site between November and December, 2000, to determine which were using cookies and the type of cookies given. We also determined whether the sites using persistent cookies (1) provided clear and conspicuous notice of their use, (2) had a compelling need to gather the data on the site, (3) had appropriate and publicly disclosed privacy safeguards for handling information derived from cookies, and (4) had personal approval by the head of the agency. We updated our findings on January 24, 2001. We performed our review by using Microsoft's Internet Explorer browser, version 5.5. We changed the security settings in the browser to alert us if we were about to receive a cookie. Before we would visit a Web site, we would clear out our computer's cache, cookies, and temporary files and clear our history folder. We then typed in the Universal Resource Locator of the site we were visiting and spent about 10 to15 minutes per site searching through its links to determine if it was using cookies. To document our review, we made a printout of the site's home page and privacy policies. If we found a persistent cookie on the site, we would make a printout of the cookie. After we captured and printed the cookie, we would stop searching and move on to another site. We contacted the agencies operating the Web sites that were using persistent cookies, notified them of our findings, and asked them to provide written responses detailing actions they planned to take in response to our findings and provide documentation to support their compliance with the Office of Management and Budget's (OMB) guidelines. Specifically, we asked them to support how they (1) provided clear and conspicuous notice that they were using persistent cookies, (2) had a compelling need to gather the data on the site, (3) had appropriate and publicly disclosed privacy safeguards for handling the information derived from cookies, and (4) had obtained the personal approval by the head of the agency. We also contacted the four agencies that did not have privacy policies posted on their home pages, notified them of our findings, and asked them to provide written responses detailing the actions they planned to take to ensure that their Web sites complied with OMB guidance. To determine whether the guidance issued by OMB provided adequate direction to federal agencies operating public Web sites, we analyzed the guidance and discussed its intent with representatives of OMB's Office of Information and Regulatory Affairs. We also met with the Chairman of the Chief Information Officers Council, Subcommittee on Privacy, to obtain the council's views on additional privacy issues and concerns that needed to be addressed in OMB guidance. We conducted our review from August 2000 through March 2001, in accordance with generally accepted government auditing standards.
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Federal agencies are using Internet "cookies" to enable electronic transactions and track visitors on their websites. Cookies are text files that have unique identifiers and are used to store and retrieve information that allow websites to recognize returning users, track on-line purchases, or maintain and serve customized web pages. This report discusses whether (1) federal websites complied with the Office of Management and Budget's (OMB) guidance on the use of cookies and (2) the guidance provided federal agencies with clear instructions on the use of cookies. GAO reviewed 65 websites randomly selected from the General Services Administration's government domain registry database between November 2000 and January 2001 to determine whether they used persistent cookies and whether such use was disclosed in the website's privacy policy. As of January 2001, most of the websites reviewed were following OMB's guidance on the use of cookies. Of the 65 sites GAO reviewed, 57 did not use persistent cookies on their websites, eight used persistent cookies, four did not disclose such use in their privacy policy, and the remaining four sites using persistent cookies did provide disclosure but did not meet OMB's other conditions for using cookies. In addition, four other sites that did not use cookies did not post privacy policies on their home pages. Those sites were taking, or planning to take, corrective action to address their noncompliance with OMB guidance. GAO found that although OMB's guidance proved useful in ensuring that federal websites address privacy issues, the guidance remained fragmented, with multiple documents addressing various aspects of Web site privacy and cookie issues. In addition, the guidance did not provide clear direction on the disclosure of session cookies.
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In July 1997, the FCC estimated that U.S. consumers could choose from over 500 long-distance service providers. Slamming subverts that choice because it changes a consumer's long-distance provider without the consumer's knowledge and consent. It distorts telecommunications markets by enabling companies engaged in misleading practices to increase their customer bases, revenues, and profitability through illegal means. In addition, slammed consumers are often overcharged, according to the FCC and the industry; are unable to use their preferred long-distance service; cannot use calling cards in emergencies or while traveling; and lose premiums (e.g., frequent flyer miles or free minutes of long-distance calls) provided by their properly authorized provider. Collectively, slamming increases the costs to long-distance providers and other firms involved in this industry. Their increased costs occur when slamming victims refuse to pay the charges of unauthorized service providers or when slammers themselves take the profits and leave unpaid bills, sometimes amounting to millions of dollars. Determining the prevalence of slamming is extremely difficult. Although the FCC began receiving slamming complaints after the divestiture of AT&T in 1985, no central repository exists for slamming complaints; and no entity, in our opinion, has made a significant effort to estimate the prevalence of slamming. Contributing to the uncertainty concerning the prevalence of slamming, some consumers, who do not review their monthly telephone bills closely, are unaware that they have been slammed. Others may be aware that they were slammed but take no corrective action, such as filing a complaint. Customers can voluntarily change their long-distance company--or Primary Interexchange Carrier (PIC)--by contacting, or submitting an "order" to, the local exchange carrier. Long-distance companies can also legitimately process a PIC change to which the customer has agreed through either a written or verbal authorization. The three types of long-distance providers are facility-based carriers such as AT&T, MCI, and Sprint; switching resellers; and switchless resellers. According to representatives of the FCC, numerous state regulatory agencies, and the industry, those who most frequently engage in intentional slamming are switchless resellers. They have the least to lose by using deceptive or fraudulent practices because they have no substantive investment in the industry. Nevertheless, the economic incentives for slamming are shared by all long-distance providers. Facility-based carriers have an economic incentive to slam because they have high fixed costs for network equipment and low costs for providing service to additional consumers. Thus, providing service to additional consumers, even without authorization, adds to a carrier's cash flow with little additional cost. Conversely, those same high fixed costs represent a strong commitment to the long-distance industry and a need to maintain the trust, and business, of their existing customers. Resellers--switching and switchless--also provide long-distance service to their customers. Switching resellers maintain and operate switching equipment to connect their customers to the networks of facility-based carriers. Switchless resellers, however, have no equipment and generally rely on facility-based carriers and other resellers to service their customers. Resellers make a profit by selling long-distance services to their customers at rates that are higher than the fees the resellers pay to facility-based carriers for handling their customers' calls. Both switching and switchless resellers have an economic incentive to slam because additional customers increase their profits. Further, unscrupulous telemarketers, that contract with a long-distance provider, may slam consumers to increase their commissions (e.g., a flat fee for every customer switched). However, entrepreneurial criminals engaged in slamming operations prefer acting as switchless resellers to generate fast profits and to make criminal prosecution more difficult. They have few, if any, overhead costs and need little, if any, financial investment in their businesses. In addition, the cost of filing the required tariff--or schedule of services, rates, and charges--with the FCC to initiate a business is inexpensive; and an unscrupulous individual can avoid that cost altogether. The unscrupulous reseller can then slam customers, collect payments from them, and run--leaving unpaid bills to the facility-based carrier and other entities, such as billing companies, that assisted the reseller. If the reseller did not submit correct information to the FCC or state regulatory agencies, the likelihood of getting caught and prosecuted is negligible. The owner/operator of our case-study companies used such tactics. (See app. I.) His eight known switchless reselling companies operated at various times between 1993 and 1996, charged their customers at least $20 million, and have been fined hundreds of thousands of dollars by state regulatory agencies and the FCC. However, neither the FCC nor we were able to locate him in 1997 or to date in 1998 because he has concealed his whereabouts. Both business and individual consumers must select a PIC to provide their long-distance service through their local exchange carrier. Intentional slamming is thus possible because the legitimate ways a consumer's PIC are changed (see following section) can be manipulated easily and in a fraudulent manner. Slamming can occur through deceptive marketing practices--whether by facility-based carriers, resellers, or telemarketers acting on their behalf--by which consumers are misled into signing an authorization to switch their PIC. Unscrupulous telemarketers or long-distance providers may also falsify records to make it appear that the consumer agreed verbally or in writing to the switch. It is also possible to slam consumers without ever contacting them, such as by obtaining their telephone numbers from a telephone book and submitting them to the local exchange carrier for changing. As an FCC Commissioner stated before a U.S. Senate subcommittee, "slamming scenarios involve [, among other methods,] deceptive sweepstakes, misleading forms, forged signatures and telemarketers who do not understand the word no." Although the FCC, most states, and the telecommunications industry have some antislamming rules and practices in place, each relies on the others to be the main forces in the antislamming battle. Of the antislamming efforts, those by some states are the most extensive. However, we found no effective antislamming effort to keep unscrupulous individuals from becoming a long-distance provider. For example, the FCC does not review information submitted to it in tariff filings that may alert it to unethical applicants. In addition, the FCC lags far behind some individual state regulatory agencies in the amount of fines imposed on companies for slamming. The FCC first adopted antislamming measures in 1985 and has subsequently promulgated regulations to improve its antislamming efforts. For example, in 1992 as a result of an increase in telemarketing, the FCC required long-distance providers to obtain one of four forms of verification concerning change-orders generated by telemarketing. Verification would occur upon the customer's written authorization; the customer's electronic authorization placed from the telephone number for which the PIC was to be changed; receipt of the customer's oral authorization by an independent third party, operating in a location physically separate from the telemarketing representative; or the long-distance provider's mailing of an information package to the customer within 3 business days of the customer's request for a PIC change. In 1995, as a result of receiving thousands of slamming complaints, the FCC again revised its regulations. The revision, in part, prohibited the potentially deceptive or confusing practice of combining a letter of agency (LOA) with promotional materials sent to consumers. However, we found nothing in FCC practices that would effectively curtail unscrupulous individuals from entering the telecommunications industry. And no FCC regulation discusses what preventive measures the FCC should take to ensure that long-distance-provider applicants have a satisfactory record of integrity and business ethics. Further, according to FCC's Deputy Director for Enforcement, Common Carrier Bureau, Enforcement Division, the FCC relies largely on state regulatory agencies and the industry's self-regulating measures for antislamming efforts. According to representatives from state regulatory agencies, facility-based carriers, resellers of long-distance services, and others in the industry, they view an entity's possession of an FCC tariff as a key credential for a long-distance provider. Each long-distance service provider is now required to file a tariff with the FCC, including information that should allow the FCC to contact the provider about, among other matters, an inordinate number of slamming complaints against it. However, according to knowledgeable FCC officials, the FCC merely accepts a tariff filing and does not review a filed tariff's information, including that regarding the applicant. Thus, the filing procedure is no deterrent to a determined slammer. Neither does the procedure support the validity that states and the industry place on an entity that has filed an FCC tariff. For example, we easily filed a tariff with the FCC through deceptive means during our investigation when testing FCC's oversight of the tariff-filing procedure. In short, although we submitted fictitious information for the tariff and did not pay FCC's required $600 application fee, we received FCC's stamp of approval. Thus, with a tariff on file, our fictitious company--PSI Communications--is able to do business and slam consumers as a switchless reseller with little chance of adverse consequences. Another antislamming measure--the FCC's Common Carrier Scorecard--publicizes the more flagrant slammers, but it is inaccurate. The FCC prepares the scorecard, which lists the long-distance providers about which the FCC has received numerous slamming complaints, for the telecommunications industry and the public. The scorecard also compares those providers by citing the ratio of the number of complaints per million dollars of company revenue. However, it presents an inaccurate picture because it severely understates the number of complaints per million dollars of revenue for resellers. This occurs because resellers are not required to, and generally do not, report their revenue to the FCC unless that revenue exceeds $109 million. Therefore, in the absence of actual data and for the sake of comparison, the FCC assumes that those resellers had $109 million in revenue. This assumption results in unrealistically low complaint-to-revenue ratios for a large number of resellers. According to representatives of some state regulatory agencies, states rely largely on the FCC and the industry's self-regulating measures for antislamming efforts. While most state regulatory agencies have some licensing procedures and requirements for an entity to become a long-distance service provider, those procedures/requirements vary from negligible to restrictive. For example, Utah does not regulate long-distance service providers. In contrast, in Georgia, switchless resellers must first file an application with the state public utility commission and provide a copy to the governor's Office of Consumer Affairs. The commission then reviews the submission, determines whether to issue an interim certificate, and rereviews the interim certificate after 12 months to determine whether to issue a permanent certificate. In addition, switchless resellers must adhere to Georgia commission rules. The telecommunications industry also attempts to weed out companies involved in slamming. For example, various facility-based carriers have different antislamming measures based on the companies' marketing philosophies. Such measures include MCI's emphasis on the use of third party verifications and AT&T's emphasis on use of written authorizations, or LOAs. In addition, a facility-based carrier may question a reseller's submission of a large number of telephone numbers at one time. However, we found few activities that resellers were undertaking to curtail slamming. In addition, we found no industry practices that would effectively keep unscrupulous individuals from entering the telecommunications industry. Moreover, according to officials of a reselling company and a billing company, the industry largely relies on the FCC and state regulatory agencies for antislamming measures. Indeed, the most effective antislamming measure appears to be one that consumers themselves can effect against all but the most resourceful of slammers--a "PIC freeze." The individual customer can contact the local exchange carrier and request a PIC freeze, in essence freezing the customer's choice of long-distance providers from change. The customer may lift the freeze by recontacting the local exchange carrier and answering certain identifying questions about the customer's account. In comparison with some states' actions, the FCC has taken little punitive action against slammers. During 1997, the FCC obtained consent decrees from nine companies nationwide that paid $1,245,000 in fines because of slamming. However, in May 1997, the California Public Utilities Commission suspended one firm for 3 years because of slamming, fined it $2 million, and ordered it to refund another $2 million to its customers. Further, within the same general time period, other state regulatory commissions took more extensive actions than did the FCC against the same companies. For example, In December 1996, the California Public Utilities Commission reached a settlement with another company and its affiliate that were involved in slamming. The settlement suspended the firms from offering long-distance service in California for 40 months and required the firms to offer $600,000 in refunds to 32,000 customers that had complained about slamming. In comparison, during 1997, the FCC issued a Notice of Apparent Liability to this company for $200,000 for apparent slamming violations. In February 1998, the Florida Public Service Commission voted to require a third firm to show cause, in writing, why it should not be fined $500,000 for slamming violations. (This firm is also the subject of numerous slamming complaints in New Jersey and Tennessee.) In comparison, during 1997 the FCC issued a Notice of Apparent Liability to this firm amounting to only $80,000 for apparent slamming violations. Further, the FCC takes an inordinate amount of time, as acknowledged by FCC officials, to identify companies that slam consumers and to issue orders for corrective actions (i.e., fines, suspensions) or to bar them from doing business altogether. For example, Mr. Fletcher, the owner/operator of the case-study companies, began his large-scale slamming activities in 1995. But it was not until June 1997 that the FCC initiated enforcement action against the eight known Fletcher-controlled companies with an Order to Show Cause and Notice of Opportunity for Hearing. In the order, the FCC indicated that it had substantial evidence that the companies had ignored FCC's PIC-change verification procedures and routinely submitted PIC-change requests that were based on forged or falsified LOAs. The FCC thus directed Mr. Fletcher and his companies to show cause in an evidentiary hearing why the FCC should not require them to cease providing long-distance services without prior FCC consent and why the companies' operating authority should not be revoked. Because Mr. Fletcher waived his right to a hearing when he did not file a "written appearance," stating that he would appear for such a hearing, the FCC could have entered an order detailing its final enforcement action against the Fletcher companies and Mr. Fletcher. However, as of March 1998, the FCC had taken no such action. Neither the FCC, the states, nor the telecommunications industry have been effective in protecting the consumer from telephone slamming. Because of the lack of FCC diligence, companies can become long-distance service providers without providing accurate background information. Some states have taken significant action to protect consumers from slamming, but others have taken little action or have no antislamming regulations. Further, the industry approach to slamming appears to be largely market-driven rather than consumer-oriented. Given this environment, unscrupulous long-distance providers slam consumers, often with virtual impunity. As a consequence, consumers and the industry itself are becoming increasingly vulnerable as targets for large scale fraud. The most effective action that consumers can take to eliminate the chance of intentional slamming is to have their local exchange carrier freeze their choice of long-distance providers. Our investigation took place between January and March 1998. We interviewed representatives of the FCC and long-distance providers, including facility-based carriers and resellers. In addition, we interviewed representatives of billing and data-processing firms servicing long-distance providers. We reviewed available public records on slamming including prior congressional hearings and documents belonging to long-distance providers. These included AT&T documents provided to us pursuant to a subpoena issued by the Permanent Subcommittee on Investigations, Senate Committee on Governmental Affairs. Further, through the National Association of State Regulatory Agencies, we obtained and reviewed information from state entities that regulate long-distance service providers. To determine the extent of FCC's oversight of tariff filings, we filed fictitious documentation with the FCC and did not pay the required filing fee. As arranged with your office, unless you announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to interested congressional committees and the Chairman of the Federal Communications Commission. Copies of this report will also be made available to others upon request. If you have any questions about our investigation, please call me at (202) 512-7455 or Assistant Director Ronald Malfi of my staff at (202) 512-7420. This case study is based on our limited investigation of four of Daniel H. Fletcher's eight known business ventures operating as long-distance providers between 1993 and 1996. Through each business, it appears that Mr. Fletcher slammed or attempted to slam many thousands of consumers. As a further indication of the extent of his dealings, industry records, although incomplete, indicate that between 1993 and 1996 two of Mr. Fletcher's companies billed their customers more than $20 million in long-distance charges. Mr. Fletcher apparently began reselling long-distance services in 1993. By mid-1996, the industry firms dealing with Mr. Fletcher's companies began to end those dealings because of his customers' slamming complaints and/or his nonpayment for long-distance network usage by his customers. Collectively, these firms claim that Mr. Fletcher's companies owe them $3.8 million. Another firm has obtained a $10-million judgment against one Fletcher company. Mr. Fletcher's companies have also come under regulatory scrutiny by several states and the FCC. For example, in 1997 the Florida Public Service Commission cancelled the right of one Fletcher-controlled company--Phone Calls, Inc. (PCI)--to do business in the state and fined it $860,000 for slamming. New York also took action against PCI in 1997. In May 1997, the FCC ordered another Fletcher company--Long Distance Services, Inc.--to forfeit $80,000 to the United States "for violating the Commission's rules and orders" when it changed (or caused the change of) the long-distance providers of two customers without authorization and through the use of apparently forged LOAs. The FCC did not refer the $80,000 forfeiture to the U. S. Department of Justice for collection, according to an FCC official, because the Justice Department had previously failed to take action with similar cases. In addition, in June 1997, the FCC, citing numerous complaints and evidence of forged or falsified LOAs, issued an Order to Show Cause and Notice of Opportunity for Hearing regarding Mr. Fletcher and his eight companies. In that order, the FCC, in effect, directed Mr. Fletcher and his companies to show cause why the FCC should not require them to stop providing long-distance services without prior FCC consent and why the companies' operating authority should not be revoked. However, since Mr. Fletcher did not provide the FCC a written appearance, or explanation, the FCC could have entered the order, citing FCC's final enforcement action. However, as of March 1998, the FCC had not done so. It appears that all eight known Fletcher-controlled companies were out of business by the end of 1996. However, our investigation identified several instances of Mr. Fletcher's continued involvement since then in the telecommunications industry. We have been unable to locate Mr. Fletcher for his response to the allegations because he knowingly used false information to conceal his identity and the location of his companies and residence(s). Based on an introduction by a Sprint representative, Mr. Fletcher's long-distance reselling business Christian Church Network, Inc. (doing business as Church Discount Group, Inc.) entered into a contract on August 18, 1993, with Billing Concepts and Sprint. Under the terms of the contract, Christian Church Network submitted electronic records to Billing Concepts, representing its customers' long-distance calls made over Sprint's network. Billing Concepts (1) advanced 70 percent of the calls' cost (as charged by the Fletcher company) to Sprint and (2) retained 30 percent in reserve for its administrative costs and potential nonpayment by the Fletcher company's customers. Sprint deducted its network charges and sent the remainder to Christian Church Network. Under this arrangement, Billing Concepts sent the electronic records of the customers' long-distance calls to the appropriate local exchange carriers for billing (at Christian Church Network's charged rate) and collection. Within 60 days, the local exchange carriers sent approximately 95 percent of the billings' value to Billing Concepts for the Fletcher company. The local exchange carriers withheld 5 percent for possible nonpayment by the Fletcher company's customers. On July 22, 1994, Sprint, Billing Concepts, and Mr. Fletcher's Christian Church Network modified their agreement whereby Billing Concepts would advance 70 percent of the billings directly to the Fletcher company rather than to Sprint. The Fletcher company was to pay Sprint for its network charges from the advances. Then from November 1994 to July 1995, the company did not receive advances from Billing Concepts and instead paid Sprint from payments received from the local exchange carriers. However, starting in July 1995, the Fletcher company requested and again received 70-percent advances from Billing Concepts. From November 1995 through April 1996, Christian Church Network produced a tenfold increase in the billable customer base. Between January and April 1996, the company also apparently stopped paying Sprint for its customers' network usage, keeping the full 70-percent advance from Billing Concepts as its profit. Further, in July 1996, Mr. Fletcher--representing another of his eight companies, Long Distance Services, Inc.--signed a second contract with Billing Concepts. Billing Concepts continued advances to Christian Church Network until September 1996. Then, after receiving a large number of slamming complaints from Christian Church Network's customers following the increase in the company's customer base, Billing Concepts terminated all business with both Fletcher companies. From December 1993 through December 1996, the two Fletcher companies submitted over $12,432,000 in bills for long-distance usage to be forwarded to their customers. When Billing Concepts terminated business with the two Fletcher companies in September 1996 because of the alleged slamming, it had already advanced the companies more than it would receive from the local exchange carriers. (Those carriers returned less than had been billed because some customers did not pay after learning they had been slammed.) Billing Concepts claims that the two Fletcher companies owe it approximately $586,000 that it was unable to collect from the local exchange carriers. In addition, Sprint terminated its business relationship with Christian Church Network and Long Distance Services in September 1996 for nonpayment of outstanding network charges. Sprint claims that the two companies still owe it about $547,000 for that nonpayment. (Sprint attempted to renegotiate its contract with Mr. Fletcher's Christian Church Network before the termination. Our investigation indicates that Mr. Fletcher instead took his increased customer base to Atlas Communications via another of his eight companies, Phone Calls, Inc. [PCI], and did not pay Sprint. See later discussion regarding PCI and Atlas.) On October 19, 1994, Mr. Fletcher, doing business as Long Distance Services, Inc., signed a contract with AT&T to place his customers on its network. The agreement called for Long Distance Services to purchase a minimum of $300,000 of long-distance service annually. AT&T's incomplete records indicated that starting in March 1996, the Fletcher company began to dramatically increase the number of new customers to be placed on AT&T's network. During an April 8, 1996, telephone call to AT&T and in an April 9, 1996, letter sent via facsimile, Mr. Fletcher requested that AT&T confirm that (1) AT&T had accepted the new customers that his company had transmitted to AT&T since March 1, 1996, and (2) AT&T had put them on line. According to Mr. Fletcher's letter, his Long Distance Services had requested that more than 540,000 new customers be switched to AT&T. The letter also noted that the company was sending an additional 95,000 customer telephone numbers that day. In an April 9, 1996, return letter to Mr. Fletcher, AT&T questioned his customer base and his customers' letters of agency (LOA) authorizing the change of long-distance companies. AT&T requested that Mr. Fletcher forward a sampling of the LOAs, and Mr. Fletcher provided approximately 1,000. In another letter to Mr. Fletcher, dated April 16, 1996, AT&T provided reasons why it believed the LOAs were in violation of FCC regulations (47 C.F.R. section 64.1150): (1) the LOAs had been combined with a commercial inducement, (2) Mr. Fletcher's LOA form did not clearly indicate that the form was authorizing a change to the customer's Primary Interexchange Carrier (PIC), and (3) it did not identify the carrier to which the subscriber would be switched. On April 25, 1996, AT&T wrote Mr. Fletcher informing him that it had rejected all "orders" (new customers) sent by Long Distance Services, Inc., presumably since March 1, 1996. Although AT&T recognized a problem with Mr. Fletcher and his business practices during April 1996, it continued service to Long Distance Services, Inc. until November 1, 1997, when it discontinued service for nonpayment for network usage. According to an AT&T representative, Long Distance Services, Inc. still owes AT&T over $1,652,000. On January 5, 1995, Mr. Fletcher, doing business as Discount Calling Card, Inc., signed a contract with Integretal, a billing company. Although Integretal officials provided us little information, stating that the information was missing, we did determine the following. From May 5, 1995, through February 26, 1996, Integretal processed approximately $8,220,000 in long-distance call billings for Discount Calling Card customers. Under the terms of its agreement, Integretal advanced the Fletcher company 70 percent of the billing value of the electronic records of calls submitted by the company. Integretal was contractually entitled to retain 30 percent of the calls' value for processing and potential nonpayment by Discount Calling Card's customers. Because of billing complaints made by Discount Calling Card's customers, Integretal claims that it lost about $1,144,000 that it was unable to recover from the company. Integretal stopped doing business with Discount Calling Card in November 1996 because of numerous customer complaints. On June 18, 1996, the Fletcher-controlled Phone Calls, Inc. (PCI) and Atlas Communications, Inc. signed a business contract for PCI's customers to be placed on Atlas' network (Sprint). In early July 1996, PCI provided its customer base of 544,000 telephone numbers to Atlas. (Information developed by our investigation suggests that Fletcher companies slammed these customers largely from the customer base they had given to Billing Concepts.) Subsequently, Atlas provided the PCI customer telephone numbers to Sprint for placement on Sprint's network. However, within the next several weeks, Atlas was able to place only about 200,000 telephone numbers from PCI's customer base on Sprint's network. This occurred, according to Atlas representatives, because (1) the individual consumers had placed a PIC freeze with their local exchange carriers, preventing the change or (2) the telephone numbers were inoperative. Because of this low placement rate, Atlas became concerned that PCI was slamming customers and elected not to honor its contract. Subsequently, on August 19, 1996, PCI filed a lawsuit against Atlas in Pennsylvania, attempting to obtain (as per the original contract) the raw record material representing the details of its customers' telephone usage, which would allow PCI to bill its customers. Sprint had supplied this raw record material to Atlas. In August 1996, Atlas submitted evidence, in the breach-of-contract suit brought by PCI, indicating that many slamming complaints had been made against PCI. For example, after the first bills, representing PCI customers' calls for July and August 1996, had been sent out, an unusually high percentage (approximately 30 percent) of PCI customers lodged complaints with regulators and government law enforcement agencies--including the FCC, various public utility commissions, and various state attorneys general; Sprint; and numerous local exchange carriers. According to an Atlas representative, Atlas attempted to answer these complaints and reviewed the customers' LOAs authorizing the change of long-distance companies. After the review, Atlas believed that a number of the LOAs were forgeries. According to the vice president of Atlas Communications, the judge issued a temporary restraining order, preventing PCI from obtaining the raw record material. The judge also agreed to allow Atlas to charge PCI's customers at the existing standard AT&T long-distance rates (as the most prevalent U.S. service) rather than PCI's excessively high rates. Subsequently, Atlas entered into a contract with US Billing to perform billing-clearinghouse services for Atlas regarding PCI's customers. In this instance, Atlas' prompt action prevented PCI from receiving any payments for its customers' long-distance calls. By February 1998, Atlas was serving less than 20 percent of the original 200,000 PCI customers that had been successfully placed on Sprint's network. This sharp drop in the customer base occurred, according to an Atlas representative, largely because PCI had initially slammed the customers. On the basis of the 1996 suit in Pennsylvania, Atlas obtained a $10-million judgment against the Fletcher-controlled PCI because, according to the court, PCI fraudulently obtained customers to switch their long-distance telephone service to Atlas' network; identified customers to Atlas, for Atlas' placement on its network, in states within which PCI was not certificated as a long-distance service provider; failed to supply customer service to those customers it had caused Atlas to place on its network; and failed to supply customers, Atlas, or regulatory agencies with those customers' LOAs upon request. Further, in August 1997, the Florida Public Service Commission fined the Fletcher-controlled PCI $860,000 for slamming, failing to respond to commission inquiries, and misusing its certificate to provide telecommunications service in Florida. This fine was in addition to the commission's March 1997 cancellation of PCI's certificate. According to a statement by the chairman of the commission, PCI accounted for over 400 of the nearly 2,400 slamming complaints received by the commission in 1996. This was the largest number of complaints logged by the commission against any company in a similar period. New York regulators also revoked PCI's license in mid-1997. Barbara Coles, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO provided information on: (1) which entities or companies engage in telephone slamming violations; (2) the process by which the providers defraud consumers; and (3) what the Federal Communications Commission (FCC), state regulatory entities, and the telecommunications industry has done to curtail slamming. GAO noted that: (1) all three types of long-distance providers--facility-based carriers, which have extensive physical equipment, switching resellers, which have one or more switching stations, and switchless resellers, having the least to lose and the most to gain, most frequently engage in intentional slamming, according to the FCC, state regulatory agencies, and the telecommunications industry; (2) intentional slamming is accomplished by deceptive practices; (3) these include falsifying documents that authorize a switch and misleading customers into signing such a document; (4) the FCC, state regulatory agencies, and the telecommunications industry rely on the others to be the main forces against intentional slamming; (5) however, with regard to the FCC, its antislamming measures effectively do little to protect consumers from slamming; (6) although representatives of state regulatory agencies and the industry view a provider's FCC tariff--a schedule of services, rates, and charges--as a key credential, the FCC places no significance on the tariffs that long-distance providers are required to file with it before providing service; (7) although the FCC in 1996 attempted to regulate tariffs out of existence, a circuit court stayed that FCC regulation in 1997 as a result of a lawsuit; (8) the FCC now accepts tariffs; however, it does not review the tariff information; (9) thus, having a tariff on file with the FCC is no guarantee of a long-distance provider's integrity or of FCC's ability to penalize a provider that slams consumers; (10) as part of GAO's investigation and using fictitious information, GAO easily filed a tariff with the FCC and could now, as a switchless reseller, slam consumers with little chance of being caught; (11) state regulatory measures that could preclude slamming range from none in a few states to extensive in others; (12) industry's antislamming measures appear to be more market-driven; and (13) however, a Primary Interexchange Carriers freeze--an action that consumers can take by contacting their local exchange carrier and freezing their choice of Primary Interexchange Carriers, or long distance providers--effectively reduces the chance of intentional slamming.
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The Recovery Act provided DOE more than $43.2 billion, including $36.7 billion for projects and activities and $6.5 billion in borrowing authority. Of the $36.7 billion for projects and activities, almost half--$16.8 billion-- was provided to the Office of Energy Efficiency and Renewable Energy for projects intended to improve energy efficiency, build the domestic renewable energy industry, and restructure the transportation industry to increase global competitiveness. The Recovery Act also provided $6 billion to the Office of Environmental Management for nuclear waste cleanup projects, $4.5 billion to the Office of Electricity Delivery and Energy Reliability for electric grid modernization, $4 billion to the Loan Guarantee Program Office to support loan guarantees for renewable energy and electric power transmission projects, $3.4 billion to the Office of Fossil Energy for carbon capture and sequestration efforts, and $2 billion to the Office of Science and the Advanced Research Projects Agency-Energy for advanced energy technology research. As of February 28, 2010, DOE reported that it had obligated $25.7 billion (70 percent) and reported expenditures of $2.5 billion (7 percent) of the $36.7 billion it received under the Recovery Act for projects and activities (see table 1). By comparison, as of December 31, 2009, the department reported it had obligated $23.2 billion (54 percent) and reported expenditures of $1.8 billion (4 percent). The percentage of Recovery Act funds obligated varied widely across DOE program offices. Several program offices--Energy Efficiency and Renewable Energy, the Energy Information Administration, Environmental Management, and Science--had obligated more than 85 percent of their Recovery Act funds by February 28, 2010, while other program offices--Fossil Energy, the Loan Guarantee Program, and the Western Area Power Administration--had obligated less than a third of their Recovery Act funds by that time. The percentage of Recovery Act funds spent also varied across DOE program offices, though to a lesser degree than the percentage obligated. None of the program offices reported expenditures of more than a third of their Recovery Act funds as of February 28, 2010. The percentage of funds spent ranged from a high of 31 percent for Departmental Administration to a low of zero percent for the Electricity Delivery and Energy Reliability, Energy Information Administration, and Fossil Energy offices. Officials from DOE and states that received Recovery Act funding from DOE cited certain federal requirements and other factors that had affected their ability to implement some Recovery Act projects. In particular, DOE officials reported that Davis-Bacon requirements and the National Environmental Policy Act affected the timing of some project selection and starts, while state officials reported that the National Historic Preservation Act affected their ability to select and start Recovery Act projects. Other factors unrelated to federal requirements--including the newness of programs, staff capacity, and state and local issues--also affected the timing of some projects, according to federal and state officials. Officials from DOE and states that received DOE funding cited certain federal requirements that had affected their ability to select or start some Recovery Act projects. For example: Davis-Bacon requirements. DOE's Weatherization Assistance Program became subject to the Davis-Bacon requirements for the first time under the Recovery Act after having been previously exempt from those requirements. Thus, the Department of Labor (Labor) had to determine the prevailing wage rates for weatherization workers in each county in the United States. In July 2009, DOE and Labor issued a joint memorandum to Weatherization Assistance Program grantees authorizing them to begin weatherizing homes using Recovery Act funds, provided they paid construction workers at least Labor's wage rates for residential construction, or an appropriate alternative category, and compensated workers for any differences if Labor established a higher local prevailing wage rate for weatherization activities. On September 3, 2009, Labor completed its determinations; later that month, we reported that Davis- Bacon requirements were a reason why some states had not started weatherizing homes. Specifically, we reported that 7 out of 16 states and the District of Columbia decided to wait to begin weatherizing homes until Labor had determined county-by-county prevailing wage rates for their state. Officials in these states explained that they wanted to avoid having to pay back wages to weatherization workers who started working before the prevailing wage rates were known. In general, the states we reviewed used only a small percentage of their available funds in 2009, mostly because state and local agencies needed time to develop the infrastructures required for managing the significant increase in weatherization funding and for ensuring compliance with Recovery Act requirements, including Davis- Bacon requirements. According to available DOE data, as of December 31, 2009, 30,252 homes had been weatherized with Recovery Act funds, or about 5 percent of the approximately 593,000 total homes that DOE originally planned to weatherize using Recovery Act funds. National Environmental Policy Act (NEPA). DOE officials told us that while NEPA is unlikely to impose a greater burden on Recovery Act projects than on similar projects receiving federal funds, the timing of certain projects may be slowed by these requirements. However, DOE officials reported that the agency had taken steps to expedite the NEPA review process and said that the agency's funding opportunity announcements specified that projects must be sufficiently developed to meet the Recovery Act's timetable for commitment of funds. Nevertheless, DOE officials also told us that several program offices--including Loan Guarantee, Fossil Energy, Electricity Delivery and Energy Reliability, and the Power Marketing Administrations--will likely have projects that significantly impact the environment and will therefore require environmental assessments or environmental impact statements. DOE officials told us that they plan to concurrently complete NEPA reviews with other aspects of the project selection and start process. State officials in California and Mississippi also told us that NEPA had caused delays in DOE Recovery Act projects. For example, California officials said that the State Energy Commission must submit some of its Recovery Act projects to DOE for NEPA review because they are not covered by DOE's existing categorical exclusions. State officials said that such reviews can take up to six or more weeks. Both California and Mississippi officials told us that activities that are categorically excluded under NEPA (e.g., road repaving or energy- efficient upgrades to existing buildings) still require clearance before the state can award funds. Staff must spend time filling out forms and supplying information to DOE on projects that may qualify for a categorical exclusion. National Historic Preservation Act (NHPA). State officials told us that NHPA had also affected DOE Recovery Act project selection and starts. Mississippi officials, in particular, cited NHPA's clearance requirements as one of the biggest potential delays to project selection in energy programs. Many of the city- and county-owned facilities that could benefit from the Energy Efficiency and Conservation Block Grant program could be subject to historic preservation requirements, which mandate that projects must be identified within 180 days of award. In part because of this requirement, the state had to adjust program plans and limit the scope of eligible recipients and projects to avoid historic preservation issues. Likewise, officials from the Michigan Department of Human Services told us that NHPA requires that weatherization projects receiving federal funds undergo a state historic preservation review. According to Michigan officials, this requirement means that the State Historic Preservation Office may review every home over 50 years of age if any work is to be conducted, regardless of whether the home is in a historic district or on a national registry. These officials estimated that 90 percent of the homes scheduled to be weatherized would need a historic review. These reviews are a departure from Michigan's previous experience; the State Historic Preservation Office had never considered weatherization work to trigger a review. Furthermore, Michigan officials told us that their State Historic Preservation Office's policy is to review weatherization applications for these homes within 30 days after receiving the application and advise the Michigan Department of Human Services on whether the work can proceed. However, as of October 29, 2009, the State Historic Preservation Office had only two employees, so state officials were concerned that this process could cause a significant delay. To avoid further delays, Michigan officials told us that in November 2009, they signed an agreement with the State Historic Preservation Office that is designed to expedite the review process. They also told us that with the agreement in place, they expect to meet their weatherization goals. Buy American provisions. DOE officials told us that Buy American provisions could cause delays in implementing Recovery Act projects. Officials from other federal agencies said those provisions have affected or may affect their ability to select or start some Recovery Act projects. In some cases, those agencies had to develop guidance for compliance with Buy American provisions, including guidance on issuing waivers to recipients that were unable to comply. For example, according to Environmental Protection Agency officials, developing Buy American guidance was particularly challenging because of the need to establish a waiver process for Recovery Act projects. At the local level, officials from the Chicago Housing Authority (CHA) reported that the only security cameras that are compatible with the existing CHA system and City of Chicago police systems are not made in the United States. CHA worked with the Department of Housing and Urban Development to determine how to seek a waiver for this particular project. Moreover, an industry representative told us that the Buy American provisions could interrupt contractors' supply chains, requiring them to find alternate suppliers and sometimes change the design of their projects, which could delay project starts. Officials from DOE and states also told us that factors other than federal requirements have affected the timing of project selection or starts. For example: Newness of programs. Because some Recovery Act programs were newly created, in some cases, officials needed time to establish procedures and provide guidance before implementing projects. In particular, the DOE Inspector General noted that the awards process for the Energy Efficiency and Conservation Block Grant program, newly funded under the Recovery Act, was challenging to implement because there was no existing infrastructure. Hence, Recovery Act funds were not awarded and distributed to recipients in a timely manner. Staff capacity. Officials from DOE stated that they would need to hire a total of 550 staff--both permanent and temporary--to carry out Recovery Act-related work. However, several issues affected DOE's ability to staff these federal positions, including the temporary nature and funding of the Recovery Act and limited resources for financial management and oversight. To address those issues, DOE was granted a special direct hire authority as part of the Recovery Act for certain areas and program offices. The authority allowed DOE to expedite the hiring process for various energy efficiency, renewable energy, electricity delivery, and energy reliability programs and helped DOE fill longer term temporary (more than 1 year, but not more than 4 years) and permanent positions. However, according to DOE officials, government-wide temporary appointment authority does not qualify an employee for health benefits, and thus few candidates have been attracted to these temporary positions. According to DOE officials, the Office of Management and Budget recently approved direct-hire authority for DOE, which officials believe will alleviate issues related to health care benefits. Some state officials told us that they experienced heavy workloads as a result of the Recovery Act, which impaired their ability to implement programs. As we reported in December 2009, smaller localities, which are often rural, told us that they faced challenges because of a lack of staff to understand, apply for, and comply with requirements for federal Recovery Act grants. For example, some local government officials reported that they did not employ a staff person to handle grants and therefore did not have the capacity to understand which grants they were eligible for and how to apply for them. In the District of Columbia, Department of the Environment officials explained that weatherization funds had not been spent as quickly as anticipated because officials needed to develop the infrastructure to administer the program. For example, the department needed to hire six new staff members to oversee and manage the program. Officials reported that, as of late January 2010, the department had still not hired any of the six new staff required. Officials from the National Association of Counties said that some localities had turned down Recovery Act funding to avoid the administrative burdens associated with the act's numerous reporting requirements. State, Local, or Tribal Issues. In our recently issued report on factors affecting the implementation of Recovery Act projects, we noted that the economic recession affected some states' budgets, which, in turn, affected states' ability to use some Recovery Act funds. For example, according to a recent report by DOE's Office of Inspector General, implementation of the Weatherization Assistance Program's Recovery Act efforts was delayed in part by state hiring freezes, problems resolving local budget shortfalls, and state-wide furloughs. State-level budget challenges have affected the implementation of other Recovery Act projects. For example, officials from the Department of Defense told us that because states were experiencing difficulties in passing their current-year budgets, some were unable to provide matching funds for certain Army National Guard programs. As a result, the Department of Defense had to revise its Recovery Act project plan to cancel or reduce the number of Army National Guard projects with state matching funds and replace them with other projects that did not require matching funds. Officials from the Department of Housing and Urban Development also told us that project starts in some instances were affected by the need for state and local governments to furlough employees as a result of the economic downturn. In a report issued yesterday, we discussed recipient reporting in DOE's Weatherization Assistance Program. Specifically, we noted that reporting about impacts to energy savings and jobs created and retained at both the state and local agency level is still somewhat limited. Although many local officials that we interviewed for that review have collected data about new hires, none could provide us with data on energy savings. Some states told us they plan to use performance measures developed by DOE, while others have developed their own measures. For example, Florida officials told us they plan to measure energy savings by tracking kilowatts used before and after weatherization, primarily with informatio from utility companies. In addition, local agencies in some states either n collect or plan to collect information about other aspects of program operations. For example, local agencies in both California and Michigan collect data about customer satisfaction. In addition, a local agency in California plans to report about obstacles, while an agency in New York will track and report the number of units on the waiting list. As we reported, DOE made several outreach efforts to their program recipients to ensure timely reporting. These efforts included e-mail reminders for registration and Webinars that provided guidance on reporting requirements. For the first round of reporting, DOE developed a quality assurance plan to ensure all prime recipients filed quarterly reports, while assisting in identifying errors in reports. The methodology for the quality assurance review included several phases and provided details on the role and responsibilities for DOE officials. According to DOE officials, the data quality assurance plan was also designed to emphasize the avoidance of material omissions and significant reporting errors. In addition to our reviews of states' and localities' use of Recovery Act funds, GAO is also conducting ongoing work on several DOE efforts that received Recovery Act funding, including the Loan Guarantee Program and the Office of Environmental Management's activities. As I noted earlier, Congress made nearly $4 billion in Recovery Act funding available to DOE to support what the agency has estimated will be about $32 billion in new loan guarantees under its innovative technology loan guarantee program. However, we reported in July 2008 that DOE was not well positioned to manage the loan guarantee program effectively and maintain accountability because it had not completed a number of key management and internal control activities. To improve the implementation of the loan guarantee program and to help mitigate risk to the federal government and American taxpayers, we recommended that, among other things, DOE complete internal loan selection policies and procedures that lay out roles and responsibilities and criteria and requirements for conducting and documenting analyses and decision making, and develop and define performance measures and metrics to monitor and evaluate program efficiency, effectiveness, and outcomes. We are currently engaged in ongoing work to determine the current state of the Loan Guarantee Program and what progress DOE has made since our last report, and we expect to report on that work this summer. Ongoing work also focuses on DOE's Office of Environmental Management, which also received Recovery Act funding. The Office of Environmental Management oversees cleanup efforts related to decades of nuclear weapons production. The Recovery Act provided DOE with $6 billion--in addition to annual appropriations of $6 billion--for cleanup activities including packaging and disposing of wastes, decontaminating and decommissioning facilities, and removing contamination from soil. DOE has begun work on the majority of its more than 85 Recovery Act projects at 17 sites in 12 states and has spent nearly $1.4 billion (about 23 percent of its total Recovery Act funding) on these projects. We are currently conducting work to evaluate the implementation of these projects, including the number of jobs that have been created and retained, performance metrics being used to measure progress, DOE's oversight of the work, and any challenges that DOE may be facing. We expect to report on that work this summer. Mr. Chairman, this completes my prepared statement. We will continue to monitor DOE's use of Recovery Act funds and implementation of programs. 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 Mark Gaffigan, Director, at (202) 512-3841. Kim Gianopoulos (Assistant Director), Amanda Krause, Jonathan Kucskar, David Marroni, Alise Nacson, and Alison O'Neill made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The American Recovery and Reinvestment Act of 2009 (Recovery Act)--initially estimated to cost $787 billion in spending and tax provisions--aims to promote economic recovery, make investments, and minimize or avoid reductions in state and local government services. The Recovery Act provided the Department of Energy (DOE) more than $43.2 billion, including $36.7 billion for projects and activities and $6.5 billion in borrowing authority, in areas such as energy efficiency and renewable energy, nuclear waste clean-up, and electric grid modernization. This testimony discusses (1) the extent to which DOE has obligated and spent its Recovery Act funds, and (2) the factors that have affected DOE's ability to select and start Recovery Act projects. In addition, GAO includes information on ongoing work related to DOE Recovery Act programs. This testimony is based on prior work and updated with data from DOE. As of February 28, 2010, DOE reported it had obligated $25.7 billion (70 percent) and reported expenditures of $2.5 billion (7 percent) of the $36.7 billion it received under the Recovery Act for projects and activities. For context, as of December 31, 2009, DOE reported that it had obligated $23.2 billion (54 percent) and reported expenditures of $1.8 billion (4 percent). The percentage of Recovery Act funds obligated varied widely across DOE program offices and ranged from a high of 98 percent in the Energy Information Administration to a low of 1 percent for the Loan Guarantee Program Office. None of DOE's program offices reported expenditures of more than a third of their Recovery Act funds as of February 28, 2010. Officials from DOE and states that received Recovery Act funding from DOE cited certain federal requirements that had affected their ability to implement some Recovery Act projects. For example: (1) Davis Bacon Requirements. Officials reported that Davis-Bacon requirements had affected the start of projects in the Weatherization Assistance Program because the program had previously been exempt from these requirements. (2) National Environmental Policy Act (NEPA). DOE officials told us that NEPA may affect certain projects that are likely to significantly impact the environment, thereby requiring environmental assessments or environmental impact statements. (3) National Historic Preservation Act (NHPA). Officials from the Michigan Department of Human Services told us that about 90 percent of the homes scheduled to be weatherized under the Weatherization Assistance Program would need a historic review. Additionally, DOE and state officials told us that (4) Newness of programs. In some cases, because some Recovery Act programs were newly created, officials needed time to establish procedures and provide guidance before implementing projects. (5) Staff capacity. DOE officials also told us that they experienced challenges in hiring new staff to carry out Recovery Act work. Also, District of Columbia officials told us they needed to hire 6 new staff members to oversee and manage the weatherization program. (6) State, local, or tribal issues. The economic recession affected some states' budgets, which also affected states' ability to use some Recovery Act funds, such as difficulty providing matching funds.
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The Federal Reserve Act of 1913 established the Federal Reserve System as the country's central bank. The Federal Reserve System consists of the Federal Reserve Board located in Washington, D.C.; 12 Reserve Banks, which have 24 branches located throughout the nation; and the Federal Open Market Committee (FOMC), which is responsible for directing open market operations to influence the total amount of money and credit available in the economy. Each Reserve Bank is a federally chartered corporation with a board of directors. The Federal Reserve Act authorizes the Reserve Banks to make discount window loans, execute monetary policy operations at the direction of the FOMC, and examine bank holding companies and member banks under rules and regulations prescribed by the Federal Reserve Board, among other things. The Federal Reserve Board and the Reserve Banks are self-funded entities that deduct their expenses from their revenue and transfer the remaining amount to Treasury. Federal Reserve System revenues transferred to Treasury have increased substantially in recent years, chiefly as a result of interest income earned from the Federal Reserve System's large-scale emergency programs. To the extent that Reserve Banks suffer losses on emergency loans, these losses would be deducted from the excess earnings transferred to Treasury. Between late 2007 and early 2009, the Federal Reserve Board created more than a dozen new emergency programs to stabilize financial markets and provided financial assistance to avert the failures of a few individual institutions. The Federal Reserve Board authorized most of this emergency assistance under emergency authority contained in section 13(3) of the Federal Reserve Act. Three of the programs covered by this review--the Term Auction Facility, the dollar swap lines with foreign central banks, and the Agency Mortgage-Backed Securities Purchase Program--were authorized under other provisions of the Federal Reserve Act that do not require a determination that emergency conditions exist, although the swap lines and the Agency MBS program did require authorization by the FOMC. In many cases, the decisions by the Federal Reserve Board, the FOMC, and the Reserve Banks about the authorization, initial terms of, or implementation of the Federal Reserve System's emergency assistance were made over the course of only days or weeks as the Federal Reserve Board sought to act quickly to address rapidly deteriorating market conditions. FRBNY implemented most of these emergency activities under authorization from the Federal Reserve Board. In a few cases, the Federal Reserve Board authorized FRBNY to lend to a limited liability corporation (LLC) to finance the purchase of assets from a single institution. The LLCs created to assist individual institutions were Maiden Lane, Maiden Lane II, and Maiden Lane III. In 2009, FRBNY, at the direction of the FOMC, began large-scale purchases of mortgage-backed securities (MBS) issued by the housing government- sponsored enterprises, Fannie Mae and Freddie Mac, or guaranteed by Ginnie Mae. Purchases of these agency MBS were intended to provide support to the mortgage and housing markets and to foster improved conditions in financial markets more generally. Most of the Federal Reserve Board's broad-based emergency programs closed on February 1, 2010. Figure 1 provides a timeline for the establishment, modification, and termination of Federal Reserve System emergency programs subject to this review. The Reserve Banks' and LLCs' financial statements, which include the emergency programs' accounts and activities, and their related financial reporting internal controls, are audited annually by an independent auditing firm. In addition, the Federal Reserve System has a number of internal entities that conduct audits and reviews of the Reserve Banks, including the emergency programs. As shown in figure 2, these other audits and reviews were conducted by the Federal Reserve Board's Division of Reserve Bank Operations and Payment Systems (RBOPS), the Federal Reserve Board's Office of Inspector General, and individual Reserve Bank's internal audit function. The independent financial statement audits and other reviews did not identify significant accounting or financial reporting internal control issues concerning the emergency programs. From 2008 through 2010, vendors were paid $659.4 million across 103 contracts to help establish and operate the Reserve Banks' emergency programs. The 10 largest contracts accounted for 74 percent of the total amount paid to all vendors. FRBNY was responsible for creating and operating all but two emergency programs and assistance and therefore awarded nearly all of the contracts. See table 2 for the total number and value of contracts for the emergency programs and assistance. As shown in table 2, the Reserve Banks relied on vendors more extensively for programs that assisted single institutions than for broad- based emergency programs. The assistance provided to individual institutions was generally secured by existing assets that either belonged to or were purchased from the institution, its subsidiaries, or counterparties. The Reserve Banks did not have sufficient expertise available to evaluate these assets and therefore used vendors to do so. For example, FRBNY used a vendor to evaluate divestiture scenarios associated with the assistance to AIG. It also hired vendors to manage assets held by the Maiden Lanes. For the broad-based emergency programs, FRBNY hired vendors primarily for transaction-based services and collateral monitoring. Under these programs, the Reserve Banks purchased assets or extended loans in accordance with each program's terms and conditions. Because of this, the services that vendors provided for these programs were focused more on assisting with transaction execution than analyzing and managing securities, as was the case for the single institution assistance. Most of the contracts, including 8 of the 10 highest-value contracts, were awarded noncompetitively, primarily due to exigent circumstances. These contract awards were consistent with FRBNY's existing acquisition policy, which applied to all services associated with the emergency programs and single-institution assistance. Under FRBNY policy, noncompetitive processes can be used in special circumstances, such as when a service is available from only one vendor or in exigent circumstances. FRBNY cited exigent circumstances for the majority of the noncompetitive contract awards. FRBNY officials said that the success of a program was often dependent on having vendors in place quickly to begin setting up the operating framework for the program. FRBNY's policy did not provide additional guidance on the use of competition exceptions, such as seeking as much competition as practicable and limiting the duration of noncompetitive contracts to the exigency period. To better ensure that Reserve Banks do not miss opportunities to obtain competition and receive the most favorable terms for services acquired, we recommended that they revise their acquisition policies to provide such guidance. From 2008 through 2010, vendors were paid $659.4 million through a variety of fee structures. For a significant portion of the fees, program recipients reimbursed the Reserve Banks or the fees were paid from program income. The Reserve Banks generally used traditional market conventions when determining fee structures. For example, investment managers were generally paid a percentage of the portfolio value and law firms were generally paid an hourly rate. Fees for these contracts were subject to negotiation between the Reserve Banks and vendors. For some of the large contracts that were awarded noncompetitively, FRBNY offered vendors a series of counterproposals and was able to negotiate lower fees than initially proposed. During the crisis, FRBNY took steps to manage conflicts of interest related to emergency programs for its employees, program vendors, and members of its Board of Directors, but opportunities exist to strengthen its conflicts policies. Historically, FRBNY has managed potential and actual conflicts of interest for its employees primarily through enforcement of its Code of Conduct, which outlines broad principles for ethical behavior and specific restrictions on financial interests and other activities, such as restrictions on employees' investments in depository institutions and bank holding companies, and incorporates the requirements of a federal criminal statute and its regulations. During the crisis, FRBNY expanded its guidance and monitoring for employee conflicts. However, while the crisis highlighted the potential for Reserve Banks to provide emergency assistance to a broad range of institutions, FRBNY has not yet revised its conflict policies and procedures to more fully reflect potential conflicts that could arise with this expanded role. For example, specific investment restrictions in FRBNY's Code of Conduct continue to focus on traditional Reserve Bank counterparties--depository institutions or their affiliates and the primary dealers--and have not been expanded to further restrict employees' financial interests in certain nonbank institutions that have participated in FRBNY emergency programs and could become eligible for future ones, if warranted. Given the magnitude of the assistance and the public's heightened attention to the appearance of conflicts related to Reserve Banks' emergency actions, existing policies and procedures for managing employee conflicts may not be sufficient to avoid the appearance of a conflict in all situations. During our review, Federal Reserve Board and FRBNY staff told us that the Federal Reserve System plans to review and update the Reserve Banks' Codes of Conduct as needed given the Federal Reserve System's recently expanded role in regulating systemically significant financial institutions. In light of this ongoing effort, we recommended that the Federal Reserve System consider how potential conflicts from emergency lending could inform any changes. FRBNY managed risks related to vendor conflicts of interest primarily through contract protections and oversight of vendor compliance with these contracts, but these efforts have certain limitations. For example, while FRBNY's Legal Division negotiated contract provisions intended to help ensure that vendors took appropriate steps to mitigate conflicts of interest related to the services they provided for FRBNY, FRBNY lacked written guidance on protections that should be included to help ensure vendors fully identify and remediate conflicts. Rather than requiring written conflict remediation plans that were specific to the services provided for FRBNY, FRBNY generally reviewed and allowed vendors to rely on their existing enterprisewide policies for identifying conflicts. However, in some situations, FRBNY requested additional program- specific controls be developed. Further, FRBNY's on-site reviews of vendor compliance in some instances occurred as far as 12 months into a contract. In May 2010, FRBNY implemented a new vendor management policy but had not yet finalized more comprehensive guidance on vendor conflict issues. As a result, we recommended that FRBNY finalize this new policy to reduce the risk that vendors may not be required to take steps to fully identify and mitigate all conflicts. Individuals serving on the boards of directors of the Reserve Banks are generally subject to the same conflict-of-interest statute and regulations as federal employees. A number of Reserve Bank directors were affiliated with institutions that borrowed from the emergency programs, but Reserve Bank directors did not participate directly in making decisions about authorizing, setting the terms, or approving a borrower's participation in the emergency programs. Rather FRBNY's Board of Directors assisted the Reserve Bank in helping ensure risks were managed through FRBNY's Audit and Operational Risk Committee. According to the Federal Reserve Board officials, Reserve Banks granted access to borrowing institutions affiliated with Reserve Bank directors only if these institutions satisfied the proper criteria, regardless of potential director-affiliated outreach or whether the institution was affiliated with a director. Our review of the implementation of several program requirements did not find evidence that would indicate a systemic bias towards favoring one or more eligible institutions. The Federal Reserve Board approved key program terms and conditions that served to mitigate risk of losses and delegated responsibility to one or more Reserve Banks for executing each emergency lending program and managing its risk of losses. The Federal Reserve Board's early broad- based lending programs--Term Auction Facility, Term Securities Lending Facility, and Primary Dealer Credit Facility--required borrowers to pledge collateral in excess of the loan amount as well as other features intended to mitigate risk of losses. The Federal Reserve Board's broad-based programs launched in late 2008 and early 2009 employed more novel lending structures to provide liquidity support to a broader range of key credit markets. These later broad-based liquidity programs included Asset- Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, Commercial Paper Funding Facility, Money Market Investor Funding Facility, and Term Asset-Backed Securities Loan Facility. These liquidity programs, with the exception of the Term Asset-Backed Securities Loan Facility, did not require overcollateralization. To help mitigate the risk of losses, the Term Asset-Backed Securities Loan Facility, as well as the programs that did not require overcollateralization, accepted only highly- rated assets as collateral. In addition, Commercial Paper Funding Facility, Money Market Investor Funding Facility, and Term Asset-Backed Securities Loan Facility incorporated various security features, such as the accumulation of excess interest and fee income to absorb losses, to provide additional loss protection. Also, for the assistance to specific institutions, the Reserve Banks negotiated loss protections with the institutions and hired vendors to help oversee the portfolios collateralizing loans. For each of the Maiden Lane transactions, FRBNY extended a senior loan to the LLC and this loan was collateralized by the portfolio of assets held by the LLC. JP Morgan Chase & Co. agreed to take a first loss position of $1.15 billion for Maiden Lane and AIG agreed to assume a similar first loss position for Maiden Lanes II and III. As of July 2011, most of the Federal Reserve Board's emergency loan programs had closed and all of those that had closed had closed without losses. Moreover, currently, the Federal Reserve Board does not project any losses on FRBNY's outstanding loans to Term Asset-Backed Securities Loan Facility borrowers and the Maiden Lane LLCs. To manage risks posed by the emergency programs, Reserve Banks developed new controls and FRBNY strengthened its risk management practices over time. In particular, FRBNY expanded its risk management function and enhanced its risk reporting and risk analytics capabilities. For example, in summer 2009, FRBNY expanded its risk management capabilities by adding expertise that would come to be organized as two new functions, Structured Products and Risk Analytics. Although FRBNY has improved its ability to monitor and manage risks from emergency lending, opportunities exist for FRBNY and the Federal Reserve System as a whole to strengthen risk management procedures and practices for any future emergency lending. Specifically, neither FRBNY nor the Federal Reserve Board tracked total potential exposures in adverse economic scenarios across all emergency programs. Moreover, the Federal Reserve System's existing procedures lack specific guidance on how Reserve Banks should exercise discretion to restrict or deny program access for higher-risk borrowers that were otherwise eligible for the Term Auction Facility and emergency programs for primary dealers. To strengthen practices for managing risk of losses in the event of a future crisis, we recommended that the Federal Reserve System document a plan for more comprehensive risk tracking and strengthen procedures to manage program access for higher-risk borrowers. The Federal Reserve Board and the Reserve Banks took steps to promote consistent treatment of eligible program participants and generally offered assistance on the same terms and conditions to eligible institutions in the broad-based emergency programs. However, in a few programs, the Reserve Banks placed restrictions on some participants that presented higher risk but lacked specific guidance to do so. Further, certain Federal Reserve Board decisions to extend credit to certain borrowers were not fully documented. The Federal Reserve Board created each broad-based emergency program to address liquidity strains in a particular credit market and designed program eligibility requirements primarily to target significant participants in these markets. The emergency programs extended loans both directly to institutions facing liquidity strains and through intermediary borrowers. For programs that extended credit directly, the Federal Reserve Board took steps to limit program eligibility to institutions it considered to be generally sound. For example, Term Auction Facility loans were auctioned to depository institutions eligible to borrow from the discount window and expected by their local Reserve Bank to remain primary-credit-eligible during the term the Term Auction Facility loan would be outstanding. For programs that provided loans to intermediary borrowers, the Federal Reserve Board based eligibility requirements in part on the ability of borrowing institutions, as a group, to channel sufficient liquidity support to eligible sellers. For example, eligible Term Asset-Backed Securities Loan Facility borrowers included a broad range of institutions ranging from depository institutions to U.S. organized investment funds. Federal Reserve Board officials told us that broad participation in Term Asset-Backed Securities Loan Facility was intended to facilitate the program goal of encouraging the flow of credit to consumers and small businesses. The Federal Reserve Board promoted consistent treatment of eligible participants in its emergency programs by generally offering assistance on the same terms and conditions to all eligible participants. For example, institutions that met the announced eligibility requirements for a particular emergency program generally could borrow at the same interest rate, against the same types of collateral, and where relevant, with the same schedule of haircuts applied to their collateral. As previously discussed, for a few programs, FRBNY's procedures did not have specific guidance to help ensure that restrictions were applied consistently to higher-risk borrowers. Moreover, the Federal Reserve Board could not readily provide documentation of all Term Auction Facility restrictions placed on individual institutions. By having written procedures to guide decision- making for restrictions and suggestions for documentation of the rationale for such decisions, the Federal Reserve Board may be able to better review such decisions and help ensure that future implementation of emergency lending programs will result in consistent treatment of higher- risk borrowers. Our review of Federal Reserve System data for selected programs found that incorrect application of certain program requirements was generally infrequent and that cases of incorrect application of criteria did not appear to indicate intentional preferential treatment of one or more program participants. The Federal Reserve Board did not fully document the basis for its decisions to extend credit on terms similar to those available at PDCF to certain broker-dealer affiliates of four of the primary dealers. In September and November of 2008, the Federal Reserve Board invoked section 13(3) of the Federal Reserve Act to authorize FRBNY to extend credit to the London-based broker-dealer subsidiaries of Merrill Lynch, Goldman Sachs, Morgan Stanley, and Citigroup, as well as the U.S. broker-dealer subsidiaries of Merrill Lynch, Goldman Sachs, and Morgan Stanley. Federal Reserve Board officials told us that the Federal Reserve Board did not consider the extension of credit to these subsidiaries to be a legal extension of PDCF but separate actions to specifically assist these four primary dealers by using PDCF as an operational tool. Federal Reserve Board officials told us that the Federal Reserve Board did not draft detailed memoranda to document the rationale for all uses of section 13(3) authority but that unusual and exigent circumstances existed in each of these cases as critical funding markets were in crisis. However, without more complete documentation, how assistance to these broker- dealer subsidiaries satisfied the statutory requirements for using this authority remains unclear. Moreover, without more complete public disclosure of the basis for these actions, these decisions may not be subject to an appropriate level of transparency and accountability. The Dodd-Frank Act includes new requirements for the Federal Reserve Board to report to Congress on any loan or financial assistance authorized under section 13(3), including the justification for the exercise of authority; the identity of the recipient; the date, amount, and form of the assistance; and the material terms of the assistance. To address these new reporting requirements, we recommended that the Federal Reserve Board set forth its process for documenting its rationale for emergency authorizations. In authorizing the Reserve Banks to operate its emergency programs, the Federal Reserve Board has not provided documented guidance on the types of program policy decisions--including allowing atypical uses of broad-based assistance--that should be reviewed by the Federal Reserve Board. Standards for internal control for federal government agencies provide that transactions and other significant events should be authorized and executed only by persons acting within the scope of their authority. Outside of the established protocols for the discount window, FRBNY staff said that the Federal Reserve Board generally did not provide written guidance on expectations for types of decisions or events requiring formal Federal Reserve Board review, although program decisions that deviated from policy set by the Federal Reserve Board were generally understood to require Board staff consultation. In 2009, FRBNY allowed an AIG-sponsored entity to continue to issue to the Commercial Paper Funding Facility, even though a change in program terms by the Federal Reserve Board likely would have made it ineligible. FRBNY staff said they consulted the Federal Reserve Board regarding this situation, but did not document this consultation and did not have any formal guidance as to whether such continued use required approval by the Federal Reserve Board. To better ensure an appropriate level of transparency and accountability for decisions to extend or restrict access to emergency assistance, we recommended that the Federal Reserve Board document its guidance to Reserve Banks on program decisions that require consultation with the Federal Reserve Board. To assess whether program use was consistent with the Federal Reserve Board's announced policy objectives, we analyzed program transaction data to identify significant trends in borrowers' use of the programs. Our analysis showed that large global institutions were among the largest users of several programs. U.S. branches and agencies of foreign banks and U.S. subsidiaries of foreign institutions received over half of the total dollar amount of Commercial Paper Funding Facility and Term Auction Facility loans (see fig. 3). According to Federal Reserve Board staff, they designed program terms and conditions to discourage use that would have been inconsistent with program policy objectives. Program terms--such as the interest charged and haircuts applied--generally were designed to be favorable only for institutions facing liquidity strains. Use of the programs generally peaked during the height of the financial crisis and fell as market conditions recovered (see fig. 4). Within and across the programs, certain participants used the programs more frequently and were slower to exit than others. Reserve Bank officials noted that market conditions and the speed with which the participant recovered affected use of the program by individual institutions. As a result of its monitoring of program usage, the Federal Reserve Board modified terms and conditions of several programs to reinforce policy objectives and program goals. During the financial crisis that began in the summer of 2007, the Federal Reserve System took unprecedented steps to stabilize financial markets and support the liquidity needs of failing institutions that it considered to be systemically significant. To varying degrees, these emergency actions involved the Reserve Banks in activities that went beyond their traditional responsibilities. Over time, FRBNY and the other Reserve Banks took steps to improve program management and oversight for these emergency actions, in many cases in response to recommendations made by their external auditor, Reserve Bank internal audit functions, or the Federal Reserve Board's RBOPS. However, the Reserve Banks have not yet fully incorporated some lessons learned from the crisis into their policies for managing use of vendors, risk of losses from emergency lending, and conflicts of interest. Such enhanced policies could offer additional insights to guide future Federal Reserve System action, should it ever be warranted. We made seven recommendations to the Chairman of the Federal Reserve Board to further strengthen Federal Reserve System policies for selecting vendors, ensuring the transparency and consistency of decision making involving implementation of any future emergency programs, and managing risks related to these programs. In its comments on our report, the Federal Reserve Board agreed to give our recommendations serious attention and to strongly consider how to respond to them. Mr. Chairman, Ranking Member Clay, and Members of the Subcommittee, this completes my prepared statement. I am prepared to respond to any questions you or other Members of the Subcommittee may have at this time. If you or your staff have any questions about this testimony, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made major contributions to this statement include Karen Tremba (Assistant Director), Tania Calhoun, and John Fisher. 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 Dodd-Frank Wall Street Reform and Consumer Protection Act directed GAO to conduct a one-time audit of the emergency loan programs and other assistance authorized by the Board of Governors of the Federal Reserve System (Federal Reserve Board) during the recent financial crisis. This testimony summarizes the results of GAO's July 2011 report (GAO-11-696) examining the emergency actions taken by the Federal Reserve Board from December 1, 2007, through July 21, 2010. For these actions, where relevant, this statement addresses (1) accounting and financial reporting internal controls; (2) the use, selection, and payment of vendors; (3) management of conflicts of interest; (4) policies in place to secure loan repayment; and (5) the treatment of program participants. To meet these objectives, GAO reviewed program documentation, analyzed program data, and interviewed officials from the Federal Reserve Board and Reserve Banks (Federal Reserve System). On numerous occasions in 2008 and 2009, the Federal Reserve Board invoked emergency authority under the Federal Reserve Act of 1913 to authorize new broad-based programs and financial assistance to individual institutions to stabilize financial markets. Loans outstanding for the emergency programs peaked at more than $1 trillion in late 2008. The Federal Reserve Board directed the Federal Reserve Bank of New York (FRBNY) to implement most of these emergency actions. In a few cases, the Federal Reserve Board authorized a Reserve Bank to lend to a limited liability corporation (LLC) to finance the purchase of assets from a single institution. In 2009 and 2010, FRBNY also executed large-scale purchases of agency mortgage-backed securities to support the housing market. The Reserve Banks, primarily FRBNY, awarded 103 contracts worth $659.4 million from 2008 through 2010 to help carry out their emergency activities. A few contracts accounted for most of the spending on vendor services. For a significant portion of the fees, program recipients reimbursed the Reserve Banks or the fees were paid from program income. The Reserve Banks relied more extensively on vendors for programs that assisted a single institution than for broad-based programs. Most of the contracts, including 8 of the 10 highest-value contracts, were awarded noncompetitively, primarily due to exigent circumstances. These contract awards were consistent with FRBNY's acquisition policies, but the policies could be improved by providing additional guidance on the use of competition exceptions, such as seeking as much competition as practicable and limiting the duration of noncompetitive contracts to the exigency period. FRBNY took steps to manage conflicts of interest for its employees, directors, and program vendors, but opportunities exist to strengthen its conflict policies. In particular, FRBNY expanded its guidance and monitoring for employee conflicts, but new roles assumed by FRBNY and its employees during the crisis gave rise to potential conflicts that were not specifically addressed in the Code of Conduct or other FRBNY policies. As the Federal Reserve System considers revising its conflict policies given its new authority to regulate certain nonbank institutions, GAO recommended it consider how potential conflicts from emergency lending could inform any changes. FRBNY managed vendor conflict issues through contract protections and actions to help ensure compliance with relevant contract provisions, but these efforts had limitations. While the Federal Reserve System took steps to mitigate risk of losses on its emergency loans, opportunities exist to strengthen risk management practices for future crisis lending. The Federal Reserve Board approved program terms and conditions designed to mitigate risk of losses and one or more Reserve Banks were responsible for managing such risk for each program. Reserve Banks required borrowers under several programs to post collateral in excess of the loan amount. For programs that did not have this requirement, Reserve Banks required borrowers to pledge assets with high credit ratings as collateral. For loans to specific institutions, Reserve Banks negotiated loss protections with the private sector and hired vendors to help oversee the portfolios that collateralized loans. While the Federal Reserve System took steps to promote consistent treatment of eligible program participants, it did not always document processes and decisions related to restricting access for some institutions. GAO made seven recommendations to the Federal Reserve Board to strengthen policies for managing noncompetitive vendor selections, conflicts of interest, risks related to emergency lending, and documentation of emergency program decisions. The Federal Reserve Board agreed that GAO's recommendations would benefit its response to future crises and agreed to strongly consider how best to respond to them.
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The Department of Homeland Security Appropriations Act for Fiscal Year 2007 states that "none of the funds appropriated...shall be obligated for full scale procurement of monitors until the Secretary of Homeland Security has certified...that a significant increase in operational effectiveness will be achieved." DNDO noted that certification would meet DHS guidelines for the review and approval of complex acquisitions. Specifically, DNDO stated that the Secretary's decision would be made in the context of DHS "Key Decision Point 3," which details the review and approval necessary for DHS acquisition programs to move from the "Capability Development and Demonstration" phase to the "Production and Deployment Phase." To meet the statutory requirement to certify the ASPs will provide a "significant increase in operational effectiveness," and requirements outlined in DHS Management Directive 1400, DNDO, with input from subject matter experts, developed a series of tests intended to demonstrate, among other things, ASP performance and deployment readiness. The tests were conducted at several venues, including the Nevada Test Site, the New York Container Terminal, the Pacific Northwest National Laboratory, and five ports of entry. DNDO stated that its request for full-scale production approval would be based upon completed and documented results of these tests. To meet the Secretary's goal of deploying 225 ASPs by the end of calendar year 2008, Secretarial Certification was scheduled for June 26, 2007. To guide the test operations, DNDO defined a set of Critical Operational Issues that outlined the tests' technical objectives and provided the baseline to measure demonstrated effectiveness. The purpose of the Critical Operational Issue 1 is to "verify operational effectiveness" of ASPs and determine whether "ASP systems significantly increase operational effectiveness relative to the current generation detection and identification system." DNDO conducted a series of tests at the Nevada Test Site, the single focus of which, according to DNDO, was to resolve Critical Operational Issue 1. According to DNDO, these tests began in February 2007 and concluded in March 2007. DNDO's Nevada Test Site test plan, dated January 12, 2007, identified three primary test objectives comparing the operational effectiveness of the ASP systems with existing detection and identification systems at current high-volume operational thresholds. Specifically, DNDO sought to determine the ASPs' probability to (1) detect and identify nuclear and radiological threats (2) discriminate threat and non-threat radionuclides in primary , and (3) detect and identify threat radionuclides in the presence of non-threat radionuclides. The Nevada Test Site test plan had two key components. First, DNDO developed guidelines for basic test operations and procedures, including test goals and expectations, test tasks and requirements, and roles and responsibilities of personnel involved in the testing, including the ASP contractors. The second component involved the National Institute of Standards and Technology developing test protocols that defined, among other things, how many times a container carrying test materials would need to be driven through portal monitors in order to obtain statistically relevant results. DNDO's tests at the Nevada Test Site were designed to compare the current system--using PVTs in primary inspections and a PVT and RIID combination in secondary inspections--to other configurations including PVTs in primary and ASPs in secondary, and ASPs in both primary and secondary inspection positions. DNDO tested three ASPs and four PVTs. The ASP vendors included Thermo, Raytheon, and Canberra. The PVT vendors included SAIC, TSA, and Ludlum. According to the test plan, to the greatest extent possible, PVT, ASP, and RIID handheld devices would be operated consistent with approved CBP standard operating procedures. Prior to "formal" collection of the data that would be used to support the resolution of Critical Operational Issue 1, DNDO conducted a series of tests it referred to as "dry runs" and "dress rehearsals." The purpose of the dry runs was to, among other things, verify ASP systems' software performance against representative test materials and allow test teams and system contractors to identify and implement software and hardware improvements to ASP systems. The purpose of the dress rehearsals was to observe the ASPs in operation against representative test scenarios and allow the test team to, among other things: develop confidence in the reliability of the ASP system so that operators and data analysts would know what to expect and what data to collect during the formal test, collect sample test data, and determine what errors were likely to occur in the data collection process and eliminate opportunities for error. In addition to improving ASP performance through dry runs and dress rehearsals conducted prior to formal data collection, ASP contractors were also significantly involved in the Nevada Test Site test processes. Specifically, the test plan stated that " contractor involvement was an integral part of the NTS test events to ensure the systems performed as designed for the duration of the test." Furthermore, ASP contractors were available on site to repair their system at the request of the test director and to provide quality control support of the test data through real time monitoring of available data. DNDO stated that Pacific Northwest National Laboratory representatives were also on site to provide the same services for the PVT systems. DNDO conducted its formal tests in two phases. The first, called Phase 1, was designed to support resolution of Critical Operational Issue 1 with high statistical confidence. DNDO told us on multiple occasions and in a written response that only data collected during Phase 1 would be included in the final report presented to the Secretary to request ASP certification. According to DNDO, the second, called Phase 3, provided data for algorithm development which targeted specific and known areas in need of work and data to aid in the development of secondary screening operations and procedures. According to DNDO documentation, Phase 3 testing was not in support of the full-scale production decision. Further, DNDO stated that Phase 3 testing consisted of relatively small sample sizes since the data would not support estimating the probability of detection with a high confidence level. On May 30, 2007, following the formal tests and the scoring of their results, DNDO told GAO that it had conducted additional tests that DNDO termed "Special Testing." The details of these tests were not outlined in the Nevada Test Site test plan. On June 20, 2007, DNDO provided GAO with a test plan document entitled "ASP Special Testing" which described the test sources used to conduct the tests but did not say when the tests took place. According to DNDO, special testing was conducted throughout the formal Phase 1 testing process and included 12 combinations of threat, masking, and shielding materials that differed from "dry run," "dress rehearsal," and formal tests. DNDO also stated that the tests were "blind," meaning that neither DNDO testing officials nor the ASP vendors knew what sources would be included in the tests. According to DNDO, these special tests were recommended by subject matter experts outside the ASP program to address the limitations of the original NTS test plan, including available time and funding resources, special nuclear material sources, and the number of test configurations that could be incorporated in the test plan, including source isotope and activity, shielding materials and thicknesses, masking materials, vehicle types, and measurement conditions. Unlike the formal tests, National Institute of Standards and Technology officials were not involved in determining the number of test runs necessary to obtain statistically relevant results for the special tests. Based on our analysis of DNDO's test plan, the test results, and discussions with experts from four national laboratories, we are concerned that DNDO used biased test methods that enhanced the performance of the ASPs. In the dry runs and dress rehearsals, DNDO conducted many preliminary runs of radiological, nuclear, masking, and shielding materials so that ASP contractors could collect data on the radiation being emitted, and modify their software accordingly. Specifically, we are concerned because almost all of the materials, and most combinations of materials, DNDO used in the formal tests were identical to those that the ASP contractors had specifically set their ASPs to identify during the dry runs and dress rehearsals. It is highly unlikely that such favorable circumstances would present themselves under real world conditions. A key component of the NTS tests was to test the ASPs' ability to detect and identify dangerous materials, specifically when that material was masked or "hidden" by benign radioactive materials. Based on our analysis, the masking materials DNDO used at NTS did not sufficiently test the performance limits of the ASPs. DOE national laboratory officials raised similar concerns to DNDO after reviewing a draft of the test plan in November 2006. These officials stated that the masking materials DNDO planned to use in its tests did not emit enough radiation to mask the presence of nuclear materials in a shipping container and noted that many of the materials that DOE program officials regularly observe passing through international ports emit significantly higher levels of radiation than the masking materials DNDO used for its tests. DNDO officials told us that the masking materials used at the Nevada Test Site represented the average emissions seen in the stream of commerce at the New York Container Terminal. However, according to data accumulated as part of DOE's program to secure international ports (the Megaports program), a significant percentage of cargo passing through one European port potentially on its way to the United States has emission levels greater than the average radiation level for cargo that typically sets off radiation detection alarms. Importantly, DNDO officials told us that the masking materials used at the Nevada Test Site were not intended to provide insight into the limits of ASP detection capabilities. Yet, DNDO's own test plan for "ASP Special Testing" states, "The DNDO ASP NTS Test Plan was designed to... measure capabilities and limitations in current ASP systems." In addition, the NTS tests did not objectively test the ASPs against the currently deployed radiation detection system. DNDO's test plan stated that, to the greatest extent possible, PVT, ASP, and RIID handheld devices would be operated consistent with approved CBP standard operating procedures. However, after analyzing test results and procedures used at the Nevada Test Site, CBP officials determined that DNDO had, in fact, not followed a key CBP procedure. In particular, if a threat is identified during a secondary screening, or if the result of the RIID screening isn't definitive, CBP procedures require officers to send the data to CBP's Laboratories and Scientific Services for further guidance. DNDO did not include this critical step in its formal tests. CBP officials also expressed concern with DNDO's preliminary test results when we met with them in May 2007. In regards to the special tests DNDO conducted, based on what DNDO has told us and our own evaluation of the special test plan, we note that because DNDO did not consult NIST on the design of the blind tests, we do not know the statistical significance of the results, and the tests were not entirely blind because some of the nuclear materials used in the blind tests were also used to calibrate the ASPs on a daily basis. During the course of our work, CBP, DOE, and national laboratory officials we spoke to voiced concern about their lack of involvement in the planning and execution of the Nevada Test Site tests. We raised our concerns about this issue and those of DOE and CBP to DNDO's attention on multiple occasions. In response to these concerns, specifically those posed by DOE, DNDO convened a conference on June 27, 2007, of technical experts to discuss the Nevada test results and the methods DNDO used to test the effects of masking materials on what the ASPs are able to detect. As a result of discussions held during that meeting, subject matter experts agreed that computer-simulated injection studies could help determine the ASPs' ability to detect threats in the presence of highly radioactive masking material. According to a Pacific Northwest National Laboratory report submitted to DNDO in December 2006, injection studies are particularly useful for measuring the relative performance of algorithms, but their results should not be construed as a measure of (system) vulnerability. To assess the limits of portal monitors' capabilities, the Pacific Northwest National Laboratory report states that actual testing should be conducted using threat objects immersed in containers with various masking agents, shielding, and cargo. DNDO officials stated at the meeting that further testing could be scheduled, if necessary, to fully satisfy DOE concerns. On July 20, 2007, DHS Secretary Chertoff notified certain members of the Congress that he planned to convene an independent expert panel to review DNDO's test procedures, test results, associated technology assessments, and cost-benefit analyses to support the final decision to deploy ASPs. In making this announcement, Secretary Chertoff noted the national importance of developing highly effective radiation detection and identification capabilities as one of the main reasons for seeking an independent review of DNDO's actions. On August 30, 2007, the DHS Undersecretary for Management recommended that the Secretary of Homeland Security delay Secretarial Certification of ASPs for an additional two months. According to DHS, the current delay is in order to provide CBP more time to field ASP systems, a concern CBP had raised early in our review. Effectively detecting and identifying radiological or nuclear threats at U.S. borders and ports of entry is a vital matter of national security, and developing new and advanced technology is critical to U.S. efforts to prevent a potential attack. However, it is also critical to fully understand the strengths and weaknesses of any next generation radiation detection technology before it is deployed in the field and to know, to the greatest extent possible, when or how that equipment may fail. In our view, the tests conducted by DNDO at the Nevada Test Site between February and March 2007 used biased test methods and were not an objective assessment of the ASPs' performance capabilities. We believe that DNDO's test methods--specifically, conducting dry runs and dress rehearsals with contractors prior to formal testing--enhanced the performance of the ASPs beyond what they are likely to achieve in actual use. Furthermore, the tests were not a rigorous evaluation of the ASPs' capabilities, but rather a developmental demonstration of ASP performance under controlled conditions which did not test the limitations of the ASP systems. As a result of DNDO's test methods and the limits of the tests--including a need to meet a secretarial certification deadline and the limited configurations of special nuclear material sources, masking, and shielding materials used--we believe that the results of the tests conducted at the Nevada Test Site do not demonstrate a "significant increase in operational effectiveness" relative to the current detection system, and cannot be relied upon to make a full-scale production decision. We recommend that the Secretary of Homeland Security take the following actions: Delay Secretarial Certification and full-scale production decisions of the ASPs until all relevant tests and studies have been completed and limitations to these tests and studies have been identified and addressed. Furthermore, results of these tests and studies should be validated and made fully transparent to DOE, CBP, and other relevant parties. Once the tests and studies have been completed, evaluated, and validated, DHS should determine in cooperation with CBP, DOE, and other stakeholders including independent reviewers, if additional testing is needed. If additional testing is needed, the Secretary should appoint an independent group within DHS, not aligned with the ASP acquisition process, to conduct objective, comprehensive, and transparent testing that realistically demonstrates the capabilities and limitations of the ASP system. This independent group would be separate from the recently appointed independent review panel. Finally, the results of the tests and analyses should be reported to the appropriate congressional committees before large scale purchases of ASP's are made. Mr. Chairman, this concludes our prepared statement. We would be happy to respond to any questions you or other members of the subcommittee may have. For further information about this testimony, please contact me, Gene Aloise, at (202) 512-3841 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Erika D. Carter, Alison O'Neill, Jim Shafer, Daren Sweeney, and Eugene Wisnoski made key contributions to this statement. Combating Nuclear Smuggling: DHS's Decision to Procure and Deploy the Next Generation of Radiation Detection Equipment Is Not Supported by Its Cost-Benefit Analysis. GAO-07-581T. Washington, D.C.: March.14, 2007. Nuclear Nonproliferation: Focusing on the highest Priority Radiological Sources Could Improve DOE's Efforts to Secure Sources in Foreign Countries. GAO-07-580T. Washington, D.C.: March. 13, 2007. Combating Nuclear Smuggling: DNDO Has Not Yet Collected Most of the National Laboratories' Test Results on Radiation Portal Monitors in Support of DNDO's Testing and Development Program. GAO-07-347R. Washington, D.C.: March 9, 2007. Technology Assessment: Securing the Transport of Cargo Containers. GAO-06-68SU. Washington, D.C.: January 25, 2006. Combating Nuclear Smuggling: DHS's Cost-Benefit Analysis to Support the Purchase of New Radiation Detection Portal Monitors Was Not Based on Available Performance Data and Did Not Fully Evaluate All the Monitors' Costs and Benefits. GAO-07-133R. Washington, D.C.: October 17, 2006. Combating Nuclear Terrorism: Federal Efforts to Respond to Nuclear and Radiological Threats and to Protect Emergency Response Capabilities Could Be Strengthened. GAO-06-1015. Washington, D.C.: September 21, 2006. Border Security: Investigators Transported Radioactive Sources Across Our Nation's Borders at Two Locations. GAO-06-940T. Washington, D.C.: July 7, 2006. Combating Nuclear Smuggling: Challenges Facing U.S. Efforts to Deploy Radiation Detection Equipment in Other Countries and in the United States. GAO-06-558T. Washington, D.C.: March 28, 2006. Combating Nuclear Smuggling: DHS Has Made Progress Deploying Radiation Detection Equipment at U.S. Ports-of-Entry, but Concerns Remain. GAO-06-389. Washington, D.C.: March 22, 2006. Combating Nuclear Smuggling: Corruption, Maintenance, and Coordination Problems Challenge U.S. Efforts to Provide Radiation Detection Equipment to Other Countries. GAO-06-311. Washington, D.C.: March 14, 2006. Combating Nuclear Smuggling: Efforts to Deploy Radiation Detection Equipment in the United States and in Other Countries. GAO-05-840T. Washington, D.C.: June 21, 2005. Preventing Nuclear Smuggling: DOE Has Made Limited Progress in Installing Radiation Detection Equipment at Highest Priority Foreign Seaports. GAO-05-375. Washington, D.C.: March 31, 2005. Homeland Security: DHS Needs a Strategy to Use DOE's Laboratories for Research on Nuclear, Biological, and Chemical Detection and Response Technologies. GAO-04-653. Washington, D.C.: May 24, 2004. Homeland Security: Summary of Challenges Faced in Targeting Oceangoing Cargo Containers for Inspection. GAO-04-557T. Washington, D.C.: March 31, 2004). Homeland Security: Preliminary Observations on Efforts to Target Security Inspections of Cargo Containers. GAO-04-325T. Washington, D.C.: December 16, 2003. Homeland Security: Radiation Detection Equipment at U.S. Ports of Entry. GAO-03-1153TNI. Washington, D.C.: September 30, 2003. Homeland Security: Limited Progress in Deploying Radiation Detection Equipment at U.S. Ports of Entry. GAO-03-963. Washington, D.C.: September 4, 2003). Container Security: Current Efforts to Detect Nuclear Materials, New Initiatives, and Challenges. GAO-03-297T. Washington, D.C.: November 18, 2002. Customs Service: Acquisition and Deployment of Radiation Detection Equipment. GAO-03-235T. Washington, D.C.: October 17, 2002. Nuclear Nonproliferation: U.S. Efforts to Combat Nuclear Smuggling. GAO-02-989T. Washington, D.C.: July 30, 2002. Nuclear Nonproliferation: U.S. Efforts to Help Other Countries Combat Nuclear Smuggling Need Strengthened Coordination and Planning. GAO-02-426. Washington, D.C.: May 16, 2002. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The Department of Homeland Security's (DHS) Domestic Nuclear Detection Office (DNDO) is responsible for addressing the threat of nuclear smuggling. Radiation detection portal monitors are key elements in our national defenses against such threats. DHS has sponsored testing to develop new monitors, known as advanced spectroscopic portal (ASP) monitors. In March 2006, GAO recommended that DNDO conduct a cost-benefit analysis to determine whether the new portal monitors were worth the additional cost. In June 2006, DNDO issued its analysis. In October 2006, GAO concluded that DNDO did not provide a sound analytical basis for its decision to purchase and deploy ASP technology and recommended further testing of ASPs. DNDO conducted this ASP testing at the Nevada Test Site (NTS) between February and March 2007. GAO's statement addresses the test methods DNDO used to demonstrate the performance capabilities of the ASPs and whether the NTS test results should be relied upon to make a full-scale production decision. Based on our analysis of DNDO's test plan, the test results, and discussions with experts from four national laboratories, we are concerned that DNDO's tests were not an objective and rigorous assessment of the ASPs' capabilities. Our concerns with the DNDO's test methods include the following: (1) DNDO used biased test methods that enhanced the performance of the ASPs. Specifically, DNDO conducted numerous preliminary runs of almost all of the materials, and combinations of materials, that were used in the formal tests and then allowed ASP contractors to collect test data and adjust their systems to identify these materials. It is highly unlikely that such favorable circumstances would present themselves under real world conditions. (2) DNDO's NTS tests were not designed to test the limitations of the ASPs' detection capabilities--a critical oversight in DNDO's original test plan. DNDO did not use a sufficient amount of the type of materials that would mask or hide dangerous sources and that ASPs would likely encounter at ports of entry. DOE and national laboratory officials raised these concerns to DNDO in November 2006. However, DNDO officials rejected their suggestion of including additional and more challenging masking materials because, according to DNDO, there would not be sufficient time to obtain them based on the deadline imposed by obtaining Secretarial Certification by June 26. 2007. By not collaborating with DOE until late in the test planning process, DNDO missed an important opportunity to procure a broader, more representative set of well-vetted and characterized masking materials. (3) DNDO did not objectively test the performance of handheld detectors because they did not use a critical CBP standard operating procedure that is fundamental to this equipment's performance in the field. Because of concerns raised that DNDO did not sufficiently test the limitations of ASPs, DNDO is attempting to compensate for weaknesses in the original test plan by conducting additional studies--essentially computer simulations. While DNDO, CBP, and DOE have now reached an agreement to wait and see whether the results of these studies will provide useful data regarding the ASPs' capabilities, in our view and those of other experts, computer simulations are not as good as actual testing with nuclear and masking materials.
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When a business hires an employee, the business generally becomes responsible for collecting and paying three federal taxes--the personal income tax (withholding), FICA, and FUTA. It also becomes liable for state and local employment taxes: in most states, these include a state income tax and a state unemployment tax. For businesses, each tax presents, in turn, its own set of rules and regulations with its own particular exceptions and unique regulatory requirements. For the small business owner just starting up, these employment tax rules make compliance with the taxes both complex and confusing. Many apparent inconsistencies among the various tax code provisions can be explained, to some degree, by reference to an actual purpose of the individual tax. Broadly speaking, employment taxes can be broken into two large groups--those whose primary purpose is to raise general revenues (e.g., the federal income tax) and those that provide social welfare insurance (e.g., FICA and FUTA). Accomplishing the different goals of the various taxes and the policy trade-offs made in their design requires different regulatory schemes. For example, in the interest of fairness and to reflect the ability of different individuals to pay, the federal income tax applies progressive rates to employee wages, taxing higher wages more than lower wages and exempting some lower wage earners from taxation. FUTA, on the other hand, ensures that employers contribute to state unemployment funds by taxing employers at a flat rate for all wages paid to employees (up to $7,000 per employee), but reducing the tax owed by amounts paid to state unemployment insurance funds (down to a federal tax rate of 0.8 percent). adverse affect on the state budget, it can choose to reject the provision as part of its state income tax code. The number and type of state and local tax assessments also vary. In New York City, for instance, an area with large amounts of commercial activity, a business may face as many as eight federal, state, and local employment taxes. Today we have brought along a chart to help illustrate the complexity of current employment taxes. Appendix III of this report is a copy of this chart. The chart is divided into two main parts: the left half of the chart covers federal taxes, and the other half covers state and local taxes. Along the bottom of the chart we list the different types of employment taxes, and in the middle of the chart we present the four major decision points an employer must come to before making actual tax payments. For state taxes, we have used as our examples those applied in Nebraska and Ohio. Aside from the fact that these are the home states of the Chairmen of this Commission, these states make a useful comparison for our purposes. Both states piggyback on federal income taxes. However, Nebraska has a primarily rural economy based mainly on agriculture and livestock. Ohio, on the other hand, has a more urban economy that includes over five times the number of businesses as Nebraska. Ohio law provides for more extensive business regulation than Nebraska--for example, three additional local employment taxes: city and village income taxes, school district tax, and workers' compensation payroll tax. employee's paycheck and pay it to the federal government, along with a matching amount imposed on the employer. 3. Federal Unemployment Tax (required by the Federal Unemployment Tax Act [FUTA]): FUTA imposes a tax on most employers. This tax, in conjunction with state unemployment taxes, supplies the funds to provide benefits for unemployed persons under the state law. The tax is imposed solely on the employer and is not deducted from the employee's wages. In complying with federal, state, and local employment-related taxes, the business person must answer four questions: Is the worker an "employee" covered by the tax? Are the compensation payments to the employee "wages"? What is the employer's employment tax liability? What are the deposit and filing requirements? Our chart provides detail on these issues for federal taxes and provides general information on the application of these issues to state and local taxes. We will discuss each issue in turn, with examples of application on hypothetical small businesses. Once a business decides to hire a worker, the first issue to be considered is whether the worker is an employee for the purpose of each different employment tax. Major factors affecting this issue for federal taxes are outlined in our chart in the lower left corner. The pivotal question on this point is whether the worker is an employee or an "independent contractor." The standard "common law" test finds the worker to be an employee if the employer controls both what work is done and how it is performed. The Internal Revenue Service (IRS) augments this test with guidelines on the factors that can affect the final determination. and exceptions where businesses hiring employees not meeting the common law test are responsible for either FICA and FUTA, or only FICA. In effect, the first set of exceptions shifts the burden for tax compliance from the employer to the employee, while the second set puts the burden on the employer. These exceptions to the general rules can affect various types of workers: for example, ministers, news vendors under age 18, certain family members, and homeworkers in a cottage industry. Depending on conditions (as stated specifically by statute), these workers may be exempt from income tax withholding, FICA, FUTA, or some combination of the three taxes. As an example, consider a jeweler, operating from her basement as a small manufacturing sole proprietor. Pressed by the coming holiday season, the jeweler would like to hire a neighbor to make small metal pieces, working in his own home with his own tools using material furnished by the jeweler. Even though this person--termed a "homeworker" in the federal tax code--will most likely not be considered an a common law employee, the jeweler will still find herself liable for FICA taxes, both deducted from the homeworker's salary and matched by her business, if she pays the neighbor more than $100 in cash. Under the federal tax law, however, she will not be liable for FUTA taxes. Having determined that the worker is an employee covered by employment taxes, the next issue confronted by the employer is what compensation payments are taxable as wages. Compensation to an employee may take many forms--pension plans, health and life insurance plans, travel and business expenses, educational assistance, to list a few examples--as well as straight cash hourly wages. Arguably, the most difficult aspect of this issue is determining whether the compensation paid to the employee fits the category of nontaxable compensation. Certain employee benefits, such as pension plan contributions, health and life insurance, commuting passes, and educational assistance, can all be taxable or nontaxable compensation, depending upon whether such benefits are paid out and administered in compliance with complex tax regulations. Compliance with such regulations requires the employer to pay meticulous attention to detailed legal provisions. Because of the exceptions and preferences in the code, how an employee is compensated can affect the tax liability of both the employer and employee. For example, suppose the owner of a beauty salon hired a part-time hairstylist, a person who is also a full-time undergraduate student at a local college. To keep bookkeeping simple, the new employer would most likely pay the hairstylist a cash hourly wage. However, she might also consider including "educational assistance" as compensation to her employee as an offset to a higher hourly rate. Because a recent law (P.L. 104-188) reinstated a tax break for employer-provided educational assistance, the employee may be eligible for annual tax-free educational assistance up to $5,250. As the tax-free educational assistance payments are not subject to FICA or FUTA, the payments would reduce the salon owner's overall payroll costs, as well as reduce the employee's federal income tax liability. Including the educational assistance would, however, also complicate the employer's recordkeeping. Concluding that the worker is an employee with compensation payments subject to employment taxes, the employer next must calculate his or her periodic tax liability. For the federal income tax, wages are withheld for each payroll period, and the amount withheld is based on the amount of wages and number of allowances claimed by the employee on his or her federal Form W-4. For FICA, the employer is to deduct 7.65 percent of the employee's wages (for wages up to $62,700; for wages over that amount, the employer is to deduct 1.45 percent) for the same payroll period and pay over the same amount as the business' matching share. FUTA is paid by the employer at a rate of 6.2 percent, but it can be reduced to as low as 0.8 percent with credit for payments to state unemployment tax. Similar calculations must be made for state tax liabilities. All these taxes are calculated independently of one another. For example, suppose two partners in a small gift shop in Lincoln, Nebraska, hire a part-time bookkeeper to work 10 hours a week at $10 an hour. The bookkeeper is paid $200 in cash twice each month, is single, and reports only 1 exemption on his Form W-4. When the partners consult the federal tax semimonthly withholding tables, they will find that they do not owe any withholding of federal income taxes for their employee. However, they will still owe payments for FICA, FUTA, Nebraska state income tax, and Nebraska state unemployment tax. although they pay the bookkeeper less than $1,500 per quarter, they still owe a flat percentage of 6.2 percent because the bookkeeper works once a week for over 20 weeks per year. However, as they will also be liable for 3.5 percent in Nebraska unemployment tax (as new employers), ultimately their federal FUTA liability will be reduced by the amount of state payments. As for state income tax, the partners look to Nebraska withholding tables--this shows a tax liability of $2.38 plus 3.65 percent of the excess wages over $179, for a total of $3.15 for each semimonthly pay period. Finally, to remit the employment taxes owed, the employer must figure out the deposit and filing requirements for each employment tax. Generally, employers must remit taxes at regular intervals, as the year progresses. They must also file statements on the amounts of taxes deposited either annually or quarterly, depending on the tax. When the deposit and filing requirements for federal taxes are combined with those for state tax assessments, these requirements can become quite complicated. Consider, for instance, the requirements applicable to a hypothetical construction company located in Cleveland, Ohio, doing most of its work in the Cleveland area, with several of its six employees residing in local counties where there are school district taxes. To fully comply with all federal and local requirements, the small business owner must make at least 56 tax deposits (if the company does business in other Ohio cities, the owner might have to make more deposits), using five different federal, state, and local forms. These tax deposits cover the collection and payment of seven different employment taxes. In addition to these tax deposits, the business must also file the federal Form 941 quarterly, the federal Form 940 annually, the Ohio Form IT-941 annually; send federal Form W-2 to each of his employees; and file federal Forms W-3 and W-2 with both the Social Security Administration (SSA) and the state of Ohio. We set out the schedule of deposit and filing requirements for this hypothetical Ohio company in appendix I. In summary, Messrs. Chairmen, hiring employees or even a single employee is a critical decision for businesses in terms of their tax liabilities and the complexities of the tax administration process they face. With laws and regulations so complicated, it is not surprising that working out feasible solutions to reduce complexity has been difficult, at best. Attempts to simplify provisions, or to make different tax code provisions consistent with each other, inevitably involve trade-offs and compromises in the administration of the tax programs. For instance, to consider eliminating a statutory exception in an unemployment tax to ensure consistency between that tax and, say, the federal income tax, one would need to weigh the trade-offs between the economic and political rationale for the particular exception and the need for simplification of the tax system. Moreover, legislative change by itself--even to simplify provisions--can add to the uncertainty of the regulations, leaving business owners unable to rely on long-term operating procedures. Since 1988, various federal and state groups have been trying to simplify aspects of the employment taxes. The current federal working group, STAWRS (Simplified Tax and Wage Reporting System), is operating under a memorandum of understanding among the Department of the Treasury, IRS, SSA, and the Department of Labor. STAWRS is addressing the employer burden through three broad categories of initiatives: (1) Streamlined Customer Service, (2) Single-Point Filing, and (3) Simplified Requirements. We discuss several of these initiatives today, and we include a list of all initiatives in appendix II. The first simplification project involved the processing of federal Wage and Tax Statements, Form W-2s. All states currently accept Form W-2 as a record of the wage payments paid to employees; however, the employer generally must send the Form W-2s to both the state and SSA. Until this project, which aims at reducing burden by showing the feasibility of requiring the employer to send Form W-2s only to SSA, SSA received both the federal and state W-2 data, but did nothing with the state data. Under the current STAWRS demonstration project, SSA scans both federal and state data onto computer tapes, transmitting the state data to participating states through IRS. Thirty-four states are participating in this project. Three states--Oklahoma, Maine, and Oregon--have dropped the requirement for Form W-2 state filing altogether. then send only one quarterly form to the state, which, in turn, would forward the federal information to IRS. Montana has recently become a partner with STAWRS on a similar project. A third initiative is attempting to reconcile and simplify the numerous federal and state definitions of terms such as employee and wages into one harmonized wage code. The STAWRS group researched the federal and state laws to identify hundreds of differences in how the various tax codes defined their operative terms. For example, the Maryland tax code excepts yacht salesman for its definition of employee, Ohio excepts part-time orchestra members; only one exception--ministers--is found in every code. Recently, STAWRS developed a Harmonized Wage Code Blueprint, which was completed in September 1996, but it does not expect to finalize any parts of this work until 1998. Even though these initiatives are under way, the difficulty involved in making choices given the context of the political, economic, and administrative issues that must be considered continues to slow their progress. With the Form W-2 initiative, for example, one question is: Who pays the extra costs when SSA scans and delivers data to the states? With the combined quarterly form, privacy issues involving the receipt and transfer of tax data between the federal and state government must be resolved, as well as administrative issues such as how taxpayers alert the government to business address changes. Political problems abound with the concept of a harmonized wage code among all states and the federal government. For example, as we noted earlier, even among states that routinely piggyback on federal tax law, there are political and economic reasons why states will not accept federal changes to tax law. In summary, we believe that employment taxes present an instructive example not only as to the complexity of the current tax code but also as to the difficulties and potential pitfalls presented by simplification endeavors. Even the smallest change to the current very complicated regulatory scheme can involve political and economic trade-offs between types of taxes and between federal and state jurisdictions. Notwithstanding the enormity of the challenge, however, we believe that efforts to simplify the tax code are essential to reducing compliance burden, thereby making voluntary tax compliance easier for all types of businesses, large and small. Messrs. Chairmen, Members of the Commission, this ends our prepared statement. We would be pleased to answer any questions. Table I.1 shows the 1995 federal and state tax deposit and filing requirements for a hypothetical business located in Cleveland, Ohio. The business was started December 1, 1994, and has six employees, some of whom reside in Ohio school districts with an income tax assessment. Prior quarter amount Form 8109 State unemployment Prior quarter amount Form UCO-2QR Form W-3, W-2s to SSA Form IT-3, W-2s to state (continued) (continued) (continued) --Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return; --Form 941, Employer's Quarterly Tax Return; --Form 8109, Federal Tax Deposit Coupon; --Form W-2, Wage and Tax Statement; --Form W-3, Transmittal of Wage and Tax Statements. The state forms include: --IT-3, Transmittal of Wage and Tax Statements; --IT-501, Ohio's Employer's Payment of Income Tax Withheld; --IT-941, Ohio's Employer's Annual Reconciliation of Income Tax Withheld; --UCO-2QR, Employer's Contribution and Wage Report. The local forms include: --CCA-102, Municipal Depository Receipt; --CCA-W-3, Reconciliation of City Income Tax Withheld and Transmittal of Wage Statements; --SD-101, Employer's Payment of School District Tax Withheld. At the current time, the STAWRS Project Office is working on nine initiatives to ease the compliance burden on employers dealing with employment taxes. Table II.1 describes these initiatives and their present status. Has developed "Employer Assistance Kit" for use on new World Wide Web site; includes procedures for employers to apply for Employer Identification Number (EIN) on Internet. Needs STAWRS Executive Steering Board approval to set up Web site with the State of Illinois. Has designed procedures whereby employers can check electronically with SSA on the validity of an employee's Social Security number. However, originally designed for small personal computer system; owing to statutory language in the Welfare Reform Act, SSA may need to use larger computer system. Recently completed limited pilot project in which employers electronically sent data for quarterly Form 941 simultaneously to IRS and a state using standardized format. Three states involved--California, Minnesota, and Texas. Phase I demonstrated the ability of SSA to receive Form W-2s electronically with use of a "Value-Adding Network" (an intermediary computer "mailbox"). In Phase II, SSA has identified 1,000 employers to use electronic personal identification numbers (PINs) to electronically transmit Forms W-3 and W-2. Current proposal being developed by the Federation of Tax Administrators to have SSA capture all state data on Form W-2 and place data on magnetic media for distribution to participating states. Would eliminate dual W-2 filing for employers. STAWRS working with the state of Oregon to add the federal Form 941 to the state's already combined report the federal Form 941. In August 1996, developed combined form. The state of Montana has recently become a partner with the potential to add aspects of the Harmonized Wage Code. (continued) SSA currently putting state W-2 data on computer tape for use by states. Thirty-four states are now participating; 3 states have eliminated their requirement for employers to file Form W-2s with the state in anticipation of adoption of the concept. Has completed research of existing federal and state statutes and regulations. In September 1996, completed a "Harmonized Wage Code Blueprint." Has completed research of existing federal and state statutes and regulations. Has identified common filing and payment dates and developed matrix of existing filing and payment dates. 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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GAO discussed the impact of various employment tax laws and regulations on small businesses hiring their first employees and all employees thereafter. GAO noted that: (1) employment tax compliance can be particularly burdensome to employers because of multiple federal, state, and local taxes; (2) each tax generally requires it own unique set of rules, regulations, and exceptions, which makes compliance difficult for employers; (3) the complexities discussed reflect the various trade-offs that have been made to address assorted tax policy issues; (4) these trade-offs include considerations as to the type of tax imposed, the types of compensation to be socially encouraged, and the fiscal requirements of individual governmental units and, consequently, they will not be easy to simplify; (5) respondents to an earlier GAO survey described characteristics of especially troublesome tax provisions, such as ambiguity, frequent changes, expiration clauses, and layers of federal and state regulation; and (6) efforts to simplify the tax code are essential to reducing compliance burden, thus making voluntary tax compliance easier for all types of businesses, large and small.
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Under a demonstration project established by VBIA, from February 8, 2005, through September 30, 2007, and subsequently extended through November 16, 2007, OSC and DOL share responsibility for receiving and investigating USERRA claims and seeking corrective action for federal employees. While the legislation did not establish specific goals for the demonstration project, the language mandating that GAO conduct a review suggested that duplication of effort and delays in processing cases were of concern to Congress. The demonstration project gave OSC, an independent investigative and prosecutorial agency, authority to receive and investigate claims for federal employees whose social security numbers end in odd numbers. VETS investigated claims for individuals whose social security numbers end in even numbers. Under the demonstration project, OSC conducts an investigation of claims assigned to determine whether the evidence is sufficient to resolve the claimants' USERRA allegations and, if so, seeks voluntary corrective action from the involved agency or initiates legal action against the agency before the Merit Systems Protection Board (MSPB). For claims assigned to DOL, VETS conducts an investigation, and if it cannot resolve a claim, DOL is to inform claimants that they may request to have their claims referred to OSC. OSC's responsibility under USERRA for conducting independent reviews of referred claims after they are investigated but not resolved by VETS remained unchanged during the demonstration project. Before sending the referred claim to OSC, two additional levels of review take place within DOL. After OSC receives the referred claim from DOL, it reviews the case file, and if satisfied that the evidence is sufficient to resolve the claimant's allegations and that the claimant is entitled to corrective action, OSC begins negotiations with the claimant's federal executive branch employer. According to OSC, if an agreement for full relief via voluntary settlement by the employer cannot be reached, OSC may represent the servicemember before MSPB. If MSPB rules against the servicemember, OSC may appeal the decision to the U.S. Court of Appeals for the Federal Circuit. In instances where OSC finds that referred claims do not have merit, it informs servicemembers of its decision not to represent them and that they have the right to take their claims to MSPB without OSC representation. Figure 1 depicts USERRA claims' processing under the demonstration project. Under the demonstration project, VETS and OSC used two different models to investigate federal employee USERRA claims. Both DOL and OSC officials have said that cooperation and communication increased between the two agencies concerning USERRA claims, raising awareness of the issues related to servicemembers who are federal employees. In addition, technological enhancements have occurred, primarily on the part of VETS since the demonstration project. For example, at VETS, an enhancement to its database enables the electronic transfer of information between agencies and the electronic filing of USERRA claims. However, we found that DOL did not consistently notify claimants concerning the right to have their claims referred to OSC for further investigation or to bring their claims directly to MSPB if DOL did not resolve their claims. We also found data limitations at both agencies that made claim outcome data unreliable. DOL agreed with our findings and recommendations and has begun to take corrective action. Since the start of the demonstration project on February 8, 2005, both DOL/VETS and OSC had policies and procedures for receiving, investigating, and resolving USERRA claims against federal executive branch employers. Table 1 describes the two models we reported DOL and OSC using to process USERRA claims. Once a VETS investigator completes an investigation and arrives at a determination on a claim, the investigator is to contact the claimant, discuss the findings, and send a letter to the claimant notifying him or her of VETS's determination. When VETS is unsuccessful in resolving servicemembers' claims, DOL is to notify servicemembers who filed claims against federal executive branch agencies that they may request to have their claims referred to OSC or file directly with MSPB. Our review of a random sample of claims showed that for claims VETS was not successful in resolving (i.e., claims not granted or settled), VETS (1) failed to notify half the claimants in writing, (2) correctly notified some claimants, (3) notified others of only some of their options, and (4) incorrectly advised some claimants of a right applicable only to nonfederal claimants--to have their claims referred to the Department of Justice or to bring their claims directly to federal district court. In addition, we found that the VETS USERRA Operations Manual failed to provide clear guidance to VETS investigators on when to notify servicemembers of their rights and the content of the notifications. VETS had no internal process to routinely review investigators' determinations before claimants are notified of them. According to a VETS official, there was no requirement that a supervisor review investigators' determinations before notifying the claimant of the determination. In addition, legal reviews by a DOL regional Office of the Solicitor occurred only when a claimant requested to have his or her claim referred to OSC. A VETS official estimated that about 7 percent of claimants ask for their claims to be referred to OSC or, for nonfederal servicemembers, to the Department of Justice. During our review, citing our preliminary findings, DOL officials required each region to revise its guidance concerning the notification of rights. Since that time, DOL has taken the following additional actions: reviewed and updated policy changes to incorporate into the revised Operations Manual and prepared the first draft of the revised Manual; issued a memo in July 2007 from the Assistant Secretary for Veteran's Employment and Training to regional administrators, senior investigators, and directors requiring case closing procedure changes, including the use of standard language to help ensure that claimants (federal and nonfederal) are apprised of their rights; and began conducting mandatory training on the requirements contained in the memo in August 2007. In addition, according to DOL officials, beginning in January 2008, all claims are to be reviewed before the closure letter is sent to the claimant. These are positive steps. It is important for DOL to follow through with its plans to complete revisions to its USERRA Operations Manual, which according to DOL officials is expected in January 2008, to ensure that clear and uniform guidance is available to all involved in processing USERRA claims. Our review of data from VETS's database showed that from the start of the demonstration project on February 8, 2005, through September 30, 2006, VETS investigated a total of 166 unique claims. We reviewed a random sample of case files to assess the reliability of VETS's data and found that the closed dates in VETS's database were not sufficiently reliable. Therefore, we could not use the dates for the time VETS spent on investigations in the database to accurately determine DOL's average processing time. Instead, we used the correct closed dates from the case files in our random sample and statistically estimated the average processing time for VETS's investigations from the start of the demonstration project through July 21, 2006--the period of our sample. Based on the random sample, there is at least a 95 percent chance that VETS's average processing time for investigations ranged from 53 to 86 days. During the same period, OSC received 269 claims and took an average of 115 days to process these claims. We found the closed dates in OSC's case tracking system to be sufficiently reliable. In his July 2007 memo discussed above, the Assistant Secretary for Veteran's Employment and Training also instructed regional administrators, senior investigators, and directors that investigators are to ensure that the closed date of each USERRA case entered in VETS's database matches the date on the closing letter sent to the claimant. We found data limitations at both agencies that affected our ability to determine outcomes of the demonstration project and could adversely affect Congress's ability to assess how well federal USERRA claims are processed and whether changes are needed. At VETS, we found an overstatement in the number of claims and unreliable data in the VETS's database. From February 8, 2005, through September 30, 2006, VETS received a total of 166 unique claims, although 202 claims were recorded as opened in VETS's database. Duplicate, reopened, and transferred claims accounted for most of this difference. Also, in our review of a random sample of case files, we found the dates recorded for case closure in VETS's database did not reflect the dates on the closure letters in 22 of 52 claims reviewed, so using the correct dates from the sample, we statistically estimated average processing time, and the closed code, which VETS uses to describe the outcomes of USERRA claims (i.e., claim granted, claim settled, no merit, withdrawn) was not sufficiently reliable for reporting specific outcomes of claims. At OSC, we assessed the reliability of selected data elements in OSC's case tracking system in an earlier report and found that the corrective action data element, which would be used for identifying the outcomes of USERRA claims, was not sufficiently reliable. We separately reviewed those claims that VETS investigated but could not resolve and for which claimants requested referral of their claims to OSC. For these claims, two sequential DOL reviews take place: a VETS regional office prepares a report of the investigation, including a recommendation on the merits and a regional Office of the Solicitor conducts a separate legal analysis and makes an independent recommendation on the merits. From February 8, 2005, through September 30, 2006, 11 claimants asked VETS to refer their claims to OSC. Of those 11 claims, 6 claims had been reviewed by both a VETS regional office and a regional Office of the Solicitor and sent to OSC. For those 6 claims, from initial VETS investigation through the VETS regional office and regional Office of the Solicitor reviews, it took an average of 247 days or about 8 months before the Office of the Solicitor sent the claims to OSC. Of the 6 referred claims that OSC received from DOL during the demonstration project, as of September 30, 2006, OSC declined to represent the claimant in 5 claims and was still reviewing 1 of them, taking an average of 61 days to independently review the claims and determine if the claims had merit and whether to represent the claimants. You asked us about factors that could be considered in deciding whether to extend the demonstration project and to conduct a follow-up review. If the demonstration project were to be extended, it would be important to have clear objectives. Legislation creating the current demonstration project was not specific in terms of the objectives to be achieved. Having clear objectives would be important for the effective implementation of the extended demonstration project and would facilitate a follow-on evaluation. In this regard, our report provides baseline data that could inform this evaluation. Given adequate time and resources, an evaluation of the extended demonstration project could be designed and tailored to provide information to inform congressional decision making. Congress also may want to consider some potential benefits and limitations associated with options available if the demonstration is not extended. Table 2 presents two potential actions that could be taken and examples of potential benefits and limitations of each. The table does not include steps, such as enabling legislation that might be associated with implementing a particular course of action. At a time when the nation's attention is focused on those who serve our country, it is important that employment and reemployment rights are protected for federal servicemembers who leave their employment to perform military or other uniformed service. Addressing the deficiencies that we identified during our review, including correcting inaccurate and unreliable data, is a key step to ensuring that servicemembers' rights under USERRA are protected. While DOL is taking positive actions in this regard, it is important that these efforts are carried through to completion. Chairman Akaka, Senator Burr, and Members of the Committee, this concludes my prepared statement. I would be pleased to respond to any questions that you may have. For further information regarding this statement, please contact George Stalcup, Director, Strategic Issues, at (202) 512-9490 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this statement included Belva Martin, Assistant Director; Karin Fangman; Tamara F. Stenzel; Kiki Theodoropoulos; and Greg Wilmoth. 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 Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) protects the employment and reemployment rights of federal and nonfederal employees who leave their employment to perform military or other uniformed service. Under a demonstration project from February 8, 2005, through September 30, 2007, and subsequently extended through November 16, 2007, the Department of Labor (DOL) and the Office of Special Counsel (OSC) share responsibility for receiving and investigating USERRA claims and seeking corrective action for federal employees. In July 2007, GAO reported on its review of the operation of the demonstration project through September 2006. This testimony describes the findings of our work and actions taken to address our recommendations. In response to the request from Congress, GAO also presents views on (1) factors to consider in deciding whether to extend the demonstration project and the merits of conducting a follow-up review and (2) options available if the demonstration is not extended. In preparing this statement, GAO interviewed officials from DOL and OSC to update actions taken on recommendations from our July 2007 report and developments since we conducted that review. Under the demonstration project, OSC receives and investigates claims for federal employees whose social security numbers end in odd numbers; DOL investigates claims for individuals whose social security numbers end in even numbers. Among GAO's findings were the following: DOL and OSC use two different models to investigate federal USERRA claims, with DOL using a nationwide network and OSC using a centralized approach, mainly within its headquarters. Since the demonstration project began, both DOL and OSC officials have said that cooperation and communication increased between the two agencies concerning USERRA claims, raising awareness of the issues related to servicemembers who are federal employees. DOL did not consistently notify claimants concerning the right to have their claims referred to OSC for further investigation or to bring their claims directly to the Merit Systems Protection Board if DOL did not resolve their claims. DOL had no internal process to routinely review investigators' determinations before claimants were notified of them. Data limitations at both agencies made claim outcome data unreliable. DOL officials agreed with GAO's findings and recommendations and are taking actions to address the recommendations. In July 2007, DOL issued guidance concerning case closing procedures, including standard language to ensure that claimants (federal and nonfederal) are apprised of their rights,and began conducting mandatory training on the guidance in August 2007. In addition, according to DOL officials, beginning in January 2008, all claims are to be reviewed before the closure letter is sent to the claimant. These are positive steps and it will be important for DOL to follow through with these and other actions. If the demonstration project were to be extended, it would be important that clear objectives be set. Legislation creating the current demonstration project was not specific in terms of the objectives to be achieved. Clear project objectives would also facilitate a follow-on evaluation. In this regard, GAO's July 2007 report provides baseline data that could inform this evaluation. Given adequate time and resources, an evaluation of the extended demonstration project could be designed and tailored to provide information to inform congressional decision making. GAO also presents potential benefits and limitations associated with options available if the demonstration project is not extended.
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From fiscal years 2005 through 2011, the physical condition of the Coast Guard's legacy vessels was generally poor. A primary Coast Guard measure of a vessel's condition--the operational percent of time free of major casualties--shows that the high endurance cutters, medium endurance cutters, and patrol boats generally remained well below target levels from fiscal years 2005 through 2011. For example, over this 7- year period, the operational percent of time free of major casualties averaged about 44 percent for the high endurance cutters and about 65 percent for the medium endurance cutters versus a target of 72 percent; and the patrol boats averaged approximately 74 percent versus a target of 86 percent. Other evidence, such as our review of vessel condition assessments and inspections the Coast Guard conducts of the legacy vessels, also shows that the condition of the legacy vessel fleet is generally declining. For example, a variety of Coast Guard assessments show that legacy vessels' critical operating systems--such as main diesel engines--have been increasingly prone to mission-degrading casualties. In addition, Coast Guard senior maintenance officials and vessel crew members we interviewed noted increased maintenance challenges because of the advanced age of the legacy vessels. In particular, the maintenance managers for both the high endurance and medium endurance cutters reported that the performance of critical systems on these legacy vessel classes has become increasingly unpredictable and refurbishments of these vessel classes' least reliable systems have brought limited returns on the investments. Maintenance officials and vessel crew members also reported devoting increasing amounts of time and resources to troubleshoot and resolve maintenance issues because some systems and parts on these legacy vessel classes are obsolete. The Coast Guard has taken two key actions to improve the condition of its legacy vessels. First, in 2009, the Coast Guard reorganized its maintenance command structure to focus on standardization of practices. Under this reorganization, the Coast Guard eliminated its two Maintenance and Logistics Commands and replaced them with a centralized command structure--the Surface Forces Logistics Center-- whereby a single product line manager oversees the maintenance of similar classes of vessels. Coast Guard officials reported that this change was made to enable better oversight of the condition of entire classes of the vessel fleet, reduce the workload on vessel crews by providing centralized support for procurement of replacement parts, and implement centralized maintenance plans to address commonly occurring Second, Coast Guard officials also reported that the Coast casualties.Guard was on schedule to complete a 10-year, almost half-billion dollar set of sustainment projects to refurbish selected patrol boats and upgrade medium endurance cutters, known as Mission Effectiveness Projects, which are intended to improve legacy vessel operating and cost performance. Our July 2012 report provides additional information regarding these actions but, as noted in the report, the condition of these legacy vessels continues to decline despite these efforts. Expenditures for the two key types of legacy vessel annual depot-level maintenance--scheduled and unscheduled maintenance--declined from fiscal year 2005 to fiscal year 2007, and then rose from fiscal year 2007 to fiscal year 2011. For example, scheduled maintenance expenditures rose from about $43 million in fiscal year 2007 to about $70 million in fiscal year 2011. Coast Guard officials attributed the increase in scheduled maintenance expenditures to better identifying maintenance needs, increasing the prioritization of completing all scheduled maintenance, and the receipt of supplemental funding. In contrast, unscheduled maintenance expenditures varied by vessel class from fiscal years 2005 through 2011, but the high endurance cutter fleet consistently incurred the greatest share of unscheduled maintenance expenditures. For example, high endurance cutters accounted for 86 percent of all unscheduled maintenance expenditures in fiscal year 2011. Coast Guard officials attributed the comparatively high unscheduled maintenance expenditures to the high endurance cutters' advanced age and size. According to Coast Guard officials, Standard Support Levels are established when a vessel class enters service or undergoes a service life extension program. For example, the Coast Guard reset the Standard Support Level for the high endurance cutters after conducting a service life extension program between 1987 and 1992--the Fleet Renovation and Modernization Program--but has not reset the Standard Support Levels for the medium endurance cutters or patrol boats. Coast Guard officials indicated that the Coast Guard increases Standard Support Levels using non-pay inflation, but it has not done so every year. noting that supplemental funding had been critical to enable the Coast Guard to fund necessary maintenance for the legacy vessel fleet. Our July 2012 report provides further information regarding the Coast Guard's annual depot-level maintenance expenditures. Our review found that the Coast Guard's process for estimating legacy vessel annual depot-level maintenance costs does not fully reflect relevant best practices. GAO's Cost Estimating and Assessment Guide states that a high-quality and reliable cost estimate includes certain best practice characteristics. We determined that the three characteristics relevant to the Coast Guard's cost estimation process are that the process should be (1) well-documented, (2) comprehensive, and (3) accurate. Our assessment showed that the Coast Guard's legacy vessel maintenance cost-estimating process partially met the three characteristics, as follows: Partially comprehensive: The Coast Guard's process for estimating annual legacy vessel depot-level maintenance costs defines the program, among other things, but does not document all cost- influencing ground rules and assumptions (e.g., inflation rate). Partially well-documented: The Coast Guard's process for estimating annual legacy vessel depot-level maintenance costs discusses the technical baseline description, and the data in the baseline are consistent with the estimate; however, the Coast Guard did not provide documentation that discusses key cost estimating factors, such as how the data were normalized or the reliability of the data. Partially accurate: The Coast Guard's process for estimating annual legacy vessel depot-level maintenance costs contains few, if any, minor mathematical mistakes and is regularly updated to reflect significant program changes and current status. However, we assessed the cost estimate as being not fully accurate because Coast Guard officials could not provide us with documentation that would allow us to assess the reliability of the historical data used, the accuracy of the calculations, the relationship of the data to the historical contractor bids, or the final estimates for all maintenance costs. To address these issues, in our July 2012 report, we recommended that the Secretary of Homeland Security direct the Commandant of the Coast Guard to ensure that the Coast Guard's annual depot-level maintenance cost estimates conform to cost estimating best practices. DHS concurred with this recommendation and described actions the Coast Guard has taken or plans to take, but these actions may not fully address the intent of this recommendation. For example, DHS noted that given current fiscal constraints, the Coast Guard will focus on improvements that do not require additional resources. While we agree that federal resources are limited, aligning the cost estimating process for legacy vessel maintenance with best practices would not necessarily require an increased investment of resources. Rather, having a well documented cost estimating process and using accurate historical data should enable the Coast Guard to operate more efficiently. The operational capacity of the Coast Guard's legacy vessel fleet declined from fiscal years 2006 through 2011. In particular, while performance varied across the legacy vessel classes, two key Coast Guard metrics--operational hours and lost cutter days--show that the legacy vessels did not meet their operational capacity targets and lost considerable planned operational time. For example, the high endurance cutters and 210-foot medium endurance cutters did not meet any of their operational hour targets from fiscal years 2006 through 2011, and the 270-foot medium endurance cutters met their targets only in fiscal year 2008. Specifically, operational hours for the high endurance cutters declined by about 32 percent from fiscal year 2008 to 2011, and the combined operational hours of the 210-foot and 270-foot medium endurance cutters declined nearly 21 percent from fiscal year 2007 to fiscal year 2011.medium endurance cutters, collectively, averaged about 618 lost cutter days per year from fiscal years 2006 through 2011. Further, the number of lost cutter days for the high endurance cutters has been nearly In addition, Coast Guard data show the high and equivalent to three high endurance cutters being out of service for an entire year in each of the last 3 fiscal years. Moreover, lost cutter days for both the 210-foot and 270-foot medium endurance cutters combined more than doubled, from 122 lost cutter days in fiscal year 2006 to 276 lost cutter days in fiscal year 2010. Coast Guard headquarters officials reported that the declining operational capacity of its legacy vessel fleet-- particularly the high and medium endurance cutters--has been a prime contributor to the Coast Guard's declining ability to meet mission requirements and intercept threats beyond U.S. territorial waters. The Naval Engineering Manual defines remaining service life as the time period during which no major expenditures will be required for hull and structural repairs or modernizations, or for machinery or system modernizations based solely on the vessel's capability to meet existing mission requirements. also increase the vessel fleet's operational capacity gap because the Coast Guard will not receive sufficient numbers of replacement vessels during this time period to make up for the lost capacity. The ongoing delivery of replacement vessels is expected to help mitigate the existing operational capacity gap for the legacy high endurance cutter and patrol boat fleets. However, Coast Guard officials reported, and our analysis of Coast Guard documents confirms, that the medium endurance cutter fleet will be most affected by delays in delivery of replacement vessels. The Coast Guard is refurbishing its medium endurance cutters through the Mission Effectiveness Project to increase these cutters' reliability and reduce longer-term maintenance costs, and third-party assessments show that the performance of those medium endurance cutters that have completed the project has improved. Even if the most optimistic projections were realized, though, and the Mission Effectiveness Project was to extend the medium endurance cutters' service lives by 15 years, the medium endurance cutters would remain in service increasingly beyond the end of their originally-expected service lives before full deployment of their replacement vessels--the offshore patrol cutters. In particular, according to current plans, some of the 270- foot medium endurance cutters are to remain in service as late as 2033-- up to 21 years beyond the end of their originally-expected service lives-- before they are replaced. Coast Guard officials reported that a further refurbishment of the medium endurance cutters will be necessary to meet operational requirements and that the Coast Guard is in the early stages of developing plans for addressing the expected gap between remaining medium endurance cutter fleet service lives and the delivery of the replacement offshore patrol cutters. Coast Guard efforts to sustain its legacy vessel fleet and meet mission requirements until the replacement vessels are delivered are also challenged by uncertainties regarding the future mix of vessels, as well as the implementation of a rotational crew concept for the replacement vessel for the high endurance cutters, known as the national security cutter. The Coast Guard's fiscal year 2013 to 2017 5-year Capital Investment Plan does not allocate funds for the acquisition of the last two replacement national security cutters, as called for by the program of record, and it is unclear how this could affect the decommissioning schedule of the high endurance cutters, the last of which the Coast Guard currently plans to decommission in fiscal year 2023. The Coast Guard has established operational hour targets for the number of hours its vessels are expected to conduct operations or missions each fiscal year and uses these targets to inform planning decisions, such as setting performance targets and corresponding resource allocations. Although senior Coast Guard headquarters officials reported considering various factors when setting overall mission performance targets annually, these officials reported doing so based on the assumption that vessel class assets will achieve 100 percent of their operational hour targets. Our analysis of Coast Guard data, though, makes it clear that the Coast Guard's legacy vessel fleet has increasingly fallen below operational hour targets in recent years, and this trend is expected to continue. In addition, Coast Guard officials reported that the decline in legacy vessel operational capacity has challenged the Coast Guard's ability to meet its mission performance targets. Further, Coast Guard operational commanders reported taking actions to mitigate the effect of declining legacy vessel capacity, such as diverting vessels tasked to other missions to help complete operations. Nevertheless, the Coast Guard has not revised legacy vessel operational hour targets because, according to Coast Guard officials, doing so would lower its mission performance targets. However, these targets have gone unmet because of the declining operational capacity of the legacy vessel fleet. Because it sets mission performance targets and allocates resources on the assumption that legacy vessels will achieve 100 percent of operational hour targets, the Coast Guard's allocation of resources is not realistic. Further, because the Coast Guard uses vessels' operational hour targets to set agency-wide performance targets and to allocate resources, consistent achievement of its performance targets is at increased risk. In our July 2012 report, we recommended that the Secretary of Homeland Security direct the Commandant of the Coast Guard to adjust legacy vessel fleet operational hour targets to reflect actual capacity, as appropriate by class. DHS did not concur with this recommendation and noted, among other things, that reducing the operational hour targets would fail to fully utilize those assets not impacted by maintenance issues. We disagree with DHS's position because, as noted in the July 2012 report, while senior Coast Guard officials reported that the Coast Guard adjusts its mission performance targets annually, it does not also adjust legacy vessel operational hour targets annually. These officials also stated that the Coast Guard's mission performance targets are based on each vessel class's capacity, with the assumption that each vessel will operate at 100 percent of its planned operating time. Thus, we do not believe that reducing the operational hour targets would result in a failure by the Coast Guard to fully utilize assets not impacted by maintenance challenges and continue to believe that this recommendation has merit. Chairman LoBiondo, Ranking Member Larsen, and members of the subcommittee, this completes my prepared statement. I would be happy to respond to any questions you may have at this time. For questions about this statement, please contact Stephen L. Caldwell at (202) 512-9610 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include Christopher Conrad (Assistant Director) and Michael C. Lenington. Additional contributors include Jason Berman, Chloe Brown, and Lara Miklozek. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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This testimony discusses the condition of the Coast Guard's legacy vessel fleet, and challenges the Coast Guard faces in sustaining these vessels and meeting mission requirements. The Coast Guard, within the Department of Homeland Security, is the principal federal agency responsible for maritime safety, security, and environmental stewardship. The legacy vessel fleet is critical for executing Coast Guard missions, which include defense operations; search and rescue; and securing ports, waterways, and coastal areas. The comments will focus on the legacy 378-foot high endurance cutters, 270-foot and 210-foot medium endurance cutters, and 110-foot patrol boats, and are based on findings from the report we released in July 2012. This testimony summarizes the findings of our July 2012 report and addresses (1) how the physical condition of the Coast Guard's legacy vessel fleet changed from fiscal years 2005 through 2011, and key actions the Coast Guard has taken related to the physical condition of its legacy fleet; (2) key annual maintenance expenditure trends for the legacy vessel fleet, and the extent to which the Coast Guard's cost estimating process has followed established best practices; and (3) the operational capacity of the legacy vessel fleet and the extent to which the Coast Guard faces challenges in sustaining the legacy vessel fleet and meeting mission requirements. For information, contact contact Stephen L. Caldwell at (202) 512-9610 or [email protected] . From fiscal years 2005 through 2011, the physical condition of the Coast Guard's legacy vessels was generally poor. A primary Coast Guard measure of a vessel's condition--the operational percent of time free of major casualties--shows that the high endurance cutters, medium endurance cutters, and patrol boats generally remained well below target levels from fiscal years 2005 through 2011. The Coast Guard has taken two key actions to improve the condition of its legacy vessels. First, in 2009, the Coast Guard reorganized its maintenance command structure to focus on standardization of practices. Under this reorganization, the Coast Guard eliminated its two Maintenance and Logistics Commands and replaced them with a centralized command structure--the Surface Forces Logistics Center--whereby a single product line manager oversees the maintenance of similar classes of vessels. Coast Guard officials reported that this change was made to enable better oversight of the condition of entire classes of the vessel fleet, reduce the workload on vessel crews by providing centralized support for procurement of replacement parts, and implement centralized maintenance plans to address commonly occurring casualties. Second, Coast Guard officials also reported that the Coast Guard was on schedule to complete a 10-year, almost half-billion dollar set of sustainment projects to refurbish selected patrol boats and upgrade medium endurance cutters, known as Mission Effectiveness Projects, which are intended to improve legacy vessel operating and cost performance. Expenditures for the two key types of legacy vessel annual depot-level maintenance--scheduled and unscheduled maintenance--declined from fiscal year 2005 to fiscal year 2007, and then rose from fiscal year 2007 to fiscal year 2011. Further, annual depot-level maintenance expenditures often exceeded the Coast Guard's budgeted funds for depot-level maintenance for the legacy vessels--known as Standard Support Levels--from fiscal years 2005 through 2011. Our review found that the Coast Guard's process for estimating legacy vessel annual depot-level maintenance costs does not fully reflect relevant best practices. GAO's Cost Estimating and Assessment Guide states that a high-quality and reliable cost estimate includes certain best practice characteristics. We determined that the three characteristics relevant to the Coast Guard's cost estimation process are that the process should be (1) well-documented, (2) comprehensive, and (3) accurate. The operational capacity of the Coast Guard's legacy vessel fleet declined from fiscal years 2006 through 2011. In particular, while performance varied across the legacy vessel classes, two key Coast Guard metrics--operational hours and lost cutter days--show that the legacy vessels did not meet their operational capacity targets and lost considerable planned operational time. Coast Guard efforts to sustain its legacy vessel fleet and meet mission requirements until the replacement vessels are delivered are also challenged by uncertainties regarding the future mix of vessels, as well as the implementation of a rotational crew concept for the replacement vessel for the high endurance cutters, known as the national security cutter. The Coast Guard's fiscal year 2013 to 2017 5-year Capital Investment Plan does not allocate funds for the acquisition of the last two replacement national security cutters, as called for by the program of record, and it is unclear how this could affect the decommissioning schedule of the high endurance cutters, the last of which the Coast Guard currently plans to decommission in fiscal year 2023.
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Since 1982, the federal government has passed a number of laws that address the role of the crime victim in the criminal justice system, including the Victim and Witness Protection Act of 1982, Victims of Crime Act of 1984, Victims' Rights and Restitution Act of 1990, Violent Crime Control and Law Enforcement Act of 1994, Mandatory Victims Restitution Act of 1996, Victim Rights Clarification Act of 1997, and Crime Victims' Rights Act of 2004. Several of these statutes provided crime victims with rights, but they also directed federal officials to provide victims with various services, such as notification of certain public court proceedings. In particular, the Victims' Rights and Restitution Act of 1990 identified crime victims' rights, delineating seven such rights and requiring federal officials to make their best efforts to see that crime victims are accorded these rights. The 1990 law also included a separate provision, codified at 42 U.S.C. SS 10607, that requires federal officials to identify crime victims and provide them information about their cases and about services that may be available to them. For example, the law requires officials to inform victims of a place where they may receive emergency medical and social services, to inform victims of programs that are available to provide counseling, treatment, and other support to the victim, and to assist victims in contacting persons who can provide such services. On October 30, 2004, the Crime Victims' Rights Act, as a component of the Justice for All Act, was signed into law. The CVRA left in place 42 U.S.C. SS 10607--the provision requiring federal officials to inform victims about their cases and about services available to them--but the CVRA modified the provision from the 1990 law regarding crime victims' rights and identified eight rights for federal crime victims, some of which were similar to the rights from the 1990 law and others of which were new. The CVRA provided that crime victims have the following rights: the right to be reasonably protected from the accused; the right to reasonable, accurate, and timely notice of any public court proceeding, or any parole proceeding, involving the crime or of any release or escape of the accused; the right not to be excluded from any such public court proceeding, unless the court, after receiving clear and convincing evidence, determines that testimony by the victim would be materially altered if the victim heard other testimony at that proceeding; the right to be reasonably heard at any public proceeding in the district court involving the release, plea, sentencing, or any parole proceeding; the reasonable right to confer with the attorney for the government in the case; the right to full and timely restitution as provided in law; the right to proceedings free from unreasonable delay; and the right to be treated with fairness and with respect for the victim's dignity and privacy. The CVRA also established two mechanisms to ensure adherence to victims' rights under the law, neither of which had been available under previous statutes. Specifically, to ensure that DOJ employees are complying with CVRA requirements, the law directed DOJ to designate an administrative authority to receive and investigate complaints relating to the provision or violation of crime victims' rights. To comply with this provision in the statute, DOJ issued regulations creating the Victims' Rights Ombudsman. The VRO is a position within the Executive Office of United States Attorneys--the DOJ division responsible for facilitating coordination between USAOs, evaluating USAO performance, and providing general legal interpretations and opinions to USAOs, among other things. Federal crime victims may submit written complaints to the designated point of contact for the DOJ division that is the subject of the complaint, who then investigates the complaint and reports the results of the investigation to the VRO. Victims may also submit complaints directly to the VRO. If the VRO finds that an employee failed to afford a CVRA right to a victim, the VRO must require that employee to undergo training on victims' rights. If based on an investigation the VRO determines that an employee willfully and wantonly failed to provide a victim with a CVRA right, the VRO must recommend a range of disciplinary sanctions to the official authorized to take action on disciplinary matters for the relevant office. The CVRA does not require DOJ employees to provide relief to victims whose rights have been violated, but the VRO guidelines do require investigators, to the best of their ability, to resolve complaints to the victims' satisfaction. The CVRA also enables victims to assert their rights in district court by filing a motion--which they can do either verbally or per a written request--with the court. Unlike the complaint process, this mechanism allows victims to assert their rights and seek relief from the court, and can be employed not only when victims believe that a DOJ employee violated their rights, but when they have general concerns regarding the provision of their rights. If the district court denies the victim's request regarding the provision of CVRA rights--such as a request to be heard at a hearing--the victim can petition the court of appeals for a writ of mandamus. Thus, if the court of appeals grants the victim's petition, it may direct the district court to take actions to afford CVRA rights to the victim. Petitions for writs of mandamus can be filed at any point in the case. The CVRA authorized appropriations for fiscal years 2005 through 2009. However, it is unclear whether and exactly how much of this funding was appropriated because funds that may have been appropriated under the CVRA were likely appropriated in a lump sum with funds for other victim assistance and grant programs. The authorized amounts, years, and purposes are listed in table 1. DOJ and the federal judiciary have made various efforts to implement the CVRA--from revising internal guidelines and developing training materials for DOJ staff and judges to providing victims with emergency, temporary housing in some cases to protect them from the accused offender and proactively asking victims if they would like to speak in court. Additionally, DOJ and the federal judiciary have taken actions to address four factors that have affected CVRA implementation, including the characteristics of certain cases, the increased workload of some USAO staff, the scheduling of court proceedings, and diverging interests between the prosecution and victims. First, the characteristics of certain cases, such as the number of victims involved and the location of the victims, make it difficult to afford victims certain CVRA rights. For instance, USAO staff stated that it can be difficult to provide timely notification of court proceedings to victims located on Indian reservations because the victims may not have access to a mailbox, a telephone, or the Internet. To address this challenge, victim-witness personnel said that they have driven to Indian reservations to personally inform victims of upcoming court proceedings. Second, due to CVRA requirements, particularly notification requirements, USAO victim-witness staff face an increased workload--about 45 percent of staff who responded to our survey reported working an average of about 6 additional hours per week in order to meet CVRA requirements. DOJ has made efforts to address this issue by providing funding to 41 of the 93 USAOs to hire contractors to assist with clerical duties related to victim notification. Third, inherent characteristics of the criminal justice process, such as the short period of time over which pretrial proceedings are scheduled and take place, make it difficult to provide timely notice to crime victims and afford them their right to be heard. For example, according to the investigative agents, USAO staff, and one magistrate judge with whom we met, a detention hearing--which is a judicial proceeding used to determine whether a defendant should remain in custody before her or his trial--typically takes place within a few days of an arrest (as generally required by federal law), and in certain situations, can occur within hours of an arrest. When faced with this challenge, USAO victim-witness personnel said that they have notified victims of court proceedings by telephone rather than mail, which may not arrive in enough time to enable the victim to attend the proceeding. Fourth, diverging interests between the prosecution and victims may affect the way in which the government affords victims their CVRA rights. For instance, according to DOJ, it is not always in the interest of a successful prosecution for victims to be notified of and attend a plea hearing for a cooperating defendant who agrees to testify against or provide information about other defendants in the case in exchange for a lesser sentence. The concern is that public knowledge of the defendant's cooperation could compromise the investigation, as well as bring harm to the defendant and others. DOJ officials stated that this issue occurs frequently in gang-related prosecutions, where, for instance, the victim is a member of the defendant's rival gang. DOJ's efforts to address this issue include requesting that the court close plea agreement proceedings-- which may prevent the victim from attending such proceedings since victims' right not to be excluded only applies to public court proceedings--and proposing legislation to revise the CVRA to allow for an exception to victims' notification rights in these instances. To enforce the provisions of the CVRA, the act established two mechanisms to help victims ensure that their rights are granted. These mechanisms include processes by which victims can submit complaints against DOJ employees whom they believe violated their rights and file motions in court related to their rights. However, many of the victims who responded to our survey reported that they were not aware of these enforcement mechanisms. Of the more than 1.1 million federal crime victims who, as of September 4, 2009, were identified in DOJ's Victim Notification System as having active cases, the Victims' Rights Ombudsman--DOJ's designated authority to receive and investigate federal crime victim complaints regarding employee compliance to the CVRA--received 259 written complaints from December 2005 through August 2009. The VRO closed 235 complaints following a preliminary investigation, primarily because the complaints were related to a state or local matter as opposed to a federal matter or it was determined that the individual was not a federal crime victim. Lastly, the VRO determined that of the 19 complaints that warranted further investigation, in no instance did a DOJ employee or office fail to comply with the provisions of the law pertaining to the treatment of these federal crime victims. We did not make a judgment on the reasonableness of the VRO's rationale for dismissing these complaints because we did not conduct an independent investigation of each complaint. Several contributing factors most likely explain the low number of complaints filed by federal crime victims against DOJ employees. First, DOJ officials believe few victims have filed complaints because victims are generally satisfied with DOJ's efforts to afford them their rights. Second, USAO officials we spoke with have made efforts to resolve complaints directly before they reached a point where a victim would file a complaint with the VRO. Third, victims reported a lack of awareness about the complaint process itself. Specifically, 129 of the 235 victims who responded to our survey question regarding the complaint process reported that they were not aware of it, and 51 did not recall whether they were aware. USAOs have been directed to take reasonable steps to provide notice to victims of the complaint process, and they generally do so through a brochure provided to victims at the beginning of the case. However, DOJ has opportunities to enhance victim awareness of the complaint process, such as by making greater use of office Web sites to publicize the process or, when appropriate, personally informing victims. If victims are not aware of the complaint process, it becomes an ineffective method for ensuring that the responsible DOJ officials are complying with CVRA requirements and that corrective action is taken when needed. Therefore, in our December 2008 report, we recommended that DOJ explore opportunities to enhance publicity of the victim complaint process to help ensure that all victims are made aware of it. In commenting on a draft of our report, DOJ stated that it agreed that victims should be well-informed of the complaint process and intended to take steps to enhance victim awareness. However, as of September 11, 2009, DOJ had not yet determined what steps are most appropriate, but hopes to make this decision by the end of the year. Even if victims submit complaints to DOJ regarding their CVRA rights, the lack of independence within the complaint investigation process could compromise impartiality of the investigation. Professional ombudsman standards for investigating complaints against employees, as well as the practices of other offices that investigate complaints, suggest that the investigative process should be structured to ensure impartiality. For example, in practice, the investigators are generally not located in the same office with the subject of the investigation, in order to avoid possible bias. DOJ's Office of Professional Responsibility, which investigates other types of complaints against DOJ employees, also does not use investigators who are located in the same office with the subject of the complaint. However, under DOJ's victim complaint investigation process, the two are generally located in the same office. In addition, in some instances the DOJ victim complaint investigator has been the subordinate or peer of the subject of the complaint. According to DOJ officials, the department structured the victim complaint investigation process as such due to resource constraints and the perception that complaints could be resolved more quickly if addressed locally. However, this structure gives the appearance of bias in the investigation, which raises questions as to whether DOJ employees' violation of victims' rights will be overlooked and employees will not receive appropriate training on the treatment of crime victims or disciplinary sanctions. In our December 2008 report, we recommended that DOJ restructure the process for investigating federal crime victim complaints in a way that ensures independence and impartiality, for example, by not allowing individuals who are located in the same office with the subject of the complaint to conduct the investigation. In commenting on a draft of our report, DOJ stated that it recognized the benefits of having an investigation process that ensures independence and impartiality and that the working group, in consultation with the VRO, would explore several options that will address this concern. Subsequently, DOJ reported that on July 31, 2009, the VRO issued guidance to ensure that complaint investigators refer to the VRO any complaint where the investigator's review of the complaint would raise an actual or apparent conflict of interest. If the VRO determines that such a conflict exists, the VRO would consider reassigning the complaint to someone in a different office for investigation. Among the hundreds of thousands of cases filed in the U.S. district courts in the nearly 5-year period since the CVRA was enacted, we found 49 instances in which victims, or victims' attorneys or prosecutors on behalf of victims, asserted CVRA rights by filing a motion--either verbally or in writing--with the district court. We also found 27 petitions for writs of mandamus that were filed with the appellate courts, the majority of which were in response to motions previously denied in the district court. Table 2 summarizes the number of times CVRA rights were asserted in the district and appellate courts and how the courts ruled in those instances. Victim attorneys and federal judicial officials gave several potential reasons for the low number of victim motions, including victims being satisfied with how they were treated and victims either being intimidated by the judicial process or too traumatized by the crime to assert their rights in court. However, the most frequently cited reason for the low number of motions was victims' lack of awareness of this enforcement mechanism. The results of our victim survey also suggest that victims lack this awareness. Specifically, 134 of the 236 victims who responded to our survey question regarding filing motions reported that they were not aware of their ability to file a motion to assert their rights in district court, and 48 did not recall whether they were aware. DOJ generally does not inform victims of their ability to assert their rights in court. While the CVRA does not explicitly require DOJ to do so, the law does direct DOJ to inform victims of their eight CVRA rights and their ability to seek the advice of an attorney. Thus, DOJ may be the most appropriate entity to inform victims of this provision as well. In addition, DOJ's guidelines state that responsible officials should provide information to victims about their role in the criminal justice process, which could include their ability to file motions with regard to their CVRA rights. If victims are not aware of their ability to assert their rights in court, it will reduce the effectiveness of this mechanism in ensuring adherence to victims' rights and addressing any violations. In our December 2008 report, we recommended that DOJ establish a mechanism for informing all victims of their ability to assert their CVRA rights by filing motions and petitions for writs of mandamus, such as by incorporating this information into brochures and letters sent to victims and on agency Web sites. In commenting on a draft of our report, DOJ stated that it agreed that victims should be well-informed of their ability to assert their CVRA rights in district court and intended to take steps to enhance victim awareness. However, as of September 11, 2009, DOJ had not yet decided upon an approach for enhancing victim awareness, but hopes to make this decision by the end of the year. Several key issues have arisen as courts interpret and apply the CVRA in cases, including (1) when in the criminal justice process CVRA rights apply, (2) what it means for a victim to be "reasonably heard" in court proceedings, (3) which standard should be used to review victim appeals of district court decisions regarding CVRA rights, and (4) whether the CVRA applies to victims of local offenses prosecuted in the District of Columbia Superior Court. First, the courts have issued varied decisions regarding whether CVRA rights apply to victims of offenses that DOJ has not charged in court, stating that the law applies in some circumstances and not in others. While some courts have stated that CVRA rights doe not apply unless charges have been filed, other courts have stated that certain VCRA rights, under particular circumstances, may apply to victims of offenses that are investigated but have not been charged in court. In implementing the CVRA, DOJ has specified in its guidelines that CVRA rights do not apply unless charges have been filed against a defendant, based on its initial interpretation of the law, but is reviewing its policy in response to a court ruling in 2008. On September 11, 2009, DOJ informed us that the department was initiating a review of the Attorney General Guidelines for Victim and Witness Assistance--which provides guidance to DOJ prosecutorial, investigative, and correctional components related to the treatment of crime victims--and any changes to the department's position on when CVRA rights apply would be reflected in the revised guidance. DOJ is uncertain when the revised guidelines will be issued. Second, the courts have issued varied rulings that interpret the meaning of the right to be "reasonably heard" at court proceedings, with, for example, one court ruling that the right to be heard gave victims the right to speak and another ruling that the right could be satisfied by a written statement, given the specific facts of the case. Third, the courts have differing interpretations regarding which standard should be used to review victim appeals of district court decisions regarding CVRA rights. Typically, when a party appeals a district court decision to a court of appeals, the court of appeals reviews the district court decision using what may be called the ordinary appellate standard of review. Under this standard, the court of appeals reviews the district court decision for legal error or abuse of discretion. In contrast to an appeal, a petition for a writ of mandamus is a request that a superior court order a lower court to perform a specified action, and courts of appeals review these petitions under a standard of review that is stricter than the ordinary appellate standard of review. Under the standard traditionally used to review petitions for writs of mandamus, petitioners must show that they have no other adequate means to attain the requested relief, that the right to the issuance of the writ is clear and indisputable, and that the writ is appropriate under the circumstances. As of July 2008, 4 of the 12 circuits were split on which standard of review should be used to review petitions for writs of mandamus under the CVRA. When new legislation is enacted, the courts typically interpret the law's provisions and apply the law as cases arise. As rulings on these cases are issued, the courts build a body of judicial decisions--known as case law-- which helps further develop the law. The issues discussed above have arisen as cases have come before the courts, largely via motions and petitions for writs of mandamus under the CVRA, and the rulings on these issues will likely contribute to the further development of case law related to the CVRA. However, DOJ and D.C. Superior Court officials stated that a statutory change would be beneficial in resolving the issue of CVRA applicability to the D.C. Superior Court. The CVRA defines a crime victim as "a person directly and proximately harmed as a result of a federal offense or an offense in the District of Columbia." At the same time, multiple provisions of the CVRA refer to district courts, which do not include the D.C. Superior Court. While it is apparent that the CVRA applies to victims whose federal offenses are prosecuted in the U.S. district court in the District of Columbia, the CVRA is not explicit about whether the law applies to victims of local offenses prosecuted in the D.C. Superior Court. As a result, some judges in the D.C. Superior Court are applying the CVRA, and others are not. In implementing the CVRA, DOJ operates as if the CVRA applies to victims of local offenses in the District of Columbia, and in July 2005, DOJ proposed legislation to clarify whether the CVRA applies to cases in the D.C. Superior Court, but no legislation had been passed. Without clarification on this issue, the question of whether the D.C. Superior Court has responsibility to implement the CVRA will remain, and judges in the D.C. Superior Court may continue to differ in whether they apply the law in their cases. As a result, victims may be told they are entitled to CVRA rights by DOJ, but whether they are afforded these rights in Superior Court proceedings will depend on which judge is presiding over their case. In our December 2008 report, we suggested that Congress consider revising the language of the CVRA to clarify this issue. As of September 2009, no related legislation had been introduced. Perceptions are mixed regarding the effect and efficacy of the implementation of the CVRA, based on factors such as awareness of CVRA rights; victim satisfaction, participation, and treatment; and potential conflicts of the law with defendants' interests. For example, while a majority of federal crime victims who responded to our survey reported that they were aware of most of their CVRA rights, less than half reported that they were aware of their right to confer with the prosecutor. In addition, victims who responded to our survey reported varying levels of satisfaction with the provision of individual CVRA rights. For instance, 132 of the 169 victims who responded to the survey question regarding satisfaction with their right to notice of public court proceedings reported being satisfied with the provision of this right. In contrast, only 72 of the 229 victims who responded to the survey question regarding satisfaction with the right to confer with the prosecutor reported being satisfied with the provision of this right. The general perception among the criminal justice system participants we spoke with and surveyed is that CVRA implementation has improved the treatment of crime victims, although many also believe that victims were treated well prior to the act because of the influence of well-established victims' rights laws at the state level. Furthermore, while 72 percent of the victim-witness personnel who responded to our survey perceived that the CVRA has resulted in at least some increase in victim attendance at public court proceedings, 141 of the 167 victims who responded to our survey question regarding participation reported that they did not attend any of the proceedings related to their cases, primarily because the location of the court was too far to travel or they were not interested in attending. Finally, defense attorneys and representatives of organizations that promote the enforcement of defendants' rights expressed some concerns that CVRA implementation may pose conflicts with the interests of defendants. For example, victims have the right not to be excluded from public court proceedings unless clear and convincing evidence can be shown that their testimony would be materially altered if they heard the testimony of others first. However, 5 of the 9 federal defenders and 6 of the 19 district judges we met with said that it would be very difficult, if not impossible, to provide such evidence that the victim's testimony would be materially altered. 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 questions about this statement, please contact Eileen R. Larence at (202) 512-8777 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include Kristy N. Brown, Assistant Director; Tracey King; and Susan Sachs. Additionally, key contributors to our December 2008 report include Lisa Berardi Marflak, David Schneider, Matthew Shaffer and Johanna Wong, as well as David Alexander, Stuart Kaufman, and Adam Vogt. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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On October 30, 2004, the Crime Victims' Rights Act (CVRA) was enacted, establishing eight rights for federal crime victims and two mechanisms to enforce those rights. The legislation also directed GAO to evaluate the implementation of the CVRA. To address this mandate, GAO reviewed, among other things: (1) efforts made to implement the CVRA, (2) mechanisms in place to ensure adherence to the CVRA, (3) key issues that have arisen in the interpretation of the CVRA by the federal courts, and (4) perspectives of criminal justice system participants on the CVRA. This testimony is based on GAO's December 2008 report on CVRA, where GAO reviewed guidance and conducted surveys and interviews with criminal justice system participants. GAO cannot generalize its crime victim survey results due to a low response rate. In September 2009, GAO obtained updated information on victim's efforts to enforce their rights. To implement the CVRA, the Department of Justice (DOJ) and the federal judiciary have, among other things, revised internal guidelines, trained DOJ staff and judges, provided victims with emergency, temporary housing to protect them, and proactively asked victims if they would like to speak in court. DOJ and the courts have also implemented two mechanisms to ensure adherence to the CVRA, including processes for victims to submit complaints against DOJ employees and assert their rights in court; however, the majority of victims who responded to GAO's survey said they were not aware of these mechanisms. If victims are not aware of these enforcement mechanisms, they will not be effective at helping to ensure victims are afforded their rights. GAO also found that DOJ's complaint investigation process lacked independence, impeding impartiality. In July 2009, in response to our recommendation, DOJ revised its victim complaint investigation process such that if investigators who are located in the same office with the subject of the investigation believe that their review of the complaint could bias the investigation or give the appearance of this, they are instructed to inform a designated official at DOJ headquarters. This official may suggest that the complaint be investigated by another DOJ office. Several key issues have arisen that require the courts to interpret various provisions of the law, including (1) when in the criminal justice process CVRA rights apply, (2) what it means for a victim to be "reasonably heard" in court, and (3) what legal standard should be used to review victim appeals of district court decisions. While judicial interpretation of various aspects of a law typically occurs after new legislation is enacted, DOJ and court officials believe that one CVRA issue may benefit from a change to the law itself. The CVRA is not explicit about whether the law applies to victims of local offenses prosecuted in the District of Columbia Superior Court. Without clarification on this issue, judges in this court may continue to differ in whether they apply the CVRA in their cases. As to the overall impacts of the CVRA, the victims as well as the DOJ and judicial officials GAO interviewed had mixed perceptions. Most maintained that CVRA has improved victim treatment. For example, 72 percent of the victim-witness professionals--individuals who are responsible for providing services to crime victims and witnesses--who responded to GAO's survey perceived that the CVRA has resulted in at least some increase in victim attendance at court proceedings. Other officials maintained that the federal government and the courts were already treating victims well prior to the act. Victims responding to GAO's survey also reported mixed views on their knowledge of, and satisfaction with, the provision of various rights. For example, 141 of the 167 victims who responded to GAO's survey question regarding participation in the judicial process reported that they did not attend any of the proceedings related to their cases, primarily because the location of the court was too far to travel or they were not interested in attending.
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The shuttle is the only U.S. launch vehicle capable of carrying humans into space. As a result, it will be critical to the space station's assembly and operation. From December 1997 to June 2002, NASA plans to use the shuttle primarily to transport station components into orbit for assembly. During this period, 27 of the shuttle's 34 primary payloads are to be station-related. At times, only two of the four shuttles will be available for station assembly. One shuttle--Columbia--cannot provide adequate lift, and, one of the remaining three shuttles will be undergoing scheduled maintenance during some portions of the assembly schedule. Also, most station components will have to be launched in a particular sequence to provide power and structural support for other hardware. In March 1993, the President directed NASA to redesign the space station. The new configuration--renamed the International Space Station--combines the efforts of Europe, Japan, Canada, Russia, and the United States. It also increased the station's planned orbital inclination to make it more accessible from Russian launch sites, creating the need for additional shuttle lift capacity. Easterly shuttle launches from Kennedy Space Center take advantage of the earth's normal west to east rotation. Launches to higher inclinations such as those needed for the space station lose some of this advantage, with a resulting loss in lift capability. In November 1993, the space station program manager requested that the space shuttle program implement modifications to provide the increased lift needed to support space station assembly. The shuttle program office responded by committing the program to increasing lift capability by at least 13,000 pounds on every station flight. The lift enhancement plan--first approved in March 1994--has been amended a number of times to introduce new ideas for achieving the required lift at the least cost. The original plan identified 13,000 pounds of added lift at a cost of about $535 million. In May 1995, NASA estimated that about 16,100 pounds of lift gain would be achieved at a cost of about $444 million. Both estimates included some recurring costs for enhancement hardware, as well as costs to integrate the enhancements, and reserves to cover the possible need for additional changes. The current plan includes about 30 individual actions that involve hardware redesign, improved navigational or flight design techniques, and new operational procedures. Figure 1 depicts the percentage of added lift NASA estimates will come from these areas, based on the May 4, 1995, approved baseline. Hardware design changes account for more than one-half of the added lift. The primary redesign program is the development of a new external fuel tank--the super lightweight tank--which involves incorporating a new aluminum alloy into the tank design. This alloy will reduce the tank's weight and change its material properties. In addition, the tank will have to accommodate a new set of design loads created by the mix of hardware and flight design changes. Other development programs necessary to support the space station include various orbitermodifications and improved main engines. The super lightweight tank program has experienced some early development problems that could affect its performance. Shortly after beginning development of this tank, technical concerns about the properties of the new material were raised. An independent review of the program was performed, and based on its results, NASA adopted a more rigorous test plan for the tank and modified the tank's production strategy. More recently, the uniqueness of the new metal caused delays in manufacturing a test article. NASA believes these early concerns have been resolved, but it recognizes that uncertainty with the development and manufacturing of the new material could ultimately reduce the amount of lift gain projected for the new tank. The main engine improvements are expected to make the engines heavier than the current engines. However, the new engines are expected to be more efficient, thus needing less propellent. They are also expected to permit occasional use at higher than normal thrust levels. Early test results indicated that the engines would not achieve all of the efficiency originally expected. NASA made additional modifications, and it now expects to achieve most of the originally predicted performance. However, as of May 1995, shuttle program officials still considered the engine development status to represent a threat to the lift gain expected from the enhancement program. An independent shuttle management review team also expressed concerns with these two programs. In its report, the team (1) concluded that the new tank had the potential for problems during development and manufacturing and (2) questioned using the improved engines for increased thrust capability. In addition to hardware redesign, NASA plans to incorporate flight design and operation enhancements. These enhancements include the use of more advanced navigational tools as well as software changes to create a more efficient trajectory. The effect of achieving greater efficiency during ascent is that less propellent would be needed. The most significant operational change involves the deletion of some of the contingency fuel, water, oxygen, and other consumables. NASA protects each mission by ensuring that there are sufficient quantities of consumables to continue the mission in the event of unexpected problems such as difficulties in docking and retrieving payloads. In the past, it has been NASA's policy to cover nearly every possible contingency. The new policy reduces the amount of consumables by about 4,000 pounds per flight. According to NASA, the revised approach will still ensure that individual unexpected problems can be handled without jeopardizing the mission. However, the reduction in consumables increases the risk of mission failure if a combination of unexpected events occurs. Under the new policy, for example, it might not be possible to perform a second rendezvous with the station, if necessary, and, as a worst case, it could be necessary to jettison a payload before landing. NASA believes the increase in risk is minimal and cites the new policy as a means to reduce weight, increase lift, and save money. In addition, it notes that the maximum reduction in consumables will only be necessary on the heaviest of station flights. According to the program director, this change helped make it possible to terminate two of the more expensive enhancements--development of a lightweight booster and extended motor nozzle--at a savings of about $35 million. To support the first shuttle space station launch, all of the enhancement programs must be integrated and recertified into the shuttle system within a demanding schedule. NASA has developed a systems integration plan identifying the major events and schedules associated with the shuttle enhancement program, as currently approved. The plan describes over 200 individual events related to the development and integration of shuttle lift-increasing modifications. The events began in early calendar year 1994, and they will end with the first space station flight, which is scheduled for December 1997. The single most critical event is the delivery of the super lightweight tank, and, according to the chief engineer of the shuttle integration office, it is on a very success-oriented schedule that has already experienced some delays. While the tank's critical design review has already been held, the final set of design loads are still being updated. Thus, many design and environment definition activities will occur in parallel. If any of the assumed design loads substantially change, additional certification cycles may have to be conducted. However, there is no schedule or budget margin that allows for major adjustments because the first tank is to be delivered only 2 to 3 months before the first launch. Based on its launch history and projected budget, the shuttle may not be able to meet the demanding launch requirements of the space station's assembly schedule. To meet the station's "assembly complete" milestone, shuttle officials have designed a very compressed launch schedule. During certain periods of the station's assembly, clusters of shuttle flights are scheduled to be launched within very short time frames. The schedule calls for five launches within a 6-month period in fiscal year 2000 and seven flights during a 9-month period in fiscal year 2002. On two other occasions, three launches are scheduled in a 3-month period. This schedule equates to about 1 launch per month, or a rate of up to 12 flights a year for these periods. In addition, on two occasions, the schedule calls for launches of two missions with less than 35 days separating them. While NASA has achieved similar launch rates a few times, it will have fewer processing personnel during the space station era. The space station's flight rate frequency cannot be met unless the orbiter is processed in 20 to 30 days less than standard. To process the orbiter at this rate, shuttle personnel will have to work overtime. However, according to operations officials, budget constraints could make it difficult to fund overtime. Because the schedule is so compressed at times, there is very little margin for error. According to shuttle and station officials, there is little flexibility in the schedule to meet major contingencies, such as late delivery of station hardware, or technical problems with the orbiters. Between December 1991 and September 1994, 9 of 22 shuttle flights slipped from the planned launch dates established 6 months before launch. The shuttle program maintained its annual flight rate, in part, by launching payloads out of sequence. However, during station assembly, most payloads must be launched in the established sequence. The Shuttle Program Director told us that he recognizes the launch schedule is tight and that if a significant delay occurs with any station flight, subsequent flights are likely to slip also. The shuttle program will be attempting to accomplish the demanding station assembly schedule with fewer resources than were available in the past. For example, to reduce operating costs, NASA has reduced the shuttle processing workforce at Kennedy Space Center by 1,400 people, or 20 percent, since 1992. According to a February 1995 internal workforce review, schedule risk already exists in areas such as engine testing, crew training, and flight software development, and NASA plans further funding cuts in the future. According to shuttle processing officials, NASA will reduce the shuttle processing workforce by another 900 people, or 15 percent, through fiscal year 2000. NASA continues to review all elements of shuttle operations to improve processes and increase efficiency and believes that these savings are achievable. At the time of the fiscal year 1996 budget request, estimated shuttle operations funding requirements exceeded projected budgets by at least 10 percent--a cumulative total of $1.3 billion--in fiscal years 1996 through 2000. Shuttle managers were concerned about their ability to achieve the additional funding cuts needed to meet the projected budgets. In February 1995, independent review teams recommended additional ways to reduce shuttle operations costs. NASA does not have an estimate of savings that may result from implementing the recommendations. According to the Director of Shuttle Management and Operations at Kennedy Space Center, the station's assembly schedule will slip unless (1) NASA provides additional funds for shuttle operations or (2) more efficiencies are found. Officials in the Office of Space Flight told us that they estimated that there is a medium to high risk that the station's assembly completion date will slip because of shuttle delays. These officials estimated that the schedule could slip about 4 to 5 months. Their estimate was based on the fact that the shuttle achieved one less flight than planned in 2 of the past 4 years. A recent internal NASA study acknowledges the possibility of a slip in the schedule. According to the April 1995 study conducted for the International Space Station Independent Assessment Office at Johnson Space Center, the shuttle cannot support the planned schedule unless additional launch resources are provided or shuttle processing methods are streamlined. The study identified a possible slip of up to 4 years in completing station assembly due to shuttle processing delays and the relatively low reliability of the Russian Zenit launch vehicle. According to the study, shuttle processing presents the largest schedule risk. To meet the manifest, NASA would have to reduce processing time to 50 percent of current levels. A delay in completing the space station assembly would increase the station's cost because fixed costs would be continued for a longer period. No reliable estimate of the increased cost exists since the estimate would depend on the length of the delay and assumptions about how long the station would remain operational after assembly is complete. However, when NASA redesigned the station in 1994, officials estimated the redesign would reduce costs by $1.6 billion because it would accelerate the assembly complete date by 15 months, from September 2003 to June 2002. At a minimum, a portion of these savings would be lost if the assembly complete date slips. NASA plans to defer some orbiter recertification activities and forgo testing all of the changes in an integrated fashion. NASA is confident that the maturity of the current system and existing databases from earlier testing are sufficient to justify the current approach. To reduce costs, NASA plans to alter the depth of a previously planned materials review. The review was to have been part of a program to recertify the individual shuttle orbiters after incorporating the performance enhancements for the space station program. It would have provided specific and detailed assurance that every piece of the orbiter structure could safely withstand the aerodynamic environments during space station missions. The space station mission environments are expected to be more stressing than those of previous missions. The purpose of the materials review was to identify and reevaluate those structural components that were previously accepted even though they did not fully conform to design specifications. NASA currently plans to assess the impact of the new environments on these components based on the design rather than the actual hardware. A materials review will be performed on critical structures, according to NASA. NASA officials also told us that they are confident the streamlined recertification program will adequately ensure that the orbiter will perform in all possible station era environments. They noted that the orbiter now has a lengthy flight history record, and the experience gained from those flights ensures that the design changes made to support the space station will be fully understood. In addition, NASA does not plan to perform test firings of the modified propulsion system in an integrated setting. Instead, the agency plans to verify system performance based on individual component testing and predictive analyses. A 1989 study performed for the Stennis Space Center addressed the concept of integrated system testing. The study cited the unpredictability of the "interactive characteristics of the propulsion, structural, and electrical systems" and concluded that propulsion system testing should be considered even in cases of "existing designs modified to accommodate one or more major system redesigns." The same study noted, however, that the technology base for the shuttle propulsion system is more advanced than for other vehicles, thus mitigating the engineering risks. NASA does not believe integrated system test firings are necessary in this case. Program officials noted that the propulsion system's design changes do not affect the way in which fluids and propellent are moved throughout the system. As a result, they believe component testing, coupled with inferential analysis and modeling of the whole system, will suffice. In addition, program management officials stated that the costs were too high to justify integrated test firings, given the test results and analyses that would be available without integrated tests. Independent assessments provide objective overviews of complex development programs and space missions and can create an incentive for more rigorous internal review of the program. In establishing an independent group to oversee space station program safety, for example, NASA noted that "engineering products are improved by independent technical peer review," and that such reviews do not "reflect on the competence, motivations, or integrity" of those responsible for implementing a program. NASA's recently completed laboratory review also endorsed the concept of independent review in situations where the need has been identified. The report, issued in February 1995, cited the value of being in a position to take a more objective view of issues and details. It also noted that the process of independent assessment requires managers to "review their efforts from a perspective that is hard to maintain in the day-to-day sequence of events." In the past, NASA has sometimes chartered independent assessments of complex development programs and missions, including assessments of some parts of the performance enhancement program such as the main engine improvement program and the super lightweight tank development. However, NASA has not requested an independent assessment of the integrated shuttle performance enhancement program, even though the integration program is complex--consisting of over 200 scheduled events, involving uncertainties such as characterization of the aerodynamic environments the enhanced shuttle will operate in, and containing departures from previous programmatic strategies. We recommend that the Administrator of NASA establish an independent review team to (1) assess NASA's systems integration plan for the lift-increasing enhancements, (2) identify the associated technical and programmatic risks, and (3) weigh the costs and benefits of NASA's tight scheduling of shuttle flights to assemble the space station. In commenting on a draft of this report, NASA concurred with our recommendation and stated that it had initiated implementation. The Aerospace Safety Advisory Panel has agreed to perform the independent reviews. According to NASA, the panel will use expert outside consultants to review the benefits and the technical and scheduling risks considering the current and projected NASA budgets. NASA noted that although the space station assembly schedule was demanding and funding was tight, it was currently on schedule and within budget. NASA's comments are presented in their entirety in appendix I, along with our evaluation of them. We conducted our review at NASA Headquarters, Marshall Space Flight Center, Johnson Space Center, and Kennedy Space Center. We examined (1) shuttle enhancement documentation, (2) budgetary data, (3) internal and external analyses regarding the shuttle program, (4) shuttle manifests, (5) shuttle processing data, and (6) space station assembly schedules. In addition, we interviewed officials from NASA Headquarters, the shuttle program, and the space station program regarding issues related to NASA's plan to support space station assembly. These interviews included discussions with representatives of the Astronaut Office at Johnson Space Center. We performed our work between November 1994 and May 1995 in accordance with generally accepted government auditing standards. Unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 15 days from its issue date. At that time, we will send copies of it to the Administrator, NASA; the Director, Office of Management and Budget; and other appropriate congressional committees. We will also provide copies to others upon request. Please contact me on (202) 512-8412 if you or your staff have any questions concerning this report. Major contributors to this report were Lee Edwards, John Gilchrist, and Reginia Grider. The following are our comments on the National Aeronautics and Space Administration's (NASA) letter dated June 23, 1995. 1. We have incorporated NASA officials informal comments in the text where appropriate. 2. Although the development programs have not experienced significant schedule slips to date, the programs have experienced some early development problems and an independent management review team concluded in February 1995 that the largest of these programs--the super lightweight tank--had the potential for further problems during development and manufacture. As we note on page 5, NASA deleted two expensive hardware programs by substituting operational changes that substantially reduced weight but increased the risk of mission failure. 3. The April 1995 study was intended to identify the shuttle program's challenge in supporting the station assembly schedule and provide an indication of the possible magnitude of schedule slips. Study officials told us that the conversion from workdays to calendar days or use of available overtime would not substantially change the study results. The study was based on actual timelines experienced since the shuttle returned to flight after the Challenger accident. NASA has not defined the streamlined payload checkout and orbiter processing approaches that it says will be in place beginning in 1998. The impact of streamlining on the shuttle's launch schedule cannot be determined at this time. Subsequent to commenting on the report, officials ran the study model again, using processing times for only those missions launched in fiscal years 1992 and subsequent, and omitting the two flights with the longest processing times. In this scenario, the model predicted a slip of over 1 year in the station assembly complete milestone, assuming 100 percent reliability and an inflexible assembly sequence. 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 extent to which the space shuttle program can support the space station's assembly requirements, focusing on the: (1) impacts of the declining shuttle budget; and (2) demanding schedule to support the space station. GAO found that: (1) the National Aeronautics and Space Administration's (NASA) plans for increasing the shuttle's lift capability are complex and involve about 30 individual actions such as hardware redesigns, improved flight design techniques, and new operational procedures; (2) some of the hardware redesign programs have experienced early development problems, and the potential exists for additional problems; (3) the NASA schedule for meeting the space station's launch requirements appears questionable in the declining budget environment; (4) NASA must successfully complete numerous shuttle-related development programs on a tight schedule to support the first space station launch; (5) the remaining launch schedule is compressed and will be difficult to achieve without additional funding or more efficient processing methods; (6) delays in the launch schedule could substantially increase the station's cost; (7) NASA plans to forgo some of the shuttle's recertification activities and full integration testing of the propulsion system until the first launch of station components; (8) NASA plans to assess the implications of the design changes through a combination of tanking and component tests and systems analyses; and (9) NASA must ensure that the implications of integrating numerous individual design changes are fully understood and safety is not compromised.
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The Atomic Energy Act of 1954 authorized a comprehensive regulatory program to permit private industry to develop and apply atomic energy for peaceful uses, such as generating electricity from privately owned nuclear power plants. Soon thereafter, government and industry experts identified a major impediment to accomplishing the act's objective: the potential for payment of damages resulting from a nuclear accident and the lack of adequate available insurance. Unwilling to risk huge financial liability, private companies viewed even the remote specter of a serious accident as a roadblock to their participating in the development and use of nuclear power. In addition, congressional concern developed over ensuring adequate financial protection to the public because the public had no assurance that it would receive compensation for personal injury or property damages from the liable party in event of a serious accident. Faced with these concerns, the Congress enacted the Price-Anderson Act in September 1957. The Price-Anderson Act has two underlying objectives: (1) to establish a mechanism for compensating the public for personal injury or property damage in the event of a nuclear accident and (2) to encourage the development of nuclear power. To provide financial protection, the Price-Anderson Act requires commercial nuclear reactors to be insured to the maximum level of primary insurance available from private insurers. To implement this provision, NRC periodically revises its regulations to require licensees of nuclear reactors to increase their coverage level as the private insurance market increases the maximum level of primary insurance that it is willing to offer. For example, in January 2003, NRC increased the required coverage from $200 million to the current $300 million, when American Nuclear Insurers informed NRC that $300 million per site in coverage was now available in its insurance pool. In 1975, the Price-Anderson Act was amended to require licensees to pay a pro-rated share of the damages in excess of the primary insurance amount. Under this amendment, each licensee would pay up to $5 million in retrospective premiums per facility it owned per incident if a nuclear accident resulted in damages exceeding the amount of primary insurance coverage. In 1988, the act was further amended to increase the maximum retrospective premium to $63 million per reactor per incident to be adjusted by NRC for inflation. The amendment also limited the maximum annual retrospective premium per reactor to $10 million. Under the act, NRC is to adjust the maximum amount of retrospective premiums every 5 years using the aggregate change in the Consumer Price Index for urban consumers. In August 2003, NRC set the current maximum retrospective payment at $95.8 million per reactor per incident. With 103 operating nuclear power plants, this secondary insurance pool would total about $10 billion. The Price-Anderson Act also provides a process to deal with incidents in which the damages exceed the primary and secondary insurance coverage. Under the act, NRC shall survey the causes and extent of the damage and submit a report on the results to, among others, the Congress and the courts. The courts must determine whether public liability exceeds the liability limits available in the primary insurance and secondary retrospective premiums. Then the President would submit to the Congress an estimate of the financial extent of damages, recommendations for additional sources of funds, and one or more compensation plans for full and prompt compensation for all valid claims. In addition, NRC can request the Congress to appropriate funds. The most serious incident at a U.S. nuclear power plant took place in 1979 at the Three Mile Island Nuclear Station in Pennsylvania. That incident has resulted in $70 million in liability claims. NRC's regulatory activities include licensing nuclear reactors and overseeing their safe operation. Licensees must meet NRC regulations to obtain and retain their license to operate a nuclear facility. NRC carries out reviews of financial qualifications of reactor licensees when they apply for a license or if the license is transferred, including requiring applicants to demonstrate that they possess or have reasonable assurance of obtaining funds necessary to cover estimated operating costs for the period of the license. NRC does not systematically review its licensees' financial qualifications once it has issued the license unless it has reason to believe this is necessary. In addition, NRC performs inspections to verify that a licensee's activities are properly conducted to ensure safe operations in accordance with NRC's regulations. NRC can issue sanctions to licensees who violate its regulations. These sanctions include notices of violation; civil penalties of up to $100,000 per violation per day; and orders that may modify, suspend, or revoke a license. Thirty-one commercial nuclear power plants nationwide are licensed to limited liability companies. In total, 11 limited liability companies are licensed to own nuclear power plants. Three energy corporations--Exelon, Entergy, and the Constellation Energy Group--are the parent companies for 8 of these limited liability companies. These eight subsidiaries are licensed or co-licensed to operate 27 of the 31 plants. The two subsidiaries of the Exelon Corporation are the licensees for 15 plants and the co- licensees for 4 others. Constellation Energy Group, Inc., and Entergy Corporation are the parent companies of limited liability companies that are licensees for four nuclear power plants each. (See table 1.) Of all the limited liability companies, Exelon Generation Company, LLC, has the largest number of plants. It is the licensee for 12 plants and co- licensee with PSEG Nuclear, LLC, for 4 other plants. For these 4 plants, Exelon Generation owns 43 percent of Salem Nuclear Generating Stations 1 and 2 and 50 percent of Peach Bottom Atomic Power Stations 2 and 3. (App. I lists all the licensees and their nuclear power plants.) NRC requires licensees of nuclear power plants to comply with the Price- Anderson Act's liability insurance provisions by maintaining the necessary primary and secondary insurance coverage. First, NRC ensures that licensees comply with the primary insurance coverage requirement by requiring them to submit proof of coverage in the amount of $300 million. Second, NRC ensures compliance with the requirement for secondary coverage by accepting the certified copy of the licensee's bond for payment of retrospective premiums. All the nuclear power plant licensees purchase their primary insurance from American Nuclear Insurers. American Nuclear Insurers sends NRC annual endorsements documenting proof of primary insurance after the licensees have paid their annual premiums. NRC and each licensee also sign an indemnity agreement, stating that the licensee will maintain an insurance policy in the required amount. This agreement, which is in effect as long as the owner is licensed to operate the plant, guarantees reimbursement of liability claims against the licensee in the event of a nuclear incident through the liability insurance. The agency can suspend or revoke the license if a licensee does not maintain the insurance, but according to an NRC official, no licensee has ever failed to pay its annual primary insurance premium and American Nuclear Insurers would notify NRC if a licensee failed to pay. As proof of their secondary insurance coverage, licensees must provide evidence that they are maintaining a guarantee of payment of retrospective premiums. Under NRC regulations, the licensee must provide NRC with evidence that it maintains one of the following six types of guarantees: (1) surety bond, (2) letter of credit, (3) revolving credit/term loan arrangement, (4) maintenance of escrow deposits of government securities, (5) annual certified financial statement showing either that a cash flow can be generated and would be available for payment of retrospective premiums within 3 months after submission of the statement or a cash reserve or combination of these, or (6) such other type of guarantee as may be approved by the Commission. Before the late 1990s, the licensees provided financial statements to NRC as evidence of their ability to pay retrospective premiums. According to NRC officials, in the late 1990s, Entergy asked NRC to accept the bond for payment of retrospective premiums that it had with American Nuclear Insurers as complying with the sixth option under NRC's regulations: such other type of guarantee as may be approved by the Commission. After reviewing and agreeing to Entergy's request, NRC decided to accept the bond from all the licensees as meeting NRC's requirements. NRC officials told us that they did not document this decision with Commission papers or incorporate it into the regulations because they did not view this as necessary under the regulations. The bond for payment of retrospective premiums is a contractual agreement between the licensee and American Nuclear Insurers that obligates the licensee to pay American Nuclear Insurers the retrospective premiums. Each licensee signs this bond and furnishes NRC with a certified copy. In the event that claims exhaust primary coverage, American Nuclear Insurers would collect the retrospective premiums. If a licensee were not to pay its share of these retrospective premiums, American Nuclear Insurers would, under its agreement with the licensees, pay for up to three defaults or up to $30 million in 1 year of the premiums and attempt to collect this amount later from the defaulting licensees. According to an American Nuclear Insurers official, any additional defaults would reduce the amount available for retrospective payments. An American Nuclear Insurers official told us that his organization believes that the bond for payment of retrospective premiums is legally binding and obligates the licensee to pay the premium. Under NRC regulations, if a licensee fails to pay the assessed deferred premium, NRC reserves the right to pay those premiums on behalf of the licensee and recover the amount of such premiums from the licensee. NRC applies the same rules to limited liability companies that it does to other licensees of nuclear power plants with respect to liability requirements under the Price-Anderson Act. All licensees must meet the same requirements regardless of whether they are limited liability companies. American Nuclear Insurers applies an additional requirement for limited liability companies with respect to secondary insurance coverage in order to ensure that they have sufficient assets to pay retrospective premiums. Given the growing number of nuclear power plants licensed to limited liability companies, NRC is examining the need to revise its procedures and regulations for such companies. NRC requires all licensees of nuclear power plants to follow the same regulations and procedures. Limited liability companies, like other licensees, are required to show that they are maintaining the $300 million in primary insurance coverage and provide NRC a copy of the bond for payment of retrospective premiums or other approved evidence of guarantee of retrospective premium payments. According to NRC officials, all its licensees, including those that are limited liability companies, have sufficient assets to cover the retrospective premiums. While NRC does not conduct in-depth financial reviews specifically to determine licensees' ability to pay retrospective premiums, it reviews the licensees' financial ability to safely operate their plants and to contribute decommissioning funds for the future retirement of the plants. According to NRC officials, if licensees have the financial resources to cover these two larger expenses, they are likely to be capable of paying their retrospective premiums. American Nuclear Insurers goes further than NRC and requires licensees that are limited liability companies to provide a letter of guarantee from their parent or other affiliated companies with sufficient assets to cover the retrospective premiums. An American Nuclear Insurers official stated that American Nuclear Insurers obtains these letters as a matter of good business practice. These letters state that the parent or an affiliated company is responsible for paying the retrospective premiums if the limited liability company does not. If the parent company or other affiliated company of a limited liability company does not provide a letter of guarantee, American Nuclear Insurers could refuse to issue the bond for payment of retrospective premiums and the company would have to have another means to show NRC proof of secondary insurance. American Nuclear Insurers informs NRC that it has received these letters of guarantee. The official also told us that American Nuclear Insurers believes that the letters from the parent companies or other affiliated companies of the limited liability company licensed by NRC are valid and legally enforceable contracts. NRC officials told us that they were not aware of any problems caused by limited liability companies owning nuclear power plants and that NRC currently does not regard limited liability companies' ownership of nuclear power plants as a concern. However, because these companies are becoming more prevalent as owners of nuclear power plants, NRC is examining whether it needs to revise any of its regulations or procedures for these licensees. NRC estimates that it will complete its study by the end of summer 2004. We provided a draft of this report to NRC for review and comment. In its written comments (see app. II), NRC stated that it believes the report accurately reflects the present insurance system for nuclear power plants. NRC said that we correctly conclude that the agency does not treat limited liability companies differently than other licensees with respect to Price- Anderson's insurance requirements. NRC also stated that we are correct in noting that it is not aware of any problems caused by limited liability companies owning nuclear power plants and that NRC currently does not regard limited liability companies' ownership of nuclear power plants as a concern. In addition, NRC commented that we agree with the agency's conclusion that all its reactor licensees have sufficient assets that they are likely to be able to pay the retrospective premiums. With respect to this last comment, the report does not take a position on the licensees' ability to pay the retrospective premiums. We did not evaluate the sufficiency of the individual licensees' assets to make these payments. Instead, we reviewed NRC's and the American Nuclear Insurers' requirements and procedures for retrospective premiums. We performed our review at NRC headquarters in Washington, D.C. We reviewed statutes, regulations, and appropriate guidance as well as interviewed agency officials to determine the relevant statutory framework of the Price-Anderson Act. To determine the number of nuclear power plant licensees that are limited liability companies, we surveyed, through electronic mail, all the NRC project managers responsible for maintaining nuclear power plant licenses. We asked them to provide data on the licensees, including the licensee's name and whether it was a limited liability company. If it was a limited liability company, we asked when the license was transferred to the limited liability company and who is the parent company of the limited liability company. We received responses for all 103 nuclear power plants currently licensed to operate. We analyzed the results of the survey responses. We verified the reliability of the data from a random sample of project managers by requesting copies of the power plant licenses and then comparing the power plant licenses to the data provided by the project managers. The data agreed in all cases. We concluded that the data were reliable enough for the purposes of this report. To determine NRC's requirements for ensuring that licensees of nuclear power plants comply with the Price-Anderson Act's liability requirements, we reviewed relevant statutes and NRC regulations and interviewed NRC officials responsible for ensuring that licensees have primary and secondary insurance coverage. We also spoke with American Nuclear Insurers officials responsible for issuing the insurance coverage to nuclear power plant licensees, and we reviewed relevant documents associated with the insurance. To determine whether and how these procedures differ for licensees that are limited liability companies, we reviewed relevant documents, including NRC regulations, and interviewed NRC officials responsible for ensuring licensee compliance with Price-Anderson Act requirements. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 7 days from the date of this letter. We will then send copies to interested congressional committees; the Commissioners, Nuclear Regulatory Commission; the Director, Office of Management and Budget; and other interested parties. We will make copies available to others on 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, I can be reached at (202) 512-3841. Major contributors to this report include Ray Smith, Ilene Pollack, and Amy Webbink. John Delicath and Judy Pagano also contributed to this report. Entergy Arkansas, Inc. Entergy Arkansas, Inc. FirstEnergy Nuclear Operating Company No Cleveland Electric Illuminating Company No FirstEnergy Nuclear Operating Company No Exelon Generation Company, LLC Exelon Generation Company, LLC Carolina Power & Light Co. North Carolina Eastern Municipal Power Agency Carolina Power & Light Co. Constellation Energy Group, Inc. Constellation Energy Group, Inc. Catawba Nuclear Station 1 North Carolina Electric Membership Saluda River Electric Cooperative, Inc. Catawba Nuclear Station 2 North Carolina Municipal Power Agency AmerGen Energy Company, LLC City of New Smyrna Beach and Utilities Commission Orlando Utilities Commission and City of Orlando Seminole Electric Cooperative, Inc. Pacific Gas and Electric Company Exelon Generation Company, LLC Exelon Generation Company, LLC Entergy Nuclear FitzPatrick, LLC Rochester Gas and Electric Corporation No 39 Grand Gulf Nuclear Station System Energy Resources, Inc. South Mississippi Electric Power Assoc. No Carolina Power & Light Co. Entergy Nuclear Indian Point 2, LLC Entergy Nuclear Indian Point 3, LLC Wisconsin Public Service Corp. Exelon Generation Company, LLC Exelon Generation Company, LLC Exelon Generation Company, LLC Exelon Generation Company, LLC Dominion Nuclear Connecticut, Inc. Dominion Nuclear Connecticut, Inc. Central Vermont Public Service Corporation Massachusetts Municipal Wholesale Electric Co. Entergy Nuclear Generation Co. Exelon Generation Company, LLC Exelon Generation Company, LLC Entergy Gulf States, Inc. Carolina Power & Light Co. FPL Group, Inc. Massachusetts Municipal Wholesale Electric Co. AmerGen Energy Company, LLC Florida Power and Light Company Florida Power and Light Company Entergy Nuclear Vermont Yankee, LLC Entergy Nuclear Operations, Inc. Municipal Electric Authority of Georgia City of Dalton, Georgia Municipal Electric Authority of Georgia City of Dalton, Georgia Entergy Operations, Inc. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. 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An accident at one the nation's commercial nuclear power plants could result in human health and environmental damages. To ensure that funds would be available to settle liability claims in such cases, the Price-Anderson Act requires licensees for these plants to have primary insurance--currently $300 million per site. The act also requires secondary coverage in the form of retrospective premiums to be contributed by all licensees to cover claims that exceed primary insurance. If these premiums are needed, each licensee's payments are limited to $10 million per year and $95.8 million in total for each of its plants. In recent years, limited liability companies have increasingly become licensees of nuclear power plants, raising concerns about whether these companies--by shielding their parent corporations' assets--will have the financial resources to pay their retrospective premiums. GAO was asked to determine (1) the extent to which limited liability companies are the licensees for U.S. commercial nuclear power plants, (2) the Nuclear Regulatory Commission's (NRC) requirements and procedures for ensuring that licensees of nuclear power plants comply with the Price-Anderson Act's liability requirements, and (3) whether and how these procedures differ for licensees that are limited liability companies. Of the 103 operating nuclear power plants, 31 are owned by 11 limited liability companies. Three energy corporations--Exelon, Entergy, and the Constellation Energy Group--are the parent companies for eight of these limited liability companies. These 8 subsidiaries are the licensees or colicensees for 27 of the 31 plants. NRC requires all licensees for nuclear power plants to show proof that they have the primary and secondary insurance coverage mandated by the Price-Anderson Act. Licensees obtain their primary insurance through American Nuclear Insurers. Licensees also sign an agreement with NRC to keep the insurance in effect. American Nuclear Insurers also has a contractual agreement with each of the licensees to collect the retrospective premiums if these payments become necessary. A certified copy of this agreement, which is called a bond for payment of retrospective premiums, is provided to NRC as proof of secondary insurance. It obligates the licensee to pay the retrospective premiums to American Nuclear Insurers. NRC does not treat limited liability companies differently than other licensees with respect to the Price-Anderson Act's insurance requirements. Like other licensees, limited liability companies must show proof of both primary and secondary insurance coverage. American Nuclear Insurers also requires limited liability companies to provide a letter of guarantee from their parent or other affiliated companies with sufficient assets to pay the retrospective premiums. These letters state that the parent or affiliated companies are responsible for paying the retrospective premiums if the limited liability company does not. American Nuclear Insurers informs NRC it has received these letters. In light of the increasing number of plants owned by limited liability companies, NRC is studying its existing regulations and expects to report on its findings by the end of summer 2004. In commenting on a draft of this report, NRC stated that it accurately reflects the present insurance system for nuclear power plants.
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The roles of certain key federal officials initially involved in the advisory board's review of the dose reconstructions may not have been sufficiently independent and actions were taken to replace these officials. Nonetheless, continued diligence by HHS is required to prevent such problems from recurring as new candidates are considered for these roles. Initially, the project officer assigned responsibility for reviewing the monthly progress reports and monitoring the technical performance of the contractor was also a manager of the NIOSH dose reconstruction program being reviewed. In addition, the designated federal officer for the advisory board, who is responsible for scheduling and attending board meetings, was the director of the dose reconstruction program being reviewed. In response to concerns about the appearance of conflicting roles, the director of NIOSH replaced both of these officials in December 2004 with a senior NIOSH official not involved in the NIOSH program under review. The contractor and members of the board told us that implementation of the contract improved after these replacements were made. With regard to structural independence, we found it appropriate that the contracting officers, who are responsible for managing the contract on behalf of the advisory board, have been federal officials with the Centers for Disease Control and Prevention (CDC), NIOSH's parent agency. The contracting officers do not have responsibilities for the NIOSH program under review and are not accountable to its managers. Members of the advisory board helped facilitate the independence of the contractor's work by playing the leading role in developing and approving the initial statement of work for the contractor and the independent cost estimate for the contract. The progress of the contracted review of NIOSH's site profiles and dose reconstructions has been hindered by the complexity of the work. Specifically, in the first 2 years, the contractor spent almost 90 percent of the $3 million that had been allocated to the contract for a 5-year undertaking. Various adjustments have been made in the review approach in light of the identified complexities, which were not initially understood. However, further improvements could be made in the oversight and planning of the review process. First, the contractor's expenditure levels were not adequately monitored by the agency in the initial months and the contractor's monthly progress reports did not provide sufficient details on the level of work completed compared to funds expended. The monthly report for each individual task order was subsequently revised to provide more details but developing more integrated data across the various tasks could further improve the board's ability to track the progress of the overall review. Second, while the advisory board has made mid-course adjustments to the contractor's task orders and review procedures, the board has not comprehensively reexamined its long-term plan for the overall project. The board revised the task orders for the contractor several times, in part to reflect adjustments made as the board gained a deeper understanding of the needs of the project. Nonetheless, the board has not reexamined its original plan for the total number of site profile and dose reconstruction reviews needed, and the time frames and funding levels for completing them. Third, there is still a gap with regard to management controls for the resolution of the findings and recommendations that emerge from SC&A's review. The advisory board developed a six-step resolution process to help resolve technical issues between the contractor and NIOSH, and this process uses matrices to track the findings and recommendations of the contractor and advisory board. However, NIOSH currently lacks a system for documenting that changes it agrees to make as part of this resolution process are implemented. With regard to reviewing special exposure cohort petitions, the advisory board has asked for and received the contractor's assistance, expanded its charge, and acknowledged the need for the board to review the petitions in a timely manner. The board has reviewed eight petitions as of October 2005, and the contractor assisted with six of these by reviewing the site profiles associated with the facilities. The contractor will play an expanded role by reviewing some of the other submitted petitions and NIOSH's evaluation of those petitions and recommending to the advisory board whether the petitioning group should be added to the special exposure cohort. The contractor will also develop procedures for the advisory board to use when reviewing petitions. While NIOSH is generally required by law to complete its review of a petition within 180 days of determining that the petition has met certain initial qualification requirements, the advisory board has no specified deadline for its review of petitions. However, the board has discussed the fact that special exposure cohort petition reviews have required more time and effort than originally estimated and that the advisory board needs to manage its workload in order to reach timely decisions. Credibility is essential to the work of the advisory board and the contractor, and actions were taken in response to initial concerns about the independence of federal officials in certain key roles. Nonetheless, it is important for HHS to continue to be diligent in avoiding actual or perceived conflicts of roles as new candidates are considered for these roles over the life of the advisory board. The advisory board's review of site profiles and dose reconstructions has presented a steep learning curve for the various parties involved. These experiences have prompted the board to make various adjustments to the contractor's work that are intended to better meet the needs of the review, such as the establishment of a formal six-step resolution process that increases transparency. Nonetheless, further improvements could be made to the oversight and planning of the contracted review. Even though the advisory board has made numerous midcourse adjustments to the work of the contractor, the board has not comprehensively reexamined its long- term plan for the project to determine whether the plan needs to be modified in light of the knowledge gained over the past few years. In addition, while the contractor's monthly reports were modified to provide more detailed expenditure data, the lack of integrated and comprehensive data across the various tasks makes it more difficult for the advisory board to track the progress of the overall review or make adjustments to funding or deliverables across tasks. Finally, without a system to track the actions taken by NIOSH in response to the findings and recommendations of the advisory board and contractor, there is no assurance that any needed improvements are being made. We are making three recommendations to the Secretary of HHS. To assist the advisory board meet its statutory responsibilities, we recommend that the Secretary of HHS (1) direct the contracting and project officers to develop and share with the advisory board more integrated and comprehensive data on contractor spending levels compared to work completed and (2) consider the need for providing HHS staff to collect and analyze pertinent information that would help the advisory board comprehensively reexamine its long-term plan for assessing the NIOSH site profiles and dose reconstructions. To ensure that the findings and recommendations of the advisory board and the contractor are promptly resolved, we recommend that the Secretary of HHS direct the Director of NIOSH to establish a system to track the actions taken by the agency in response to these findings and recommendations and update the advisory board periodically on the status of such actions. We provided a draft of this report to HHS, the contractor, and all the members of the advisory board for comment. We received comments from HHS, the contractor, and four individual members of the advisory board. The comments from the four members of the board represent the views of these individuals and not an official position of the advisory board. HHS agreed with GAO's recommendations to provide more integrated and comprehensive data to the advisory board and said that it will consider the need to provide staff to help the advisory board reexamine its overall plan for assessing NIOSH site profiles and dose reconstructions. With regard to the third recommendation, HHS stated that a system is already in place to track actions taken by the agency in response to advisory board recommendations in letters from the board to the Secretary of HHS. HHS added that matrices used in conjunction with the six-step resolution process outline the contractor's concerns, NIOSH's response, and the actions to be taken. However, we believe that these matrices do not provide sufficient closure with regard to tracking the actions NIOSH has actually implemented in response to advisory board and contractor findings and recommendations. For example, in some of the matrices, the advisory board has made numerous recommendations that NIOSH perform certain actions to resolve various issues, but there is no system in place to provide assurance that these actions have in fact been taken. Thus, we continue to see a need for this recommendation. Some individual advisory board members who provided comments expressed concerns about our recommendations, although differing in their reasons. One individual board member expressed concern about the recommendations to provide more integrated and comprehensive data to the advisory board or to provide staff to help in reexamining the overall review plan, suggesting that these changes might not be very helpful. We still believe that these recommendations are necessary to ensure that the advisory board has more complete information to better oversee the review as well as a long-term plan for completing the review; hence we did not revise the recommendation. Another individual board member suggested that a system be established to track the advisory board's recommendations rather than the contractor's recommendations since it is these that should be of greater concern. While GAO believes it is important to track the resolution of the board's recommendations, it also important to track the resolution of the contractor's recommendations, and we therefore revised the wording of our recommendation to reflect this position. HHS, the contractor, and individual advisory board members took issue with statements in the report about the contractor being over budget and behind schedule. While they agreed with GAO's assessment that the review process got off to a slow start, they thought that the report did not provide sufficient information about the various factors that complicated or led to an expansion of work for the contractor, the revisions to the contractor's task orders, and the performance of the contractor with respect to the revised task orders. For example, commenters pointed out that in some instances, the contractor had to review a site profile more than once after NIOSH had revised the site profile to include additional information. Commenters added that the contractor's work also had to shift to accommodate changing priorities. For instance, NIOSH's increased reliance on using the site profiles to complete dose reconstructions prompted a shift in contractor priorities to devote more time and resources to site profile reviews than originally anticipated. The commenters added that since the task orders were revised, the contractor has been meeting the time frames and budgets specified in the task orders. We therefore revised the report to incorporate additional information on factors that complicated or led to an expansion in the work of the contractor, the revisions that were made to the task orders, and the contractor's progress in meeting the terms of the revised task orders. HHS, the contractor, and some of the individual members of the advisory board maintained that the advisory board has taken actions to reexamine and adjust its strategy for reviewing site profiles and dose reconstruction cases. For instance, HHS stated that during the advisory board's meetings in 2005, the board regularly discussed the future of contract activities and altered the review schedule and scope of work several times. For example, the contractor was asked to perform site profile reviews for sites not originally anticipated in order to facilitate the advisory board's review of related special exposure cohort petitions. Other commenters pointed out the board's development of a six-step resolution process for use by NIOSH and the contractor to resolve differences on technical issues. We revised the report to more fully reflect actions taken by the advisory board to reexamine and adjust its strategy for the review. We also changed the report title to reflect changes made in the report in this regard. However, we continue to see a need for the advisory board to build on its actions by comprehensively reexamining whether its original long-term plan for the overall project is still appropriate. Several individual advisory board members commented that they remain concerned about the independence of the board and its contractor. Although acknowledging that replacement of the original officials appointed as the designated federal officer and project officer has helped reduce possible challenges to independence, the members pointed out that NIOSH officials remain involved in managing the contract and could still potentially influence the work of the contractor. These individual board members also emphasized that the board has no independent budgetary authority and that it relies on NIOSH to obtain funding. Our review suggests that the contractor has been able to demonstrate its independence during the review. For instance, our report notes that the contractor's reports have criticized numerous aspects of NIOSH site profiles and dose reconstructions. Further, contractor officials told us that they believe relations with NIOSH are thoroughly professional and board members told us that they are satisfied with the information provided by the contractor. We acknowledge that the potential for impairment of the contractor's efforts remains. In fact, our draft report concluded that there is a need for continued diligence in avoiding actual or perceived conflicts of roles as new candidates are considered for certain positions over the life of the advisory board. We have further highlighted this point in the final report. HHS's comments are provided in appendix II, and the contractor's comments are provided in appendix III. HHS, the contractor, and individual board members also provided technical comments, which we have incorporated as 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 issue date. At that time, we will send copies of this report to the Secretary of Health and Human Services, interested congressional committees, and other interested parties. We are also sending copies to the Chair and members of the advisory board. We will 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 have any questions about this report, please contact me at (202) 512- 7215. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff that made major contributions to this report are listed in appendix III. predecessor agencies and contractors have employed thousands of individuals in secret and dangerous work in the atomic weapons industry. The Energy Employees Occupational Illness Compensation Program Act (EEOICPA) of 2000 compensates individuals who have developed cancer or other specified diseases related to on-the-job exposure to radiation and other hazards at these work sites. Under Subtitle B, determining a claimant's eligibility for compensation involves developing estimates of the likely radiation levels a worker was exposed to based on information such as exposure records. These estimates are referred to as "dose reconstructions" and are developed by the National Institute for Occupational Safety and Health (NIOSH) under the Department of Health and Human Services (HHS). NIOSH also compiles information in "site profiles" about the radiation protection practices and hazardous materials used at various plants and facilities, which assist NIOSH in completing the dose reconstructions. Employees at certain facilities were designated under the law as members of a "special exposure cohort" because it was believed that exposure records were insufficient and the reasonable likelihood was that the workers' radiation exposure caused their cancers. Their claims are paid without completing exposure estimates. The law also allows the Secretary, HHS, to designate additional groups of employees as members of the special exposure cohort. claims process, EEOICPA created a citizen's advisory board of scientists, physicians, and employee representatives--the President's Advisory Board on Radiation and Worker Health (advisory board). Members of board serve part-time, and the board has limited staff support. The advisory board is tasked with reviewing the scientific validity and quality of NIOSH's dose reconstructions and advising the Secretary of HHS. The board has the flexibility to determine the scope and methodology for this review. In addition, the advisory board is tasked with reviewing NIOSH's evaluation of petitions for special exposure cohort status and recommending whether such status should be granted. To facilitate the advisory board's review, HHS awarded a 5-year, $3-million contract to Sanford Cohen & Associates (SC&A) in October 2003 to examine a sample of dose reconstructions and particular site profiles and to perform a variety of other tasks. assist NIOSH in developing site profiles and in performing dose reconstructions. Originally, about $70 million was allocated to the contract, but this figure had increased to over $200 million by 2004. We focused our work on three questions: Are the roles of key federal officials involved in the review of NIOSH's dose reconstructions sufficiently independent to assure the objectivity of the review? Have the agency's management controls and the advisory board's oversight been sufficient to ensure that the contract to review site profiles and dose reconstructions is adequately carried out? Is the advisory board using the contractor's expertise in reviewing special exposure cohort petitions? key officials and interviewed these officials to document their roles. We used the broad principles specified in various criteria, including those specified in the Federal Acquisition Regulation and Government Auditing Standards, to assess the independence of key officials' roles. We analyzed the contract provisions, including the specific task orders and monthly progress reports as well as the actions taken by officials to manage the contract. We assessed whether the management controls were adequate, considering criteria such as the Federal Acquisition Regulation. meeting minutes as well as interviewed key officials and attended advisory board meetings, to determine the process the advisory board has used and plans to use to evaluate petitions. The scope of our work did not include examining the contract NIOSH awarded to Oak Ridge Associated Universities. We conducted this review from March 2005 through November 2005 in accordance with generally accepted government auditing standards. The roles of certain key federal officials initially involved in the review of dose reconstructions may not have been sufficiently independent and these officials were replaced. However, continued diligence by HHS is required to prevent such problems from recurring as new candidates are considered for these roles. The progress of the contracted review of site profiles and dose reconstructions has been hindered, largely by the complexity of the work. Some adjustments have been made, but further improvements could be made to the oversight and planning of the review. The advisory board is using the contractor's work in reviewing special exposure cohort petitions and has acknowledged the need to review the petitions in a timely manner. (HHS) (CDC) National Institute for Occupational Safety and Health (PGO) Designated federal officer (since 12/04) Project officer (since 12/04) Office of Compensation Analysis and Support (OCAS) Project officer (prior to 12/04) (SC&A) delegated by the President, and is tasked by executive order with providing administrative services, funds, facilities, staff, and other necessary support services to assist the advisory board in carrying out its responsibilities. CDC NIOSH's parent agency awarded the contract on behalf of the advisory board. A CDC Procurement and Grants Office (PGO) official serves as the contracting officer. The contracting officer is responsible for administering and providing management of the contract on the advisory board's behalf. This includes reviewing the monthly progress reports and paying the contractor for its approved costs. for preparing the site profiles and completing the dose reconstructions. NIOSH officials serve as the project officer for the contract and the designated federal officer for the advisory board. The project officer is responsible for reviewing the monthly progress reports and monitoring the technical performance of the contractor. The designated federal officer schedules and attends meetings of the advisory board. reconstructions and (2) review NIOSH's evaluation of special exposure cohort petitions and recommend whether such status should be granted. Operates under Federal Advisory Committee Act (FACA) requirements such as conducting its meetings in public. Contractor - SC&A Under contract, assists the advisory board in meeting its statutory responsibilities by reviewing a sample of dose reconstructions and their associated site profiles and providing assistance with special exposure cohort petitions. Provides monthly progress reviews to the contracting officer, project officer, and advisory board. Task 1: Review selected NIOSH-developed site profiles. Task 2: Develop automated system to track NIOSH dose reconstruction cases. Task 3: Review NIOSH dose reconstruction procedures. Task 4: Review a sample of NIOSH dose reconstruction cases. Review NIOSH's special exposure cohort petition procedures and individual petitions. Provide administrative (logistical) support to advisory board (monthly progress reports, attendance at advisory board meetings, etc.). The contracting officer is a CDC employee whose organization is independent of the NIOSH program under review. In 2003-2004, the project officer also served as a NIOSH program manager of the program under review. In December, 2004, a senior NIOSH official, who does not have responsibilities for the program under review, took over this role. In 2002-2004, the designated federal officer also served as the NIOSH director of the program under review. In December 2004, a senior NIOSH official, who does not have responsibilities for the program, took over this role. approving the initial statement of work for the contractor and the independent government cost estimate for the contract, actions which helped facilitate the independence of the contractor's work. overall project performance in the initial months. More detailed expenditure data were subsequently provided to facilitate monitoring but developing more comprehensive data would be useful. While the advisory board has made various adjustments to the contractor's task orders and work processes after the contractor encountered initial difficulties, the board has not comprehensively reexamined its long-term plan for the project. Additionally, NIOSH lacks a process for documenting actions it has taken in response to the contractor's findings that are reported to the advisory board and the advisory board's recommendations to HHS. The contractor's expenditure levels were not adequately monitored in the initial months. Although the contractor's reports indicated that costs were higher than anticipated, the project officer was caught by surprise in October 2004 when the contractor announced a need for work stoppage because expenditures on a specific task order had approached budget ceilings. The contracting officer noted that during this period the contractor's reports did not reflect the actual percent of work completed, making it very difficult to identify the actual cost of performance. Work was suspended on the site profile review task and a smaller task for several days in November until additional funds were authorized. Separate monthly progress reports are submitted for each task order. However, there is no single comprehensive report on overall contract performance, which could facilitate tracking the progress of the overall review or making strategic adjustments where needed. Initial task orders called for the contractor to complete: 12 to 16 site profile reviews by February 2005 for $426,000 60 dose reconstruction reviews by August 2004 for $467,000 These tasks cost more or took longer to complete than originally estimated. At the end of January 2005, the contractor had completed 2 site profile reviews and partially completed 2 others while spending $481,000. The contractor completed the first 60 dose reconstruction reviews by September 2005 while spending about $1.0 million. (According to SC&A, the cost increase consisted of costs related to overall contract management, not to increased dose reconstruction review costs.) Overall, in the first 2 years, the contractor spent almost 90 percent of the $3 million allocated for a 5-year undertaking. anticipated. Both the contractor and NIOSH officials involved in the review reported that reviews of site profiles and dose reconstructions have proven considerably more complex than originally anticipated; thus the original cost estimates for the project (based on very limited information and experience) were not realistic. Contractor encountered initial delays in obtaining information. The contractor's progress was initially hindered by substantial delays it encountered in obtaining necessary security clearances and access from NIOSH to various technical documents. These early implementation issues have generally been resolved, according to the contractor. Contractor has met these revised task order requirements. to NIOSH's increased reliance on site profiles. Site profiles were originally seen as one of numerous resources to be used in developing dose reconstructions. However, as site profiles became the primary resource used by NIOSH, the advisory board wanted assurance that these site profiles were credible. NIOSH revisions to site profiles required the contractor to complete multiple reviews in some instances. For example, the contractor completed four reviews of the Mallinckrodt site profile as a result of NIOSH's changes. NIOSH views the site profiles as "living documents" that can be added to as new information is identified or changes need to be made. In addition, as NIOSH worked to complete many of the site profiles within an 18-month time frame, many "loose ends" remained in the site profiles, according to the contractor. and contractor to resolve their differences of views on technical issues. This process expanded the time and resources needed for reviews. Unanticipated site profile reviews (e.g., Iowa Army Ammunition Plant) were needed to facilitate the advisory board's review of special exposure cohort petitions. use by, or in support of, the advisory board. The advisory board has authorized a new set of contractor reviews for fiscal year 2006. An additional 6 site profile reviews, 60 dose reconstruction case reviews, and 6 special exposure cohort petition reviews. In August 2005, the designated federal officer pointed out that at the current rate of progress, the original plan to review a total of 600 dose reconstructions would require about 10 years to complete. But the advisory board has not comprehensively reexamined its original long-term plan for the project to determine if it needs to be modified. Total number of site profile reviews needed? Total number of dose reconstruction case reviews needed? Time frames for completion and funding levels required? profiles and dose reconstructions, such as NIOSH's failure to consider information provided by site experts in its site profiles and certain assumptions NIOSH used to calculate dose reconstructions. As part of the six-step resolution process, the contractor and NIOSH develop matrices that specify NIOSH's response and any planned actions for each of the contractor's findings and recommendations. In some matrices, space is provided for the board to recommend that NIOSH take certain actions to resolve issues. However, there is no system in place to track NIOSH's implementation of these actions or advisory board recommendations. Procedures for prompt resolution and implementation of audit findings and other reviews should be part of all federal agencies' internal controls. exposure cohort petitions. A recent task order expands the contractor's role for this facet of the board's work. A potentially large increase in the board's petition review workload did not occur because many petitions did not meet initial qualification requirements. The advisory board has acknowledged the need to review the petitions in a timely manner. For six of these petitions, the contractor reviewed the site profiles (though not the actual petitions associated with the named facilities). For the other two petitions, the advisory board did not request the contractor's assistance. evaluations of these petitions to recommend to the advisory board whether the petitioning group should be added to the special exposure cohort. The contractor will also develop the procedures for the advisory board to use when reviewing petitions. thus did not need to be reviewed by the board. As of October 2005, NIOSH had determined that 18 of the submitted petitions did not meet the qualification requirements. filed as of October 2005: One petition is ready for the advisory board to review. NIOSH is completing its evaluation of four more petitions that will be sent to the board for review. NIOSH is assessing three other petitions to determine if they meet the qualification requirements. for evaluation is unknown. While NIOSH is generally required by law to complete its review of a petition within 180 days of the petition's being qualified, there is no specified time frame for the advisory board's review of petitions. Nonetheless, the advisory board has discussed the fact that special exposure cohort petition reviews have required more time and effort to reach a recommended decision than originally estimated and that the advisory board needs to manage its workload in order to reach timely decisions. performing key roles, actions were taken to replace these officials. Credibility is essential to the work of the advisory board and the contractor. Thus, it is important to continue to be diligent in avoiding actual or perceived conflicts of roles as new candidates are considered for certain positions over the life of the advisory board. Management and Oversight of the Review of Site Profiles and Dose The advisory board's review has presented a steep learning curve for the various parties involved. Despite some adjustments, further improvements could be made: reassessing the long-term plan for the project integrating data on contractor expenditures tracking resolution of board and contractor findings and recommendations. Reassessing the long-term plan for the project The advisory board has made numerous midcourse adjustments to the work of the contractor as operations have matured. It would thus be appropriate for the advisory board to comprehensively reexamine its long-term plan for the overall project to determine whether this plan needs to be modified. Integrated data on contractor expenditures Contractor's monthly reports were modified to provide more detailed data for individual tasks on expenditures compared to work completed. However, the lack of integrated and comprehensive data across the various tasks makes it more difficult for the advisory board to track the progress of the overall review or make strategic adjustments to funding or deliverables across tasks. Tracking resolution of findings and recommendations The advisory board developed a six-step resolution process that uses matrices to track the findings and recommendations of the contractor and board. However, without a system for documenting the actions NIOSH has taken in response, there is no assurance that any needed improvements are being made. direct the contracting and project officers to develop and share with the advisory board more integrated and comprehensive data on contractor's spending levels compared to work completed and consider the need for providing HHS staff to collect and analyze pertinent information that would help the advisory board comprehensively reexamine its long-term plan for assessing the NIOSH site profiles and dose reconstructions. direct the Director of NIOSH to establish a system to track the actions taken by the agency in response to these findings and recommendations and update the advisory board periodically on the status of such actions. Processing, Program Structure May Result in Inconsistent Benefit Outcomes. GAO- 04-516. Washington, DC: May 28, 2004. Energy Employees Compensation: Many Claims Have Been Processed, but Action Is Needed to Expedite Processing of Claims Requiring Radiation Exposure Estimates. GAO-04-958. Washington, DC: Sept.10, 2004. Andy Sherrill, Assistant Director; Margaret Armen, Richard Burkard, Susan Bernstein, Sandra Chefitz, Mary Nugent, and Robert Sampson made significant contributions to this report. Energy Employees Compensation: Many Claims Have Been Processed, but Action Is Needed to Expedite Processing of Claims Requiring Radiation Exposure Estimates. GAO-04-958. Washington, D.C.: Sept. 10, 2004. Energy Employees Compensation: Even with Needed Improvements in Case Processing, Program Structure May Result in Inconsistent Benefit Outcomes. GAO-04-516. Washington, D.C.: May 28, 2004.
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For the last several decades, the Department of Energy and its predecessor agencies and contractors have employed thousands of individuals in secret and dangerous work in the atomic weapons industry. In 2000, Congress enacted the Energy Employees Occupational Illness Compensation Program Act to compensate those individuals who have developed cancer or other specified diseases related to on-the-job exposure to radiation and other hazards at these work sites. Under Subtitle B, determining the eligibility of claimants for compensation is a complex process, involving several federal agencies and a reconstruction of the historical evidence available. The Department of Labor must consider a claimant's case based on records of his or her employment and work activities, which are provided by the Department of Energy. Labor considers the compensability of certain claims by relying on estimates of the likely radiation levels to which particular workers were exposed. These "dose reconstructions" are developed by the National Institute for Occupational Safety and Health (NIOSH) under the Department of Health and Human Services (HHS). NIOSH also compiles information in "site profiles" about the radiation protection practices and hazardous materials used at various plants and facilities, which helps complete the dose reconstructions. Because certain facilities are known to have exposed employees to radiation while keeping few records of individuals' exposure, their employees have been designated under the law as members of a "special exposure cohort," and their claims may be paid without individual dose reconstructions. The law also allows the Secretary of HHS to add additional groups of employees to the special exposure cohort. For quality control and to raise public confidence in the fairness of the claims process, the compensation act also created a citizen's advisory board of scientists, physicians, and employee representatives--the President's Advisory Board on Radiation and Worker Health. Members of the board serve part-time and the board has limited staff support. The advisory board is tasked to review the scientific validity and quality of NIOSH's dose reconstructions and advise the Secretary of HHS. The board has the flexibility to determine the scope and methodology for this review. We assessed how well the advisory board's review and the contracted work with SC&A are proceeding. We focused on three questions: (1) Are the roles of key federal officials involved in the review of NIOSH's dose reconstructions sufficiently independent to assure the objectivity of the review? (2) Have the agency's management controls and the advisory board's oversight been sufficient to ensure that the contract to review site profiles and dose reconstructions is adequately carried out? and (3) Is the advisory board using the contractor's expertise in reviewing special exposure cohort petitions? The roles of certain key federal officials initially involved in the advisory board's review of the dose reconstructions may not have been sufficiently independent and actions were taken to replace these officials. Nonetheless, continued diligence by HHS is required to prevent such problems from recurring as new candidates are considered for these roles. Initially, the project officer assigned responsibility for reviewing the monthly progress reports and monitoring the technical performance of the contractor was also a manager of the NIOSH dose reconstruction program being reviewed. In addition, the designated federal officer for the advisory board, who is responsible for scheduling and attending board meetings, was the director of the dose reconstruction program being reviewed. The progress of the contracted review of NIOSH's site profiles and dose reconstructions has been hindered by the complexity of the work. Specifically, in the first 2 years, the contractor spent almost 90 percent of the $3 million that had been allocated to the contract for a 5-year undertaking. Various adjustments have been made in the review approach in light of the identified complexities, which were not initially understood. However, further improvements could be made in the oversight and planning of the review process. With regard to reviewing special exposure cohort petitions, the advisory board has asked for and received the contractor's assistance, expanded its charge, and acknowledged the need for the board to review the petitions in a timely manner. The board has reviewed eight petitions as of October 2005, and the contractor assisted with six of these by reviewing the site profiles associated with the facilities. The contractor will play an expanded role by reviewing some of the other submitted petitions and NIOSH's evaluation of those petitions and recommending to the advisory board whether the petitioning group should be added to the special exposure cohort. The contractor will also develop procedures for the advisory board to use when reviewing petitions. While NIOSH is generally required by law to complete its review of a petition within 180 days of determining that the petition has met certain initial qualification requirements, the advisory board has no specified deadline for its review of petitions. However, the board has discussed the fact that special exposure cohort petition reviews have required more time and effort than originally estimated and that the advisory board needs to manage its workload in order to reach timely decisions.
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Information security is a critical consideration for any organization that depends on information systems and computer networks to carry out its mission or business and is especially important for government agencies, where maintaining the public's trust is essential. While the dramatic expansion in computer interconnectivity and the rapid increase in the use of the Internet have enabled agencies such as SEC to better accomplish their missions and provide information to the public, agencies' reliance on this technology also exposes federal networks and systems to various threats. This can include threats originating from foreign nation states, domestic criminals, hackers, and disgruntled employees. Concerns about these threats are well founded because of the dramatic increase in reports of security incidents, the ease of obtaining and using hacking tools, and advances in the sophistication and effectiveness of attack technology, among other reasons. Without proper safeguards, systems are vulnerable to individuals and groups with malicious intent who can intrude and use their access to obtain or manipulate sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. We and federal inspectors general have reported on persistent information security weaknesses that place federal agencies at risk of destruction, fraud, or inappropriate disclosure of sensitive information. Accordingly, since 1997, we have designated federal information security as a government-wide high-risk area, and in 2003 expanded this area to include computerized systems supporting the nation's critical infrastructure. Most recently, in the February 2015 update to our high-risk list, we further expanded this area to include protecting the privacy of personally identifiable information (PII)--that is, personal information that is collected, maintained, and shared by both federal and nonfederal entities. The Federal Information Security Modernization Act (FISMA) of 2014 is intended to provide a comprehensive framework for ensuring the effectiveness of information security controls over information resources that support federal operations and assets. FISMA requires each agency to develop, document, and implement an agency-wide security program to provide security for the information and systems that support the operations and assets of the agency, including information and information systems provided or managed by another agency, contractor, or other source. Additionally, FISMA assigns responsibility to the National Institute of Standards and Technology (NIST) to provide standards and guidelines to agencies on information security. NIST has issued related standards and guidelines, including Recommended Security Controls for Federal Information Systems and Organizations, NIST Special Publication (NIST SP) 800-53, and Contingency Planning Guide for Federal Information Systems, NIST SP 800-34. To support its financial operations and store the sensitive information it collects, SEC relies extensively on computerized systems interconnected by local and wide-area networks. For example, to process and track financial transactions, such as filing fees paid by corporations or disgorgements and penalties from enforcement activities, and for financial reporting, SEC relies on numerous enterprise applications, including the following: Various modules in Delphi-Prism, a federal financial management system provided by the Department of Transportation's Federal Aviation Administration's Enterprise Service Center, are used by SEC for financial accounting, analyses, and reporting. Delphi-Prism produces SEC's financial statements. The Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system performs the automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others that are required to file certain information with SEC. Its purpose is to accelerate the receipt, acceptance, dissemination, and analysis of time-sensitive corporate information filed with the commission. EDGAR/Fee Momentum, a subsystem of EDGAR, maintains accounting information pertaining to fees received from registrants. End User Computing Spreadsheets and/or User Developed Applications are used by SEC to prepare, analyze, summarize, and report on its financial data. FedInvest invests funds related to disgorgements and penalties. Federal Personnel and Payroll System/Quicktime processes personnel and payroll transactions. The SEC's general support system provides (1) business application services to internal and external customers and (2) security services necessary to support these applications. Under FISMA, the SEC Chairman has responsibility for, among other things, (1) providing information security protections commensurate with the risk and magnitude of harm resulting from unauthorized access, use, disclosure, disruption, modification, or destruction of the agency's information systems and information; (2) ensuring that senior agency officials provide information security for the information and information systems that support the operations and assets under their control; and (3) delegating to the agency chief information officer (CIO) the authority to ensure compliance with the requirements imposed on the agency. FISMA further requires the CIO to designate a senior agency information security officer who will carry out the CIO's information security responsibilities. SEC had implemented and made progress in strengthening information security controls, including implementing access controls, deploying multiple firewalls, establishing monitoring and logging capabilities, and resolving five weaknesses that we had previously identified. However, weaknesses limited the effectiveness of other controls in protecting the confidentiality, integrity, and availability of SEC's information systems. Specifically, SEC did not consistently control logical and physical access to its network, servers, applications, and databases; manage its configuration settings; segregate duties; or update its contingency plan. These weaknesses existed, in part, because SEC did not effectively implement key elements of its information security program, including keeping up-to-date policies and procedures, completely documenting plans of actions and milestones (POA&M) for control weakness remediation, establishing and maintaining configuration settings, and monitoring configuration settings for compliance with standards. Consequently, SEC's financial information and systems were exposed to increased risk of unauthorized disclosure, modification, and destruction. A basic management objective for any organization is to protect the resources that support its critical operations and assets from unauthorized access. Organizations accomplish this by designing and implementing controls that are intended to prevent, limit, and detect unauthorized access to computer resources (e.g., data, programs, equipment, and facilities), thereby protecting them from unauthorized disclosure, modification, and destruction. Specific access controls include boundary protection, identification and authentication of users, authorization restrictions, audit and monitoring capability, configuration management, separation of duties, and physical security. Without adequate access controls, unauthorized individuals, including intruders and former employees, can surreptitiously read and copy sensitive data and make undetected changes or deletions for malicious purposes or for personal gain. In addition, authorized users could intentionally or unintentionally modify or delete data or execute changes that are outside of their span of authority. Although SEC had issued policies and implemented controls based on those policies, it did not consistently protect its network from possible intrusions, identify and authenticate users, authorize access to resources, audit and monitor actions taken on its systems and network, and restrict physical access to sensitive assets. Boundary protection controls (1) logical connectivity into and out of networks and (2) connectivity to and from network-connected devices. Implementing multiple layers of security to protect an information system's internal and external boundaries provides defense-in-depth. By using a defense-in-depth strategy, entities can reduce the risk of a successful cyber attack. For example, multiple firewalls could be deployed to prevent both outsiders and trusted insiders from gaining unauthorized access to systems. At the host or device level, logical boundaries can be controlled through inbound and outbound filtering provided by access control lists and personal firewalls. At the system level, any connections to the Internet, or to other external and internal networks or information systems, should occur through controlled interfaces. To be effective, remote access controls should be properly implemented in accordance with authorizations that have been granted. SEC deployed multiple firewalls that were intended to prevent unauthorized access to its systems; however, it did not always restrict traffic passing through its firewalls. For example, SEC did not always configure access control lists to restrict potentially insecure traffic or ports on each of the six internal firewalls reviewed, subjecting the hosts to potentially vulnerable services. Also, SEC did not apply host firewall configuration rules on three of four hosts. As a result of these inadequate configurations, SEC introduced vulnerability to potentially unnecessary and undetectable access at multiple points in its network environment. Information systems need to be managed to effectively control user accounts and identify and authenticate users. Users and devices should be appropriately identified and authenticated through the implementation of adequate logical access controls. Users can be authenticated using mechanisms such as a password and smart card combination. SEC policy requires enforcement of minimum password complexity and password expiration. In addition, SEC policy requires that multifactor authentication be implemented for network and local access to privileged and non-privileged accounts. However, SEC did not fully implement controls for identifying and authenticating users. For example, it did not always enforce individual accountability, as 20 different users used the same password on multiple servers in the production, development and testing environments. Also, SEC configured the password for a key financial server to never expire. Additionally, while SEC implemented multifactor authentication for remote access, it did not require multifactor authentication for network or console access managed by the agency's security group. As a result, SEC is at an increased risk that accounts could be compromised and used by unauthorized individuals to access sensitive financial data. Authorization encompasses access privileges granted to a user, program, or process. It involves allowing or preventing actions by that user based on predefined rules. Authorization includes the principles of legitimate use and least privilege. Access rights and privileges are used to implement security policies that determine what a user can do after being allowed into the system. Maintaining access rights, permissions, and privileges is one of the most important aspects of administering system security. SEC policy states that information system owners shall explicitly authorize access to configuration settings, file permissions, and privileges. SEC policy also states that information systems must prevent non-privileged users from executing privileged functions, including disabling, circumventing, or altering implemented security safeguards or countermeasures. However, SEC did not always ensure that only authorized individuals were granted access to its systems. For example, it did not promptly remove 9 of 66 expired administrator accounts that we reviewed. In addition, SEC did not appropriately set configuration settings, file permissions, and privileged access to sensitive files, such as allowing group membership not explicitly authorized to access these files. As a result, users had excessive levels of access that were not required to perform their jobs. This could lead to unauthorized users who had penetrated SEC networks inadvertently or deliberately modifying financial data or other sensitive information. Audit and monitoring involves the regular collection, review, and analysis of auditable events for indications of inappropriate or unusual activity, and the appropriate investigation and reporting of such activity. Automated mechanisms may be used to integrate audit monitoring, analysis, and reporting into an overall process for investigating and responding to suspicious activities. Audit and monitoring controls can help security professionals routinely assess computer security, perform investigations during and after an attack, and recognize an ongoing attack. Audit and monitoring technologies include network- and host-based intrusion detection systems, audit logging, security event correlation tools, and computer forensics. SEC policy states that appropriate audit logs shall be generated at all times for SEC information systems, depending on the security categorization of the system and the level of risk associated with the loss, compromise, or unauthorized disclosure of the data processed or transmitted by the system. However, SEC did not consistently enable audit log configuration settings to capture key security activities on its server hosts reviewed. For example, audit logs for policy settings were not set to be the same for the four server hosts reviewed. As a result, SEC was not able to monitor key activities on some of the server hosts and thus may not be able to detect or investigate unauthorized system activity. Physical security controls restrict physical access to computer resources and protect them from intentional or unintentional loss or impairment. Adequate physical security controls over computer facilities and resources should be established that are commensurate with the risks of physical damage or access. Physical security controls over the overall facility and areas housing sensitive information technology components include, among other things, policies and practices for granting and discontinuing access authorizations; controlling badges, ID cards, smartcards, and other entry devices; controlling entry during and after normal business hours; and controlling the entry and removal of computer resources (such as equipment and storage media) from the facility. SEC instituted physical security controls that included badge swipe readers to enter the building or use the elevators, alarm systems that would sound if exterior doors were propped open for extended periods of time, and additional check points to restrict access to areas housing the EDGAR working space. However, the effectiveness of its physical security was reduced by weaknesses identified. For example, SEC's facilities service provider did not monitor the perimeter of the contingency site on a real-time basis. In addition, SEC did not adequately secure the server storage area at its contingency site. SEC also did not periodically conduct a physical inventory of employee badges. The insufficient physical access control over the commission's information systems place sensitive information and assets at greater risk from unauthorized access. Configuration management involves the identification and management of security features for all hardware, software, and firmware components of an information system at a given point and systematically controlling changes to that configuration during the system's life cycle. FISMA requires each federal agency to have policies and procedures that ensure compliance with minimally acceptable system configuration requirements. Systems with secure configurations have less vulnerability and are better able to thwart network attacks. Also, effective configuration management provides reasonable assurance that systems are configured and operating securely and as intended. SEC policy states that the agency should maintain proper system configuration in compliance with official SEC baselines. SEC did not maintain and monitor official configuration baselines for some of the platforms used to host financially significant systems and general support system that we reviewed. Consequently, increased risk exists that systems could be exposed to vulnerabilities that could be exploited by attackers seeking to gain unauthorized access. To reduce the risk of error or fraud, duties and responsibilities for authorizing, processing, recording, and reviewing transactions should be separated to ensure that one individual does not control all critical stages of a process. Effective segregation of duties starts with effective entity- wide policies and procedures that are implemented at the system and application levels. Often, segregation of incompatible duties is achieved by dividing responsibilities among two or more organizational groups, which diminishes the likelihood that errors and wrongful acts will go undetected because the activities of one individual or group will serve as a check on the activities of the other. Inadequate segregation of duties increases the risk that erroneous or fraudulent transactions could be processed, improper program changes implemented, and computer resources damaged or destroyed. SEC policy states that information system owners must separate duties of individuals as necessary to provide appropriate management and security oversight and define information system access authorizations to support the separation of duties. However, SEC did not appropriately separate incompatible access to three computing environments for 20 individuals. SEC assigned multiple user accounts to individuals that gave the individuals access to the production, disaster recovery, and test/development environments. SEC officials stated that they had implemented the principles of separation of duties and accepted the risk for those individuals that required access to multiple environments. However, SEC had not documented management's acceptance of this risk. Thus, an increased risk exists that unauthorized individuals from the disaster recovery environment and test/development environment could gain access to processes and data in the production environment, potentially impacting the integrity of the financial data. Losing the capability to process, retrieve, and protect electronically maintained information can significantly affect an agency's ability to accomplish its mission. If contingency and disaster recovery plans are inadequate, even relatively minor interruptions can result in lost or incorrectly processed data, which can cause financial losses, expensive recovery efforts, and inaccurate or incomplete information. Given these severe implications, it is important that an entity have in place (1) up-to- date procedures for protecting information resources and minimizing the risk of unplanned interruption; (2) a plan to recover critical operations should interruptions occur that considers the activities performed at general support facilities, including data processing centers and telecommunication facilities; and (3) redundancy in critical systems. SEC policy states that the agency should provide for the recovery and reconstitution of the information system to a known state after a disruption, compromise, or failure. This includes establishing an alternate processing site that can operate as the network operation center that permits the transfer and resumption of essential business functions within 12 hours when the primary processing capabilities are unavailable. In addition, SEC policy states that the contingency plan should be reviewed at least annually and updated to address (1) changes to the Commission, information system, or environment of operation and (2) problems encountered during contingency plan implementation, execution, or testing. Although SEC had developed contingency and disaster recovery plans and implemented controls for this planning, its plans were not complete or up to date. Specifically, SEC did not maintain a sufficiently prepared alternate network operations center in the event of a disaster. Also, SEC did not consistently review and update contingency planning documents. Consequently, SEC had limited ability to monitor the health of its network in the event of a failure at its primary data center. The information security weaknesses existed in the SEC computing environment, in part, because SEC had not fully implemented key elements of its agency-wide information security program. Specifically, it did not always (1) review and update its policies in a timely manner, (2) completely document plans of actions and milestones items, (3) document its physical inventory, and (4) fully implement and effectively manage its continuous monitoring program. Security control policies and procedures should be documented and approved by management. According to FISMA, each federal agency information security program must include policies and procedures that are based on risk assessments that cost-effectively reduce information security risks to an acceptable level, and ensure that information security is addressed throughout the life cycle of each agency information system. SEC policy states that the agency should review and update policy and procedures annually. SEC did not always review and update its information technology policies and guidance in a timely manner. Specifically, SEC had not reviewed and updated the 10 information technology policies that we reviewed for between 4 and 8 years. In addition, SEC did not review implementing policies for its User Access Program, and one of three of these policies reviewed was dated to 2007. Without appropriate review to ensure up-to- date policies and procedures, increased risk exists that information technology operations would not be in step with current security leading practices or reflect SEC's current operating environment. When weaknesses are identified, the related risks should be reassessed, appropriate corrective or remediation actions taken, and follow-up monitoring performed to make certain that corrective actions are effective. FISMA specifically requires that agency-wide information security programs include a process for planning, implementing, evaluating, and documenting remedial action to address any deficiencies in the information security policies, procedures, and practices of the agency. SEC policy states that a plan of action and milestones (POA&M) will be developed to plan, track, and manage the remedial actions required to address identified information security deficiencies. POA&Ms are based on the findings from security control assessments, security impact analyses, continuous monitoring activities, and other reported deficiencies, including but not limited to Office of Inspector General and GAO engagements. Further, SEC policy states that, at a minimum, each POA&M must include the following for each information security deficiency: tasks planned to correct the deficiency and to address any residual risk, resources required to accomplish the planned tasks, responsible organizations for implementing the mitigation, any milestones to meet the tasks, scheduled completion dates for each milestone, and the status of corrective action activity. SEC did not completely document POA&M items. While SEC had made progress in documenting POA&Ms in its repository, the following artifacts supporting closure were not adequately documented in 20 of 20 plans reviewed: tasks planned to correct the weakness and to address any residual risk, milestones in meeting the tasks with the scheduled completion dates, and the status of corrective action activity. Without adequate documentation to support POA&M progress, it would be difficult to determine whether the weakness is properly remedied. Configuration management involves the identification and management of security features for all hardware, software, and firmware components of an information system at a given point and systematically controls changes to that configuration during the system's life cycle. SEC policy states that the agency should develop, document, and maintain a current baseline configuration for information systems and, for moderate risk systems, review and update baseline configurations at least annually due to patches and common vulnerability enumeration announcements, and as an integral part of information system component installations and upgrades. The policy also states that information system owners of the general support system and major applications should be responsible for developing, documenting, and maintaining an inventory of information system components that accurately reflects the current information system, includes all components within the authorization boundary of the information system, maintains sufficient level of granularity for tracking and reporting, includes information deemed necessary to achieve effective property accountability, and reviews and updates the inventory as part of the system security plan update. While SEC had a well-documented and up-to-date system security plan for a key financial system that included accurately identified program changes and version numbers, it did not document a comprehensive physical inventory of the systems and applications in its production environments. Specifically, SEC did not document, for each system or application, purpose, host names, operating system version, database version, and location of the system or application in the inventory. In addition, SEC did not adequately review and update current configuration baseline settings documentation for the operating systems. The baselines documentation was last reviewed and approved by SEC management in fiscal year 2012, including those for the operating systems. Without maintaining an accurate inventory of systems and applications in production and conducting annual review of configuration baselines, SEC may not be able to obtain the current status of its systems and applications and the agency would not be able to identify unauthorized actions performed against the baseline. An important element of risk management is ensuring that policies and controls intended to reduce risk are effective on an ongoing basis. To do this effectively, top management should understand the agency's security risks and actively support and monitor the effectiveness of its security policies. SEC policy states that the agency shall develop a continuous monitoring strategy and implement a continuous monitoring program that includes establishment of system-dependent monthly automated scans for monitoring and reviews at least every other month, ongoing security control assessments, correlation and analysis of security related information generated by assessments and monitoring. SEC invested in multiple tools with the ability to conduct compliance monitoring for its information systems. However, the agency had not developed a process, including the use of vulnerability scanners, to monitor the configuration of components of a key financial system and evaluate host compliance with SEC policy. For example: While scans were run to detect vulnerabilities on SEC systems identified in databases of common vulnerabilities, resulting reports were not sent to database personnel for them to take appropriate actions. Personnel for a key financial system were not granted access to the database scanning tool. SEC had not instituted processes to review the information produced by the vulnerability scanning tools, including necessary personnel and processes for conducting analysis. Without implementing an effective process for monitoring, evaluating, and remedying identified weaknesses, SEC would not be aware of potential weaknesses that could affect the confidentiality, integrity and availability of its information systems. SEC resolved 5 of the 20 previously reported information security control deficiencies in the areas of access controls, audit and monitoring, and separation of duties that remained unresolved as of September 30, 2014. In particular, SEC resolved 2 weaknesses important to improving its information security by separating the user production network from the internal management network and storing all critical system logs in a centralized location for a key financial system. While SEC had made progress in addressing the remaining 15 of 20 previously reported weaknesses, these weaknesses still existed as of September 30, 2015. These 15 remaining weaknesses encompassed SEC's financial and general support systems. While SEC had improved its information security by addressing previously identified weaknesses, the information security control weaknesses that continued to exist in its computing environment may jeopardize the confidentiality, integrity, and availability of information residing in and processed by the system. Specifically, the lack of adequate separation among SEC users in different computing environments increases the risk that users could gain unrestricted access to critical hardware or software and intentionally or inadvertently access, alter, or delete sensitive data or computer programs. Weaknesses in SEC's controls over access control, configuration management, segregation of duties, physical security, and contingency and disaster recovery planning exist in part because SEC did not fully implement its information security program. In particular, SEC did not always review and update its policies in a timely manner, completely document POA&M items and physical inventory, and fully implement and effectively manage its continuous monitoring program. While SEC had no material weaknesses or significant deficiencies over financial reporting, the weaknesses identified could decrease the reliability of the data processed by key financial systems, which the commission relies on to communicate its financial position to Congress and the public. We recommend that the Chair direct the Chief Information Officer to take six actions to more effectively manage its information security program: Review and appropriately update information technology and guidance consistent with SEC policy. Document artifacts that support recommendation closure consistent with SEC policy. Document a comprehensive physical inventory of the systems and applications in the production environment. Review and update current configuration baseline settings for the operating systems. Provide personnel appropriate access to continuous monitoring reports and tools to monitor, evaluate, and remedy identified weaknesses. Institute a process and assign the necessary personnel to review information produced by the vulnerability scanning tools to monitor, evaluate, and remedy identified weaknesses. In a separate report with limited distribution, we are also making 30 recommendations to address newly identified control weaknesses related to access controls, configuration management, segregation of duties, physical security, and contingency and disaster recovery plans. We provided a draft of this report to SEC for its review and comment. In written comments signed by the Chief Information Officer (reproduced in app. II), SEC concurred with the six recommendations addressing its information security program. SEC also stated that the commission had taken action to address one recommendation and described actions to address the other five. This report contains recommendations to you. The head of a federal agency is required by 31 U.S.C. SS 720 to submit a written statement on the actions taken on the recommendations by the head of the agency. The statement must be submitted to the Senate Committee on Homeland Security and Governmental Affairs and the House Committee on Oversight and Government Reform not later than 60 days from the date of this report. A written statement must also be sent to the House and Senate Committees on Appropriations with your agency's first request for appropriations made more than 60 days after the date of this report. Because agency personnel serve as the primary source of information on the status of its open recommendations, we request that the commission also provide us with a copy of its statement of action to serve as preliminary information on the status of open recommendations. We are also sending copies of this report to interested congressional parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. We acknowledge and appreciate the cooperation and assistance provided by SEC management and staff during our audit. If you have any questions about this report or need assistance in addressing these issues, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected] or Nabajyoti Barkakati at (202) 512-4499 or [email protected]. GAO staff who made significant contributions to this report are listed in appendix III. Our objective was to determine the effectiveness of the Securities and Exchange Commission's (SEC) information security controls for ensuring the confidentiality, integrity, and availability of its key financial systems and information. To assess information systems controls, we identified and reviewed SEC information systems control policies and procedures, conducted tests of controls, and held interviews with key security representatives and management officials concerning whether information security controls were in place, adequately designed, and operating effectively. This work was performed to support our opinion on SEC's internal control over financial reporting as of September 30, 2015. We evaluated controls based on our Federal Information System Controls Audit Manual (FISCAM), which contains guidance for reviewing information system controls that affect the confidentiality, integrity, and availability of computerized information; National Institute of Standards and Technology standards and special publications; and SEC's plans, policies, and standards. We assessed the effectiveness of both general and application controls by performing information system controls walkthroughs surrounding the initiation, authorization, processing, recording, and reporting of financial data (via interviews, inquiries, observations, and inspections); reviewing systems security risk assessment and authorization documents; reviewing SEC policies and procedures; observing technical controls implemented on selected systems; testing specific controls; and scanning and manually assessing SEC systems and applications, including financial systems and related general support system network devices (firewalls, switches, and routers) servers and systems. We also evaluated the Statement on Standards for Attestation Engagements report and performed testing on key information technology controls on the following applications and systems: Delphi- Prism, FedInvest, EDGAR/Fee Momentum, and Federal Personnel and Payroll System/Quicktime. We selected which systems to evaluate based on a consideration of financial systems and service providers integral to SEC's financial statements. To determine the status of SEC's actions to correct or mitigate previously reported information security weaknesses, we identified and reviewed its information security policies, procedures, practices, and guidance. We reviewed prior GAO reports to identify previously reported weaknesses and examined the commission's corrective action plans to determine which weaknesses it had reported were corrected. For those instances where SEC reported that it had completed corrective actions, we assessed the effectiveness of those actions by reviewing appropriate documents, including SEC-documented corrective actions, and interviewing the appropriate staffs. To assess the reliability of the data we analyzed, such as information system control settings, security assessment and authorization documents, and security policies and procedures, we corroborated them by interviewing SEC officials and programmatic personnel to determine whether the data obtained were consistent with system configurations in place at the time of our review. In addition, we observed configuration of these settings in the network. Based on this assessment, we determined the data were reliable for the purposes of this report. We performed our work 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 provided a reasonable basis for our findings and conclusions based on our audit objective. In addition to the contacts named above, GAO staff who made major contributions to this report are Michael Gilmore, Hal Lewis, and Duc Ngo (Assistant Directors), Angela Bell, Lee McCracken, and Henry Sutanto.
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The SEC is responsible for enforcing securities laws, issuing rules and regulations that provide protection for investors, and helping to ensure that the securities markets are fair and honest. In carrying out its mission, the SEC relies on computerized information systems to collect, process, and store sensitive information, including financial data. Having effective information security controls in place is essential to protecting these systems and the information they contain. This report details weaknesses GAO identified in the information security program at SEC during its audit of the commission's fiscal years 2015 and 2014 financial statements. GAO's objective was to determine the effectiveness of information security controls for protecting the confidentiality, integrity, and availability of SEC's key financial systems and information. To do this, GAO examined information security policies, plans, and procedures; tested controls over key financial applications; interviewed agency officials; and assessed corrective actions taken to address previously reported weaknesses. The Securities and Exchange Commission (SEC) improved its information security by addressing weaknesses previously identified by GAO, including separating the user production network from the internal management network. However, weaknesses continue to limit the effectiveness of other security controls. In particular: While SEC had issued policies and implemented controls based on those policies, it did not consistently protect access to its systems. Organizations should design and implement controls to prevent, limit, and detect unauthorized access to computer resources. The commission did not consistently protect its network from possible intrusions, identify and authenticate users, authorize access to resources, audit and monitor actions taken on its systems and network, and restrict physical access to sensitive assets. The commission did not consistently manage the configuration of its systems. Configuration management includes ensuring that hardware and software are configured with appropriate security features and that changes are systematically controlled. However, SEC did not maintain and monitor official configuration baselines for its financial systems and general support system. The commission did not always appropriately separate incompatible duties. Separation of duties involves dividing responsibilities so that a single individual does not control all critical stages of a process. However, SEC did not adequately separate duties among its three computing environments. While SEC had developed contingency and disaster recovery plans for its information systems, those plans were not fully reviewed, completed, or up-to-date. Contingency and disaster recovery planning are essential to resuming operations in the event of a disruption or disaster. These weaknesses existed in part because SEC had not fully implemented an organization-wide information security program, as called for by federal law and guidance. In particular, the commission had not (1) consistently reviewed and updated its information security policies in a timely manner, (2) completely documented plans of action to address weaknesses, (3) documented a physical inventory of its systems and applications, and (4) fully implemented a program to continuously monitor the security of its systems and networks. Finally, of 20 weaknesses previously identified by GAO that remained unresolved as of September 30, 2014, SEC had resolved 5 and made progress in addressing the other 15 as of September 30, 2015. Two resolved weaknesses were important to improving SEC security. Collectively, these weaknesses increase the risk that SEC's systems could be compromised, jeopardizing the confidentiality, integrity, and availability of sensitive financial information. While not constituting material weaknesses or significant deficiencies, they warrant SEC management's attention. In addition to the 15 prior recommendations that have not been fully implemented, GAO is recommending that SEC take 6 additional actions to more fully implement its information security program. In a separate report with limited distribution, GAO recommended SEC take 30 actions to address newly identified control weaknesses. SEC concurred with GAO's recommendations.
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Information security is a critical consideration for any agency that depends on information systems and computer networks to carry out its mission and is especially important for a government corporation such as FDIC, which has responsibilities to oversee the financial institutions that are entrusted with safeguarding the public's money. While the use of interconnected electronic information systems allows the corporation to accomplish its mission more quickly and effectively, this also exposes FDIC's information to threats from sources internal and external to the agency. Internal threats include errors, as well as fraudulent or malevolent acts by employees or contractors working within the agency. External threats include the ever-growing number of cyber-based attacks that can come from a variety of sources such as hackers, criminals, foreign nations, terrorists, and other adversarial groups. Potential cyber attackers have a variety of techniques at their disposal, which can vastly enhance the reach and impact of their actions. For example, cyber attackers do not need to be physically close to their targets, their attacks can easily cross state and national borders, and they can preserve their anonymity. Additionally, advanced persistent threats-- where an adversary that possesses sophisticated levels of expertise and significant resources can attack using physical and cyber methods to achieve its objectives -- pose increasing risks. Further, the interconnectivity among information systems presents increasing opportunities for such attacks. Indeed, reports of security incidents from federal agencies are on the rise. Specifically, the number of incidents reported by federal agencies to the United States Computer Emergency Readiness Team (US-CERT) has increased dramatically in recent years: from 5,503 incidents reported in fiscal year 2006 to 67,168 incidents in fiscal year 2014. Compounding the growing number and types of threats are the deficiencies in security controls on the information systems at federal agencies, which have resulted in vulnerabilities in both financial and nonfinancial systems and information. These deficiencies continue to place assets at risk of inadvertent or deliberate misuse, financial information at risk of unauthorized modification or destruction, and critical operations at risk of disruption. Accordingly, we have designated information security as a government-wide high-risk area since 1997, a designation that remains in force today. Federal law and guidance specify requirements for protecting federal information and information systems. The Federal Information Security Management Act of 2002 (FISMA) provides a comprehensive framework for ensuring the effectiveness of information security controls over information resources that support federal operations and assets. To accomplish this, FISMA requires each agency to develop, document, and implement an agency-wide information security program to provide information security for the information and systems that support its operations and assets, using a risk-based approach to information security management. Such a program includes assessing risk; developing and implementing cost-effective security plans, policies, and procedures; providing specialized training; testing and evaluating the effectiveness of controls; planning, implementing, evaluating, and documenting remedial actions to address information security deficiencies; and ensuring continuity of operations. FISMA also assigned to the National Institute of Standards and Technology (NIST) the responsibility for developing standards and guidelines that include minimum information security requirements. To this end, NIST has issued several publications to provide guidance for agencies in implementing an information security program. For example, NIST Federal Information Processing Standard (FIPS) 199 provides requirements on how agencies should categorize their information and information system(s) and NIST special publication (SP) 800-53guidance to agencies on the selection and implementation of information security and privacy controls for systems. FDIC was created by Congress to maintain the stability of and public confidence in the nation's financial system by insuring deposits, examining and supervising financial institutions, and resolving troubled institutions. FDIC is an independent agency of the federal government, which Congress created in 1933 in response to the thousands of bank failures that had occurred throughout the late 1920s and early 1930s. FDIC insures deposits in banks and thrift institutions for at least $250,000; identifies, monitors, and addresses risks to the deposit insurance funds; and limits the effect on the economy and the financial system when a bank or thrift institution fails. FDIC administers two funds in carrying out its mission: The Deposit Insurance Fund (DIF) has the primary purposes of (1) insuring the deposits and protecting the depositors of banks and savings associations (insured depository institutions) and (2) resolving failed insured depository institutions in a manner that will result in the least possible cost to the fund. In cooperation with other federal and state agencies, FDIC promotes the safety and soundness of insured depository institutions by identifying, monitoring, and addressing risks to the DIF. The Federal Savings and Loan Insurance Corporation Resolution Fund (FRF) is responsible for the sale of the remaining assets and the satisfaction of the liabilities associated with the former Federal Savings and Loan Insurance Corporation and the former Resolution Trust Corporation. FDIC maintains the DIF and the FRF separately to support their respective functions. FDIC relies extensively on computerized systems to support its mission, including financial operations, and to store the sensitive information that it collects. The corporation uses local and wide area networks to interconnect its systems and a layered approach to security defense. To support its financial management functions, FDIC uses a corporate-wide system that functions as a unified set of financial and payroll systems that are managed and operated in an integrated fashion; a system to calculate and collect FDIC deposit insurance premiums and Financing Corporationinsured financial institutions; bond principal and interest amounts from a web-based application that provides full functionality to support franchise marketing, asset marketing, and asset management; an application and web portal to provide acquiring institutions with a secure method for submitting required data files to FDIC; computer programs used to derive the corporation's estimate of losses from shared loss agreements; a system to request access to and receive permission for the computer applications and resources available to its employees, contractors, and other authorized personnel; and a primary receivership and subsidiary financial processing and reporting system. Under FISMA, the Chairman of FDIC is responsible for, among other things, providing information security protections commensurate with the risk and magnitude of the harm resulting from unauthorized access, use, disclosure, disruption, modification, or destruction of the agency's information systems and information; ensuring that senior agency officials provide information security for the information and information systems that support the operations and assets under their control; and delegating to the corporation's Chief Information Officer the authority to ensure compliance with the requirements imposed on the agency under FISMA. The Chief Information Officer is responsible for developing and maintaining a corporate-wide information security program and for developing and maintaining information security policies, procedures, and control techniques that address all applicable requirements. The Chief Information Officer also serves as the authorizing official with the authority to approve the operation of the information systems at an acceptable level of risk to the corporation. The Chief Information Security Officer reports to the Chief Information Officer and serves as the Chief Information Officer's designated representative. The Chief Information Security Officer is responsible for (1) the overall support of assessment and authorization activities; (2) the development, coordination, and implementation of FDIC's security policy; and (3) the coordination of information security and privacy efforts across the corporation. Although FDIC developed and implemented elements of its information security program, the corporation did not always implement key program activities. Additionally, FDIC has designed and documented numerous information security controls intended to protect its key financial systems; however, shortcomings existed in the implementation of other information security controls. By mitigating known information security weaknesses and ensuring that information security controls are consistently applied, FDIC could continue to reduce risks and better protect its sensitive financial information and resources from inadvertent or deliberate misuse, improper modification, unauthorized disclosure, or destruction. An entity-wide information security management program is the foundation of a security control structure and a reflection of senior management's commitment to addressing security risks. The security management program should establish a framework and continuous cycle of activity for assessing risk, developing and implementing effective security procedures, and monitoring the effectiveness of these procedures. Without a well-designed program, security controls may be inadequate; responsibilities may be unclear, misunderstood, or improperly implemented; and controls may be inconsistently applied. FISMA requires each agency to develop, document, and implement an information security program that, among other things, includes plans for providing adequate information security for networks, facilities, and systems; security awareness training to inform personnel of information security risks and of their responsibilities in complying with agency policies and procedures, as well as training personnel with significant security responsibilities for information security; policies and procedures that (1) are based on risk assessments, (2) cost effectively reduce information security risks to an acceptable level, (3) ensure that information security is addressed throughout the life cycle of each system, and (4) ensure compliance with applicable requirements; a process for planning, implementing, evaluating, and documenting remedial actions to address any deficiencies in its information security policies, procedures, or practices; and periodic testing and evaluation of the effectiveness of information security policies, procedures, and practices, to be performed with a frequency depending on risk, but no less than annually, and that includes testing of management, operational, and technical controls for every system identified in the agency's required inventory of major information systems. FDIC made improvements in developing and documenting many elements of its corporate information security program. For example: During 2014, FDIC completed actions to address two weaknesses we previously reported related to system security planning. Specifically, the corporation had ensured that the system security plans for three applications thoroughly described each control and included all required information, and ensured that descriptions of common controls were adequately documented. During 2014, FDIC addressed our prior recommendation to ensure that those with administrative-level access have completed the requisite rules of behavior training upon receiving access and each year after that. FDIC had taken steps to document, implement, and improve policies for information security. Specifically, in June 2014, the corporation formalized a new policy on security patch management. The policy defines risk categories for patches, time frames for applying patches based on the risk categories and platform-specific requirements, and roles and responsibilities for patch management. Additionally, the FDIC Office of the Inspector General reported in November 2014 that FDIC had drafted a new information technology (IT) security risk management program policy that was designed to align with NIST and Office of Management and Budget guidance and reflect the corporation's information security risk management program and governance structure. FDIC addressed many weaknesses that we previously identified in its information systems supporting financial processing. Specifically, during 2014, FDIC implemented 27 of the 36 recommendations pertaining to unaddressed security weaknesses that we previously reported, and actions to correct or mitigate the remaining 9 weaknesses were in progress. Although FDIC continues to improve its implementation of its corporate information security program, shortcomings existed in other information security program elements. Specifically: FDIC's information security policies and procedures did not always include important requirements. NIST special publication (SP) 800-53 Revision 4 recommends that agencies regularly review individuals' physical access to facilities and remove that access when it is no longer required. However, although FDIC had a policy on controlling physical access to its primary data center, the corporation did not recertify access to its backup data center because the policy did not apply to all FDIC data centers. Additionally, although FDIC policy states that access to IT resources is to be provided only after proper authorization has been provided, the corporation did not document that it had verified access to a system supporting the marketing of failed banks' assets because its existing procedures did not require the access verifications to be documented. As a result, there is an increased risk that individuals who no longer need access to information systems could accidentally or intentionally damage critical resources. Improvements are needed in the corporation's continuous monitoring program. To its credit, the corporation conducted control assessments of the major applications and general support systems we reviewed and addressed a weakness we previously identified by assessing security controls for two systems in accordance with its assessment schedule. In addition, the FDIC Office of Inspector General reported in November 2014 that FDIC had performed a number of continuous monitoring activities, developed an assessment methodology that defined a risk-focused approach for performing continuous monitoring on information systems, and reported various continuous monitoring metrics to senior managers. However, the office reported that the corporation had not yet developed a written, corporate-wide information security continuous monitoring strategy that included key elements from NIST guidance for continuous monitoring. The office recommended that FDIC develop and approve a written continuous monitoring strategy consistent with Office of Management and Budget and NIST guidance. Until this recommendation is addressed, FDIC will have limited assurance that the controls are operating effectively to protect its financial systems and information. Improvements are needed in the corporation's remedial action processes. Specifically, at the time of our review, 25 of the 285 remedial action plans applicable to agency information systems in our audit scope were past their expected closure dates by between about 2 weeks and 10 months, including 4 high-risk items. In addition, the FDIC Office of Inspector General reported in November 2014 that, as of July 2014, the corporation's remedial action management system contained a large number of high- and moderate-risk security vulnerabilities, many of which had planned corrective actions that were significantly past their scheduled completion dates. The Office also reported that FDIC has taken steps to improve its remedial action processes by creating a strategy outlining planned actions to address weaknesses in the corporation's plan of action and milestones processes. Nevertheless, until FDIC fully addresses shortcomings in its remedial action processes, the corporation's financial information and systems will remain at increased and unnecessary risk. Because the FDIC Office of Inspector General has already made recommendations to address shortcomings in FDIC's remedial action processes, we are not making additional recommendations in this area. An agency can protect the resources that support its critical operations and assets from unauthorized access, disclosure, modification, or loss by designing and implementing controls for segregating incompatible duties, identifying and authenticating users, restricting user access to only what has been authorized, encrypting sensitive data, auditing and monitoring systems to detect potentially malicious activity, managing and controlling system configurations, and conducting employee background investigations, among other things. Although FDIC had implemented numerous controls in these areas, weaknesses continue to challenge the corporation in ensuring the confidentiality, integrity, and availability of its information and information systems. To reduce the risk of error or fraud, duties and responsibilities for authorizing, processing, recording, and reviewing transactions should be separated to ensure that one user does not control all of the critical stages of a process. NIST SP 800-53 Revision 4 states that, to prevent malevolent activity without collusion, organizations should separate the duties of users as necessary and implement separation of duties through defined information system access authorizations. Additionally, consistent with NIST guidance, FDIC policy on access control for IT resources states that, where required, access controls shall be used to enforce the principle of separation of duties to restrict the level of access and ability provided to any single user. FDIC improved its implementation of segregation of duties controls by implementing four recommendations we had previously made pertaining to segregation of duties. For example, FDIC identified and documented incompatible roles and established processes and procedures to enforce segregation of duties for several applications and systems supporting financial processing. Additionally, the corporation had restricted users with access to source code for a financial system from having access to that system's production environment. As a result, FDIC has reduced its risk that users could conduct fraudulent activity by bypassing intended controls. Information systems need to effectively control user accounts and identify and authenticate users. Users and devices should be appropriately identified and authenticated through the implementation of adequate logical access controls. Users can be authenticated using mechanisms such as a password and user ID combination. Consistent with NIST SP 800-53 Revision 4, FDIC policy establishes minimum password length and complexity requirements. During 2014, FDIC improved controls for identifying and authenticating the identity of users by implementing two recommendations that we had previously made and that were still unresolved as of December 31, 2013. For example, FDIC had disallowed the use of default credentials for access to an application supporting FDIC's process for managing cash and investment transactions and had provided password lifetime and complexity controls to user accounts for a database that supported financial processing. However, FDIC did not fully implement password controls on the application supporting its process for managing cash and investment transactions in accordance with its policy. Specifically, passwords for the application did not comply with the minimum length standards established by FDIC's password policy. As a result, there is an increased likelihood that passwords could potentially be compromised and used to gain unauthorized access to financial information in the application. Authorization encompasses access privileges granted to a user, program, or process. It is used to allow or prevent actions by that user based on predefined rules. Authorization includes the principles of legitimate use and least privilege. NIST SP 800-53 Revision 4 recommends that organizations employ the principle of least privilege by allowing only authorized access for users (or processes acting on behalf of users) which are necessary to accomplish assigned tasks in accordance with organizational missions and business functions, periodically review the privileges assigned to users to validate the need for such privileges and reassign or remove privileges when necessary, and disable access to information systems within a defined period when individuals are terminated. NIST also recommends that organizations develop, approve, and maintain a list of individuals with authorized access to facilities where information systems reside, periodically review the list, and remove individuals from the list when access to the facility is no longer required. Consistent with NIST guidance, FDIC policy also states that access to IT resources shall be terminated immediately after an employee or contractor exits the FDIC and that periodic reviews of access settings shall be conducted to ensure that appropriate controls remain consistent with existing authorizations and current business needs. During 2014, FDIC improved controls for authorizing users' access by implementing 11 of 12 recommendations we had previously made pertaining to authorization controls and that were still unresolved as of December 31, 2013. For example, FDIC had ensured that accounts belonging to users who had not accessed certain applications and systems in a predefined period of time were disabled, discontinued the use of shared user IDs for several applications and databases supporting financial processing, removed certain users' excessive access to an application supporting FDIC's process for estimating potential losses from litigation, and restricted access to the network shared folder where annual financial statements and footnotes were maintained. Although improvements were made, FDIC did not always implement sufficient authorization controls. For example, as discussed earlier, the corporation did not recertify the need for data center access on a periodic basis to ensure that individuals' access remained appropriate, and did not always recertify account access to an application used by FDIC to store loan data for failing financial institutions. Additionally, the corporation had not yet completed actions to implement our prior-year recommendation to ensure that accounts for users who have access to the network and who have been separated from employment are removed immediately upon separation. Although these weaknesses did not materially impact FDIC's financial statements, they nevertheless increase the risk that individuals may have greater access to data centers or to financial information and systems than they need to fulfill their responsibilities, or that user accounts for departed individuals could be used to gain unauthorized access to systems that process sensitive financial information. Cryptography controls can be used to help protect the integrity and confidentiality of data and computer programs by rendering data unintelligible to unauthorized users and/or protecting the integrity of transmitted or stored data. Cryptography involves the use of mathematical functions called algorithms and strings of seemingly random bits called keys to, among other things, encrypt a message or file so that it is unintelligible to those who do not have the secret key needed to decrypt it, thus keeping the contents of the message or file confidential. NIST Special Publication 800-53 Revision 4 recommends that organizations employ cryptographic mechanisms to prevent unauthorized disclosure of information during transmission, encrypt passwords while being stored and transmitted, and establish a trusted communications path between users and security functions of information systems. The NIST standard for an encryption algorithm is Federal Information Processing Standard (FIPS) 140-2. FDIC improved its encryption controls by implementing our prior-year recommendation to use FIPS 140-2-compliant encryption for protection of authentication and session data for two systems supporting financial processing. However, FDIC had not completed actions to implement our prior recommendation to use FIPS-compliant encryption for all mainframe connections. As a result, sensitive data transmitted over these connections could be exposed to potential compromise. Audit and monitoring involves the regular collection, review, and analysis of auditable events for indications of inappropriate or unusual activity, and the appropriate investigation and reporting of such activity. Automated mechanisms may be used to integrate audit monitoring, analysis, and reporting into an overall process for investigation and response to suspicious activities. Audit and monitoring controls can help security professionals routinely assess computer security, perform investigations during and after an attack, and even recognize an ongoing attack. Audit and monitoring technologies include network and host-based intrusion detection systems, audit logging, security event correlation tools, and computer forensics. NIST SP 800-53 revision 4 states that organizations should review and analyze information system audit records for indications of inappropriate or unusual activity and report the findings to designated agency officials. Additionally, NIST states that audit records should contain information on individual audit events, including their type, source, and outcome, as well as the date and time that they occurred and any individuals or subjects associated with the events, among other things. FDIC improved its audit and monitoring controls by implementing three of six recommendations pertaining to audit and monitoring that we had previously identified and that were still unresolved as of December 31, 2013. For example, the corporation had ensured that log history for privileged accounts on key servers supporting financial processing were sufficient to aid incident response and forensic investigations. However, FDIC had not yet completed actions to address three weaknesses related to auditing and monitoring controls we previously identified. For example, the corporation had not yet ensured that, for certain systems, sensitive and high-risk events are consistently logged. In addition, FDIC did not always effectively monitor server security logs. Specifically, three servers supporting financial processing did not send log output to the corporation's centralized audit logging system. While the three outstanding recommendations and the additional weakness identified this year did not materially affect the corporation's financial statements, they nevertheless increase the risk that the incident response team would not detect malicious activity occurring on these systems supporting financial processing, or that sufficient data would not be available, hindering efforts to investigate potential security incidents after the fact. Configuration management is an important control that involves the identification and management of security features for all hardware and software components of an information system at a given point and systematically controls changes to that configuration during the system's life cycle. Configuration management involves, among other things, (1) verifying the correctness of the security settings in the operating systems, applications, or computing and network devices and (2) obtaining reasonable assurance that systems are configured and operating securely and as intended. Patch management, a component of configuration management, is important for mitigating the risks associated with software vulnerabilities. When a software vulnerability is discovered, the software vendor may develop and distribute a patch or work-around to mitigate the vulnerability. Without the patch, an attacker can exploit the vulnerability to read, modify, or delete sensitive information; disrupt operations; or launch attacks against other systems. NIST SP 800-53 Revision 4 states that organizations should establish a baseline configuration for the information system and its constituent components. Additionally, FDIC policy states that FDIC must establish and document mandatory configuration settings for IT products employed within the information system using information-system-defined security configuration checklists. Further, NIST SP 800-128 states that patch management procedures should define how the organization's patch management process is integrated into configuration management processes, how patches are prioritized and approved through the configuration change control process, and how patches are tested for their impact on existing secure configurations. Although improvements were made, shortcomings remain in FDIC's implementation of configuration management controls. FDIC had made progress toward addressing our prior recommendation to establish baseline configurations for all FDIC information systems by establishing agency-wide configuration settings for three platforms. According to officials, FDIC plans to establish baselines for the majority of its platforms by the end of 2015. In addition, FDIC had begun to implement actions intended to improve its process for managing vulnerabilities and applying patches, including establishing a Patch and Vulnerability Group to facilitate the identification and distribution of patches; however, the corporation had not yet completed actions to address our prior recommendation to apply patches to remediate known vulnerabilities in third-party software. These issues did not materially affect the corporation's financial statements. Nevertheless, until our previously identified weaknesses are addressed, FDIC faces increased risk that unpatched vulnerabilities in systems and applications could be exploited, potentially exposing the corporation's financial systems and information to unauthorized access or modification. Policies related to hiring and management of personnel are important considerations in securing information systems. If personnel policies are not adequate, an entity runs the risk of (1) hiring unqualified or untrustworthy individuals; (2) providing terminated employees opportunities to sabotage or otherwise impair entity operations or assets; (3) failing to detect continuing unauthorized employee actions; (4) lowering employee morale, which may in turn diminish employee compliance with controls; and (5) allowing staff expertise to decline. Personnel procedures should include contacting references, performing background investigations, and ensuring that periodic reinvestigations are consistent with the sensitivity of the position, in accordance with criteria from the Office of Personnel Management. FDIC policy states that personnel in moderate- and low-risk positions should be subject to a background reinvestigation every 5 and 7 years, respectively. In 2014, we reported that background reinvestigations were not being performed in accordance with FDIC policy; specifically, background reinvestigations had not been performed prior to Fall 2013 for users with a security rating less than high risk. During our current review, FDIC officials stated that their planned efforts to address this weakness will not be completed until April 2016. Until this weakness is fully addressed, FDIC will continue to face elevated risk that it will not identify malicious users of financial applications who would commit or attempt to commit fraud. FDIC had developed, documented, and implemented many elements of its corporate information security program. For example, the corporation had formalized a new policy for information security patch management and had ensured that administrators completed required training. In addition, FDIC had implemented and strengthened many information security controls over its financial systems and information. For example, the corporation had taken steps to improve controls for segregating incompatible duties, identifying and authenticating users, restricting user access to only what has been authorized, encrypting of sensitive data, and auditing and monitoring systems for potentially malicious activity, by addressing many of the weaknesses that we previously reported. However, management attention is still needed to address shortcomings in the corporation's information security program. For example, shortcomings in certain security policies and procedures led to weaknesses in conducting and documenting reviews of user access. Additionally, further actions are needed to address weaknesses in identification and authentication, authorization, and audit and monitoring controls. Given the important role that information systems play in FDIC's internal controls over financial reporting, it is vitally important that FDIC address the remaining weaknesses in information security controls--both old and new--as part of its ongoing efforts to mitigate the risks from cyber attacks and to ensure the confidentiality, integrity, and availability of its financial and sensitive information. Although we do not consider these weaknesses individually or collectively to be either a material weakness or a significant deficiency for financial reporting purposes, we are nevertheless making five recommendations in a separate product with limited distribution for FDIC to address new weaknesses we identified in this review. Until FDIC takes further steps to mitigate these weaknesses, the corporation's sensitive financial information and resources will remain unnecessarily exposed to increased risk of inadvertent or deliberate misuse, improper modification, unauthorized disclosure, or destruction. To help improve the corporation's implementation of its information security program, we recommend that the Chairman of FDIC direct the Chief Information Officer to take the following two actions: Ensure that physical access policies require periodic review of access to all FDIC data centers. Update existing procedures to require that access verifications to the system supporting the marketing of failed banks' assets be documented. Additionally, in a separate report with limited distribution, we are making five recommendations consisting of actions to implement and correct specific information security weaknesses related to identification and authentication, authorization, and audit and monitoring. In providing written comments (reprinted in app. II) on a draft of this report, FDIC stated that corrective actions for the two new recommendations have already been or will be completed during 2015. FDIC also provided an attachment detailing its actions to implement our recommendations as well as technical comments that we addressed in our report as appropriate. We are sending copies of this report to interested congressional parties. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you have any questions regarding this report, please contact Gregory C. Wilshusen at (202) 512-6244 or Dr. Nabajyoti Barkakati at (202) 512- 4499. We can also be reached by e-mail at [email protected] and [email protected]. Key contributors to this report are listed in appendix III. The objective of this information security review was to determine the effectiveness of the Federal Deposit Insurance Corporation's (FDIC) controls in protecting the confidentiality, integrity, and availability of its financial systems and information. The review was conducted as part of our audit of the FDIC financial statements of the Deposit Insurance Fund and the Federal Savings and Loan Insurance Corporation Resolution Fund. The scope of our audit included an examination of FDIC information security policies and plans; controls over key financial systems; and interviews with agency officials in order to (1) assess the effectiveness of corrective actions taken by FDIC to address weaknesses we previously reported and (2) determine whether any additional weaknesses existed. This work was performed in support of our opinion on internal control over financial reporting as it relates to our audits of the calendar year 2014 and 2013 financial statements of the two funds administered by FDIC. GAO used an independent public accounting firm, under contract, to evaluate and test certain FDIC information systems controls, including the follow-up on the status of FDIC's corrective actions during calendar year 2014 to address open recommendations from our prior years' reports. We agreed on the scope of the audit work, monitored the firm's progress, and reviewed the related audit documentation to determine whether the firm's findings were adequately supported. To determine whether controls over key financial systems and information were effective, we considered the results FDIC's actions to mitigate previously reported weaknesses that remained open as of December 31, 2013, and performed audit work at FDIC facilities in Arlington, Virginia. We concentrated our evaluation primarily on the controls for systems and applications associated with financial processing. Our selection of the systems to evaluate was based on consideration of systems that directly or indirectly support the processing of material transactions that are reflected in the funds' financial statements. Our audit methodology was based on the Federal Information System Controls Audit Manual, which contains guidance for reviewing information system controls that affect the confidentiality, integrity, and availability of computerized information. Using standards and guidance from the National Institute of Standards and Technology as well as FDIC's policies and procedures, we evaluated controls by examining access responsibilities to determine whether incompatible functions were segregated among different individuals; reviewed password settings to determine if password management was being enforced in accordance with agency policy; analyzing user system authorizations to determine whether users had more permissions than necessary to perform their assigned functions; observing methods for providing secure data transmissions to determine whether sensitive data were being encrypted; assessing configuration settings to evaluate settings used to audit inspecting vulnerability scans for in-scope systems to determine whether patches, service packs, and hot fixes were appropriately installed on affected systems. Using the requirements of the Federal Information Security Management Act of 2002, which establishes elements for an agency-wide information security program, we evaluated FDIC's implementation of its security program by analyzing security plans for key financial systems to determine whether management, operational, and technical controls had been documented and whether security plans had been updated regularly in accordance with NIST requirements; reviewing training records for administrators to determine if they had received training appropriate to their responsibilities; reviewing information security policies to determine whether they were adequately documented and implemented; examining an FDIC Office of Inspector General report for information on FDIC's implementation of risk management policies; reviewing ongoing assessments of security controls to determine if they had been completed as scheduled; reviewing an FDIC Office of Inspector General report for information on the corporation's information security continuous monitoring program; examining remedial action plans to determine whether FDIC addressed identified vulnerabilities in a timely manner; and examining an FDIC Office of Inspector General report for information on findings related to FDIC's remedial action process. To determine the status of FDIC's actions to correct or mitigate previously reported information security weaknesses, we reviewed prior GAO reports to identify previously reported weaknesses and examined FDIC's corrective action plans to determine which weaknesses FDIC had reported as being corrected. For those instances where FDIC reported it had completed corrective actions, we assessed the effectiveness of those actions. We performed our work from June 2014 to April 2015 in accordance with U.S. generally accepted government auditing standards. We believe that our audit work provided a reasonable basis for our conclusion in this report. In addition to the individuals named above, Gary Austin and Nick Marinos (assistant directors), William Cook, Thomas J. Johnson, George Kovachick, and Lee McCracken made key contributions to this report.
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FDIC has a demanding responsibility enforcing banking laws, regulating financial institutions, and protecting depositors. Because of the importance of FDIC's work, effective information security controls are essential to ensure that the corporation's systems and information are adequately protected from inadvertent or deliberate misuse, improper modification, unauthorized disclosure, or destruction. As part of its audits of the 2014 financial statements of the Deposit Insurance Fund and the Federal Savings and Loan Insurance Corporation Resolution Fund administered by FDIC, GAO assessed the effectiveness of the corporation's controls in protecting the confidentiality, integrity, and availability of its financial systems and information. To do so, GAO examined security policies, procedures, reports, and other documents; tested controls over key financial applications; and interviewed FDIC personnel. The Federal Deposit Insurance Corporation (FDIC) has implemented numerous information security controls intended to protect its key financial systems; nevertheless, weaknesses remain that place the confidentiality, integrity, and availability of financial systems and information at risk. During 2014, the corporation implemented 27 of the 36 GAO recommendations pertaining to previously reported security weaknesses that were unaddressed as of December 31, 2013; actions to implement the remaining 9 recommendations were in progress. The table below details the status of these recommendations. Although FDIC developed and implemented elements of its information security program, shortcomings remain in key program activities. For example: FDIC had taken steps to improve its security policies and procedures, but important activities were not always required by its policies. For example, although FDIC had a policy on controlling physical access to its primary data center, the policy did not apply to all FDIC data centers. FDIC did not consistently remediate agency-identified weaknesses in a timely manner. However, to its credit, the corporation created a strategy outlining planned actions to address weaknesses in its remedial action processes. Additionally, FDIC has designed and documented numerous information security controls intended to protect its key financial systems; nevertheless, controls were not always consistently implemented. For example, the corporation had not always (1) ensured that passwords for a financial application complied with FDIC policy for password length or (2) centrally collected audit logs on certain servers. These weaknesses individually or collectively do not constitute either a material weakness or a significant deficiency for financial reporting purposes. Nonetheless, by mitigating known information security weaknesses and consistently applying information security controls, FDIC could continue to reduce risks and better protect its sensitive financial information and resources from inadvertent or deliberate misuse, improper modification, unauthorized disclosure, or destruction. GAO is making two recommendations to FDIC to improve its implementation of its information security program. FDIC concurred with GAO's recommendations. In a separate report with limited distribution, GAO is recommending that FDIC take five specific actions to address weaknesses in security controls.
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DOD defines category I items as those that are highly explosive, extremely lethal, portable, and a potential threat if they were to be used by unauthorized individuals or groups. Category I missiles and rockets are nonnuclear and handheld. The missiles are the Stinger, Dragon, and Javelin; the rockets are the light antitank weapon (LAW) and the AT4. The Stinger can destroy aircraft in flight, and the Dragon and Javelin missiles and the LAW and AT4 rockets can pierce armor. Category II munitions and explosives are hand or rifle grenades, antitank or antipersonnel mines, C-4 explosives, TNT, and dynamite. See appendix I for pictures of the category I missiles and rockets. In September 1994, we reported that many serious discrepancies in the quantities, locations, and serial numbers of handheld category I missiles indicated inadequate management oversight for these lethal weapons. Further, we reported that the services did not know how many handheld missiles they had in their possession because they did not have systems to track by serial numbers the missiles produced, fired, destroyed, sold, and transferred. At that time, we could not determine the extent to which any missiles were missing from inventory. We also stated that security measures were not uniformly applied at all locations where missiles were stored. Our report contained several recommendations to the Secretary of Defense to correct these problems. In addition, the Army Inspector General conducted two follow-up studies and found similar problems. DOD has taken actions to correct the deficiencies cited in our September 1994 report. In that report, we recommended that DOD conduct independent worldwide inventories of category I missiles to establish a new baseline number. DOD established the new baseline number as of December 31, 1994, as shown in table 1. The Army, the Navy, and the Marine Corps are the primary purchasers of category I missiles; consequently, our review and the prior report focused on their inventories. Our prior report also recommended that DOD establish procedures to track, document, and report additions to and deletions from the new inventory baseline. Since that time, the Army has begun modifying its automated system--the Standard Army Ammunition System--to report changes to the inventories of Stinger, Dragon, and Javelin missiles by serial number. The modification to the system is designed to provide item managers at all Army commands with 24- to 72-hour notification of changes to the inventory. In the interim, the Army has implemented manual reporting procedures to track handheld missiles on a monthly basis. This temporary system has a 30- to 45-day time lag in reporting changes to the missile inventory. The Navy and the Marine Corps have also implemented automated systems to track category I missiles. The Navy's automated system is intended to provide information within 24 to 48 hours on where a given missile is located, and the Marine Corps' system is intended to provide such information within 24 hours. In addition, our prior report recommended that DOD establish procedures to include a random sampling of missile containers during inventories to ensure that they contain missiles. The services have since established procedures to verify the presence of missiles inside their containers during maintenance checks. Finally, our report recommended that DOD reemphasize security procedures and reexamine the current security policy. In response, the services reemphasized physical security regulations for all category I munitions. Although the services established a baseline inventory count of category I missiles as of December 31, 1994, updates to the baseline continue to be made as additional missiles are located or errors are discovered. Discrepancies existed at some sites between records of the number of category I missiles in their inventories and our physical count, but we were able to reconcile the discrepancies manually. Even though missile containers are being opened and serial numbers are being verified, random checks are not being performed because the services stated that they would be too costly. Also, DOD has not fully complied with physical security regulations at all of its sites. Army officials stated that, because of prior reporting, weaknesses involving the handheld missile inventory, they cannot fully assure that the category I missile baseline is completely accurate. The baseline had to be updated several times since its establishment because additional missiles were located. In February 1996, the Army discovered it had not counted 3,949 missiles during the initial inventory, which increased its baseline by almost 7 percent. Some of the missiles had been in transit and were not counted by either the shipping or receiving parties. Other missiles were being used by the Signal Communications Electronics Command in Fort Monmouth, New Jersey, for test purposes but were not included in the initial baseline inventory. A Stinger missile had been at a storage facility in Kuwait since September 1992. Pakistanis discovered the missile during post-Desert Storm cleanup operations, and Kuwait did not return it to the United States until April 1996. However, the Army had previously reported that 6,373 Stinger missiles were shipped to and subsequently sent back from the Persian Gulf. Thus, the Army did not realize that this missile had been missing from inventory until after it was discovered. Also, errors in the initial inventory count have affected the baseline. For example, two missiles on the Army item manager's contractor database actually belonged to another country through the Foreign Military Sales program. These missiles, which were included in the baseline number, were at the contractor's facility for repair. At the time of our visit, one of the missiles was still at the facility, and the other had been fixed and returned. The item manager stated that the contractor was not reporting to her the number of missiles received, completed, and returned. However, as a result of our finding, the contract has been modified to provide the item manager a monthly report of the missiles received at the contractor's facility and the missiles transferred from the contractor's facility to a DOD facility. In our September 1994 report, we noted that records of the number of category I missiles in some sites' inventories did not match our physical count. This problem still exists at the Army and Marine Corps sites we visited, but we were able to reconcile the discrepancies manually. At a Navy storage site, we found no discrepancies between the item manager's records and our physical count. At the Army military storage location we visited, we found discrepancies between the item manager's records and the missiles we counted at the storage facility. All of the missiles that were on the item manager's records, but not at the storage location, had been issued to units for training. We used the Army's monthly interim reports to reconcile the discrepancies. We verified that these missiles had in fact been expended during training exercises. The item manager still had the missiles on the records because of the lag time in receiving the interim reports. We also found five discrepancies with our missile count at a Marine Corps site that we visited. All of the discrepancies involved the serial numbers. One missile was not on the item manager's records because the wrong serial number was keyed into the system. Two missiles were upgraded and their serial numbers changed; the new serial numbers, however, were not yet changed on the database that we used to conduct our reconciliation. Two of the six digits in one missile's serial number were apparently transposed on the container. Finally, one missile's correct serial number was in both the depot's and item manager's systems, but the wrong number was apparently stenciled on the container. We also found discrepancies at two contractor facilities where both the Stinger and Dragon were being upgraded or modified. Most of the discrepancies were due to the lag between the time we received the database and the time we performed our physical count. Many missiles on the item manager's records had already been sent to the DOD storage sites by the time we conducted our inventory count. We verified that the DOD storage sites had received the missiles. However, we found four additional missiles at one of the contractor facilities that were not on the item manager's records. The item manager had recorded that one of the missiles, still at the contractor's facility, was made non-lethal (demilitarized). Eight additional missiles were also listed as being at that contractor's facility, but six were actually at another location, and two belonged to other countries, as stated previously, under the Foreign Military Sales program. Finally, we noted a practice during this review, in addition to those that have been previously mentioned, that complicates serial number tracking: giving new serial numbers to missiles that have been upgraded. Stinger missiles that are undergoing a technical upgrade will be given new serial numbers once the upgrade has been completed. According to a Production Assurance and Test Division official, U.S. Army Missile Command, the justification for changing the serial numbers was that the missiles would, in effect, become new missiles, since they would be broken down into major component parts and reassembled with different components. Both the old and new serial numbers would then be cross-referenced. However, a Quality Assurance official, U.S. Army Missile Command, stated that he had opposed changing the serial numbers because it would be harder to track the life cycle of the missiles and that cross-referencing old and new serial numbers would create additional bookkeeping and the potential for transposition and other errors. Instead of changing the serial numbers, the upgraded missiles could be distinguished by adding a suffix to the serial number. Even though the services have established procedures to verify the presence of missiles inside their containers, a representative sample is not always being selected, according to the services, because it would be too costly. For example, an Army official said that during maintenance checks only the missiles that are easy to access in a storage facility are selected to be opened. This methodology does not provide complete assurance that missiles are not being stolen because it may not deter insider theft. Moreover, opening a representative sample of missile containers helps to obtain assurance that all reported missiles do exist, are held by the services, and are owned by DOD. This check improves the accuracy of the missile inventory reports for item managers as well as DOD's financial statements required by the CFO Act. We opened 108 missile containers to verify the presence of the correct missile in each container. Figures 1 and 2 show opened Stinger and Dragon missile containers. All containers had a missile, but the serial number on one container did not match the one on the missile. Neither the item manger nor the site officials could determine the reason for the mismatch. In another instance, a contractor official discovered that a missile going through an upgrade did not have the same serial number as its container. The correct container was at the storage depot, and the missile inside belonged in the container located at the contractor's facility. Also, according to an Army policy notice, the sample size and the results of missile container checks are to be reported to the item managers. However, we found that Army item managers were not receiving this information. As a result of our finding, the Chief of Staff, Army Materiel Command, issued a memorandum reemphasizing the reporting requirement. Some of the sites we visited were not in full compliance with service or DOD security regulations. Personnel at one Army location were not inspecting all vehicles leaving the storage area. The Army Inspector General's 1996 report also noted that not all sites were fully enforcing physical security regulations. The Army Inspector General included the National Guard in its follow-up review of handheld missiles. In its report, the Inspector General noted that National Guard sites were storing category I Dragon missiles in violation of DOD and Army physical security policies. Both of these policies permit the National Guard to use the missiles for training purposes only and store them temporarily at Guard installations. However, the Inspector General found that some sites had the Dragon missile in storage for many years. As a result of the Inspector General's report, the Army National Guard was directed to return the Dragon missiles to the storage sites. Since that time, all missiles have either been returned or used for training. The National Guard requested approval to permanently store Dragon missiles at selected sites. The Army denied this request because some storage sites were not in compliance with its physical security regulations. For example, armed guards were not used to prevent unauthorized access of the storage structures when intrusion detection systems were inoperable. However, if a site can meet physical security regulations, the Army stated it would reconsider a request only to temporarily store Dragon missiles at selected sites. Contractors are required to follow DOD Manual 5100.76, Physical Security of Sensitive Conventional Arms, Ammunition, and Explosives, for their security guidelines. These regulations are not as stringent as the Army's physical security regulations. For example, Army regulations require that storage sites be secured with two locks and keys and that no one person have possession of both keys at the same time. DOD regulations permit one lock and key, which allows single individuals access to storage sites. We noted the following conditions, among others, at one of the contractor facilities we visited: The entrance to the storage area was not locked. No guard was available to check vehicles entering or exiting the storage area. There was no clear zone outside the security fence. (This area was cleared, however, after our visit.) One employee had keys to operate the locks to the storage site, security fence gate, and gate to a perimeter road that led to the main road. This employee also had the code for calling in to security to deactivate the intrusion detection system. We observed this employee leave the storage site in a truck, proceed to unlock the perimeter gate, and exit. We believe that allowing one person such access leaves the missiles more vulnerable to theft. After bringing this concern to the attention of the Commander, Army Materiel Command, a memorandum was issued requiring that the security requirements of Army Regulation 190-11 and the Army Materiel Command supplement requiring that storage sites be secured with two locks and keys, among other things, be included in contracts for activities involving category I munitions. The services have different procedures and requirements for maintaining oversight of AT4 and LAW rockets. The Army and the Navy manage AT4 and LAW rockets by production lot and quantity. The Marine Corps maintains oversight and visibility of AT4 rockets (it does not have any LAW rockets) by serial numbers. Although we found no missing rockets in our physical count, three AT4 rockets that were sent to the Persian Gulf for Operation Desert Storm are missing from the Marine Corps' inventory. The investigations were closed on these three missing rockets, but no conclusions were reached by the Naval Criminal Investigative Service on whether the rockets were missing, lost, or stolen. The Marine Corps adjusted their physical inventory to reflect the decrease of the three AT4 rockets. However, the serial numbers will remain within its accounting and reporting system should these rockets be recovered. The Army manages AT4 and LAW rockets by production lot and quantity. However, the Army item manager's oversight of the AT4 rocket extends only to the quantities that are issued to the various major commands. Each major command then redistributes AT4 rockets to the installations within that command, and oversight for installation inventories is maintained by the major command. The item manager, therefore, does not know the quantities of AT4 rockets at the installation level. The Army is developing a system, called Unique Item Tracking, for all of its category I munitions, including the AT4. This system is intended to provide weekly reports showing the serial number of each munition by location. The purpose of the system is to identify the last accountable location of a weapon in the event that it is lost or stolen and recovered by law enforcement or other organizations. However, the system will not include the LAW rocket, since it is being phased out of the inventory, and most LAWs do not have serial numbers. The Navy also manages AT4 and LAW rockets by production lot and quantity. The Navy item manager does not oversee the rockets by serial number because it is not a requirement. This situation could be problematic if a rocket is missing because the Navy does not have a system in place to identify the missing rocket by serial number. However, some storage locations report AT4 rockets by serial numbers in addition to production lot and quantity. We conducted a physical count of AT4 and LAW rockets at Army, Navy, and Marine Corps storage sites and were able to match the physical count with the item managers' records. We also opened 89 containers to verify the presence and correct serial number of each rocket. We did not note any violations in the physical security regulations at the sites we visited. Another issue related to accountability over sensitive defense material relates to the financial management system. In accordance with the CFO Act of 1990, each agency is to establish an integrated financial management system. Establishing an integrated, general ledger controller system, which ties together DOD's accounting systems with its logistics and other key management systems, is critical if DOD is to effectively ensure oversight and control over its sensitive materials. For example, an integrated accounting and logistics system will automatically update both sets of records when missiles or other sensitive inventory items are purchased and received. In addition, carrying out rudimentary controls, such as periodically reconciling DOD's accounting and logistics records, will help oversee and identify any unaccounted for in-transit items. Audit reports have repeatedly pointed out, however, that DOD's existing accounting and related systems, including its logistics systems, are not integrated and lack a general ledger. As part of DOD's efforts to reform its financial operations, the DOD Chief Financial Officer has stated that DOD will develop property accountability systems that will meet the federal government's system requirements. If properly designed and implemented as part of a DOD-wide integrated financial management systems structure called for under the CFO Act, these systems will be integral to ensuring effective accountability over DOD's sensitive inventories of missiles and rockets and other sensitive material. We did not find any documentation that terrorists or other extremists had stolen category I handheld missiles or rockets or category II grenades, mines, and explosives from DOD arsenals. Intelligence and DOD officials said that it is more likely that terrorists would seek handheld surface-to-air missiles or other munitions from sources other than DOD arsenals. International terrorist groups receive financial aid and other forms of assistance from several nations. The Secretary of State has determined that these countries have repeatedly provided support for acts of international terrorism by supplying, training, supporting, or providing safehaven to known terrorists. Intelligence officials told us that there are a variety of places around the world for terrorists to obtain weapons. For example, several countries besides the United States, including Bulgaria, China, Egypt, France, Japan, Czech Republic, Pakistan, Poland, Romania, Sweden, and the United Kingdom produce handheld surface-to-air missiles. Terrorists tend to favor small conventional weapons--handguns, rifles, grenades, machine guns, or explosives--because they can be easily transported and hidden from view. C-4 plastic explosives can be purchased from several countries. In addition, law enforcement officials told us that extremist groups have made their own C-4. Terrorists have used plastic explosives. For example, less than one pound of Semtex, similar to C-4, was used to bring down Pan Am Flight 103 over Lockerbie, Scotland, in 1988. There have been thefts of category II munitions and explosives by uniformed and DOD civilian employees that involved quantities of items such as grenades, C-4 explosives, and TNT. We previously reported that military inventories remain more vulnerable to employee theft than outside intrusion. Table 2 shows the types and quantities of category II items reported missing, lost, or stolen from 1993 to 1996. Some of the weapons were recovered. According to a law enforcement official, DOD could not determine whether any of the unrecovered stolen DOD weapons were in the hands of terrorists or other extremists. We recognize that DOD has made significant strides in gaining visibility and accountability over its handheld missile inventory. DOD has implemented several recommendations from our prior work and has already taken action to correct some of the problems we cite in this report. We believe, however, that DOD can take some additional actions to further improve physical security and ensure accurate reporting of its inventory of missiles and rockets. Therefore, we recommend that the Secretary of Defense direct the Secretaries of the Army, the Navy, and the Air Force and the Commandant of the Marine Corps to develop a cost-effective procedure for periodically revalidating the category I inventory baseline by, for example, matching item managers' records with site records annually at a representative sample of storage sites; develop a cost-effective procedure for opening containers of missiles and rockets, for example, by selecting a representative sample of pallets, rather than individual missiles and rockets, to inspect; manage category I rockets by serial number so that the item managers will have total visibility over the numbers and locations of rockets; establish procedures for ensuring that serial numbers are not changed during upgrades and modifications of category I missiles and rockets; and continue to emphasize compliance with physical security requirements. In commenting on a draft of this report, DOD concurred with all of our recommendations (see app. II). DOD noted that it had already begun taking action to address several of the recommendations. For example, the services have developed or are developing procedures for revalidating the category I baseline. DOD also plans to issue guidance to manage category I rockets by serial numbers, develop procedures to ensure that serial numbers are not changed during upgrades and modifications of category I missiles and rockets, and continue to emphasize compliance with physical security requirements. DOD concurred with our recommendation to develop a cost-effective procedure to open containers of missiles and rockets. DOD's response also cited various existing regulations, which require that samples selected for inspection be representative of the entire lot under evaluation. We discussed the comments with an official from the Office of the Secretary of Defense and pointed out that during our review we found that this was not always being done. For example, an Army official told us that some inspectors only select and inspect the missiles that are easy to access in a storage facility. The Office of the Secretary of Defense officials agreed to issue guidance reinforcing the need to follow these procedures. We met with officials from the Office of the Secretary of Defense, the Army, the Navy, the Marine Corps, and the National Guard regarding the oversight and physical security of category I missiles and rockets and the physical security of category II weapons. We discussed the actions taken to correct problems cited in our 1994 report. We also met with officials from the intelligence and law enforcement agencies to discuss the vulnerability of category I missiles and rockets to theft by terrorists and other extremists and obtain information on category I and category II weapons that are missing, lost, or stolen. We excluded the Air Force because of the limited number of missiles and rockets in its possession and because that service was not included in our prior report. Based on initial discussions on the scope of our work, the Army Inspector General added the National Guard to its follow-up review of handheld missiles. Because the Inspector General went to the same sites that we planned to visit, we did not visit any National Guard sites. To determine whether changes made to the oversight of category I missiles have improved the services' visibility over these missiles, we physically counted about 15,000 Stinger, Dragon, and Javelin missiles by serial number at selected Army, Navy, and Marine Corps storage sites and two contractor facilities. We selected sites that had a comparatively high incidence of problems found during our first review. We opened 108 missile containers to ensure that a missile was in the container. To inventory the missiles, we used the item managers' automated database. We then entered this information into a notebook computer. On site, as we physically inventoried, we entered into the computer the serial number of each of the missiles at that location. This information was automatically compared against the database from the item managers. Missiles that were not in the database or at the storage location were reconciled with site and item manager information. We also counted 6,637 AT4 and LAW rockets at randomly selected Army, Navy, and Marine Corps storage sites. At these locations, we opened 89 containers (which contained different quantities of rockets depending on the type) and physically verified the presence of 403 AT4s and 261 LAWs. We used the same procedures as the missiles to inventory the rockets at the Marine Corps storage site. At the Navy and the Army rocket storage sites, an automated database of serial numbers was not available from the item managers. At these two locations, we matched the inventory count against the item manager's or major command's records. We tested the reliability of the systems' data by physically counting the missiles and rockets and matching the count to the item managers' records; however, we did not test whether the information was provided to the item managers within 24 to 48 hours. We conducted our review from September 1996 to July 1997 in accordance with generally accepted government auditing 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 Secretaries of Defense, the Army, the Navy, and the Air Force; the Commandant of the Marine Corps; the Director, Office of Management and Budget; and other interested congressional committees. Copies will also be made available to others upon request. Please contact me on (202) 512-8412 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix III. Sandra D. Epps Tracy W. Banks 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. 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Pursuant to a congressional request, GAO reviewed the actions taken by the Department of Defense (DOD) to correct weaknesses cited in GAO's September 1994 report on the military services' most sensitive category I missiles and to determine if problems still remained. GAO also reviewed DOD's oversight of category I rockets and the vulnerability of category I missiles and rockets and category II grenades, mines, and explosives to theft from U.S. military arsenals by terrorists or extremists. GAO noted that: (1) DOD has taken actions to improve the oversight of category I handheld missiles; (2) it conducted a worldwide inventory of handheld missiles; established a new baseline inventory count as of December 31, 1994; and implemented procedures to track changes to the baseline; (3) DOD also established procedures to check containers to ensure that each had a missile and verify serial numbers; (4) DOD reemphasized physical security procedures to be followed at its facilities; (5) despite DOD's progress toward better oversight of handheld missiles, some weaknesses remain; (6) adjustments continue to be made to the baseline as additional missiles are located and errors are discovered; (7) discrepancies still exist between records of the number of missiles and GAO's physical count; (8) the missiles may be vulnerable to insider theft because DOD is not always selecting a representative sample of containers to be opened during maintenance checks; (9) some facilities are not fully complying with DOD physical security requirements; (10) although GAO was able to match the physical count of AT4 and light antitank weapon (LAW) rockets at each site visited with the item manager's records, GAO also found oversight weaknesses with the category I rockets; (11) the Marine Corps reported three AT4 rockets missing from shipments returning from the Persian Gulf after Operation Desert Storm; (12) the Naval Criminal Investigative Service reached no conclusions on whether the rockets were missing, lost, or stolen, and the investigations were closed; (13) the services have different procedures and requirements for maintaining oversight of the rockets; (14) DOD's accounting and related systems, including its logistics systems, are not integrated; (15) in accordance with the Chief Financial Officer's (CFO) Act of 1990, each agency is to establish an integrated financial management system; (16) establishing an integrated, general ledger controller system, which ties together DOD's accounting systems with its logistics and other key management systems, is critical if DOD is to effectively ensure oversight and control over its sensitive material; (17) GAO did not find any documentation that terrorists or other extremists had stolen any category I handheld missiles or rockets or category II munitions or explosives from DOD arsenals; (18) some weapons continue to be vulnerable to insider theft as quantities of various category II items have been stolen by uniformed or DOD civilians; and (19) DOD and intelligence sources did not have any indication that the stolen items were intended for terrorists.
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Uranium undergoes a number of processing steps in the production of nuclear fuel. To ensure its efficiency and ability to be used safely in nuclear reactors, nuclear fuel must meet rigorous technical specifications. For example, if certain contaminants are present in the material, they must be at or below specified levels so as not to harm workers or the environment or contaminate equipment. Technetium, a radioactive metal that is produced as a by-product of fission in a nuclear reactor, is considered a contaminant by commercial specifications for nuclear fuel. Its presence in the nuclear fuel production process can contaminate equipment, lead to increased worker radiation doses, and raise environmental concerns. Therefore, specifications require that uranium that is to be enriched should contain no more technetium than one part per billion. USEC first discovered that some of the uranium DOE previously transferred to the corporation may have been contaminated with technetium in March 2000, when DOE requested that USEC sample uranium storage cylinders for technetium content. DOE believed that, during the 1970s, technetium-contaminated recycled uranium that it processed through certain production lines at the Paducah plant inadvertently left residual amounts of technetium in certain equipment. Subsequent processing of uranium using that equipment contaminated the material. USEC was able to determine that up to 9,550 metric tons of the 45,000 metric tons of uranium that DOE had transferred to the corporation prior to privatization had been processed through the contaminated production lines at Paducah and therefore was contaminated with technetium. USEC's initial sampling indicated technetium contamination levels ranging from 11 to 148 parts per billion, all in excess of the commercial specification of one part per billion. In addition, DOE was able to determine that about 5,500 metric tons of uranium in its inventory had also been processed through the contaminated production lines at the Paducah plant and was also likely to be contaminated with technetium. USEC conducts uranium decontamination work using equipment at the Portsmouth plant. Figure 1 illustrates the decontamination process. Through the end of February 2006, USEC reported that about 960 metric tons, or 10 percent, of the 9,550 metric tons of technetium-contaminated uranium transferred to it by DOE prior to privatization remains to be decontaminated. DOE estimates USEC will finish decontaminating this uranium by the end of December 2006. In total, USEC has decontaminated about 6,500 metric tons of its contaminated uranium. Specifically: USEC decontaminated nearly 3,600 metric tons of its inventory between June 2002 and December 2003 under the terms of the June 2002 agreement between USEC and DOE. Under this agreement, DOE compensated USEC for its decontamination costs by taking title to some of USEC's depleted uranium, reducing USEC's costs for eventually disposing of the material. About 2,050 metric tons of USEC's uranium were decontaminated between December 2003 and December 2004 under the terms of the April 2004 agreement between USEC and DOE. DOE compensated USEC for its decontamination costs using appropriated funds. USEC decontaminated approximately 842 metric tons of its uranium between December 2004 and February 2006 under the December 2004 agreement, which provided that USEC cover its decontamination costs using proceeds from the commercial sale of clean uranium transferred from DOE's inventory to USEC for sale. The June 2002 agreement between DOE and USEC also provided for DOE to replace some of USEC's contaminated uranium with clean uranium from DOE's inventory. In October 2004, DOE exchanged 2,116 metric tons of USEC's contaminated uranium with an equal amount of clean uranium from its inventory. In addition to USEC's inventory, since October 2004 USEC has been decontaminating about 7,600 metric tons of contaminated uranium in DOE's inventory: 2,116 metric tons exchanged with USEC in October 2004 and 5,517 metric tons of contaminated uranium that were already in DOE's inventory. As of February 28, 2006, USEC had decontaminated 2,065 of the 2,116 metric tons it transferred to DOE in October 2004 and 248 of the 5,517 metric tons that was already in DOE's inventory. DOE estimates USEC will finish decontaminating the 5,327 metric tons of contaminated uranium that remain in DOE's inventory by the end of October 2008. Figures 2 and 3 illustrate the amount of technetium-contaminated uranium in USEC's and DOE's inventories. From June 2002 through the end of February 2006, USEC had invoiced DOE for decontamination costs totaling about $152 million. Of this amount, about $67 million was spent for direct costs, such as labor and decontamination equipment and supplies, and about $85 million was spent for indirect costs. These indirect costs included utilities and other plant overhead costs and administrative costs. Table 1 details USEC's decontamination costs. DOE has compensated USEC for its decontamination services in three ways. First, DOE has paid USEC about $62 million in appropriated funds. Second, DOE officials told us that the department has taken title to about 30,000 metric tons of USEC's depleted uranium, which DOE estimated in 2004 would cost the department about $27 million to convert to a more stable form. Third, DOE compensated USEC for its remaining decontamination services using the proceeds from the commercial sale of clean uranium transferred from DOE to USEC pursuant to the December 2004 agreement between USEC and DOE. In total, DOE has transferred about 1,100 metric tons of clean uranium to USEC for commercial sale under the December 2004 agreement. DOE transferred about 900 metric tons of clean uranium to USEC in December 2004, which USEC sold to four different buyers, resulting in total proceeds of $62 million. DOE officials told us that increases in market prices for uranium resulted in more money than DOE originally estimated. These additional proceeds allowed USEC to decontaminate about 280 metric tons more uranium than DOE originally believed the sale would fund. By February 2006, however, USEC had completely spent the proceeds generated from the sale of the 900 metric tons of clean uranium. Therefore, DOE transferred an additional 200 metric tons of clean uranium to generate additional funds for decontamination. USEC sold this uranium in February 2006, resulting in total proceeds of $22.4 million, which USEC expects will fund its decontamination services through June 2006. In addition, instead of transferring clean uranium to USEC and having USEC conduct additional uranium sales, DOE sold 200 metric tons of clean uranium in April 2006 to obtain money to compensate USEC for its decontamination services. These sales resulted in total proceeds of $23.4 million, which USEC expects will fund its decontamination services from July 2006 through November 2006. According to DOE officials, the department itself will likely conduct additional uranium sales to fund USEC's decontamination services, rather than transferring additional uranium to USEC. DOE takes several steps to oversee USEC's uranium decontamination activities, including reviewing monthly reports submitted by USEC detailing decontamination progress and costs and tracking the proceeds USEC generates from selling clean uranium that DOE has transferred to the corporation under the December 2004 agreement. DOE has also contracted with DCAA to audit USEC's decontamination costs. However, DOE and DCAA have been unable to complete some of their oversight steps because they have been unable to obtain some financial and other data from USEC in a timely manner. As a result, DOE has some concerns about whether USEC consistently conducts decontamination work in a cost-effective manner and is currently uncertain whether the compensation the department provided the corporation matches USEC's actual decontamination costs. DOE takes several steps to oversee USEC's uranium decontamination activities. For example, DOE reviews a number of monthly reports that USEC submits to the department. These monthly reports contain detailed information on USEC's uranium decontamination activities. Specifically, these reports include the following: Information on the amount of uranium decontaminated each month, USEC's estimate of the remaining contaminated uranium in USEC's and DOE's inventories, and data on the level of technetium contamination for uranium storage cylinders before and after processing. These data verify whether the uranium in each cylinder meets commercial specification after it has been through the decontamination process. Summary data on USEC's monthly decontamination costs as well as USEC's estimate of the project's total cost when the decontamination is completed. USEC also submits a breakdown of its costs into specific categories, such as, among other things, labor, employee benefits, materials, site security, and electricity. Information on waste generated from the decontamination process. DOE officials told us that they perform detailed analyses of these reports to verify that USEC is consistently conducting decontamination work in a cost-effective and efficient manner. If these officials identify inconsistencies or trends in the data that generate concerns or questions, they follow up with USEC each month through written inquiries to resolve uncertainties and obtain adequate justification for costs such as overtime and training. DOE officials at the Portsmouth and Paducah plants also conduct on-site inspections of the uranium cylinders in order to verify that USEC's and DOE's actual uranium inventories match what appear in USEC's monthly reports. DOE also tracks the proceeds from USEC's sale of clean uranium transferred to the corporation under the December 2004 agreement. DOE obtains copies of all sales contracts between USEC and the buyers of this uranium. These contracts provide detailed information on the buyer, the quantity sold, its sale price, and the date of the sale. In addition, USEC provides DOE with a copy of the wire transfer between the buyer and USEC to verify the receipt of funds. DOE requires that USEC segregate the proceeds of the uranium sales into an account separate from USEC's other funds. USEC maintains these funds in a separate brokerage account that invests in tax-exempt short-term securities. Each month, USEC submits a cost invoice to DOE for the decontamination work it performed during the preceding month. DOE then reviews and approves USEC's invoice and USEC withdraws money from the brokerage account equivalent to its invoiced costs. DOE monitors the withdrawal rate to estimate when more uranium will need to be sold to obtain additional funding for the account. Finally, DOE has also contracted with DCAA to audit the annual costs submitted by USEC, which DOE uses to verify that USEC's decontamination costs match what DOE paid the corporation. To receive compensation for its indirect costs under the agreement, USEC provides estimates of its costs to DOE annually. These estimates, called "provisional billing rates," are the basis of DOE's compensation to USEC for its costs for that year. USEC submits monthly invoices to DOE using the provisional billing rates. DOE then compensates the corporation for its invoiced costs. Following the end of each calendar year, USEC is to submit financial data to DCAA that details the corporation's actual incurred indirect costs. DCAA uses these data in its audits to verify that USEC's incurred costs are reasonable. Any differences between USEC's provisional billing rates and USEC's incurred decontamination costs would mean either that DOE owes USEC additional money or that USEC owes DOE for any compensation in excess of incurred costs. DOE officials told us that they have had difficulties receiving complete and timely responses to their inquiries on USEC's monthly reports. Following their detailed analyses of USEC's monthly reports to verify that USEC is conducting decontamination work in a cost-effective and efficient manner, DOE often submits written inquiries to USEC to resolve inconsistencies or other concerns. For example, DOE officials have submitted numerous inquiries to USEC questioning the amount of overtime hours USEC has billed to the project, which these officials think are unusually high. DOE officials have also questioned the large amounts of worker training that USEC has billed to the project. In addition, DOE officials have also inquired about certain materials USEC has purchased. According to DOE officials, DOE submits about five concerns per month to USEC. However, in its comments on a draft version of this report, USEC told us that DOE submits about 15 inquiries per month. DOE officials told us that USEC sometimes takes up to 6 months before responding to DOE's inquiries and then often only selectively respond to certain questions. In comments on a draft version of this report, USEC disagreed with DOE and stated that it has responded completely to DOE's inquiries in an average of about 3 months. While USEC officials told us they attempt to provide timely responses to DOE's inquiries, they also stated that the inquiries often request very specific data that are difficult to provide quickly. In addition, USEC officials told us that delays sometimes occurred when personnel from both DOE and DCAA were asking similar questions. USEC officials stated that they were sometimes confused about whether they should respond to DOE, DCAA, or both. Moreover, USEC indicated that DOE's inquiries were often poorly communicated and not delivered to the appropriate personnel in a timely fashion. DOE officials indicated that they believed that the inquiries were adequately communicated and delivered to the appropriate USEC personnel in a timely fashion. Further, DOE officials stated that although some of the inquiries were more detailed, this would not justify the delays in USEC's responses to the department. USEC officials also told us that despite their belief that DOE's inquiries are often unnecessary and redundant, USEC is working to improve the timeliness and completeness of their responses. According to USEC officials, they met with DOE in March 2005 to try to reduce the size and redundancy of these inquiries. However, DOE officials stated that the reason for the apparent redundancy was USEC's inability to respond to the original inquiries in a timely manner. DOE's inquiries have resulted in some benefits to the government. For example, USEC officials told us that, in response to DOE's inquiries, USEC has adjusted some monthly invoices to remove some charges USEC incorrectly billed to the project because of administrative errors. According to DOE officials, these errors were only discovered after DOE submitted written inquiries to USEC after it had analyzed USEC's monthly reports. DCAA has also experienced delays in obtaining the financial data from USEC that are necessary to complete its annual audits of USEC's decontamination costs. At the end of each fiscal year, USEC has 6 months to submit financial data to DCAA detailing the corporation's indirect costs for that year. DCAA then completes an audit of these costs, which allows DOE to verify that USEC's actual incurred costs for the year match what DOE paid the corporation. However, USEC has not submitted incurred cost data to DOE or DCAA for decontamination conducted during any time period from July 2002 to the present. DCAA has not completed any of its full annual audits of USEC's incurred decontamination costs. DCAA has completed five limited-scope audits of USEC's incurred costs for the individual months of December 2004 and January, March, May, and November 2005 to verify that USEC's incurred costs are in accordance with applicable laws, regulations, and the provisions of the December 2004 agreement. According to DCAA officials, these limited audits of USEC's monthly incurred costs have not found significant problems. In addition, DCAA has conducted other audits to examine, among other things, USEC's internal controls and accounting systems. According to USEC, these other audits have not found significant deficiencies. According to USEC officials, the delays in providing incurred cost data to DCAA are caused by several factors including limited internal accounting resources that are familiar with Federal Acquisition Regulations and government cost accounting standards protracted contract negotiations with DOE over how employee pension and post-retirement benefits should be treated in USEC's accounting systems. DOE officials with whom we spoke disagreed that these reasons should cause such a significant delay in providing incurred cost data to DCAA. USEC has submitted a revised schedule to DOE that estimates when it will provide incurred cost data to DCAA. (See table 2.) In the absence of DCAA audits of USEC's annual decontamination costs, DOE has taken steps to protect the government's interests by limiting the amount of compensation paid to USEC. For example, USEC has stated that its actual decontamination costs in calendar year 2004 exceeded DOE's compensation for that year. However, because DCAA was unable to complete its audit of USEC's costs for that year, DOE refused to pay this difference. In addition, provisional billing rates were not revised in 2005, and USEC was compensated using 2004 provisional billing rates. USEC officials told us that the failure to revise the provisional billing rates has only increased the difference between USEC's actual decontamination costs and the amount the corporation is being compensated. According to USEC officials, the difference between the corporation's actual decontamination costs and the amount it has been compensated is about $3 million and will continue to grow until new billing rates are approved by DOE. DOE officials told us that they plan to approve new billing rates in June 2006. Furthermore, DOE officials said that the department will pay USEC any difference between the corporation's actual decontamination costs and the amount already compensated once USEC submits its actual incurred costs and DCAA has been able to complete its audits. Almost 8 years after USEC's privatization, USEC and DOE are still dealing with the cleanup of technetium-contaminated uranium. According to DOE officials, the department decided to compensate USEC for decontaminating uranium to resolve potential legal liabilities and to help achieve other policy goals, such as the continuation of a reliable domestic source of uranium enrichment today and in the future. In our view, however, DOE has left the Congress and the public largely uninformed about these policy goals, as well as about the amount of progress USEC has made decontaminating uranium and the costs incurred in doing so. DOE deserves credit for attempting to protect the public interest by limiting the amount of compensation paid to USEC until the corporation provides the key financial data that are necessary for DOE's oversight of USEC's activities. However, because of the complexity of the issues, including the need to achieve multiple policy goals and the importance of maintaining a reliable, domestic source of uranium enrichment, it is important for DOE to provide the Congress with the information necessary for congressional oversight of the department's activities. We are recommending that the Secretary of Energy clarify with USEC (1) the specific oversight steps that DOE and DCAA conduct and (2) procedures that USEC should follow in responding to the department's and DCAA's questions on the corporation's performance. In addition, to assist the Congress in its continuing oversight of the department, we further recommend that the Secretary of Energy report the following information in DOE's annual budget request to the Congress until USEC has completed uranium decontamination: the remaining quantities of uranium in USEC's and DOE's inventories that need to be decontaminated, the estimated costs of completing this decontamination work, the source of funds necessary to compensate USEC, and the progress DCAA has made completing the annual audits of USEC's decontamination costs. We provided a draft copy of this report to DOE and USEC for their review and comment. DOE's letter is presented as appendix II, and USEC's letter is presented as appendix III. In its written comments, DOE agreed with our recommendations, but requested that any report to the Congress be done on an annual basis, as part of the annual budget process. We agree with DOE and have modified our recommendation to provide for DOE reporting uranium decontamination performance and cost information in its annual budget requests rather than semiannually. Both DOE and USEC commented that the report would be more accurate if it acknowledged the value and the successful performance of the program. DOE's comments stated that the overall value of the program is not stated clearly and is somewhat overshadowed by detailed issues related to USEC's cost reports. USEC believes that the report would be more precise if it acknowledged the successful technical and financial performance of the program. The objectives of our review were to provide factual information on USEC's progress in decontaminating uranium and on DOE's oversight of USEC's uranium decontamination activities. Contrary to DOE's and USEC's assertions, our draft report clearly described what DOE and USEC officials told us were the benefits of the uranium decontamination agreements, including the amounts of uranium in USEC's and DOE's inventories that have been decontaminated, the technology developed to decontaminate the uranium, the continued employment of workers at the Portsmouth plant, and the maintenance of a reliable, domestic source of uranium enrichment. However, it is also important to note that these benefits did not come without significant cost. Specifically, DOE has provided over $150 million in various forms of compensation to USEC. To provide detailed information concerning the overall value of the program was beyond the scope of this review. USEC generally agreed with the draft report's findings and supported our recommendations to DOE. However, USEC commented that the report contained shortcomings in the presentation of its supporting analysis. Specifically, USEC said that the draft report does not acknowledge that USEC provided detailed invoice data to DOE that conformed to DOE's rules on invoice review. On the contrary, our draft report contained detailed information on the types of information provided to DOE including reports on the amounts of uranium decontaminated each month, the amounts of waste generated, and the decontamination costs incurred. USEC states that DOE's rules contain no requirements for incurred cost submissions. However, as our draft report stated, the contract clause in Federal Acquisition Regulation SS52.216-7, which is specifically incorporated in DOE's agreements with USEC, requires contractors to submit their final indirect cost rates, based on actual costs, to the cognizant federal agency within 6 months of the end of the contractor's fiscal year. USEC has not complied with this requirement. In addition, USEC stated in its comments that the draft report's discussion of USEC's delays in responding to DOE's follow-up questions is incomplete and inaccurate. In response, we have modified our report to note USEC's disagreement with DOE officials' statements regarding the number of DOE inquiries each month and USEC's responsiveness. USEC also stated that the draft report's title overstates the report's findings and implies a materiality to USEC's delays that is not supported in the body of the report. We disagree that the draft report's title makes this implication. USEC recommends that the title be changed to better reflect the report's recommendation that clarification of procedures would improve DOE's oversight of the uranium decontamination agreement. The purpose of the recommendation is not for DOE to change its oversight of USEC's activities, as is implied by USEC's suggested title. Rather, the recommendation is intended to encourage DOE to better communicate its existing oversight steps to USEC and instruct the corporation how to properly respond to the department's inquiries. DOE and USEC also provided technical comments that we incorporated into the report as appropriate. We will send copies of this report to interested congressional committees, the Secretary of Energy, and USEC, Inc. 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 www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. At the request of the Chairman, Committee on Energy and Natural Resources, United States Senate, we examined (1) the United States Enrichment Corporation's (USEC) progress in decontaminating technetium-contaminated uranium transferred to it by the Department of Energy (DOE) prior to its privatization and (2) DOE's oversight of USEC's decontamination activities. To accomplish these objectives, we reviewed the preprivatization agreements between DOE and USEC that transferred uranium inventories to the corporation; memorandums of agreement and memorandums of understanding between DOE and USEC on the decontamination of technetium-contaminated uranium, signed in June 2002, April 2004, October 2004, and December 2004; DOE and USEC legal memorandums detailing DOE's potential liability to replace uranium or compensate USEC; Federal Acquisition Regulations; and appropriate statutes, including the Energy Policy Act of 1992 and the USEC Privatization Act of 1996. We also interviewed officials from DOE's Portsmouth and Paducah Project Office; Oak Ridge Operations Office; Environmental Management Consolidated Business Center; Office of Environmental Management; Office of Nuclear Energy; Office of General Counsel; and Office of the Under Secretary for Energy, Science, and Environment. In addition, we interviewed USEC officials at the corporation's headquarters in Bethesda, Maryland, and at the Portsmouth Gaseous Diffusion Plant in Piketon, Ohio. We also interviewed officials with the Defense Contract Audit Agency (DCAA), which conducts audits of USEC's decontamination costs. To determine USEC's progress in decontaminating uranium, we reviewed USEC's monthly reports detailing its monthly decontamination progress as well as remaining uranium inventories to be decontaminated. We also reviewed USEC data on uranium storage cylinders processed each month and the specific amount of uranium in each cylinder. We also obtained USEC's monthly cost statements submitted to DOE, which detail USEC's monthly costs under a variety of categories, such as labor, plant overhead, and materials. We examined the reliability of uranium decontamination and cost data by obtaining responses from DOE to a series of data reliability questions covering issues such as data entry access, internal control procedures, and the accuracy and completeness of the data. We asked follow-up questions whenever necessary. We determined that these data were sufficiently reliable for the purposes of this report. Furthermore, we reviewed USEC's marketing strategy for selling clean uranium transferred to the corporation by DOE under the December 2004 agreement and reviewed USEC's sales reports submitted to DOE detailing the amount of uranium USEC sold to each buyer, the contract price of the uranium, its delivery date, and the date of payment. In addition, we reviewed the sales contracts between USEC and buyers of the clean uranium as well as invoices confirming receipt of funds from each uranium sale. We also visited the Portsmouth Gaseous Diffusion Plant site to inspect uranium decontamination facilities and to interview DOE and USEC officials. To assess DOE's oversight of USEC's uranium decontamination activities, we interviewed DOE officials that conduct oversight of USEC's decontamination work at the Portsmouth and Paducah Project Office, Oak Ridge Operations Office, and the Environmental Management Consolidated Business Center. We discussed DOE's processes for conducting analyses of USEC's monthly reports on decontamination progress and costs and the steps DOE takes to oversee USEC's sales of clean uranium transferred by DOE under the December 2004 agreement. We also discussed DOE's oversight with USEC officials. In addition, we obtained copies of five audits conducted by DCAA of USEC's monthly decontamination costs and interviewed DCAA auditors to discuss the objectives, scope, and methodology of DCAA's audit work. We conducted our work between August 2005 and May 2006 in accordance with generally accepted government auditing standards. Appendix III: Comments from USEC, Inc. In addition to the contact named above, Diane B. Raynes (Assistant Director), Ryan T. Coles, Jessica A. Evans, Doreen S. Feldman, Christopher E. Ferencik, Neill W. Martin-Rolsky, Mehrzad Nadji, Omari A. Norman, Susan A. Poling, Katherine M. Raheb, Keith A. Rhodes, Susan D. Sawtelle, and Rebecca Shea made key contributions to this report.
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Prior to the 1998 privatization of the U.S. Enrichment Corporation (USEC), the Department of Energy (DOE) transferred about 45,000 metric tons of natural uranium to USEC to, among other things, be enriched to fulfill USEC's nuclear fuel contracts. About 9,550 metric tons were subsequently discovered to be contaminated with technetium, a radioactive metal, at levels exceeding the specification for nuclear fuel. Although DOE has not admitted liability, DOE and USEC have entered into agreements under which USEC is decontaminating the uranium. DOE has compensated USEC for its decontamination costs in several ways, including using proceeds from sales of government-owned clean uranium. GAO was asked to examine (1) USEC's progress in decontaminating uranium and (2) DOE's oversight of USEC's decontamination activities. A forthcoming GAO legal opinion will address DOE's legal authority to transfer clean uranium to USEC for sale and use the proceeds to compensate USEC for its decontamination services. As of February 28, 2006, USEC reported that about 10 percent of the contaminated uranium that DOE transferred to the corporation prior to privatization remains to be decontaminated, or about 960 metric tons of the 9,550 contaminated metric tons transferred. DOE estimates USEC will finish decontaminating this uranium by the end of December 2006. Through the end of February 2006, USEC has invoiced DOE for a total of about $152 million in decontamination costs. DOE takes several steps to oversee USEC's uranium decontamination activities. DOE reviews monthly USEC reports that detail, among other things, the corporation's decontamination progress and costs. In addition, DOE, through the Defense Contract Audit Agency (DCAA), audits USEC to verify that USEC's actual costs match the amount DOE paid to the corporation and are in accordance with the provisions of the uranium decontamination agreement. However, DOE has had difficulties completing some of its oversight because of USEC's delays in providing financial data and other information. DOE officials told us that USEC sometimes takes up to 6 months before responding to its inquiries about the corporation's monthly reports. As a result, DOE has some concerns about whether USEC consistently conducts decontamination work in a cost-effective manner. DCAA has also experienced significant delays obtaining USEC financial data that it requires for its annual audit of USEC's costs. DOE uses these data to verify that USEC's actual decontamination costs match what DOE paid USEC. Until DCAA's audits are complete, DOE cannot be certain whether the compensation it provided to USEC matches USEC's actual decontamination costs. As a result, USEC may need to repay money to the government or DOE may owe additional money to USEC upon completion of these audits. In addition, the Congress has not received information to assist in the appropriations process on the progress and costs of decontamination.
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State relies on a variety of decentralized information systems and networks to help it carry out its responsibilities and support business functions, such as personnel, financial management, medical, visas, passports, and diplomatic agreements and communications. The data stored in these systems is sensitive enough to be attractive targets for individuals and organizations seeking monetary gain or desiring to learn about or damage State operations. For example, much of this information deals with State employees and includes American and Foreign Service National personnel records, employee and retiree pay data, and private health records. Background investigation information about employees being considered for security clearances is also processed on State's unclassified network as is sensitive financial and procurement information. The potential consequences of misuse of this information are of major concern. For example, unauthorized deletion or alteration of data could enable dangerous individuals to enter the United States. In addition, personnel information concerning approximately 35,000 State employees could be useful to foreign governments wishing to build personality profiles on selected employees. Further, manipulation of financial data could result in over- or underpayments to vendors, banks, and individuals, and inaccurate information being provided to agency managers and the Congress. Our objectives were to (1) determine how susceptible the State Department's automated information systems are to unauthorized access, (2) identify what the State Department is doing to address information security issues, and (3) determine what additional actions may be needed. To determine how susceptible State's systems are to unauthorized access, we tested the department's technical and physical controls for ensuring that data, systems, and facilities were protected from unauthorized access. We tested the operation of these controls to determine whether they existed and were operating effectively. We contracted with a major public accounting firm to assist in our evaluation and testing of these controls. We determined the scope of our contractor's audit work, monitored its progress, and reviewed the related work papers to ensure that the resulting findings were adequately supported. During our testing, we performed controlled penetration attacks at dial-in access points, the department's Internet gateways, and public information servers. We also performed penetration activities to access security controls on State's major internal networks. In addition, we performed social engineeringactivities to assess user awareness, and attempted to gain physical access to two State facilities. We attempted to access State's sensitive data and programs under conditions negotiated with State Department officials known as "rules of engagement." These rules were developed to assist us in obtaining access to State's facilities and information resources and to prevent damage to any systems or sensitive information. Under the rules, all testing was required to take place within the department's headquarters building between 8:00 a.m. and 10:00 p.m. and was physically monitored by State employees and contractor personnel. In addition, State monitors were authorized to stop our testing when we obtained access to sensitive information or systems. We were also required to inform State personnel about the types of tests we planned to conduct prior to the testing. As agreed with State, we limited the scope of our testing to unclassified systems. To identify what State is doing to address the issue of unauthorized access to its information systems, we discussed with department officials their efforts to protect these systems and reviewed supporting documentation. For example, we obtained information on the department's initiatives to improve the security of its mainframe computers and establish a centrally managed information system security officer program at headquarters. We also discussed with department officials preliminary plans to expand the use of the Internet and reviewed supporting documentation. We reviewed numerous evaluations of information security at domestic State locations and foreign posts performed by the department's Bureau of Diplomatic Security. We reviewed recent reports submitted by State to the President and the Congress under provisions of the 1982 Federal Managers' Financial Integrity Act, which outlined known information management and technology weaknesses and plans for corrective actions. We reviewed the department's policy guidance on information security as contained in the Foreign Affairs Manual, Volume 1 and Volume 12, Chapter 600, and its Fiscal Year 1997-2001 Strategic and Performance Management Plan for Information Resources Management. We visited a computer security assessment center in Fairfax, Virginia, which the department uses primarily for certifying and accrediting software to be used on State information systems. To evaluate State's security program management and formulate recommendations for improvement, we compared State's practices to guidelines in two National Institute of Standards and Technology (NIST) publications, the "Generally Accepted Principles and Practices for Securing Information Technology Systems" and "An Introduction to Computer Security: The NIST Handbook," as well as other guides and textbooks. In addition, we reviewed a Department of State Inspector General report on unclassified mainframe systems security. We also relied on our work to identify the best information security management practices of non-federal organizations which is presented in our Executive Guide Information Security Management: Learning From Leading Organizations (GAO/AIMD-98-21 Exposure Draft, November 1997). The guide identifies key elements of an effective information security program and practices which eight leading nonfederal organizations have adopted and details the management techniques these leading organizations use to build information security controls and awareness into their operations. We performed our audit work primarily at State Department headquarters offices from July 1996 through August 1997 in accordance with generally accepted government auditing standards. Our penetration tests revealed that State's sensitive but unclassified information systems can be easily accessed by unauthorized users who in turn can read, delete, modify, or steal sensitive information on State's operations. First, while simulating outside attackers without knowledge of State's systems, we were able to successfully gain unauthorized access to State's networks through dial-in connections to modems. Having obtained this access, we could have modified or deleted important data, shut down services, downloaded data, and monitored network traffic such as e-mail and data files. We also tested internal network security controls and found them to be inadequate. For example, we were able to gain privileged (administrator) access to host systems on several different operating platforms (such as UNIX and Windows NT). This access enabled us to view international financial data, travel arrangements, detailed network diagrams, a listing of valid users on local area networks, e-mail, and performance appraisals, among other sensitive data. Our tests also found that security awareness among State employees is problematic. We were able to gain access to State's networks by guessing user passwords, bypassing physical security at one facility, and searching unattended areas for user account information and active terminal sessions. For example, in several instances we were able to enter a State facility without required identification. In an unlocked work area for one office, we found unattended personal computers logged onto a local area network. We also found a user identification and password taped to one of the computers. Using these terminals, we were able to download a file that contained a password list. In another unlocked area, we were able to access the local area network server and obtain supervisor-level access to a workstation. With this access, we could have added or deleted users, implemented unauthorized programs, and eliminated audit trails. Our tests of dial-in-security, internal network security, and physical security demonstrated that information critical to State's operations as well as to the operations of other federal agencies operating overseas can be easily accessed and compromised. For example, we gained access to information that detailed the physical layout of State's automated information infrastructure. These data would make it much easier for an outsider who had no knowledge of State's operations or infrastructure to penetrate the department's computer resources. In addition, we obtained information on administrative and sensitive business operations which may be attractive targets to adversaries or hackers. At the conclusion of our testing, we provided senior State managers with the test results and suggestions for correcting the specific weaknesses identified. Our tests were successful primarily because State's computer security program is not comprehensive enough to effectively manage the risks to which its systems and networks are exposed. For example, the department does not have the information it needs to effectively manage its risks--it does not fully appreciate the sensitivity of its information, the vulnerabilities of its systems, or the costs of countermeasures. In addition, security is not managed by a strong focal point within the agency that can oversee and coordinate security activities. State also does not have the types of controls needed to ensure the security of its sensitive information, including current and complete security policies and enterprisewide incident reporting and response capability. Moreover, top managers at State have not demonstrated that they are committed to strengthening security over the systems that they rely on for nearly every aspect of State's operations. Our study of information security management at leading organizations identified the following five key activities that are necessary in order to effectively manage security risks. A strong framework with a central management focal point and ongoing processes to coordinate efforts to manage information security risks. Risk assessment procedures that are used by business managers to determine whether risks should be tolerated or mitigated and to select appropriate controls. Comprehensive and current written policies that are effectively implemented and then updated to address new risks or clarify areas of misunderstanding. Steps to increase the awareness of users concerning the security risks to information and systems and their responsibilities in safeguarding these assets. Ability to monitor and evaluate the effectiveness of policy and other controls. Furthermore, each of these activities should be linked in a cycle to help ensure that business risks are continually monitored, policies and procedures are regularly updated, and controls are in effect. Perhaps the single most important factor in prompting the establishment of an effective information security program is commitment from top management. Ultimately, it is top managers who ensure that the agency embraces all elements of good security and who drive the risk management cycle of activity. However, State's top managers are not demonstrating the commitment necessary to practice good security and State's information security program does not fully incorporate any of the activities described above. Specifically, there is (1) no central management focal point, (2) no routine process for assessing risks, (3) no comprehensive and current set of written policies, (4) inadequate security awareness among State personnel, and (5) no effective monitoring and evaluation of policies and controls. In addition, State lacks a comprehensive information security plan that would help ensure that these elements are in place. While senior management at State has shown some interest in information security through actions including drafting memoranda, forming working groups to improve information security, and approving limited funding for selected security activities, this interest has not been sufficient to overcome longstanding and institutionalized security weaknesses. For example, while top management at State is aware of longstanding problems associated with its information management and information security and has reported a number of these high-risk and material weaknesses to the President and the Congress under provisions of the 1982 Federal Managers' Financial Integrity Act, these weaknesses remain unresolved. For example, mainframe computer security was identified as a material weakness 10 years ago but has not yet been corrected. "The lack of senior management's involvement in addressing authority, responsibility, accountability and policy is the critical issue perpetuating the Department's lax approach to mainframe security . . . . In addition, the lack of clear management responsibility has resulted in incomplete and unreliable security administration . . . ." Many mid-level State officials told us that the information security problems we and others identified during our review were already known throughout the department. Collectively, they believed that senior State management was not convinced of the seriousness of the problems and were unable or unwilling to commit the requisite attention and resources to resolve them. They noted that budget requests for security measures, such as information systems security officers, were approved but later rescinded. Many officials said that while the assignment of a chief information officer (CIO) was a critical step in elevating the importance of information management and security throughout the department, the CIO does not have the authority needed to ensure that improvements are made throughout State's decentralized activities. They also said that budgets for important controls, such as Bureau of Diplomatic Security information security evaluations at worldwide posts, are severely constrained and that the same security deficiencies are found and ignored year after year. Other officials reported that State personnel do not carry out their security responsibilities satisfactorily because security is assigned as a low-priority collateral duty. The Department of State is a decentralized organization with bureaus operating semi-autonomously in their areas of responsibility. As a result, information resources management is scattered throughout the department. There is no single office responsible for overseeing the architecture, operations, configuration, or security of its networks and systems. The chief information officer, the Bureau of Diplomatic Security, and the information management office all perform information security functions. Many offices and functional bureaus also manage, develop, and procure their own networks and systems. In addition, according to Bureau of Diplomatic Security officials, some of the approximately 250 posts operated by State around the world have established their own network connections, further complicating security and configuration management. "Since there is no enterprise-wide authority for ensuring the confidentiality, integrity and availability of information as it traverses the unclassified network, it is extremely difficult to detect when information is lost, misdirected, intercepted or spoofed. Therefore, a post that is not expecting to receive information will not miss critical information that never arrives. More importantly, if a post does receive information it was not expecting, there is no office to confirm that the transmission was legitimate and not disinformation sent by a network intruder or disgruntled employee." In assessing risks, managers should consider the (1) value and sensitivity of the information to be protected, (2) vulnerabilities of their computers and networks, (3) threats, including hackers, thieves, disgruntled employees, competitors, and in State's case, foreign adversaries and spies, (4) countermeasures available to combat the problem, and (5) cost-effectiveness of the countermeasures. In addition to providing the basis for selecting appropriate controls, results obtained from risk assessments should also be used to help develop and update an organizations's security plan and policies. We met with representatives from the Office of Information Management and Bureau of Diplomatic Security who told us that they are unaware of any significant risk management activity related to information security within the department. These officials stated that they have not been requested to provide technical assistance to program managers at State. One significant exception to this is the comprehensive risk analysis performed by the Bureau of Diplomatic Security, which evaluated the risks associated with Internet connectivity. Computer security evaluations performed at posts located around the world by Bureau of Diplomatic Security staff further demonstrate that State officials are not addressing and correcting risks appropriately. The evaluations revealed numerous problems at foreign posts such as use of inappropriate passwords and user identifications, failure to designate an information systems security officer, poor or nonexistent systems security training, and lack of contingency plans. Diplomatic security staff also told us that they have found that some posts have installed modem connections and Internet connections without approval, further complicating the department's ability to manage and secure its networks. Annual analyses of these evaluations show a pattern in which system security requirements are continually overlooked or ignored. Diplomatic security staff noted that the majority of the security deficiencies that they found are correctable with modest capital outlay and more attentive system administration. State's information security policies are primarily contained in its Foreign Affairs Manual. State also provides policy guidance in other formats, including instructions, cablegrams, letters, and memoranda. These policies are deficient in several respects. First, they fail to acknowledge some important security responsibilities within the department. For example, while the security manual details responsibilities of system managers and information systems security officers, it does not address the information security responsibilities of the Department's chief information officer (CIO). The CIO's authority and ability to operate effectively would be enhanced with departmental policy recognition of the legislatively prescribed security responsibilities. State's Foreign Affairs Manual was updated in February 1997 to describe the CIO position, but it does not discuss any information security responsibilities. Second, the Foreign Affairs Manual does not require and consequently provides no mandate for, or guidance on, the use of risk assessments. As previously discussed, the department does not routinely assess and manage its information security risks. There is no specific State policy requiring threat and vulnerability assessments, despite their known value. Third, State's policy manual does not sufficiently address users' responsibilities. For example, the manual does not emphasize that users should be accountable for securing their automated data, much as they are held responsible for securing classified paper documents. And it does not adequately emphasize the importance of information and computer resources as critical assets that must be protected. A significant finding in the department's Internet risk analysis is that users and even systems administrators "do not feel that their unclassified data is sensitive and therefore spend little to no effort in protecting the data from external disclosure." Clearly stated policy and effective implementation could contribute greatly to increased awareness. Often, computer attacks and security breakdowns are the result of failures on the part of computer users to take appropriate security measures. For this reason, it is vital that employees who use a computer system in their day-to-day operations be aware of the importance and sensitivity of the information they handle, as well as the business and legal reasons for maintaining its confidentiality and integrity. In accepting responsibility for security, users need to follow organizational policies and procedures, and acknowledge the consequences of security violations. They should also devise effective passwords, change them frequently, and protect them from disclosure. Further, it is important that users not leave their computers, workstations, or terminals unattended, and log out when finished using their computers. In addition, users should help maintain physical security over their assigned areas and computer resources. Many computer users at State had weak passwords that were easily guessed, indicating that they were unaware of or insensitive to the need for secure passwords. During our testing of State's systems, we were able to guess passwords on a number of machines on various networks using both manual guessing and automated password cracking programs. One way to prevent password guessing is to ensure that users use complex passwords such as those composed of alphanumeric, upper- and lower-case characters. However, there was no evidence that State was training its users to employ these techniques. We also found little evidence that State was training its users to prevent unauthorized access to information. For example, we called a user under the pretense that we were systems maintenance personnel and were able to convince her to disclose her password. We also bypassed physical security at a State facility and searched unattended areas for user account information and active terminal sessions. For example, in several instances we were able to enter a facility without the required State identification by using turnstiles designed for handicapped use. Once inside the facility, we entered unlocked work areas and found unattended personal computers logged onto a local area network. From one of these computers, we downloaded a file that contained a password list. We also noticed that a password and user identification code were taped to the desk in a workstation. Some key controls are not in place at State to ensure that it can defend its sensitive information and systems. For example, State has very little departmentwide capacity to respond to security incidents and individual bureaus currently handle incidents on an ad hoc basis. Problems experienced are not shared across the department because the incidents are not reported or tracked centrally and very little documentation is prepared. Furthermore, State does not regularly test its systems and network access controls through penetration testing. Finally, State has limited ability to visit all its worldwide locations to perform security evaluations. Our study of information security management at leading organizations found that an organization must monitor and evaluate its policies and other controls on a regular basis to periodically reassess whether it is achieving its intended results. Testing the existence and effectiveness of controls and other risk reduction efforts can help determine if they are operating effectively. Over time, policies and controls may become inadequate because of changes in threats, changes in operations, or deterioration in the degree of compliance. Because breaches in information security, computer viruses, and other related problems are becoming more common, an aggressive incident response capability is an important control and a key element of a good security program. Organizations need this capability to respond quickly and effectively to security incidents, help contain and repair any damage caused and prevent future damage. In recognition of the value of an incident response capability, federal agencies are now required by the Office of Management and Budget to establish formal mechanisms to respond to security incidents. Many organizations are now setting up emergency response teams and coordinating with other groups, including the Federal Computer Incident Response Capability and Carnegie Mellon's Computer Emergency Response Team. Knowing that organizations have a formidable response capability has proved to be a deterrent to hackers and other unauthorized users. State acknowledges that it needs the capability to detect and react to computer incidents and information security threats in a timely and efficient manner. At the time of our review, Department personnel were drafting incident response procedures. Bureau of Diplomatic Security officials told us that they are beginning to develop an incident response capability at the laboratory that they use to evaluate and accredit systems and software. Information management officials also told us that efforts were underway to obtain some services from the Federal Computer Incident Response Capability that would help them detect and react to unauthorized access to their systems. As discussed earlier, Bureau of Diplomatic Security performs evaluations of field locations to identify and make recommendations for correcting security weaknesses. However, Bureau of Diplomatic Security officials told us that budget constraints limit their ability to perform these evaluations and visit all locations on a systematic and timely basis. State officials also told us that they need to periodically assess the vulnerabilities of and threats to their systems. They also acknowledged the need for and importance of developing a reporting mechanism that can be used across the department to share information on vulnerabilities and incidents. An additional control mechanism that could help State ensure that controls are in place and working as intended, and that incident response capability is strong, is the annual financial statement audit. This audit is required to be conducted annually by the Chief Financial Officers Act of 1990. A part of this audit could involve a detailed examination of an agency's general and application computer controls. We have been working with the department's inspector general to ensure that State's financial audit includes a comprehensive assessment of these controls. When this audit is complete, management will be able to better gauge its progress in establishing and implementing sound information security controls. Federal agencies are required by the Computer Security Act to develop and implement security plans to protect any systems containing sensitive data. The February 1996 revision to Appendix III of OMB Circular A-130 requires that a summary of the security plans be incorporated into an agency's strategic information resources management plan. State has no information security plan. Instead, the department's IRM Strategic and Performance Management Plan includes several pages of text on information security and its implementation. This discussion highlights the development of computer security and privacy plans for each system containing sensitive information, as required by the Computer Security Act. However, when we requested copies of these individual plans, we were told that they could not be located and that even if they were found, they would be virtually useless because they were drafted in the late 1980s, never updated, and are now obsolete. The strategic plan also references other efforts underway within the department, including assessments of various software applications to identify vulnerabilities and evaluations of antivirus software products. However, this discussion is insufficient. It merely lists a set of ad hoc and largely unrelated programs and projects to improve information security. It does not relate these programs to any risk-based analysis of threats to and vulnerabilities of the department's networks or systems. Furthermore, this discussion mentions the existence of but does not endorse or discuss planned efforts to implement any key recommendations identified in the Internet Risk Analysis. A companion document to the strategic plan, the department's February 1997 Tactical Information Resources Management Plan, indicates the lack of emphasis that information security receives. According to this plan, the department should closely monitor and centrally manage all information resource management initiatives that "are critical to the Department missions; will cost more than $1 million through their life cycle; have schedules exceeding one year; and cut across organizational lines." However, the plan acknowledges that "at this time the Department has no Security projects that meet the criteria" above. In addition, the plan ignores the need for centralized management for information technology projects and, instead, requires individual offices to fund and manage their own security requirements. Internet security was the only area in which we found that State's controls were currently adequate. We attempted to gain access to internal State networks by going through and around State's Internet gateways or exploiting information servers from the outside via the Internet, but we were not able to gain access to State's systems. State's protection in this area is adequate, in part, because the department has limited its use and access to the Internet. However, State officials have been requesting greater Internet access and the department is considering various options for providing it. Expansion of Internet services would provide more pathways and additional tools for an intruder to attempt to enter unclassified computer resources and therefore increase the risk to State systems. Recognizing this, State conducted an analysis of the risks involved with increasing Internet use. However, the department has not yet decided to what extent it will accept and/or address these new risks. Until it does so and implements a comprehensive security program that ensures that top managers are committed to enforcing security controls and users are fully aware of their computer security responsibilities, State will not be in a good position to expand its Internet use. Networked information systems offer tremendous potential for streamlining and improving the efficiency of State Department operations. However, they also greatly increase the risks that sensitive information supporting critical State functions can be attacked. Our testing demonstrated that State does not have adequate controls to protect its computer resources and data from external attacks and unauthorized activities of trusted users who are routinely allowed access to computer resources for otherwise legitimate purposes. These weaknesses pose serious risk to State information and operations and must be mitigated. We recognize that no organization can anticipate all potential vulnerabilities, and even if it could, it may not be cost-effective to implement every measure available to ensure protection. However, State has yet to take some basic steps to upgrade its information systems security and improve its position against unauthorized access. These steps include ensuring that top managers are fully aware of the need to protect State's computer resources, establishing a strong central management focal point to remedy the diluted and fragmented security management structure, and addressing the risks of additional external connectivity before expanding its Internet usage. Until State embraces these important aspects of good computer security, its operations, as well as those of other federal agencies that depend on State, will remain vulnerable to unauthorized access to computer systems and data. We reaffirm the recommendations we made in our March 1998 classified report. These recommendations called on State to take the following actions. Establish a central information security unit and assign it responsibility for facilitating, coordinating, and overseeing the department's information security activities. In doing so, assign the Chief Information Officer the responsibility and full authority for ensuring that the information security policies, procedures, and practices of the agency are adequate; clarify the computer security responsibilities of the Bureau of Diplomatic Security, the Office of Information Management, and individual bureaus and diplomatic posts; and consider whether some duties that have been assumed by these offices can be assigned to, or at a minimum coordinated with, the central information security unit. Develop policy and procedures that require senior State managers to regularly determine the (1) value and sensitivity of the information to be protected, (2) vulnerabilities of their computers and networks, (3) threats, including hackers, thieves, disgruntled employees, foreign adversaries, and spies, (4) countermeasures available to combat the problem, and (5) cost-effectiveness of the countermeasures. Revise the Foreign Affairs Manual so that it clearly describes the legislatively-mandated security responsibilities of the Chief Information Officer, the security responsibilities of senior managers and all computer users, and the need for and use of risk assessments. Develop and maintain an up-to-date security plan and ensure that revisions to the plan incorporate the results obtained from risk assessments. Establish and implement key controls to help the department protect its information systems and information, including periodic penetration testing to identify vulnerabilities in State's assessments of the department's ability to (1) react to intrusion and attacks on its information systems, (2) respond quickly and effectively to security incidents, (3) help contain and repair any damage caused, and (4) prevent future damage, and central reporting and tracking of information security incidents to ensure that knowledge of these problems can be shared across the department and with other federal agencies. Ensure that the results of the annual financial statement audits required by the Chief Financial Officers Act of 1990 are used to track the department's progress in establishing, implementing, and adhering to sound information security controls. Require department managers to work with the central unit to expeditiously review the specific vulnerabilities and suggested actions we provided to State officials at the conclusion of our testing. After the department has reviewed these weaknesses and determined the extent to which it is willing to accept or mitigate security risks, assign the central unit responsibility for tracking the implementation and/or disposition of these actions. Direct the Assistant Secretary for Diplomatic Security to follow-up on the planned implementation of cost-effective enhanced physical security measures. Defer the expansion of Internet usage until (1) known vulnerabilities are addressed using risk-based techniques and (2) actions are taken to provide appropriate security measures commensurate with the planned level of Internet expansion. The Department of State provided written comments on a draft of our classified report and concurred with eight of our nine recommendations. In summary, State said that its Chief Information Officer is beginning to address the lack of a central focus for information systems security through the establishment of a Security Infrastructure Working Group; agreed to formalize and document risk management decisions; agreed to revise provisions of the Foreign Affairs Manual related to information security and undertake an evaluation of one of its most significant networks based on our review; and said it is implementing a plan to correct the technical weaknesses identified during our testing. State also took steps to minimize unauthorized physical access to a State facility. State did not concur with our recommendation to defer the expansion of Internet usage. In explaining its nonconcurrence, State asserted that expanded use of Internet resources is a priority; the Chief Information Officer, Office of Information Management, and Bureau of Diplomatic Security are coordinating on architecture and security functionality that should mitigate any significant security vulnerabilities through the use of a separate enclave; segmenting the network, implementing controlled interfaces, restricting services, restricting the processing or transmission of sensitive unclassified information, and proactive network monitoring and incident handling should mitigate these risks; and a formal risk analysis of expanding the Internet throughout the department has been conducted and known risk factors are being considered in the Internet expansion. Some of these assertions are invalid; the rest do not fully address our recommendation. First, designating expanded Internet usage as a priority does not mean that State should proceed before it fully implements appropriate security controls. If State expands Internet connectivity without effectively mitigating the significant additional risks that entails, it will increase its already serious vulnerabilities to individuals or organizations seeking to damage State's operations, commit terrorism, or obtain financial gain. Second, State does not explain how "coordination on architecture and security functionality" between the Chief Information Officer, Office of Information Management, and Bureau of Diplomatic Security will reduce Internet risks, including computer attacks from those wishing to steal information or disable the department's systems. As noted in this report, the organizations cited by State share various information security responsibilities, but have different missions and interests. This assertion does not address our recommendation that State establish an organization unit with responsibility for and authority over all information security activities, including protecting the department from computer attacks via Internet. Third, State identified a number of controls with it believes will reduce Internet security risks, including establishing a (logically) separate network (enclave) dedicated to Internet usage, and proactively monitoring the network and handling incidents. If effectively implemented and maintained, these measures can help reduce security risks. However, State did not specify how it planned to implement these controls, what resources it has allocated to these efforts, or if they would be completed before State expands its Internet usage. Our point is that State must actually implement and maintain security measures to mitigate these risks prior to increasing Internet usage. Finally, we discussed State's risk analysis of expanded Internet usage in our report. This analysis identifies numerous risks associated with expansion and options for addressing them. It is not sufficient that "known risk factors are being considered in the Internet expansion"; as previously noted, State must mitigate these risks prior to increasing Internet usage. As agreed with your offices, unless you publicly announce the contents of this report earlier, we will not distribute it until 30 days from its date. At that time, we will send copies of this report to the Chairman and Ranking Minority Members of the House Government Reform and Oversight Committee, Senate Committee on Appropriations, Subcommittee on Commerce, Justice, State, the Judiciary and Related Agencies, the House Committee on Appropriations, Subcommittee on Commerce, Justice, State, the Judiciary and Related Agencies, and the Secretary of State. Copies will be available to others upon request. If you have questions about this report, please contact me at (202) 512-6240. Major contributors are listed in appendix I. Keith A. Rhodes, Technical Director John B. Stephenson, Assistant Director Kirk J. Daubenspeck, Evaluator-in-Charge Patrick R. Dugan, Auditor Cristina T. Chaplain, Communications Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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: (1) how susceptible the Department of State's unclassified automated information systems are to unauthorized access; (2) what State is doing to address information security issues; and (3) what additional actions may be needed to address the computer security problem. GAO noted that: (1) State's information systems and the information contained within them are vulnerable to access, change, disclosure, disruption or even denial of service by unauthorized individuals; (2) GAO conducted penetration tests to determine how susceptible State's systems are to unauthorized access and found that it was able to access sensitive information; (3) moreover, GAO's penetration of State's computer resources went largely undetected, further underscoring the department's serious vulnerability; (4) the results of GAO's tests show that individuals or organizations seeking to damage State operations, commit terrorism, or obtain financial gain could possibly exploit the department's information security weaknesses; (5) although State has some projects under way to improve security of its information systems and help protect sensitive information, it does not have a security program that allows State officials to comprehensively manage the risks associated with the department's operations; (6) State lacks a central focal point for overseeing and coordinating security activities; (7) State does not routinely perform risk assessments to protect its sensitive information based on its sensitivity, criticality, and value; (8) the department's primary information security policy document is incomplete; (9) the department lacks key controls for monitoring and evaluating the effectiveness of its security programs and it has not established a robust incident response capability; (10) State needs to greatly accelerate its efforts and address these serious information security weaknesses; (11) however, to date, its top managers have not demonstrated that they are committed to doing so; (12) Internet security was the only area in which GAO found that State's controls were currently adequate; (13) however, plans to expand its Internet usage will create new security risks; (14) State conducted an analysis of the risks involved with using the Internet more extensively, but has not yet decided how to address the security risks of additional external connectivity to the concerns this review has raised; and (15) if State increases its Internet use before instituting a comprehensive security program and addresses the additional vulnerabilities unique to the Internet, it will unnecessarily increase the risks of unauthorized access to its systems and information.
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The Results Act is the centerpiece of a statutory framework to improve federal agencies' management activities. The Results Act was designed to shift the focus of attention of federal agencies from the amount of money they spend, or the size of their workloads, to the results achieved by their programs. Agencies are expected to base goals on their results-oriented missions, develop strategies for achieving their goals, and measure actual performance against the goals. The Results Act requires agencies to consult with the Congress in developing their strategic plans. This consultation gives the Congress the opportunity to help ensure that the agencies' missions and goals are focused on results, are consistent with the programs' authorizing laws, and are reasonable in light of fiscal constraints. The products of these consultations are to be clearer guidance to agencies on their missions and goals, which should lead to better information to help the Congress choose among programs, consider alternative ways to achieve results, and assess how well agencies are achieving them. The Results Act required SBA and other executive agencies to complete their first strategic plans and submit them to the Congress and OMB by September 30, 1997. The act also requires that agencies submit their first annual performance plans, which set out measurable goals that define what will be accomplished during a fiscal year, to the Congress after the President submits his fiscal year 1999 budget to the Congress. OMB requested that agencies integrate, to the extent possible, their annual performance plans into their fiscal year 1999 budget submissions. OMB, in turn, is required to include a governmentwide performance plan in the President's fiscal year 1999 budget submission to the Congress. SBA's September 30, 1997, strategic plan is an improvement over the March 5, 1997, version of the plan. The September plan includes the two required elements that were lacking in the March version. First, the September plan includes a section on how program evaluations were used to develop the plan and mentions some specific evaluations that SBA plans in the future, such as those for business information centers. Second, it includes a section entitled "Linkages to Annual Performance Plans" that recognizes the need to link (1) the strategic goals in the plan to annual performance goals and (2) SBA's annual budget submissions to annual performance goals. In addition, the five goals in the September plan--which are to (1) increase opportunities for small business success, (2) transform SBA into a 21st century, leading edge financial institution, (3) help businesses and families recover from disasters, (4) lead small business participation in welfare-to-work, and (5) serve as the voice of America's small businesses--are, as a group, more clearly linked to SBA's statutory mission than the goals in the March version of the plan. Also, the inclusion of date-specific performance objectives to help measure performance makes the strategic goals and objectives in the September plan more amenable to a future assessment of SBA's progress. For example, Under the goal of increasing opportunities for small business success, one of SBA's performance objectives is as follows: "By the year 2000, SBA will help increase the share of federal procurement dollars awarded to small firms to at least 23 percent." Under the goal of transforming SBA into a 21st century, leading edge financial institution, one of SBA's performance objectives is as follows: "By the year 2000, SBA will expand the Chief Financial Officer (CFO) annual financial audit to include a separate opinion on whether SBA's internal control structure meets Committee of Sponsoring Organizations (COSO) of the Treadway Commission standards for financial reporting. By the year 2002, SBA will receive an unqualified opinion on its internal control structure for financial reporting." SBA also improved its strategic plan by more clearly and explicitly linking the strategies in the September plan to the specific objectives that they are intended to achieve. Also, some of the strategies are more detailed and more clearly indicate how they will enable SBA to accomplish its goals and objectives. For example, under the objective of "implementing effective oversight" of lenders and other resource partners, SBA's strategies include (1) establishing loan program credit, service, and mission standards to measure lenders' performance and (2) developing a scoring system, based on objective criteria, that measures and determines whose performance is consistent with the laws and regulations governing SBA programs. Furthermore, certain strategies recognize the crosscutting nature of some activities; for example, a strategy for achieving SBA's strategic goal to "help businesses and families recover from disasters" is to combine SBA's home loss verification with that of the Federal Emergency Management Agency's home inspections. We also observed certain other changes which we believe have improved SBA's strategic plan: The mission statement in SBA's September plan appears to incorporate observations we made in our July report: It is concise and reflects SBA's key statutory authorities of aiding, counseling, and assisting small businesses and of providing disaster assistance to families and businesses. In general, the September plan does a better job of recognizing that SBA's success in achieving certain goals and objectives in its plan is dependent on the actions of others. For example, one of the strategies under the objective "expanding small business procurement opportunities" calls for SBA to "work with other federal agencies to set higher small business procurement goals and assist these agencies in meeting those goals." SBA significantly improved its September plan by more clearly and explicitly linking performance measures to the specific objectives that they are intended to assess. Performance measures are directly linked to 11 of the 14 performance objectives in the plan. An exception is SBA's fifth goal of serving as a voice for America's small business, where the performance measures are listed as a group at the end of the discussion of the goal's three objectives. While SBA's September 30, 1997, strategic plan is an improvement over the March 1997 version that we reviewed, we believe that further revisions to the plan as SBA continues to implement the Results Act and build on current efforts would enable SBA's plan to better meet the purposes of the Results Act. As noted earlier, while the five goals in the September plan are more clearly linked to SBA's statutory mission, the relationship of one goal--leading small businesses' participation in the welfare-to-work effort--to SBA's mission is unclear. While the performance objective for this goal places emphasis on helping small businesses meet their workforce needs, the subsequent discussion implies a focus on helping welfare recipients find employment; for example, the plan states that "SBA's goal is to help 200,000 work-ready individuals make the transition from welfare to work . . . ." It is not clear in the plan why SBA is focusing on welfare recipients and not on other categories of potential employees to help meet small businesses' workforce needs. Under the Results Act, strategy sections in the strategic plans are to briefly describe items, such as the human, capital, information, or other resources needed to achieve goals and objectives. The strategy sections in SBA's September plan lack such a discussion. At the same time, the plan recognizes the need for information on resources needed to achieve the goals and objectives, and states that accountable program managers will develop an annual business plan that contains a set of program activities, milestones, and resources for each objective and strategy in the plan. The Results Act requires that strategic plans include a schedule of future program evaluations. SBA's plan mentions certain program evaluations planned by SBA for future fiscal years; for example, the plan states that in fiscal 1998, SBA will (1) assess the results of counseling services provided by two pilot Women Business Centers and (2) conduct an assessment of the effectiveness and efficiency of existing United States Export Assistance Centers. The plan also states that SBA will continue its goal monitoring of field and headquarters offices. However, the September plan does not contain schedules of future comprehensive program evaluations for SBA's major programs, such as the 7(a) loan program, which is SBA's largest small business lending program, and the 8(a) business development program, which supports the establishment and growth of small firms by providing them with access to federal procurement opportunities. In addition, while SBA acknowledges in the September plan that it needs a more systematic approach for using program evaluations for measuring progress toward achieving its goals and objectives, the plan does not outline how SBA will develop and implement such an approach. It should be noted that the IG's plan references future audits and evaluations that the IG plans to conduct as part of its effort to improve SBA's management. Under OMB's Circular A-11, strategic plans are to briefly describe key external factors and how each factor may influence achievement of the goals and objectives. A section added to the September plan identifies four external factors--the state of the economy, continued congressional and stakeholder support, public-private cooperation, and interagency coordination--that could affect the achievement of the plan's goals. However, with the exception of the "interagency coordination" factor, the plan does not link these factors to particular goals or describe how each could affect achievement of the plan's goals and objectives. Also, the plan does not articulate strategies that SBA would take to mitigate the effects of these factors. The added section also discusses how SBA's programs and activities interact with other federal agencies' programs and activities. While SBA states that it will work with other federal agencies to coordinate its activities, the section does not provide evidence that SBA coordinated with the other agencies in the plan's development. The September plan, while recognizing the need for reliable information to measure progress toward the plan's goals and objectives, notes that SBA currently does not collect or report many of the measures that it will require to assess performance. The plan would benefit from brief descriptions of how SBA plans to collect the data to measure progress toward its goals and objectives. Similarly, a section in the September plan discusses SBA's efforts to improve internal controls and to obtain an unqualified opinion on its internal control structure for financial reporting by the year 2002. While this section implies that SBA will address management problems identified by GAO and others, such as SBA's failure to reconcile certain fund balances with those of the Department of Treasury and the problem of overvalued or nonexistent collateral on liquidated 7(a) loans, specific strategies to address the identified management problems are not described. Unlike the March version that we reviewed, SBA's September plan includes, as appendices, separate strategic plans for SBA's Office of Inspector General (IG) and Office of Advocacy. In the March version of the plan, the IG material was presented under one of the plan's seven goals, while the Office of Advocacy material did not appear at all. Generally, the goals and objectives in the IG and Advocacy plans appear consistent with, and may contribute to the achievement of, the goals and objectives in SBA's plan, but the relationship is not explicit. SBA's plan makes little mention of the IG and Advocacy plans and does not indicate if or how the IG and Advocacy activities are intended to help SBA achieve the agency's strategic goals. Similarly, the IG and Advocacy plans do not make reference to the goals and objectives in the SBA plan. These plans could be more useful to decisionmakers if their relationships were clearer. In summary, SBA has made progress in its strategic planning efforts, based in part on its consultation with the Congress. As I noted earlier, SBA's September 1997 strategic plan includes several improvements that make it more responsive to the requirements of the Results Act. However, as is the case with many other agencies, SBA's development of a plan that conforms to the requirements of the Results Act and to OMB's guidance is an evolving process. As my testimony notes, there are still several areas where improvements need to be made to SBA's strategic plan in order to meet the purposes of the Results Act. This concludes my statement. I would be pleased to respond to any questions you or members of the Committee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed the September 30, 1997 strategic plan developed by the Small Business Administration (SBA), pursuant to the Government Performance and Results Act. GAO noted that: (1) SBA's plan represents an improvement over its March 1997 version; (2) the plan contains the six elements required by the Results Act; (3) the strategic goals, as a group, are more clearly linked to SBA's mission and are more amenable to measurement; (4) the strategies and performance measures are more clearly linked to the objectives that they are intended to achieve and measure; (5) other improvements in the plan encompass a mission statement that now includes the disaster loan program for families and more accurately reflects SBA's statutory authorities and a better recognition that SBA's success in achieving certain goals and objectives in the plan is dependent on the actions of others; (6) an additional section discusses how SBA's programs and activities interact with those of other federal agencies; (7) the plan could be further improved to better meet the purposes of the Results Act; (8) the relationship of one of the plan's goals, leading small business participation in the welfare-to-work effort, to SBA's mission is unclear; (9) the plan does not discuss the human, capital, and other resources needed by SBA to carry out the strategies identified in the plan; (10) the plan does not include comprehensive schedules of future program evaluations for major SBA programs; (11) the plan does not consistently link identified external factors to the particular goal or goals they could affect or describe how how each factor could affect the achievement of the goal; (12) in a departure from its March version, SBA's plan includes as appendices separate strategic plans for SBA's Office of Inspector General and Office of Advocacy; and (13) the relationship between the goals and objectives in the plans included in the appendices and those in SBA's plan is not explicit.
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Distinctions between cruise missiles and UAVs are becoming blurred as the militaries of many nations, in particular the United States, attach missiles to traditional reconnaissance UAVs and develop UAVs dedicated to combat missions. A UAV, a pilotless vehicle that operates like an airplane, can be used for a variety of military and commercial purposes. UAVs are available in a variety of sizes and shapes, propeller-driven or jet propelled, and can be straight-wing aircraft or have tilt-rotors like helicopters. They can be as small as a model aircraft or as large as a U-2 manned reconnaissance aircraft. A cruise missile is an unmanned aerial vehicle designed for one-time use, which travels through the air like an airplane before delivering its payload. A cruise missile consists of four major components: a propulsion system, a guidance and control system, an airframe, and a payload. The technology for the engine, the autopilot, and the airframe could be similar for both cruise missiles and UAVs, according to a 2000 U.S. government study of cruise missiles. Cruise missiles provide a number of military capabilities. For example, they present significant challenges for air and missile defenses. Cruise missiles can fly at low altitudes to stay below radar and, in some cases, hide behind terrain features. Newer missiles are incorporating stealth features to make them less visible to radars and infrared detectors. Furthermore, land-attack cruise missiles may fly circuitous routes to get to their targets, thereby avoiding radar and air defense installations. U.S. policy on the proliferation of cruise missiles and UAVs is expressed in U.S. commitments to the MTCR and Wassenaar Arrangement. These multilateral export control regimes are voluntary, nonbinding arrangements among like-minded supplier countries that aim to restrict trade in sensitive technologies. Regime members agree to restrict such trade through their national laws and regulations, which set up systems to license the exports of sensitive items. The four principal regimes are the MTCR; the Wassenaar Arrangement, which focuses on trade in conventional weapons and related items with both civilian and military (dual-use) applications; the Australia Group, which focuses on chemical and biological technologies; and the Nuclear Suppliers Group, which focuses on nuclear technologies. The United States is a member of all four regimes. Regime members conduct a number of activities in support of the regimes, including (1) sharing information about each others' export licensing decisions, including certain export denials and, in some cases, approvals and (2) adopting common export control practices and control lists of sensitive equipment and technology into national laws or regulations. Exports of commercially supplied American-made cruise missiles, military UAVs, and related technology are transferred pursuant to the Arms Export Control Act, as amended, and the International Trafficking in Arms Regulations, implemented by State. Government-to-government transfers are made pursuant to the Foreign Assistance Act of 1961, as amended, and are subject to DOD guidance. Exports of dual-use technologies related to cruise missiles and UAVs are transferred pursuant to the Export Administration Act of 1979, as amended, and the Export Administration Regulations, implemented by Commerce. The Arms Export Control Act, as amended in 1996, requires the President to establish a program for end-use monitoring of defense articles and services sold or exported under the provisions of the act and the Foreign Assistance Act. This requirement states that, to the extent practicable, end-use monitoring programs should provide reasonable assurance that recipients comply with the requirements imposed by the U.S. government on the use, transfer, and security of defense articles and services. In addition, monitoring programs, to the extent practicable, are to provide assurances that defense articles and services are used for the purposes for which they are provided. The Export Administration Act, as amended, provides the Department of Commerce with the authority to enforce dual- use controls. Under the act, Commerce is authorized to conduct PSV visits outside the United States of dual-use exports. Although cruise missiles and UAVs provide important capabilities for the United States and its friends and allies, in the hands of U.S. adversaries they pose substantial threats to U.S. interests. First, anti-ship cruise missiles threaten U.S. naval forces deployed globally. We reported in 2000 that the next generation of anti-ship cruise missiles--most of which are now expected to be fielded by 2007--will be equipped with advanced target seekers and stealthy design. These features will make them more difficult to detect and defeat. At least 70 nations possess some type of cruise missile, mostly short-range, anti-ship missiles armed with conventional, high-explosive warheads, according to a U.S. government study. Countries that export cruise missiles currently include China, France, Germany, Israel, Italy, Norway, Russia, Sweden, United Kingdom, and the United States. China and Russia have sold cruise missiles to Iran, Iraq, Libya, North Korea, and Syria. Nations that manufacture but do not yet export cruise missiles currently include Brazil, India, Iran, Iraq, North Korea, South Africa, and Taiwan. None of these nonexporting manufacturing countries is a member of the Wassenaar Arrangement, and only Brazil and South Africa are in the MTCR. Second, land-attack cruise missiles have a potential in the long-term to threaten the continental United States and U.S. forces deployed overseas. Various government and academic studies have raised concerns that the wide availability of commercial items, such as global positioning system receivers and lightweight engines, allows both countries and nonstate actors to enhance the accuracy of their systems, upgrade to greater range or payload capabilities, and convert certain anti-ship cruise missiles into land-attack cruise missiles. Although not all cruise missiles can be modified into land-attack cruise missiles because of technical barriers, specific cruise missiles can and have been. For example, a 1999 study outlined how the Chinese Silkworm anti-ship cruise missile had been converted into a land-attack cruise missile. Furthermore, the Iraq Survey Group reported in October 2003 that it had discovered 10 Silkworm anti- ship cruise missiles modified to become land-attack cruise missiles and that Iraq had fired 2 of these missiles at Kuwait. According to an unclassified national intelligence estimate, several countries are technically capable of developing a missile launch mechanism to station on forward-based ships or other platforms to launch land-attack cruise missiles against the United States. Finally, UAVs represent an inexpensive means of launching chemical and biological attacks against the United States and allied forces and territory. For example, the U.S. government reported its concern over this threat in various meetings and studies. The Acting Deputy Assistant Secretary of State for Nonproliferation testified in June 2002 that UAVs are potential delivery systems for WMD, and are ideally suited for the delivery of chemical and biological weapons given their ability to disseminate aerosols in appropriate locations at appropriate altitudes. He added that, although the primary concern has been that nation-states would use UAVs to launch WMD attacks, there is potential for terrorist groups to produce or acquire small UAVs and use them for chemical or biological weapons delivery. The U.S. government generally uses two key nonproliferation tools--- multilateral export control regimes and national export controls--to address cruise missile and UAV proliferation, but both tools have limitations. The United States and other governments have traditionally used multilateral export control regimes, principally the MTCR, to address missile proliferation. However, despite successes in strengthening controls, the growing capability of countries of concern to develop and trade technologies used for WMD limits the regime's ability to impede proliferation. For example, between 1997 and 2002, the United States and other governments successfully revised the MTCR's control lists of sensitive missile-related equipment and technology to include six of eight U.S.-proposed items related to cruise missile and UAV technology. Adding items to the control lists commits regime members to provide greater scrutiny when deciding whether to license the items for export. Despite the efforts of these regimes, nonmembers such as China and Israel continue to acquire, develop, and export cruise missile or UAV technology. The growing capability of nonmember supplier countries to develop technologies that could be used for WMD and trade them with other countries of proliferation concern undermines the regimes' ability to prevent proliferation. In October 2002, we reported on other limitations that impede the ability of the multilateral export control regimes, including the MTCR and Wassenaar Arrangement, to achieve their nonproliferation goals. We found that MTCR members may not share complete and timely information, such as members' denied export licenses, in part because the regime lacks an electronic data system to send and retrieve such information. The Wassenaar Arrangement members share export license approval information but collect and aggregate it to a degree that it cannot be used constructively. Both MTCR and the Wassenaar Arrangement use a consensus-based process that makes decision-making difficult. The regimes also lack a means to enforce compliance with members' political commitments to regime principles. We recommended that the Secretary of State establish a strategy to work with other regime members to enhance the effectiveness of the regimes by implementing a number of steps, including (1) adopting an automated information-sharing system in MTCR to facilitate more timely information exchanges, (2) sharing greater and more detailed information on approved exports of sensitive transfers to nonmember countries, (3) assessing alternative processes for reaching decisions, and (4) evaluating means for encouraging greater adherence to regime commitments. However, State has not been responsive in implementing the recommendation to establish a strategy to enhance the effectiveness of the regimes. State officials said that the recommendation is under consideration in a review by the National Security Council that has been ongoing for over a year. The U.S. government uses its national export control authorities to address missile proliferation but finds it difficult to identify and track commercially available items not covered by control lists. For example, Bureau of Immigration and Customs Enforcement agents upon inspecting an item to be exported might identify that the item is a circuit board, but not that it is part of a guidance system and that the guidance system is intended for a cruise missile. Moreover, a gap in the catch-all provision of U.S. export control regulations could allow subnational actors to acquire American cruise missile or UAV technology for missile proliferation or terrorist purposes without violating U.S. export control laws or regulations. This gap in U.S. export control authority enabled American companies to legally export dual-use items to a New Zealand resident who bought the items to show how a terrorist could legally build a cruise missile. The gap results from current regulations that restrict the sale of certain dual-use items to national missile proliferation projects and countries of concern, but not to nonstate actors such as certain terrorist organizations or individuals. The United States has other nonproliferation tools to address cruise missile and UAV proliferation--diplomacy, sanctions, and interdiction of illicit shipments of items--but these tools have had unclear results or have been little used. End-use monitoring refers to the procedures used to verify that foreign recipients of controlled U.S. exports use such items according to U.S. terms and conditions of transfer. A post-shipment verification visit is a key end-use monitoring tool for U.S. agencies to confirm that authorized recipients of U.S. technology both received transferred items and used them in accordance with conditions of the transfer. State is responsible for conducting PSVs on direct commercial sales of cruise missiles, UAVs, and related technology. We found that State did not use PSVs to assess compliance with cruise missile or UAV licenses having conditions limiting how the item may be used. These licenses included items deemed significant by State regulations. Based on State licensing data, we identified 786 licenses for cruise missiles, UAVs, or related items from fiscal years 1998 through 2002. Of these, 480 (61 percent) were licenses with conditions, while 306 (39 percent) were licenses without conditions. We found that State did not conduct PSVs for any of the 480 licenses with conditions and conducted PSVs on 4 of 306 licenses approved without conditions. A State licensing official stated that few post-shipment checks have been conducted for cruise missiles, UAVs, and related items because many are destined for well-known end users in friendly countries. However, over fiscal years 1998 through 2002, 129 of the 786 licenses authorized the transfer of cruise missile and UAV-related items to countries such as Egypt, Israel, and India. These countries are not MTCR members, which indicates that they might pose a higher risk of diversion. In commenting on a draft of our report, State emphasized the importance of pre-license checks in verifying controls over the end user and end use of exported items and said that we did not include such checks in our analysis. We therefore reviewed the original 786 cruise missile and UAV licenses to determine how many had received pre-license checks, a possible mitigating factor reducing the need to conduct a PSV. We found that only 6 of the 786 licenses from fiscal years 1998 through 2002 that State provided us had been selected for pre-license checks. Defense is responsible for monitoring transfers of cruise missiles, UAVs, and related technology provided under government-to-government agreements through the Foreign Military Sales program. Defense's end-use monitoring program has conducted no end-use checks related to cruise missile or UAV transfers, according to the program director. From fiscal years 1998 through 2002, DOD approved 37 agreements for the transfer of more than 500 cruise missiles and related items, as well as one transfer of UAV training software. The agreements authorized the transfer of Tomahawk land-attack cruise missiles, Standoff land-attack missiles, and Harpoon anti-ship cruise missiles, as well as supporting equipment such as launch tubes, training missiles, and spare parts. Approximately 30 percent of cruise missile transfers were destined for non-MTCR countries. Despite the 1996 legal requirement to create an end-use monitoring program, Defense's Golden Sentry monitoring program is not yet fully implemented. DOD issued program guidance in December 2002 that identified the specific responsibilities for new end-use monitoring activities. In addition, as of February 2004, DOD was conducting visits to Foreign Military Sales recipient countries to determine the level of monitoring needed and was identifying weapons and technologies that may require more stringent end- use monitoring. The program director stated that he is considering adding cruise missiles and UAVs to a list of weapon systems that receive more comprehensive monitoring. The Commerce Department is responsible for conducting PSVs on exports of dual-use technology that might have military applications for cruise missiles and UAVs. Based on Commerce licensing data, we found that Commerce issued 2,490 dual-use licenses between fiscal years 1998 and 2002 for items that could be useful in developing cruise missiles or UAVs. These licenses were for items to countries including India, Israel, Poland, Switzerland, Turkey, and the United Arab Emirates. Of these, Commerce selected 2 percent of the licenses, or 52 cases, for a PSV visit and completed visits for about 1 percent of the licenses, or 29 cases. Other supplier countries place conditions on cruise missile and UAV- related transfers, but few reported conducting end-use monitoring once they exported the items. While national export laws authorize end-use monitoring, none of the foreign government officials reported to us any PSV visits for cruise missile or UAV-related items. Government officials in France, Italy, and the United Kingdom stated that their respective governments generally do not verify conditions on cruise missile and UAV transfers and conduct few PSV visits of such exports. The South African government was the only additional supplier country responding to a written request for information that reported it regularly requires and conducts PSVs on cruise missile and UAV transfers. The continued proliferation of cruise missiles and UAVs poses a growing threat to the United States, its forces overseas, and its allies. Most countries already possess cruise missiles, UAVs, or related technology, and many are expected to develop or obtain more sophisticated systems in the future. The dual-use nature of many of the components of cruise missiles and UAVs also raises the prospect that terrorists could develop rudimentary systems that could pose additional security threats to the United States. Because this technology is widely available throughout the world, the United States works in concert with other countries through multilateral export control regimes whose limited effectiveness could be enhanced by adopting recommendations we have made in previous reports. U.S. export controls may not be sufficient to prevent cruise missile and UAV proliferation and to ensure compliance with license conditions. Because some key dual-use components can be acquired without an export license, it is difficult for the export control system to limit or track their use. Moreover, current U.S. export controls may not prevent proliferation by nonstate actors, such as certain terrorists, who operate in countries that are not currently restricted under missile proliferation regulations. Furthermore, the U.S. government seldom uses its end-use monitoring programs to verify compliance with the conditions placed on items that could be used to develop cruise missiles or UAVs. As a result, the U.S. government does not have sufficient information to know whether recipients of these exports are effectively safeguarding equipment and technology and, thus, protecting U.S. national security and nonproliferation interests. The challenges to U.S. nonproliferation efforts in this area, coupled with the absence of end-use monitoring programs by several foreign governments for their exports of cruise missiles or UAVs, raise questions about how nonproliferation tools are keeping pace with the changing threat. We recommended that the Secretary of Commerce assess and report to Congress on the adequacy of the export control regulations' catch-all provision to address missile proliferation by nonstate actors and on ways the provision might be modified. We also recommended that the Secretaries of State, Commerce, and Defense each complete a comprehensive assessment of the nature and extent of compliance with license conditions on cruise missiles, UAVs, and related dual-use technology. As part of the assessment, the departments should also conduct additional PSV visits on a sample of cruise missile and UAV licenses. This assessment would allow the departments to gain critical information that would allow them to better balance potential proliferation risks of various technologies with available resources for conducting future PSV visits. Commerce and Defense partially concurred with our recommendations, which we modified to address their comments. State disagreed with the need to conduct a comprehensive assessment of the nature and extent of compliance with license conditions for cruise missile and UAV technology transfers. However, State said that it would consider conducting more PSVs on such technology transfers as it improves its monitoring program. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I will be happy to answer any questions you may have. For future contacts regarding this testimony, please contact Joseph Christoff at (202) 512-8979. David C. Maurer, Jeffrey D. Phillips, Claude Adrien, W. William Russell IV, Lynn Cothern, Stephen M. Lord, and Richard Seldin 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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Cruise missiles and unmanned aerial vehicles (UAV) pose a growing threat to U.S. national security interests as accurate, inexpensive delivery systems for conventional, chemical, and biological weapons. GAO assessed (1) the tools the U.S. and foreign governments use to address proliferation risks posed by the sale of these items and (2) efforts to verify the end use of exported cruise missiles, UAVs, and related technology. The growing threat to U.S. national security of cruise missile and UAV proliferation is challenging the tools the United States has traditionally used. Multilateral export control regimes have expanded their lists of controlled technologies that include cruise missile and UAV items, but key countries of concern are not members. U.S. export control authorities find it increasingly difficult to limit or track unlisted dual-use items that can be acquired without an export license. Moreover, a gap in U.S. export control authority enables American companies to export certain dual-use items to recipients that are not associated with missile projects or countries listed in the regulations, even if the exporter knows the items might be used to develop cruise missiles or UAVs. American companies have in fact legally exported dual-use items with no U.S. government review to a New Zealand resident who bought the items to build a cruise missile. The U.S. government seldom uses its end-use monitoring programs to verify compliance with conditions placed on the use of cruise missile, UAV, or related technology exports. For example, State officials do not monitor exports to verify compliance with license conditions on missiles or other items, despite legal and regulatory requirements to do so. Defense has not used its end-use monitoring program initiated in 2002 to check the compliance of users of more than 500 cruise missiles exported between fiscal years 1998 and 2002. Commerce conducted visits to assess the end use of items for about 1 percent of the 2,490 missile-related licenses we reviewed. Thus, the U.S. government cannot be confident that recipients are effectively safeguarding equipment in ways that protect U.S. national security and nonproliferation interests.
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Recognizing the potential value of IT for public and private health systems, the federal government has, for several years, been working to promote the nationwide use of health IT. In April 2004, President Bush called for widespread adoption of interoperable electronic health records within 10 years and issued an executive order that established the position of the National Coordinator for Health IT within HHS. The National Coordinator's responsibilities include developing, maintaining, and directing the implementation of a strategic plan to guide the nationwide implementation of interoperable health IT in both the public and private sectors. According to the strategic plan, the National Coordinator is to lead efforts to build a national health IT infrastructure that is intended to, among other things, ensure that patients' individually identifiable health information is secure, protected, and available to the patient to be used for medical and nonmedical purposes, as directed by the patient and as appropriate. In January 2007, we reported on the steps that HHS was taking to ensure the protection of personal health information exchanged within a nationwide network and on the challenges facing health information exchange organizations in protecting electronic personal health information. We reported that although HHS and the Office of the National Coordinator had initiated actions to identify solutions for protecting electronic personal health information, the department was in the early stages of its efforts and had not yet defined an overall privacy approach. As described earlier, we made recommendations regarding the need for an overall privacy approach, which we reiterated in subsequent testimonies in February 2007, June 2007, and February 2008. In our report, we described applicable provisions of HIPAA and other federal laws that are intended to protect the privacy of certain health information, along with the HIPAA Privacy Rule and key principles that are reflected in the rule. Table 1 summarizes these principles. We also described in our report and testimonies challenges associated with protecting electronic health information that are faced by federal and state health information exchange organizations and health care providers. These challenges are summarized in table 2. We reported that HHS had undertaken several initiatives intended to address aspects of key principles and challenges for protecting the privacy of health information. For example, in 2005, the department awarded four health IT contracts that included requirements for developing solutions to comply with federal privacy requirements and identifying techniques and standards for securing health information. Since January 2007, HHS has undertaken various initiatives that are contributing to its development of an overall privacy approach, although more work remains. We recommended that this overall approach include (1) identifying milestones and the entity responsible for integrating the outcomes of its privacy-related initiatives, (2) ensuring that key privacy principles in HIPAA are fully addressed, and (3) addressing key challenges associated with the nationwide exchange of health information. In this regard, the department has fulfilled the first part of our recommendation, and it has taken important steps in addressing the two other parts. Nevertheless, these steps have fallen short of fully implementing our recommendation because they do not include a process for ensuring that all key privacy principles and challenges will be fully and adequately addressed. In the absence of such a process, HHS may not be effectively positioned to ensure that health IT initiatives achieve comprehensive privacy protection within a nationwide health information network. The department and its Office of the National Coordinator have continued taking steps intended to address key privacy principles and challenges through various health IT initiatives. Among other things, these initiatives have resulted in technical requirements, standards, and certification criteria related to the key privacy principles described in table 1. The following are examples of ways that the Office of the National Coordinator's health IT initiatives relate to privacy principles reflected in HIPAA. As part of its efforts to advance health IT, the American Health Information Community defines "use cases," which are descriptions of specific business processes and ways that systems should interact with users and with other systems to achieve specific goals. Among other things, several of the use cases include requirements and specifications that address aspects of the access, uses and disclosures, and amendments privacy principles. For example, the "consumer empowerment" use case describes at a high level specific capabilities that align with the access principle. It requires that health IT systems include mechanisms that allow consumers to access their own clinical information, such as lab results and diagnosis codes, from other sources to include in their personal health records. The use case also aligns with the uses and disclosures principle and includes requirements that allow consumers to control access to their personal health record information and specify which information can be accessed by health care providers and organizations within health information networks. Further, the consumer empowerment use case aligns with the amendments privacy principle, emphasizing the need for policies to guide decisions about which data consumers should be able to modify, annotate, or request that organizations change. (Other use cases that are related to these privacy principles are the "personalized healthcare" and "remote monitoring" use cases.) Under HHS's initiative to implement a nationwide health information network, in January 2007, four test network implementations, or prototypes, demonstrated potential nationwide health information exchange and laid the foundation for the Office of the National Coordinator's ongoing network trial implementations. Activities within the prototypes and the trial implementations are related to privacy principles, including the security, access, uses and disclosures, and administrative requirements principles. For example, the prototypes produced specific requirements for security mechanisms (such as data access control and encryption) that address aspects of the security principle. Additionally, the ongoing trial implementations are guided by requirements for using personal health data intended to address the access, uses and disclosures, and administrative requirements principles. For example, participants in the trial implementations are to provide the capability for consumers to access information, such as registration and medication history data, from other sources to include in their personal health records, to control access to self-entered data or clinical information held in a personal health record, and to control the types of information that can be released from personal health records for health information exchange. In addition, organizations participating in the network are required to provide system administrators the ability to monitor and audit all access to and use of the data stored in their systems. The Healthcare Information Technology Standards Panel continued work to "harmonize" standards directly related to several key privacy principles, primarily the security principle. In addition, the panel developed technical guidelines that are intended to address other privacy principles, such as the authorization principle and the uses and disclosures principle. For example, the panel's guidelines specify that systems should be designed to ensure that consumers' instructions related to authorization and consent are captured, managed, and available to those requesting the health information. The Certification Commission for Healthcare Information Technology, which is developing and evaluating the criteria and process for certifying the functionality, security, and interoperability of electronic health records, took steps that primarily address the security principle. For example, the commission defined specific security criteria for both ambulatory and inpatient electronic health records that require various safeguards to be in place before electronic health record systems are certified. Among other things, these safeguards include ensuring that system administrators can modify the privileges of users so that only those who have a need to access patients' information are allowed to do so and that the minimum amount of information necessary can be accessed by system users. The State-Level Health Information Exchange Consensus Project, a consortium of public and private-sector stakeholders, is intended to promote consistent organizational policies regarding privacy and health information exchange. The consortium issued a report in February 2007 that addresses, among other principles, the uses and disclosures privacy principle. For example, the report advises health information exchange organizations to maintain information about access to and disclosure of patients' personal health information and to make that data available to patients. The consortium subsequently issued another report in March 2008 that recommended practices to ensure the appropriate access, use, and control of health information. Additionally, two of HHS's key advisory groups continued to develop and provide recommendations to the Secretary of HHS for addressing privacy issues and concerns: The Confidentiality, Privacy, and Security Workgroup was formed in 2006 by the American Health Information Community to focus specifically on these issues and has submitted recommendations to the community that address privacy principles. Among these are recommendations related to the notice principle that the workgroup submitted in February and April 2008. These recommendations stated that health information exchange organizations should provide patients, via the Web or another means, information in plain language on how these organizations use and disclose health information, their privacy policies and practices, and how they safeguard patient or consumer information. The work group also submitted recommendations related to the administrative requirements principle, stating that the obligation to provide individual rights and a notice of privacy practices under HIPAA should remain with the health care provider or plan that has an established, independent relationship with a patient, not with the health information exchange. The National Committee on Vital and Health Statistics, established in 1949, advises the Secretary of HHS on issues including the implementation of health IT standards and safeguards for protecting the privacy of personal health information. The committee's recent recommendations related to HHS's health IT initiatives addressed, among others, the uses and disclosures principle. For example, in February 2008, the National Committee submitted five recommendations to the Secretary that support an individual's right to control the disclosure of certain sensitive health information for the purposes of treatment. Although the recommendations from these two advisory groups are still under consideration by the Secretary, according to HHS officials, contracts for the nationwide health information network require participants to consider these recommendations when conducting network trials once they are accepted by the Secretary. The Office of the National Coordinator also took actions intended to address key challenges to protecting exchanges of personal electronic health information. Specifically, state-level initiatives (described below) were formed to bring stakeholders from states together to collaborate, propose solutions, and make recommendations to state and federal policymakers for addressing challenges to protecting the privacy of electronic personal health information within a nationwide health information exchange. Outcomes of these initiatives provided specific state-based solutions and recommendations for federal policy and guidance for addressing key challenges described by our prior work (see table 2). The Health Information Security and Privacy Collaboration is pursuing privacy and security projects directly related to several of the privacy challenges identified in our prior work, including the need to resolve legal and policy issues resulting from varying state laws and organizational-level business practices and policies, and the need to obtain individuals' consent for the use and disclosure of personal health information. For example, the state teams noted the need for clarification about how to interpret and apply the "minimum necessary" standard, and they recommended that HHS provide additional guidance to clarify this issue. In addition, most of the state teams cited the need for a process to obtain patient permission to use and disclose personal health information, and the teams identified multiple solutions to address differing definitions of patient permission, including the creation of a common or uniform permission form for both paper and electronic environments. The State Alliance for e-Health created an information protection task force that in August 2007 proposed five recommendations that are intended to address the challenge of understanding and resolving legal and policy issues. The recommendations, which the alliance accepted, focused on methods to facilitate greater state-federal interaction related to protecting privacy and developing common solutions for the exchange of electronic health information. Beyond the initiatives previously discussed, in June 2008, the Secretary released a federal health IT strategic plan that includes a privacy and security objective for each of its strategic goals, along with strategies and target dates for achieving the objectives. For example, one of the strategies is to complete the development of a confidentiality, privacy, and security framework by the end of 2008, and another is to address inconsistent statutes or regulations for the exchange of electronic health information by the end of 2011. The strategic plan emphasized the importance of privacy protection for electronic personal health information by acknowledging that the success of a nationwide, interoperable health IT infrastructure in the United States will require a high degree of public confidence and trust. In accordance with this strategy, the Office of the National Coordinator is responsible for developing the confidentiality, privacy, and security framework. The National Coordinator has indicated that this framework, which is to be developed and published by the end of calendar year 2008, is to incorporate the outcomes of the department's privacy-related initiatives, and that milestones have been developed and responsibility assigned for integrating these outcomes. The National Coordinator has assigned responsibility for these integration efforts and the development of the framework to the Director of the Office of Policy and Research within the Office of the National Coordinator. In this regard, the department has fulfilled the first part of our recommendation. While the various initiatives that HHS has undertaken are contributing to the development and implementation of an overall privacy approach, more work remains. In particular, the department has not defined a process for ensuring that all privacy principles and challenges will be fully and adequately addressed. This process would include, for example, steps for ensuring that all stakeholders' contributions to defining privacy-related activities are appropriately considered and that individual inputs to the privacy framework will be effectively assessed and prioritized to achieve comprehensive coverage of all key privacy principles and challenges. Such a process is important given the large number and variety of activities being undertaken and the many stakeholders contributing to the health IT initiatives. In particular, the contributing activities involve a wide variety of stakeholders, including federal, state and private-sector entities. Further, certain privacy-related activities are relevant only to specific principles or challenges, and are generally not aimed at comprehensively addressing all privacy principles and challenges. For example, the certification and standards harmonization efforts primarily address the implementation of technical solutions for interoperable health IT and, therefore, are aimed at system-level security measures, such as data encryption and password protections, while the recommendations submitted by HHS's advisory committees and state-level initiatives are primarily aimed at policy and legal issues. Effectively assessing the contributions of individual activities could play an important role in determining how each activity contributes to the collective goal of ensuring comprehensive privacy protection. Additionally, the outcomes of the various activities may address privacy principles and challenges to varying degrees. For example, while a number of the activities address the uses and disclosures principle, HHS's advisory committees have made recommendations that the department's activities more extensively address the notice principle. Consequently, without defined steps for thoroughly assessing the contributions of the activities, some principles and challenges may be addressed extensively, while others may receive inadequate attention, leading to gaps in the coverage of the principles and challenges. In discussing this matter with us, officials in the Office of the National Coordinator pointed to the various health IT initiatives as an approach that it is taking to manage privacy-related activities in a coordinated and integrated manner. For example, the officials stated that the purpose of the American Health Information Community's use cases is to provide guidance and establish requirements for privacy protections that are intended to be implemented throughout the department's health IT initiatives (including standards harmonization, electronic health records certification, and the nationwide health information network). Similarly, contracts for the nationwide health information network require participants to adopt approved health IT standards (defined by the Healthcare Information Technology Standards Panel) and, as mentioned earlier, to consider recommendations from the American Health Information Community and the National Committee on Vital and Health Statistics when conducting network trials, once these recommendations are accepted or adopted by the Secretary. While these are important activities for addressing privacy, they do not constitute a defined process for assessing and prioritizing the many privacy-related initiatives and the needs of stakeholders to ensure that privacy issues and challenges will be addressed fully and adequately. Without a process that accomplishes this, HHS faces the risk that privacy protection measures may not be consistently and effectively built into health IT programs, thus jeopardizing patient privacy as well as the public confidence and trust that are essential to the success of a future nationwide health information network. HHS and its Office of the National Coordinator for Health IT intend to address key privacy principles and challenges through integrating the privacy-related outcomes of the department's health IT initiatives. Although it has established milestones and assigned responsibility for integrating these outcomes and for the development of a confidentiality, privacy, and security framework, the department has not fully implemented our recommendation for an overall privacy approach that is essential to ensuring that privacy principles and challenges are fully and adequately addressed. Unless HHS's privacy approach includes a defined process for assessing and prioritizing the many privacy-related initiatives, the department may not be able to ensure that key privacy principles and challenges will be fully and adequately addressed. Further, stakeholders may lack the overall policies and guidance needed to assist them in their efforts to ensure that privacy protection measures are consistently built into health IT programs and applications. As a result, the department may miss an opportunity to establish the high degree of public confidence and trust needed to help ensure the success of a nationwide health information network. To ensure that key privacy principles and challenges are fully and adequately addressed, we recommend that the Secretary of Health and Human Services direct the National Coordinator for Health IT to include in the department's overall privacy approach a process for assessing and prioritizing its many privacy-related initiatives and the needs of stakeholders. HHS's Assistant Secretary for Legislation provided written comments on a draft of this report. In the comments, the department generally agreed with the information discussed in our report; however, it neither agreed nor disagreed with our recommendation. HHS agreed that more work remains to be done in the department's efforts to protect the privacy of electronic personal health information and stated that it is actively pursuing a two-phased process for assessing and prioritizing privacy-related initiatives intended to build public trust and confidence in health IT, particularly in electronic health information exchange. According to HHS, the process will include work with stakeholders to ensure that real-world privacy challenges are understood. In addition, the department stated that the process will assess the results and recommendations from the various health IT initiatives and measure progress toward addressing privacy-related milestones established by the health IT strategic plan. As we recommended, effective implementation of such a process could help ensure that the department's overall privacy approach fully addresses key privacy principles and challenges. HHS also provided technical comments, which we have incorporated into the report as appropriate. The department's written comments are reproduced in appendix II. We are sending copies of this report to interested congressional committees and to the Secretary of HHS. Copies of this report will be made available at no charge on our Web site at www.gao.gov. If you have any questions on matters discussed in this report, please contact me at (202) 512-6304 or Linda Koontz at (202) 512-6240, or by e-mail at [email protected] or [email protected]. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. Other contacts and key contributors to this report are listed in appendix III. Our objective was to provide an update on the department's efforts to define and implement an overall privacy approach, as we recommended in an earlier report. Specifically, we recommended that the Secretary of Health and Human Services define and implement an overall approach for protecting health information that would (1) identify milestones and the entity responsible for integrating the outcomes of its privacy-related initiatives, (2) ensure that key privacy principles in the Health Insurance Portability and Accountability Act of 1996 (HIPAA) are fully addressed, and (3) address key challenges associated with the nationwide exchange of health information. To determine the status of HHS's efforts to develop an overall privacy approach, we analyzed the department's federal health IT strategic plan and documents related to its planned confidentiality, privacy, and security framework. We also analyzed plans and documents that described activities of each of the health IT initiatives under the Office of the National Coordinator and identified those intended to (1) develop and implement mechanisms for addressing privacy principles and (2) develop recommendations for overcoming challenges to ensuring the privacy of patients' information. Specifically, we assessed descriptions of the intended outcomes of the office's health IT initiatives to determine the extent to which they related to these privacy principles and challenges identified by our prior work. To supplement our data collection and analysis, we conducted interviews with officials from the Office of the National Coordinator to discuss the department's approaches and future plans for addressing the protection of personal health information within a nationwide health information network. We conducted this performance audit at the Department of Health and Human Services in Washington, D.C., from April 2008 through September 2008, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to those named above, key contributors to this report were John A. de Ferrari, Assistant Director; Teresa F. Tucker, Assistant Director; Barbara Collier; Heather A. Collins; Susan S. Czachor; Amanda C. Gill; Nancy Glover; M. Saad Khan; Thomas E. Murphy; and Sylvia L. Shanks.
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Although advances in information technology (IT) can improve the quality and other aspects of health care, the electronic storage and exchange of personal health information introduces risks to the privacy of that information. In January 2007, GAO reported on the status of efforts by the Department of Health and Human Services (HHS) to ensure the privacy of personal health information exchanged within a nationwide health information network. GAO recommended that HHS define and implement an overall privacy approach for protecting that information. For this report, GAO was asked to provide an update on HHS's efforts to address the January 2007 recommendation. To do so, GAO analyzed relevant HHS documents that described the department's privacy-related health IT activities. Since GAO's January 2007 report on protecting the privacy of electronic personal health information, the department has taken steps to address the recommendation that it develop an overall privacy approach that included (1) identifying milestones and assigning responsibility for integrating the outcomes of its privacy-related initiatives, (2) ensuring that key privacy principles are fully addressed, and (3) addressing key challenges associated with the nationwide exchange of health information. In this regard, the department has fulfilled the first part of GAO's recommendation, and it has taken important steps in addressing the two other parts. The HHS Office of the National Coordinator for Health IT has continued to develop and implement health IT initiatives related to nationwide health information exchange. These initiatives include activities that are intended to address key privacy principles and challenges. For example: (1) The Healthcare Information Technology Standards Panel defined standards for implementing security features in systems that process personal health information. (2) The Certification Commission for Healthcare Information Technology defined certification criteria that include privacy protections for both outpatient and inpatient electronic health records. (3) Initiatives aimed at the state level have convened stakeholders to identify and propose solutions for addressing challenges faced by health information exchange organizations in protecting the privacy of electronic health information. In addition, the office has identified milestones and the entity responsible for integrating the outcomes of its privacy-related initiatives, as recommended. Further, the Secretary released a federal health IT strategic plan in June 2008 that includes privacy and security objectives along with strategies and target dates for achieving them. Nevertheless, while these steps contribute to an overall privacy approach, they have fallen short of fully implementing GAO's recommendation. In particular, HHS's privacy approach does not include a defined process for assessing and prioritizing the many privacy-related initiatives to ensure that key privacy principles and challenges will be fully and adequately addressed. As a result, stakeholders may lack the overall policies and guidance needed to assist them in their efforts to ensure that privacy protection measures are consistently built into health IT programs and applications. Moreover, the department may miss an opportunity to establish the high degree of public confidence and trust needed to help ensure the success of a nationwide health information network.
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As you know, Mr. Chairman, the decennial census is a critical national effort mandated by the Constitution. Census data are used to apportion seats in Congress, redraw congressional districts, allocate billions of dollars in federal assistance to state and local governments, and for numerous other public and private sector purposes. Importantly, the census is conducted against a backdrop of immutable deadlines. In order to meet legally mandated reporting requirements, census activities need to take place at specific times and in the proper sequence. For example, the group quarters validation operation, where census workers verify the location of group quarters, such as nursing homes and college dormitories, needs to be completed after the address canvassing operation. As a result, it is absolutely critical for the Bureau to stay on schedule. Figure 1 shows some dates for selected decennial events. The Bureau estimates that the 2010 Census will cost more than $14 billion over its life-cycle, making it the most expensive census in our nation's history. According to the Bureau, the increasing cost of the census is caused in part by various societal trends--such as increasing privacy concerns, more non-English speakers, and people residing in makeshift and other nontraditional living arrangements--making it harder to find people and get them to participate in the census. Automation and IT will play a critical role in the success of the 2010 Census by supporting data collection, analysis, and dissemination. According to the Bureau's estimates, it is spending more than $3 billion on IT acquisitions for the census. The Bureau is relying on both the acquisition of new systems and the enhancement of existing legacy systems for conducting operations for the 2010 Census. These systems are to play important roles with regard to different aspects of the process, such as providing geographic information to establish where to count, capturing and integrating census responses, supporting field operations such as address canvassing, and tabulating and publicly disseminating census data. Accurate cost estimates are essential to a successful census because they help ensure that the Bureau has adequate funds, and so that Congress, the administration, and the Bureau itself can have reliable information on which to base or advise decisions. However, as we have reported before, the Bureau has insufficient policies and procedures and inadequately trained staff for conducting high-quality cost estimation for the decennial census. The Bureau does not have cost estimation guidance and procedures in place or staff that is certified in cost estimation techniques. The Bureau is developing a new budget management tool that will support the cost estimation process beyond 2010. As part of that, the Bureau will need to establish rigorous cost estimation policies and procedures and use skilled estimators to ensure that future cost estimates are reliable and of high quality. For example, to help manage the 2010 census and contain costs, over 5 years ago we recommended that the Bureau develop a comprehensive, integrated project plan for the 2010 Census that should include the itemized, estimated costs of each component and a sensitivity analysis and an explanation of significant changes in the assumptions on which these costs were based. In response, the Bureau provided us with the 2010 Census Operations and Systems Plan, dated August 2007. This plan represented an important step forward by including operational inputs and outputs and describing linkages among operations and systems. However, that document did not include itemized cost estimates of each component or sensitivity analysis, and thus did not provide a valid baseline or range of estimates for the Bureau and Congress. The Bureau has provided annual cost updates as part of its budget submission process, but these too have lacked cost analyses to support them. As the Bureau approaches the final surge in the current decade-long decennial spending cycle, providing reliable cost estimates accompanied by sound justification, as we have recommended, will be important if Congress is to make informed decisions about the levels at which to fund the remainder of the 2010 Census. A complete and accurate list of all addresses where people live in the country 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. The Bureau goes to great lengths to develop a quality address list and maps, working with the U.S. Postal Service; federal agencies; state, local, and tribal governments; local planning organizations; the private sector; and nongovernmental entities. For example, under the Local Update of Census Addresses (LUCA) program, the Bureau is authorized to partner with state, local, and tribal governments, tapping into their knowledge of local populations and housing conditions in order to secure a more complete count. Between November 2007 and March 2008, over 8,000 state, local, and tribal governments provided approximately 8 million address updates through the LUCA program. The Bureau will send thousands of temporary census workers, known as listers, into the field to collect and verify address information and update maps on-site, including verifying address updates provided through the LUCA program. Despite the Bureau's efforts, an inherent challenge is locating unconventional and hidden housing units, such as converted basements and attics. For example, as shown in figure 2, what appears to be a small, single-family house could contain an apartment, as suggested by its two doorbells. The Bureau has trained listers to look for extra mailboxes, utility meters, and other signs of hidden housing units and is developing training guides for 2010 to help listers locate hidden housing. Nonetheless, decisions on what is a habitable dwelling are often difficult to make--what is habitable to one worker may seem uninhabitable to another. According to Bureau estimates, approximately 1.4 million housing units were missed in the 2000 Census. If an address is not in the Bureau's address file, its residents are less likely to be included in the census. A nationwide address canvassing operation for the 2010 Census is scheduled to begin this spring, when listers will use handheld computers for the first time to collect address data. Listers will add addresses that do not already appear on the Bureau's list and mark for deletion any that they cannot verify according to the rules and guidance developed by the Bureau. When the handheld computers were tested during the dress rehearsal of the address canvassing operation, the devices experienced such problems as slow or inconsistent data transmission, freeze-ups, and difficulties collecting mapping coordinates. The software that managers used to review worker productivity and assign work was also troublesome. For example, management reports were unreliable because they pulled data from incorrect sources, and Bureau staff had difficulty using the work management software to reassign work. The Bureau took steps to fix these issues and, in December 2008, conducted a limited field test in Fayetteville, North Carolina, to test the functionality and usability of the handheld computer, including whether the handheld computer problems encountered earlier had been resolved. Although the Bureau's final evaluation of the field test was due by the end of February 2009, we were not able to review it for this testimony. From our observations of the December 2008 field test and interviews with Bureau officials, the Bureau appears to have addressed many of the handheld computer performance issues, as well as the problems with the work management software, observed during the dress rehearsal. This is an important and noteworthy development. Nonetheless, more information is needed to determine the Bureau's overall readiness for address canvassing as the field test was not an end- to-end systems evaluation, did not validate all address canvassing requirements, such as training and help desk support, and did not include urban areas. Additionally, the scale of the field test was a fraction of that of the address canvassing operation. The Bureau was to conduct a review of the readiness of the handheld computers in January 2009 but has not yet reported the results of that review. Finally, the Bureau's actual workload for address canvassing--about 144.7 million addresses--is 11 million addresses more than the Bureau had planned for, leaving the Bureau with too few handheld computers to complete the workload in the time originally scheduled. In response, the Bureau will be extending the amount of time listers will be working in the field in affected areas, although not extending the end date of the operation, to compensate for the larger workload. During the dress rehearsal, listers also experienced problems when collecting address data for large blocks having more than 1,000 housing units. According to the Bureau, the handheld computer did not have the capacity to efficiently collect data for large blocks. The Bureau has taken steps to mitigate this problem. Specifically, in January 2009, the Bureau began using laptop computers and software already used in other operations to canvass the 2,086 blocks it identified as large blocks, and by the end of February 2009, the Bureau had completed approximately 80 percent of large-block canvassing. In February 2009 we observed large- block canvassing in Atlanta, Georgia; Boston, Massachusetts; New York, New York; San Francisco, California; and Washington, D.C. From our preliminary observations, the laptops appear to work well, and listers reported their training was satisfactory. We are in the process of discussing these and other observations with the Bureau. The Bureau's largest and most costly field operation is nonresponse follow-up. The Bureau estimates that it will employ over 600,000 temporary workers to collect data from about 47 million nonresponding households over the course of 10 weeks in 2010. On April 3, 2008, the Bureau announced that it would no longer use handheld computers for nonresponse follow-up and would instead change to a paper-based nonresponse follow-up operation. According to the Bureau, this change added between $2.2 billion to $3 billion to the total cost of the census. In May 2008, the Bureau issued a plan that covered major components of the paper-based nonresponse follow-up. Bureau officials said that they are developing a more detailed plan that would describe 2010 nonresponse follow-up operations and systems, workflow, major milestones, and roles and responsibilities of different census divisions. Although the plan was due in January 2009, it has yet to be completed. Because this plan serves as a road map for monitoring the development and implementation of nonresponse follow-up, it will be important for the Bureau to complete this plan. The Bureau has changed plans for many aspects of nonresponse follow-up, and officials are determining which activities and interfaces will be tested and when that testing will occur. Although the Bureau has carried out a paper-based follow-up operation in past decennials, the 2010 Census includes new procedures and system interfaces that have not been tested under census-like conditions because they were dropped from the dress rehearsal. Bureau officials acknowledged the importance of testing new and modified nonresponse follow-up activities and system interfaces in order to reduce risk but have not yet developed detailed testing plans. Given the number of tasks at hand and the increasingly shorter time frame in which to accomplish them, it will be important for the Bureau to monitor the development of these testing plans, coordinate this testing with other activities, and ensure that testing occurs in time to take corrective actions, if needed. In our previous work, we have highlighted the importance of sound risk management in planning for the decennial census. The Bureau has strengthened aspects of its risk management process. For example, in July 2008, the Bureau identified 31 nonresponse follow-up risks, such as lower than expected enumerator productivity. However, it has not developed mitigation plans for these risks. Officials said that they are reevaluating these risks and plan to develop mitigation plans for high- and medium- priority nonresponse follow-up risks starting in spring 2009. However, the Bureau has not yet determined when these plans will be completed. One of the Bureau's long-standing challenges is resolving conflicting information respondents provide on census forms. This problem can occur, for example, when the number of household members reported on a completed form differs from the number of persons for whom information is provided. In such instances, the Bureau attempts to reconcile the data during the coverage follow-up operation. For 2010, the Bureau plans to expand the scope of this operation and include two questions--known as coverage probes--on the census form to help identify households where someone may have been missed or counted incorrectly (see fig. 3). However, after testing the probes earlier in the decade, the Bureau found one of the probes was problematic in identifying persons potentially missing from the count. Although these probes were included on the forms mailed out during the dress rehearsal, the coverage follow-up operation did not include cases from nonresponse follow-up, which was cancelled from the dress rehearsal. In the absence of a final test of the coverage probes in nonresponse follow-up, the effectiveness of the information generated by the probes is uncertain. A successful census depends, in large part, on the work carried out in the local census offices. For the 2010 Census, this field work cannot be accomplished without a properly functioning OCS. This system is intended to provide managers with essential, real-time information, such as worker productivity and completion rates for field operations. It also allows managers to assign and reassign cases among workers. If the system does not work as intended, it could bog down or delay field operations and introduce errors into data collected. Initially, the Bureau had planned to use a contractor to develop OCS to manage the workflow for those operations relying on paper-based processes, such as group quarters enumeration and nonresponse follow- up. However, in August 2008, the Bureau created an internal program to develop OCS and other related infrastructure that are needed to support these operations. The Bureau is still in the process of developing OCS for paper-based operations. Although the Bureau has established a high-level schedule for testing OCS, it has not yet finalized the requirements needed to begin its programming or developed a detailed schedule for conducting additional tests. Further, the Bureau has not yet fully defined how OCS will work together with other systems. According to Bureau officials, the lack of detailed plans for operations, such as nonresponse follow-up, makes it difficult to finalize requirements for OCS or its testing plans. Our work on IT systems testing has shown that without adequate oversight and more comprehensive guidance, the Bureau cannot ensure that it is thoroughly testing its systems and properly prioritizing testing activities before the 2010 Census. The Bureau estimates that it will need to produce approximately 30 million different map files from which 80 million paper maps will be printed to assist census workers in locating addresses in major census operations. The quality of maps and the timing of map printing are critical to the success of the census. In addition, many map production and printing activities must be conducted in sequence with no time to spare, putting at risk the Bureau's ability to print its maps on time. The Bureau has taken positive steps to meet its requirements for map production and printing for 2010. For example, in June 2008, the Bureau decided to produce a generic map type in lieu of several operation-specific versions to reduce the number of map files to be produced. Furthermore, the Bureau is preparing to print most of its maps at the local census offices rather than at the regional offices, reducing the need to coordinate map delivery to the local census offices. In addition, the Bureau has replaced its labor-intensive quality assurance process with integrated, automated processes. These steps taken to improve workflow will become particularly important as the Bureau works to produce and print maps on an already compressed schedule. The Bureau's schedule for producing and printing maps does not allow for any delays in receiving data from other operations or from the contractor delivering map files. For example, the Bureau intends to include map information from address canvassing, which ends in July 2009, in maps that will be used to validate locations of group quarters, which begins in September 2009. Bureau officials have stated that the turnaround time between these operations allows no slippage, and if these data are received late, an entire chain of subsequent map production steps would be thrown off schedule. Furthermore, according to the Bureau, local census offices need to receive map files from the contractor in time to print maps for certain field operations by January 8, 2010. However, the contractor is not scheduled to finish delivering the map files until January 19, 2010. Bureau officials said that they have taken steps to ensure that the necessary map files are delivered in time for printing but are still working to resolve the discrepancy. The Bureau goes to great lengths to reduce the undercount, especially for those groups likely to be undercounted at a higher rate than others, such as minorities and renters. For example, the Bureau plans to provide language assistance guides in 59 languages for completing the census, an increase from 49 languages in 2000. For the first time in 2010, the Bureau plans to send bilingual questionnaires to approximately 13 million households that are currently likely to need Spanish language assistance, as determined by analyzing recent data from a related Bureau survey program. The Bureau also plans to deploy a multifaceted communications campaign consisting of, among other efforts, paid advertising and the hiring of as many as 680 partnership staff who will be tasked with reaching out to local governments, community groups, and other organizations in an effort to secure a more complete count. Overall, the Bureau estimates it will spend around $410 million on its communication efforts for the 2010 Census. However, in constant 2010 dollars, this amount is somewhat less than the approximately $480 million that the Bureau spent marketing the 2000 Census. Although the effects of the Bureau's communication efforts are difficult to measure, the Bureau reported some positive results from its 2000 Census marketing efforts with respect to raising awareness of the census. For example, four population groups--non-Hispanic Blacks, non-Hispanic Whites, Asians, and Native Hawaiians--indicated they were more likely to return the census form after the 2000 Census partnership and marketing program than before its onset. However, a Bureau evaluation demonstrated only a limited linkage between the partnership and marketing effort and improvements in actual census mail return behavior for these or other groups. Put another way, while the Bureau's marketing activities might raise awareness of the census, a remaining challenge is converting that awareness into an actual response. Other marketing challenges include long-standing issues such as the nation's linguistic diversity and privacy concerns, as well as a number of newly emerging concerns, such as local campaigns against illegal immigration and a post- September 11 environment that could heighten some groups' fear of government agencies. Since 2005, we have reported on weaknesses in the Bureau's management of its IT acquisitions, and we remain concerned about the Bureau's IT management and testing of key 2010 Census systems. For example, in October 2007, we reported on the status of and plans for key 2010 Census IT acquisitions and whether the Bureau was adequately managing associated risks. We found critical weaknesses in the Bureau's risk management practices, including those associated with risk identification, mitigation, and oversight. We later presented multiple testimonies on the Bureau's progress in addressing significant risks facing the 2010 Census. In particular, the Field Data Collection Automation (FDCA) program, which includes the development of handheld computers for the address canvassing operation and the systems, equipment, and infrastructure that field staff will use to collect data, has experienced significant problems. For example, in March 2008, we testified that the FDCA program was experiencing schedule delays and cost increases, and was contributing significant risk to the 2010 Census. At that time, we highlighted our previous recommendations to better manage FDCA and the other IT acquisitions. In response to our findings and recommendations, the Bureau has taken several steps to improve its management of IT for the 2010 Census. For example, the Bureau has sought external assessments of its activities from independent research organizations, implemented a new management structure and management processes and brought in experienced personnel to key positions, and improved several reporting processes and metrics. In part due to our review of the FDCA program, the Bureau requested a revised cost proposal for the FDCA program, which resulted in a cost reduction of about $318 million for the remaining 5-year life-cycle of the program. As we have previously reported, operational testing planned during the census dress rehearsal would take place without the full complement of systems and functionality that was originally planned, and it was unclear whether the Bureau was developing plans to test all interrelated systems and functionality. At your request, we reviewed the status and plans of testing of key 2010 Census systems. As stated in our report, which we are releasing today, we found that the Bureau has made progress in conducting systems, integration, and end-to-end testing, but critical testing still remains to be performed before systems will be ready to support the 2010 Census, and the planning, execution, and monitoring of its testing needs much improvement. We are making 10 recommendations for strengthening the Bureau's testing of 2010 Census systems. Those recommendations address improvements needed in test planning, management, and monitoring. In response to our report, the Department of Commerce and the Bureau stated they had no significant disagreements with our recommendations. In summary, little more than a year remains until Census Day. At a time when major testing should be completed and there should be confidence in the functionality of key operations, the Bureau instead finds itself managing late design changes and developing testing plans. The Bureau has taken some important steps toward mitigating some of the challenges that it has faced to date, yet much remains uncertain, and the risks to a successful decennial census remain. Addressing these risks and challenges will be critical to the timely completion of a cost-effective census, and it will be essential for the Bureau to develop plans for testing systems and procedures not included in the dress rehearsal, and for Congress to monitor the Bureau's progress. As always, we look forward to working with Congress in assessing the Bureau's efforts to overcome these hurdles to a successful census and providing regular updates on the rollout of the decennial in the critical months that lie ahead. Mr. Chairman and members of the Subcommittee, this concludes our statement. We would be happy to respond to any questions that you or members of the Subcommittee may have at this time. If you have any questions on matters discussed in this testimony, please contact Robert Goldenkoff at (202) 512-2757 or David A. Powner at (202) 512-9286 or by e-mail at [email protected] or [email protected]. Other key contributors to this testimony include Sher'rie Bacon, Thomas Beall, Steven Berke, Vijay D'Souza, Elizabeth Fan, Richard Hung, Andrea Levine, Signora May, Ty Mitchell, Catherine Myrick, Lisa Pearson, Kathleen Padulchick, Crystal Robinson, Melissa Schermerhorn, Cynthia Scott, Karl Seifert, Jonathan Ticehurst, Timothy Wexler, and Katherine Wulff. High Risk: An Update. GAO-09-271. Washington, D.C.: January 2009. 2010 Census: The Bureau's Plans for Reducing the Undercount Show Promise, but Key Uncertainties Remain. GAO-08-1167T. Washington, D.C.: September 23, 2008. 2010 Census: Census Bureau's Decision to Continue with Handheld Computers for Address Canvassing Makes Planning and Testing Critical. GAO-08-936. Washington, D.C.: July 31, 2008. 2010 Census: Census Bureau Should Take Action to Improve the Credibility and Accuracy of Its Cost Estimate for the Decennial Census. GAO-08-554. Washington, D.C.: June 16, 2008. 2010 Census: Plans for Decennial Census Operations and Technology Have Progressed, But Much Uncertainty Remains. GAO-08-886T. Washington, D.C.: June 11, 2008. 2010 Census: Bureau Needs to Specify How It Will Assess Coverage Follow-up Techniques and When It Will Produce Coverage Measurement Results. GAO-08-414. Washington, D.C.: April 15, 2008. 2010 Census: Census at Critical Juncture for Implementing Risk Reduction Strategies. GAO-08-659T. Washington, D.C.: April 9, 2008. Information Technology: Significant Problems of Critical Automation Program Contribute to Risks Facing 2010 Census. GAO-08-550T. Washington, D.C.: March 5, 2008. Information Technology: Census Bureau Needs to Improve Its Risk Management of Decennial Systems. GAO-08-259T. Washington, D.C.: December 11, 2007. 2010 Census: Planning and Testing Activities Are Making Progress. GAO-06-465T. Washington, D.C.: March 1, 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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The decennial census is a constitutionally-mandated activity that produces data used to apportion congressional seats, redraw congressional districts, and allocate billions of dollars in federal assistance. In March 2008, GAO designated the 2010 Census a high-risk area in part because of problems with the performance of handheld computers used to collect data. The U.S. Census Bureau has since strengthened its risk management efforts and made other improvements; however, the Bureau curtailed a dress rehearsal scheduled for 2008 and was unable to test key operations under census-like conditions. This testimony discusses the Bureau's readiness for 2010 and covers: (1) the importance of reliable cost estimates; (2) building a complete and accurate address list; (3) following up on missing and conflicting responses to ensure accuracy; (4) targeting outreach to undercounted populations; and (5) designing, testing, and implementing technology for the census. The testimony is based on previously issued and ongoing GAO work. The Bureau estimates the 2010 Census will cost more than $14 billion over its life-cycle, making it the most expensive census in the nation's history, even after adjusting for inflation. Accurate cost estimates help ensure that the Bureau has adequate funds, and that Congress, the administration, and the Bureau itself have reliable information on which to base advice and decisions. However, as GAO has reported before, the Bureau has insufficient policies and procedures and inadequately trained staff for conducting high-quality cost estimation for the decennial census. A successful census requires a complete and accurate address list. The Bureau sends thousands of census workers (listers) into the field to collect and verify address information, and this year for the first time, listers will use handheld computers to collect data. During the dress rehearsal, there were significant technical problems. A small-scale field test showed that these problems appear to have been addressed; however, the test was not carried out under full census-like conditions and did not validate all address canvassing requirements. Nonresponse follow-up, the Bureau's largest and most costly field operation, was initially planned to be conducted using the handheld computers, but was recently changed to a paper-based system due to technology issues. The Bureau has not yet developed a detailed road map for monitoring the development and implementation of nonresponse follow-up under the new design. Such a plan is essential to conducting a successful nonresponse follow-up. Furthermore, the system that manages the flow of work in field offices is not yet developed. Lacking plans for the development of both nonresponse follow-up and this management system, the Bureau faces the risk of not having them developed and fully tested in time for the 2010 Census. In an effort to reduce the undercount, the Bureau is implementing a program of paid advertising integrated with other communications strategies, such as partnerships with state, local, and tribal governments and community organizations. Moving toward 2010, the Bureau faces long-standing challenges with the nation's linguistic diversity and privacy concerns, which can contribute to the undercounting of some groups. Since 2005, we have reported concerns with the Bureau's management and testing of key IT systems. We have reviewed the status and plans for the testing of key 2010 Census systems. The Bureau has made progress in conducting systems, integration, and end-to-end testing, but critical testing still remains to be performed before systems will be ready to support the 2010 Census, and the planning for the testing needs much improvement. In short, while the Bureau has made some noteworthy progress in gearing up for the enumeration, with just over a year remaining until Census Day, uncertainties surround the Bureau's overall readiness for 2010.
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In order to meet our mandate to conduct bimonthly reviews and prepare reports on selected states' and localities' use of funds, we have selected 16 states and the District of Columbia to track over the next few years to provide an ongoing longitudinal analysis of the use of funds under the Recovery Act. These states contain about 65 percent of the U.S. population and are estimated to receive about two-thirds of the intergovernmental grant funds available through the Recovery Act. In addition to reporting on the core group of 16 states, we will review the recipient reports from all 50 states. These recipient reports are to include information on funds received, the amount of Recovery funds obligated or expended to projects or activities, the projects or activities for which funds were obligated or expended, and the number of jobs created or preserved as a result of Recovery Act funds. The Recovery Act also included a number of specific mandates on which GAO must take action between April 2009 and February 2014. Our first bimonthly report, issued two weeks ago, covers the actions of selected states and localities under the Recovery Act as of April 20, 2009. About 90 percent of the $49 billion in Recovery Act funding being provided to states and localities in fiscal year 2009 will be through health, transportation, and education programs. (See app. I for federal programs that are receiving Recovery Act funding and are administered by states and localities.) Our first report focused particularly on Recovery Act funds for the three largest programs in these categories--Medicaid Federal Medical Assistance Percentage grant awards, highway infrastructure investment, and the Department of Education's State Fiscal Stabilization Fund. We reported on the status of states' activities related to these three programs. The report contains separate appendixes on each of the 16 states and the District of Columbia that discuss the plans and uses of funds in these three major programs as well as selected other programs that are receiving Recovery Act funds. The report also makes several recommendations to the Office of Management and Budget (OMB) directed toward improving accountability and transparency requirements; clarifying the Recovery Act funds that can be used to support state efforts to ensure accountability and oversight; and improving communications with Recovery Act funds recipients about when funds become available for their use and when federal guidance is modified or newly released. OMB concurred with the overall objectives of our recommendations and plans to work with us to further accountability for these funds. In consultation with the Congress in exercising our general statutory authority to evaluate the results of government programs and activities, we also will continue to target programs for additional review using a risk- based approach and will incorporate reviews of Recovery Act funding where practicable when we are examining base programs. There are many implementation challenges to ensuring adequate accountability and efficient and effective implementation of the Recovery Act. Experience tells us that the risk for fraud, waste, and abuse grows when billions of dollars are going out quickly, eligibility requirements are being established or changed, new programs are being created, or a mix of these characteristics. This suggests the need for a risk-based approach to target for early attention specific programs and funding structures based on known strengths, vulnerabilities, and weaknesses, such as a track record of improper payments or contracting problems. Of particular concern to this Subcommittee will be the extent to which Recovery Act R&D funding is effectively expended, and we discuss the initial implementation of R&D funding below. Regular and frequent GAO coordination with federal IGs, the Board, and state and local government auditors is a critical component of our work to ensure effective and efficient oversight. With several early coordination meetings, we laid the foundation for this ongoing coordination soon after the act was passed. First, I reached out to the IG community and, with Ms. Phyllis Fong, the Chair of the Council of Inspectors General on Integrity and Efficiency, hosted an internal coordination meeting on February 25, 2009, with Inspectors General or their representatives from 17 agencies. It was a very productive discussion in which we outlined coordination approaches going forward. In addition, soon after the President appointed him as Chair of the Board on February 23, 2009, I talked with Mr. Earl Devaney, former Inspector General at the Department of the Interior, to begin to coordinate such efforts as the audit of the U.S. government's consolidated financial statements whereby GAO relies on the individual efforts of the IG's financial audits of their departments and entities across the government. I am confident that we will coordinate our respective efforts well, both with the IG community and with the Board. We also reached out to the state and local audit community and participated in initial coordination conference calls. The first call, on February 26, 2009, included state auditors or their representatives from 46 states and the District of Columbia. The next day, we held a similar discussion with auditors from many localities across the country. State and local auditors perform very important oversight functions within their jurisdictions and have unique knowledge about their governments; we are continuing to coordinate with them closely as we carry out our responsibilities. It is also important for us to coordinate with OMB, especially in regard to the reporting requirements and other guidance to fund recipients and on what information is to be collected in order to adequately evaluate how well the Recovery Act achieves its objectives. We participate in weekly coordination conference calls with OMB, the Board, IGs, and state and local auditors. The impetus to schedule these calls was a letter OMB Director Peter Orszag and I received from the National Association of State Auditors, Comptrollers, and Treasurers; the National Association of State Budget Officers; the National Association of State Chief Information Officers; and the National Association of State Procurement Officials. This letter expressed their strong interest in coordinating reporting and compliance aspects of the Recovery Act. During these calls, we provide updates on our Recovery Act activities, and OMB provides updates on its actions. One important outcome of these calls thus far has been to call OMB's and the Board's attention to the need to clarify certain reporting requirements. For example, the Recovery Act requires federal agencies to make information publicly available on the numbers of jobs created and retained as a result of Recovery Act funded activities. Our work in the states yielded information that local level officials needed to define how to capture these data, and the state and local auditors were able to corroborate what we had heard. We included a recommendation to OMB in our first bimonthly report on the Recovery Act actions of selected states and localities to clarify this requirement, and OMB generally concurred with this recommendation. In addition to these regular calls, we are actively participating in discussions with state and local organizations to further foster coordination within the accountability community. These organizations include the National Association of State Auditors, Comptrollers, and Treasurers; the National Association of State Budget Officers; the National Association of State Procurement Officials; the National Association of State Chief Information Officers; the National Governors Association; the National Conference of State Legislatures; and the National League of Cities. For example, in March 2009, we participated--along with a state auditor, local auditor, and inspector general--in a webinar hosted by the National Association of State Auditors, Comptrollers, and Treasurers for its members. As Acting Comptroller General, I also serve as the Chairman of the National Intergovernmental Audit Forum (NIAF). The NIAF is an association that has existed for over 3 decades as a means for federal, state, and local audit executives to discuss issues of common interest and share best practices. NIAF's upcoming May meeting will bring together these executives, including OMB, to update them on the Recovery Act and provide another opportunity to discuss emerging issues and challenges. In addition, a number of Intergovernmental Audit Forum meetings have been scheduled at the regional level that seek to do the same, and this regional coordination is directly contributing to our work in the states. For example, GAO's western regional director recently made a presentation at the Pacific Northwest Audit Forum regarding GAO's efforts to coordinate with state and local officials in conducting Recovery Act oversight. In conjunction with that forum and at other related forums, she has regularly participated in meetings, panel discussions, and break-out discussions with the principals of state and local audit entities to coordinate efforts to provide oversight of Recovery Act spending. The work of our 16 state teams that resulted in our first bimonthly report on the actions of selected states and localities under the Recovery Act also exemplifies the level of coordination we are undertaking with the accountability community. During the conduct of our work, we collected documents from and interviewed State Auditors, Controllers, and Treasurers; state Inspectors General; and other key audit community stakeholders to determine how they planned to conduct oversight of Recovery Act funds. We also coordinated as appropriate with legislative offices in the states concerning state legislatures' involvement with decisions on the use of Recovery Act funds. In addition, we relied on reporting and data collected from the Federal Audit Clearinghouse, which operates on behalf of OMB to assist oversight agencies in obtaining audit information on states, local governments, and non-profit organizations. Illustrative examples follow: Our team working in Georgia coordinated closely with that state's State Accounting Office, the State Auditor, and Inspector General among others, to understand their plans for mitigating risks and overseeing Recovery Act funding. For example, the Inspector General developed a database specifically to track Recovery Act complaints and a public service announcement to alert the public of how to report fraud, waste, and abuse. Our team working in North Carolina coordinated with the State Auditor regarding that state's plans to ensure that Recovery Act funds are segregated from other federal funds coming through traditional funding streams to help ensure accountability and transparency. Our team working in New Jersey coordinated with the state's new Recovery Accountability Task Force, which will review how state and local agencies spend Recovery Act funds as well as provide guidance and best practices on project selection and internal controls. As part of the Task Force, the state Comptroller has responsibility for coordinating all of the oversight agencies within the state. Our team working in California is coordinating with the state's newly appointed Recovery Act Inspector General, who is seeking to make sure that Recovery Act funds are spent as intended and to identify instances of waste, fraud, and abuse. In addition, the team relied on the work of the State Auditor, whose most recent single audit identified numerous material weaknesses associated with programs included in GAO's review. Provisions in GAO's authorizing statute, the Whistleblower Protection Act, and the Recovery Act as well as a dedicated fraud reporting hotline facilitate our ability to evaluate allegations of waste, fraud and abuse in the federal government. Under our authorizing statute, we have authority to access information needed for the effective and efficient performance of our reviews and evaluations. Subject to certain limited exceptions, all agencies must provide the Comptroller General access to information he requires about the duties, powers, activities, organization, and financial transactions of that agency, including for the purpose of evaluating whistleblower complaints. Moreover, the Recovery Act applies certain federal whistleblower protections to the employees of recipients of Recovery funds. The Whistleblower Protection Act prohibits personnel actions taken against federal employees in reprisal for the disclosure of evidence of a violation of any law, rule, or regulation, gross mismanagement, a gross waste of funds, an abuse of authority, or a substantial and specific danger to public health or safety. Similarly, the Recovery Act prohibits reprisals against employees of nonfederal recipients of Recovery funds, but its protections only relate to disclosures regarding the use of Recovery funds. The Recovery Act provides employees of a nonfederal entity receiving a contract, grant, or other payment funded in whole or part by Recovery funds may not be discharged, demoted, or otherwise subject to discrimination as a reprisal for disclosing to the Board, an IG, the Comptroller General, the Congress, a state or federal regulatory or law enforcement agency, the employee's supervisor, a court or grand jury, or a federal agency information about mismanagement, waste, danger to public health or safety, or a violation of law regarding the use of Recovery Act funds. People who believe they have been subject to reprisal may submit a complaint to the appropriate inspector general for investigation and seek redress through the courts. Table 1 outlines the coverage of Whistleblower Act and Recovery Act provisions. Section 902 of the Recovery Act gives us additional authority to examine the relevant records of contractors, subcontractors, or state or local agencies administering contracts that are awarded with Recovery Act funds. We may also interview officers and employees of such contractors or their subcontractors as well as officers or employees of any state or local agency administering such transactions. This additional authority could be applied to examining allegations made by whistleblowers. As part of our normal operations, we maintain a fraud reporting service. Anyone can report evidence of fraudulent activity to FraudNet through an automated answering system, a dedicated fax line, a dedicated email address, a dedicated mailing address, or an online form accessible from our Web site at www.gao.gov. Information about how to provide evidence of fraud is available on our web site at http://gao.gov/fraudnet.htm and on the last page of every GAO report. After the Recovery Act was passed, we coordinated with the IG community to publicize the use of FraudNet as a means to solicit public input and gather information on potential instances of waste, fraud, and abuse in the allocation and spending of Recovery Act funds. We also issued a press release on March 30, 2009, which was cited by the national news media in articles about the Recovery Act. Over the past few months, Fraudnet has received more than 25 allegations related to the misuse of Recovery Act, Troubled Asset Relief Program, or other related funds. These allegations are currently under review by GAO's Forensic Audits and Special Investigations (FSI) unit, a specialized team with many years of experience conducting fraud investigations. FSI coordinates with the IG community as appropriate to ensure that there is no duplication of investigative efforts across the federal government. Further, in cases where GAO determines that another agency is better positioned to perform an investigation, FSI will refer relevant information to the appropriate agency. Although it is too soon to discuss details of the allegations we have received or the status of ongoing investigations, we will continue to work with our partners in the IG community, with the appropriate law enforcement agencies, and with the Congress, to ensure that all allegations are reviewed and investigated. On March 19, 2009, we testified before this Subcommittee on our role in helping to ensure accountability and transparency for Recovery Act science R&D funding. Our statement identified over $21 billion in related funding appropriated to DOE; the National Institute of Standards and Technology (NIST) and the National Oceanographic and Atmospheric Administration (NOAA) within the Department of Commerce; NSF; and NASA. As initial implementation of the Recovery Act unfolds, we are tracking these agencies' activities to plan for science R&D expenditures. Table 2 provides information on the status of these agencies R&D-related Recovery Act funds, as of April 28, 2009. To collect this information, we worked with agencies' officials and coordinated with agencies' IGs. As implementation of the act progresses, further evaluations will continue to be coordinated with agencies' IGs to prevent duplication and minimize any overlap in our work. As table 2 shows, the status of agencies' R&D-related funding varies. Officials from each agency told us about the controls in place to ensure that their program plans are approved before funds are either apportioned by OMB or allotted by their agencies' CFOs. For example, officials from each agency told us they are following OMB's April 3, 2009, guidance for implementing the Recovery Act. OMB's guidance requires that agencies' submit program plans justifying Recovery Act expenditures that include a program's objectives, funding, activities, types of financial awards to be used, schedule, environmental review compliance, performance measures, description of plans to ensure accountability and transparency, and a plan for monitoring and evaluation. In addition, this guidance requires that agencies submit the program plans to OMB for approval by May 1, 2009, and states that OMB will approve these program plans by May 15, 2009. Officials from NIST, NOAA, and NSF told us that their agencies' CFOs will not allot funds for obligation until the House Appropriations Subcommittee on Commerce, Justice, and Science has reviewed their program plans. DOE CFO officials told us that the CFO will allot apportioned funds after an internal DOE approval process, even if OMB has not yet approved program plans; however, officials said DOE programs cannot obligate funds until OMB program plan approval is complete. As of April 28, 2009, only DOE's Office of Science had obligated any funds for R&D project expenditures. These obligations, totaling $342 million will support various construction, facilities disposition, and general plant projects at national laboratories, as well as procurement and installation of experimental equipment and instrumentation. (See app. II for additional details on each agency's planned uses of funds.) Related to the efforts of the four federal agencies to obligate the R&D funds, our April 29, 2009, report discussed our initial observations on improving grant submission policies that could help minimize disruptions to the grants application process during the Recovery Act's peak filing period. Our report was requested in response to two OMB memoranda to federal agencies stating that the existing Grants.gov infrastructure would not be able to handle the influx of applications expected as key Recovery Act deadlines approached. We found that at least 10 agencies will accept some or all applications outside of Grants.gov during the Recovery Act's peak filing period. For example, NSF and NASA are only accepting applications through their own existing electronic systems for some grants. We recommended that the Director of OMB take actions to increase the likelihood that applicants can successfully apply for grants during the Recovery Act's peak application filing period. Specifically, we recommended that OMB (1) ensure that an announcement discussing agency alternate submission methods similar to that recently posted on Grants.gov is posted in a prominent location on Recovery.gov and on all federal Web sites or in all documents where instructions for applying to Recovery Act grants are presented and (2) prominently post certain government policies for all grant applications submitted during the peak filing period for Recovery Act grants, notifying applicants that, among other things, if an application was deemed late they are notified of such an outcome and are provided an opportunity to provide supporting documentation demonstrating they attempted to submit the application on time. OMB generally concurred with these recommendations. In addition to direct expenditures, the Recovery Act also includes tax provisions that benefit individuals and businesses. The Internal Revenue Service (IRS) recently published a fact sheet on 12 different tax credits available under the Recovery Act for various energy efficiency measures taken by homeowners and businesses as well as for qualified renewable energy producers. Some of these credits are new, and others are modifications of existing tax credits previously included in the tax code. As I testified in March 2009, one particular area that needs additional early attention is identifying the data to be collected concerning the use and results of the Recovery Act's various tax provisions. Accountability and transparency are perhaps easier to envision for the outlay portions of the stimulus package because the billions of dollars in tax provisions in the Recovery Act are considerably different than outlay programs in their implementation, privacy protections, and oversight. Most tax benefits are entirely administered by the Internal Revenue Service (IRS), and all taxpayer information, including the identity of those using the benefits, is protected by law from disclosure. Further, unlike most outlay programs, IRS does not know who makes use of the tax benefit until after the fact, if then. While IRS previously collected information that may have been sufficient to evaluate the benefits of energy tax credits, IRS has not yet announced what information it will collect for the credits as revised or added by the Recovery Act. In closing, I want to underscore that we welcome the responsibility that the Congress has placed on us to assist in the oversight, accountability, and transparency of the Recovery Act. We will continue to coordinate closely with the rest of the accountability community and honor our ongoing commitment to promptly address information provided by whistleblowers. We are committed to completing our Recovery Act work on the timetable envisioned by the act and will keep the Congress fully informed as our plans evolve. Mr. Chairman, Representative Broun, and Members of the Subcommittee this concludes my statement. I would be pleased to respond to any questions you may have. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information about this testimony, please contact Patricia Dalton, Managing Director, Natural Resources and Environment (202) 512-3841 or [email protected]. Key contributors to this testimony were Richard Cheston (Assistant Director), Divya Bali, Allison Bawden, Karen Keegan, Michelle Munn, and Barbara Timmerman. To update information on Recovery Act funding for R&D-related activities, we met with and interviewed Department of Energy (DOE), National Institute of Standards and Technology (NIST), National Oceanographic and Atmospheric Administration (NOAA), National Science Foundation (NSF), and National Aeronautics and Space Administration (NASA) officials, and analyzed documentation they provided. We also reviewed publicly available information provided by the Office of Management and Budget (OMB), through the recovery.gov Web site, and agencies' own recovery Web sites. Finally, we coordinated with each agency's Inspector General (IG) to discuss the data we collected. We conducted this work in accordance with generally accepted government auditing standards. DOE's program offices vary in the extent to which they have funds available to obligate for expenditure. A little more than 40 percent of DOE's R&D-related Recovery Act funding has been apportioned by OMB, and only DOE's Office of Science has obligated R&D project funds. OMB has not apportioned any funds to DOE's Office of Fossil Energy and has only apportioned minimal funds to its Loan Guarantee Program. Energy Efficiency and Renewable Energy (EERE). The Recovery Act appropriated $2.5 billion to EERE for R&D activities related to alternative and renewable energy sources, such as biomass and geothermal. An additional $2.4 billion was appropriated for advanced transportation research focused on next-generation plug-in hybrid electric vehicles, their advanced battery components, and transportation electrification. OMB has apportioned all of EERE's appropriation, and DOE's Office of the Chief Financial Officer (CFO) has generally allotted the funds to support the R&D activities associated with vehicle technologies and electrification. EERE has issued a solicitation for grants, which closes May 13, 2009, to establish development, demonstration, evaluation, and education projects to accelerate the market introduction and penetration of advanced electric drive vehicles. In addition, EERE has issued a solicitation for grant proposals supporting the construction of U.S.-based manufacturing plants to produce batteries and electric drive components, which closes May 19, 2009. Fossil Energy (FE). The Recovery Act appropriated $3.4 billion to FE for R&D-related activities, including funds to support a third round of competition under the Clean Coal Power Initiative; fossil energy R&D programs, such as fuel and power systems research or FutureGen; and competitive grants for carbon capture and energy efficiency improvement projects. As of April 28, 2009, OMB had not apportioned any of these funds to DOE, and thus no funds have been allotted, obligated, or expended. According to an FE official, OMB is unlikely to apportion funds to FE until after May 15, 2009, when its program plans are expected to be approved. Science. The Recovery Act included a $1.6 billion appropriation for DOE's Office of Science (Science). Nearly all $1.6 billion appropriated has been apportioned by OMB to DOE without restriction, and the Secretary of Energy has announced priorities for $1.2 billion of these funds, including: $248 million for major construction, modernization, infrastructure improvements, and needed decommissioning of facilities at national laboratories; $330 million for operations and equipment procurement and installation at major scientific user facilities; $277 million for competitive research collaborations on transformational basic science needed to develop alternative energy sources; $90 million for core scientific research grants to be awarded to graduate students, postdocs, and Ph.D. scientists across the nation for applications of nuclear science and technology, and for alternative isotope production techniques; and $215 million to accelerate construction of two experimental facilities. Science has obligated $342 million to support various approved construction, infrastructure improvement, and facility decommissioning projects at national laboratories, as well as procurement and installation of experimental equipment and instrumentation. Table 3 describes Science's Recovery Act projects at its national laboratories, including those for which funding has already been obligated. Advanced Research Projects Agency-Energy (ARPA-E). The Congress authorized the establishment of ARPA-E within DOE in August 2007. ARPA-E supports transformational energy technology research projects with the goal of enhancing the nation's economic and energy security. ARPA-E received its first appropriation of $400 million in the Recovery Act, which was soon followed by an additional $15 million in the Omnibus Appropriations Act, 2009. According to a DOE official, the Secretary of Energy signed a memorandum formally creating the new office on April 22, 2009, and designated an Acting Deputy Director until a presidential appointee is confirmed by the Senate. As of April 28, 2009, DOE's CFO had allotted $2 million in program direction funds to ARPA-E to hire employees, set up office space, and support requirements necessary to implement the provisions of the Recovery Act. In addition, ARPA-E issued its first competitive solicitation on April 27, 2009, to fund up to $150 million of high-risk, high-potential projects focused on innovative energy technologies. Project proposals are due June 2, 2009, and awards are generally expected to range from $2 million to $5 million. According to a DOE official, ARPA-E anticipates issuing more targeted solicitations associated with the remaining Recovery Act funds; however, the official said these solicitations are not likely to be issued until a Senate confirmed appointee is in place to lead the organization. Loan Guarantee Program (LGP). The Recovery Act included appropriations totaling $6 billion to LGP, which could support $60 billion in new loan guarantees, depending on the credit subsidy rate. LGP officials told us the program plans that they submitted to OMB on May 1, 2009, support new loan guarantees for renewable energy systems, electric power transmission systems, and leading-edge biofuel projects performing at the pilot or demonstration stage and that the Secretary of Energy determines are likely to become commercial technologies. In addition, the Secretary of Energy has announced a number of restructuring initiatives for the program, which, as we reported in July 2008, faces a number of challenges. Officials have indicated that 6 of the 11 applicants who responded to DOE's August 2006 solicitation for various types of innovative technology loan guarantees could be eligible for loan guarantees under Recovery Act terms. We are currently examining the status of LGP's efforts to solicit and review loan guarantee applications, including its efforts to use Recovery Act funds, and its progress in implementing the recommendations in our July 2008 report. As of April 28, 2009, OMB had apportioned all $1.41 billion directly appropriated to NIST and NOAA for Recovery Act R&D-related activities. According to agency officials, funds have not yet been made available for obligation pending OMB and Congressional approval of program plans. NIST. NIST plans to spend the $580 million it was directly appropriated to support, competitive research grants, fellowships, and procurement of advanced research and measurement equipment and supplies. These funds are also planned to support a construction grant program for research science buildings, construction of new NIST facilities, and the reduction of the backlog of deferred maintenance for existing NIST facilities. In addition, NIST will receive $10 million appropriated to DOE under the Recovery Act for work on the electricity grid and $20 million appropriated to the Department of Health and Human Services to create and test standards related to health security. According to one official, NIST is working with OMB to prepare solicitations and other grant-related documents, so the agency can quickly issue Recovery Act grant solicitations once its program plans are approved. NOAA. The Recovery Act appropriated $830 million to NOAA for construction and procurement related to R&D-related activities, including support for research operations and facilities; construction and repair of facilities, ships and equipment; and research to address gaps in climate modeling and to establish climate data records for research into the cause, effects, and ways to mitigate climate change. NOAA has issued a competitive solicitation for up to $170 million in grants for shovel-ready projects to restore marine and coastal habitats. Applications were due on April 6, 2009. A NOAA official told us that NOAA is working with OMB to draft solicitations and other contract-related documents so the agency can quickly issue Recovery Act contract solicitations once its program plans are approved. The Recovery Act appropriated $3 billion to NSF for R&D-related activities, including competitive research grants; major research instrumentation and equipment procurement and facilities construction; academic research facilities modernization; and education and human resources. NSF officials believe their Recovery Act funds can be obligated quickly once program plans are approved because, for example, $2 billion of the $3 billion will fund proposals that NSF's independent expert review panels have already deemed of merit but that NSF was not previously able to fund. Specifically, NSF officials have stated that these grants will be awarded by September 30, 2009, and NSF expects its Recovery Act funds will allow the agency to support an additional 50,000 investigators, post- doctoral fellows, graduate and undergraduate students, and teachers throughout the nation. The Recovery Act appropriated $1 billion to NASA for expenditures on space exploration; earth science and climate research missions; adding supercomputing capacity; aeronautics activities, including aviation safety research, environmental impact mitigation, and activities supporting the Next Generation Air Transportation System; and restoration of facilities at the Johnson Space Center in Houston, Texas, damaged during Hurricane Ike in 2008. $50 million to support restoration work at the Johnson Space Center has been apportioned by OMB, and NASA has begun to issue requests for proposals for this restoration work. According to a NASA official, OMB has agreed with NASA on the funding priorities for the remaining $950 million appropriated, and funds will apportioned once OMB approves NASA's program plans. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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This testimony discusses GAO's efforts to coordinate with the accountability community--the Recovery Accountability and Transparency Board (the Board), the Inspectors General (IGs), and state and local government auditors--to help ensure effective and efficient oversight of American Recovery and Reinvestment Act (Recovery Act) funds. The Recovery Act assigns GAO a range of responsibilities including bimonthly reviews of the use of funds by selected states and localities. Because funding streams will flow from federal agencies to the states and localities, it is important for us to coordinate with the accountability community. Also, on March 19, 2009, GAO testified before this Subcommittee about the more than $21 billion in Recovery Act funds estimated to be spent for research and development (R&D) activities at four federal agencies. This statement discusses (1) GAO's efforts to fulfill its responsibilities under the Recovery Act; (2) GAO's coordination with others in the accountability community; (3) GAO's authorities to assist whistleblowers and elicit public concerns; and (4) updated information on the status of Recovery Act funds for R&D. It is based in part on GAO's first bimonthly Recovery Act report, Recovery Act: As Initial Implementation Unfolds in States and Localities, Continued Attention to Accountability Issues Is Essential (GAO-09-580), and GAO's March 5, 2009 testimony, American Recovery and Reinvestment Act: GAO's Role in Helping to Ensure Accountability and Transparency (GAO-09-453T). GAO is carrying out its responsibilities to review the uses of Recovery Act funds and will also target certain areas for additional review using a risk-based approach. GAO's first bimonthly report examined the steps 16 states, the District of Columbia, and selected localities are taking to use and oversee Recovery Act funds. These states contain about 65 percent of the U.S. population and are estimated to receive about two-thirds of the intergovernmental grant funds available through the Recovery Act. GAO's report made several recommendations to the Office of Management and Budget (OMB) toward improving accountability and transparency requirements; clarifying the Recovery Act funds that can be used to support state efforts to ensure accountability and oversight; and improving communications with Recovery Act funds recipients. Soon after the Recovery Act passed, GAO began to coordinate with the accountability community. By the end of February 2009, GAO conducted initial outreach to IGs, the Board, OMB, and state and local auditors. Now, GAO participates in regular coordination conference calls with representatives of these constituencies to discuss Recovery Act efforts and regularly coordinates with individual IGs. GAO also participates in discussions with state and local organizations to further foster coordination. The work of GAO's 16 state and District of Columbia teams that resulted in the first bimonthly report on the actions of selected states and localities under the Recovery Act also exemplifies the level of coordination we are undertaking with the accountability community. For example, teams working in the states collected documents from and interviewed State Auditors, Controllers, and Treasurers; state IGs; and other key audit community stakeholders to determine how they planned to conduct oversight of Recovery Act funds. Provisions in statute as well as a fraud reporting hotline facilitate GAO's ability to evaluate allegations of waste, fraud, and abuse in the federal government. Under GAO's authorizing statute, subject to certain limited exceptions, all agencies must provide the Comptroller General with access to information about the duties, powers, activities, organization and financial transactions of that agency, including for the purpose of evaluating whistleblower complaints. The Whistleblower Protection Act and the Recovery Act provide additional authority for GAO to assist whistleblowers. GAO also maintains a fraud reporting service, which has recently generated more than 25 allegations of misuse of Recovery and other federal funds. These allegations are currently under review by our forensic audit team. Since GAO first provided this Subcommittee with an estimate of the Recovery Act R&D funds to be spent, agencies have submitted program plans to OMB that include, among other things, programs' objectives, schedules, and the types of financial awards to be used. OMB expects to approve these plans by May 15, 2009. As of April 28, 2009, only the Department of Energy's Office of Science had obligated Recovery Act R&D funds for project expenditures.
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Concerns about long-term national economic growth have focused attention on the federal government's role in promoting investment necessary to sustain the economy's capacity to maintain and improve future living standards. The federal government contributes to investment in two primary ways. First, the federal government can facilitate private investment by reducing the federal deficit. Federal budget deficits have absorbed large proportions of national savings that would otherwise have been available to finance investments, either public or private. Second, within an established fiscal policy, the federal government can change the proportion of government spending devoted to investment. In the past, federal investments in infrastructure, human capital, and R&D have played a key role in economic growth, either directly or by creating an environment conducive to private sector investment. Both the Congress and the administration are considering budgeting alternatives to decrease the annual federal deficit while increasing long-term federal investment intended to enhance private sector growth. Some discussions have focused on capital budgeting and the possible use of depreciation in the budget as a measure of the cost of federal investments which deliver benefits over a future period of time. These investments include infrastructure such as highways, bridges, and air traffic control systems; R&D, which produces new technology that leads to innovative products and processes; and investments in human capital through education and training designed to increase worker productivity. Depreciation is an integral component in capital budgeting--a proposal contained in several bills in recent years. A capital budget approach using depreciation would report total acquisition costs of the investment in a capital budget and the annual depreciation in an operating budget. The cost of the investment recorded in the operating budget would thus be spread over the estimated life of the investment. The operating budget would reflect the cost of goods and services consumed rather than purchased during the period. Under most capital budgeting proposals, the operating budget must balance while the capital budget may be financed by borrowing. By contrast, the federal budget is a unified cash-based budget which treats outlays for capital and operating activities the same. Federal debt is undertaken for general purposes of the government rather than for specific projects or activities. Three views have been cited in support of proposals to depreciate investments in the federal budget. First, the long-lived nature of the benefits arising from these investments causes some analysts to believe that their costs should also be spread over time by some method of depreciation so that costs are shared by those who will benefit in the future. Second, some analysts believe that because the initial cost of these investments is high, budgeting for the full commitment up-front discourages investment and favors consumption spending. Finally, proponents believe that budgeting for depreciation instead of the full commitment up-front frees up budgetary resources for greater investment or other uses in the current period and reduces the current year's deficit. Other analysts, taking an opposing view, believe that depreciation would not really free up resources or reduce the deficit. Such a proposal would only redefine the deficit to be controlled as the operating budget deficit rather than the larger unified budget deficit. This would mean that any spending categorized as "capital" would not be subject to the same pressures to reduce the deficit as any other federal spending. Thus, it might be used to justify larger unified budget deficits and borrowing. In addition, they believe that appropriating annual depreciation instead of the amount of the full commitment undertaken by the government poses a loss of budgetary control that would threaten the integrity of the budget and the budget process. The objectives of this review were to determine (1) whether federal agencies are depreciating transportation infrastructure, R&D, and human capital for accounting and budgeting purposes, and if so, the methods they use, (2) whether any state, local, or foreign governments are depreciating these investments, and (3) whether depreciation of these investments could be useful in budgeting. Based on the items traditionally included in these categories, we define infrastructure as federally funded physical transportation assets, such as highways, bridges, railways, and air traffic control systems. We define R&D as federally funded activities intended to produce new or improved products or processes. For purposes of this study, we define investment in human capital as federally funded education and training programs. To meet these objectives, we discussed the concept of depreciation as a budgeting tool with professional staff at the Office of Management and Budget (OMB), the Congressional Budget Office (CBO), the Department of Commerce's Bureau of Economic Analysis (BEA), and the Organization for Economic Cooperation and Development (OECD). We also discussed depreciation from an accounting and budgeting perspective with officials at the Departments of Education and Transportation, the National Science Foundation, the Federal Highway Administration, the Federal Aviation Administration, and the Federal Railroad Administration. We reviewed articles in budgeting and accounting professional journals on the use of depreciation in federal budgeting and accounting. We reviewed relevant standards issued by the Financial Accounting Standards Board (FASB), the Governmental Accounting Standards Board (GASB), and the International Accounting Standards Committee (IASC). We also reviewed Title 2 of the GAO's Policy and Procedures Manual for Guidance of Federal Agencies, and standards drafted by the Federal Accounting Standards Advisory Board (FASAB) dealing with depreciation. To specifically address the second objective, we reviewed the GASB standards to determine if state and local governments are required to treat depreciation of infrastructure, R&D, and human capital for financial statement purposes. We also interviewed officials from federal agencies, OECD, and two consultants regarding the budgeting practices of foreign governments. We discussed the experience of New Zealand with these experts because of its recent adoption of accrual-based budgeting. We performed our work in Washington, D.C., between June and December 1994. Depreciation is an accepted part of accounting in business organizations. Under business accounting practices, depreciation is the allocation of the costs, less salvage value, of fixed assets, including equipment, buildings, and other structures, over their useful lives in a systematic and rational manner. It is recorded in the business' financial statements to reflect the use of assets during specific operating periods in order to match costs with related revenues in measuring income and to determine the organization's profit or loss, its federal tax liability, and the depreciated book value of the asset. It is also a factor in determining the cost of manufactured items and the amount of user charges appropriate for services rendered. Depreciation of assets in federal accounting is often not done because it is difficult to do and often provides little relevant information. In the past, federal accounting standards for non-business-type activities established by GAO, known as Title 2, encouraged, but did not require, depreciation of general tangible assets. However, Title 2 did require depreciation accounting for all federal business-type activities in cases where depreciation of federal assets were used to establish sales prices or user charges necessary to reimburse revolving funds or otherwise recover costs. In these cases, federal agencies do depreciate the relevant assets to determine user charges to recover the cost of the asset. Presently, FASAB is considering standards that would require federal agencies to depreciate infrastructure assets owned by the federal government, but probably not intangible investments such as R&D and human capital. GASB, which sets accounting standards for state and local governments, prohibits recording annual depreciation charges in financial statements for the general fund because these funds do not operate on a strictly accrual basis. Depreciation, which is an expense, applies only to accrual-based accounting systems. GASB standards, however, do require the reporting of depreciation in financial statements for proprietary and certain trust fund assets because these funds are reported on an accrual rather than a cash basis. If depreciation methodologies were to be used in federal budgeting, one starting point for establishing those methodologies conceivably would be the accounting methods used for depreciation of tangible assets for financial statement purposes. Depreciation in accounting can be a complex and technical subject and involves significant subjectivity concerning such key factors as the asset's value, its useful life, and its salvage value. Because of its subjective nature, it is only an approximation of how much of an asset is used up in any period. Ultimately, depreciation of tangible assets is an imperfect way of spreading costs over the asset's useful life. Trying to apply depreciation accounting techniques to intangible assets such as R&D and human capital investment for either accounting or budgeting purposes would be even more difficult because of the additional difficulties in estimating value, useful life, or establishing ownership. Calculating the amount of depreciation to be recorded annually depends on how assets are valued to determine the depreciation base, the depreciation method used, and the asset's useful life. There are three general ways to value assets--historical cost, constant cost, and current cost. Historical cost is the amount of cash (or its equivalent) paid to acquire an asset and is considered to be an objective and verifiable basis for valuation. Constant cost restates historical cost information in terms of dollars of equal purchasing power. Current cost is the amount of cash or other consideration that would be required today to obtain the same asset or its equivalent. Market prices are often used to determine current cost. Which of these valuation methods is chosen greatly affects the depreciation base. While historical cost is most widely used and documented, current cost provides a more relevant measure of the resources tied up in a particular asset and the cost to replace the asset. After an asset is valued (usually at historical cost), one of numerous depreciation methods is then selected to spread the depreciation base over the asset's useful life. Depreciation computations are based on the assumption that every fixed asset (except land) has a limited useful life. The value of the asset (or depreciation base, as described previously) is thought of as a prepaid expense that by some method must be spread over the asset's useful life. Various methods have been developed to do this--among the most well-known are the straight-line, declining-balance, and replacement cost methods. The straight-line method is the simplest and most commonly used. Other methods that can be more complicated have been advocated or approved by accountants for income tax and other purposes. The following describes the three methods mentioned above. The straight-line method spreads the depreciation base equally over the useful life of the asset. The declining-balance or geometric method determines the annual depreciation charge by applying a fixed percentage to the diminishing value of the asset, that is, the asset's value after deducting the preceding year's depreciation charges. The replacement method considers the asset's replacement cost and increases the current depreciation charge by a percentage based on a comparison of the anticipated replacement cost with the recorded cost. Selecting an appropriate depreciation method depends on the purposes for which depreciation is being recorded. In our review, we found that depreciation of transportation infrastructure, R&D, and human capital investments in the public sector was used primarily by economists for analytical purposes such as estimating economic wealth. Many economists identified the replacement method as the appropriate method for economic analysis because it provides the closest estimate of true economic cost. In general we found that none of the three types of federal investments we examined--transportation infrastructure, R&D, and human capital--are depreciated for either accounting or budgeting by federal agencies. We did find that some consideration had been given to depreciating infrastructure because physical assets are depreciated in the private sector, and its tangible nature provides a reasonable basis for discussion. However, investments for R&D and human capital had received little attention because they are not depreciated in the private sector and the intangible nature of these assets made issues of valuation and ownership difficult to determine. The Department of Transportation (DOT) administrations that we reviewed--the Federal Highway Administration, the Federal Aviation Administration, and the Federal Railroad Administration--do not depreciate transportation infrastructure investments for accounting or budgeting purposes. The reason given for this is that the federal government does not own most of the transportation assets it funds. The federal government funds most transportation infrastructure through grants. For example, the federal government spent more than $24 billion on physical transportation investments in 1993, but more than $21 billion of this spending was in the form of grants. Generally accepted accounting principles established by FASB provide that infrastructure assets owned by the reporting entity, such as railroad tracks owned by the entity, are depreciated in the entity's financial statements. At this time, federal accounting standards for infrastructure assets not owned by the federal government do not provide for recording grantee assets for purposes of depreciation. FASAB is considering standards for infrastructure assets owned by the federal government, but not for infrastructure grants or assets owned by grantees. DOT analysts cited two major problems with depreciating assets which DOT does not own. First, it is often difficult, and in some cases impossible, to link federal grant money to the value of a specific infrastructure asset. In part, this is because it is difficult to distinguish how the federal share of funding is used when mixed with funding from other sources. It is also difficult to assign value to portions of a project that are only components of larger projects. Also, if federal investment expenditures cannot be linked directly to an asset, there is no basis for determining a useful life over which to spread the cost. A second problem cited by analysts at DOT is the difficulty of monitoring the value of an asset not owned by the entity seeking to depreciate it. The owners of an infrastructure asset can improve or discard that asset at their own discretion, although in the case of highways the federal government may share in any monetary return resulting from disposition. Applying the concept of depreciation to federal grants could result in a situation in which an annual depreciation charge would appear in the federal budget for an asset that is not owned by the federal government or that may not even exist any longer. Analysts at DOT said that the effort that would be required to determine the value of depreciable transportation assets funded by grants would be large and would detract from DOT's other missions. Officials at these agencies expressed strong doubts that the benefits from depreciating these infrastructure investments would justify the cost of determining the assets' value. Among the 24 OECD nations, none appropriates depreciation for infrastructure assets in its national budget. Even New Zealand, the only OECD nation that uses depreciation in its budget, does not appropriate depreciation for infrastructure assets that are owned by the government as a whole. New construction of roads and other infrastructure assets owned by the New Zealand government as a whole are appropriated up front on a cash basis. In this instance, New Zealand's system is, in principle, similar to the system that is used to budget for highways in the United States. Infrastructure assets not owned by the New Zealand government are not depreciated by the government for either budgeting or financial reporting purposes. However, for accounting purposes, in cases where the government owns transportation infrastructure assets, the assets are depreciated using the current replacement cost method in the government's financial statements. Officials at the National Science Foundation (NSF) told us that they do not depreciate R&D and advised us that they could imagine no reasonable method or practical reason for doing so. Major impediments to depreciation include establishing the value and useful life of R&D. Also, NSF's R&D funds are usually disbursed through grants for which there is no established method of depreciation. Depreciation of R&D investment has been proposed and considered for the private sector, but not practiced. FASB prohibits capitalization and depreciation of any R&D expenses by private sector entities, including the R&D costs of internally developed computer software. Depreciation of R&D was rejected because of the uncertainty and difficulty in measuring the benefits and the inability to determine useful life. From an international perspective, the IASC provides that in limited cases R&D expenditures may be deferred and depreciated if they result in a product or process that is technically and commercially feasible and can be marketed. In our review, we found only one OECD government, New Zealand, that provided for depreciation of R&D to a limited extent in its budget, and then only for R&D owned by the government. In New Zealand, government R&D expenditures generally are expensed as incurred in both the budget and financial statements. However, they can be capitalized and depreciated in both if they result in a product or process which is demonstrated to be technically useful and is intended to be used or marketed. In cases where this is anticipated, depreciation is deferred until a market asset is produced. At that point, the R&D expenditures (based on historical cost) are depreciated over the expected period of future benefits, allowing for a more accurate assessment of costs for the period. Otherwise, R&D expenditures are reported as expenses for that year. We found no government that capitalizes or depreciates human capital in any budget or financial statement. At the core of this issue there is a basic unresolved question as to whether human capital depreciates or appreciates over its relevant life. Officials at the Department of Education told us they had discussed the concept of depreciating human capital, but did not find it cost beneficial or a useful tool. Similar to the DOT with its highway grants, the Department of Education funds education and training mostly through grants for which there is no standard or methodology for depreciation. In the academic literature we reviewed, there is general agreement that the problems preventing the acceptance of depreciation of human capital are insurmountable in part because of the inability to determine the useful life and real value of education and training spending. In the private sector, various methods for recognizing in financial statements the value of a firm's employees have been developed and proposed over the last 30 years. However, no standard for reporting human capital has ever been accepted, or even seriously considered, because (1) the methods are complicated and difficult to apply and (2) the methods used to determine values for human capital are subjective and open to challenge. The methods that have been developed apply only to specific firms and are not intended to measure the value of human capital outside the firm. Thus, even if they were accepted as valid, they are not applicable to the education and training expenditures that governments would make, which are primarily for the benefit of the general public. Although federal investments in transportation infrastructure, R&D, and human capital are not depreciated for budgeting or accounting purposes, OMB and BEA depreciate infrastructure and R&D investments to make rough estimates of national wealth for analytical purposes. Depreciation is considered to be appropriate for generating national economic wealth estimates because it is used only to provide rough estimates of the value of existing assets in the economy. In these economywide analyses, the problems of determining ownership or control of assets are not relevant. However, the analysts who generate these estimates maintain that this type of analysis is inappropriate for budgeting because (1) the estimates are imprecise and dependent on questionable assumptions and (2) because measures of stocks have no place in a budget that allocates resource flows. In making national economic wealth estimates, the BEA and OMB use a valuation method called the perpetual inventory method. In this method, the gross federal investment for the year is added to the sum of previous years' net investments. This sum is then reduced by depreciation and estimated discarded investment to determine net investment. All OECD nations use the perpetual inventory method in estimating their national wealth. BEA and OMB have both estimated the value of the stock, that is, inventories, of physical capital investments including infrastructure. In making estimates of the value of the nation's stocks of economic wealth, BEA depreciates the estimated stock of infrastructure assets valued on historical cost, constant cost, and current cost bases using straight-line depreciation over a 50-year estimated useful life. OMB estimates the total net federally financed physical capital stock including transportation stocks, regardless of ownership. OMB made its estimates using a constant dollar adjustment to historical federal spending for transportation and depreciated it on a straight-line basis. The transportation stocks are depreciated over a 40-year estimated useful life. These estimates are produced for economic policy information. OMB has also estimated the stock of federally financed research and development. In making these estimates, OMB assumed that basic research did not depreciate but applied research and development depreciated, using the geometric method, at a 10 percent rate. BEA recently published estimates of the national R&D stocks. In making its estimates it depreciated all R&D, including basic research using a method equivalent to an 11 percent geometric rate. In the President's 1995 budget, OMB estimated the stock of the nation's education capital based on an estimate of what it would cost to reeducate the population at 1987 prices. They did not assume any depreciation of education over an individual's lifetime. BEA has made no attempt to estimate the stock of human capital. We found widespread agreement among accounting experts published in professional journals, budget experts, and economists at BEA and OECD that the use of depreciation is not well suited to a cash and obligation-based budget like that of the United States. Depreciation as envisioned in most capital budgeting proposals is not currently done in the federal budget. Appropriations and outlays are normally recorded on a cash basis in the budget. Thus, in general, the total commitment of the government in making an investment is usually recorded up front, not spread over the useful life of the investment. No state records annual depreciation in its capital or operating budgets because depreciation has no effect on the flow of current financial resources. However, an important task of state capital budgets is to relate the purchase of some of a state's fixed assets to borrowing and other specified types of financing. Business enterprises do not include depreciation of capital assets in their budgets. Businesses do, however, include a cost of capital (primarily principal and interest payments) in their financial budgets. Textbooks on private business budgeting practices indicate that depreciation is irrelevant for budgeting except where income taxes are affected. Private businesses use depreciation primarily for two purposes: (1) to match revenues with expenses in a given period for the purposes of reporting profit or loss in financial statements and (2) for tax purposes. Neither of these purposes, however, are applicable to federal budgeting, except for federal business-type activities which consider revenues and expenses in setting user fees. Of the OECD member nations only one, New Zealand, uses depreciation in its budget. New Zealand began to apply depreciation to budgeting in 1992 as a part of its transition from a cash to an accrual-based budgeting system. New Zealand's accrual-based budgeting system includes depreciation for department or agency-owned physical assets in the budget statements where the depreciation is appropriated as part of the cost of departmental operations. However, assets owned by the government as a whole, such as transportation infrastructure and some R&D, are depreciated in the financial statements, but are not appropriated in the budget. New Zealand does not depreciate expenditures for human capital in either its financial or budget statements. In talking to budget experts, we identified four major disadvantages in the use of depreciation for federal investments in infrastructure, R&D, and human capital: (1) loss of budgetary control, (2) increasing uncertainty over budget estimates, (3) obscuring the effect of budgetary decisions on the deficit, and (4) concern with depreciating assets not owned by the federal government. The greatest disadvantage according to these experts was that depreciation would result in a loss of budgetary control under an obligation-based budgeting system. In general, the federal budget records the full cost of its spending decisions up front in terms of both budget authority and outlays so that decisionmakers have the information needed and an incentive to take the full cost of any decision into account. The only time that spending on a federal investment can be controlled is before obligations are made. After obligation, recipients of the spending expect it to occur and the government is generally committed to payment of all the costs. Depreciation, on the other hand, would spread that cost over the asset's expected useful life. The focus of control for the operating budget--the component that would be subject to a balanced budget requirement--would not be on the total up-front government commitment because, by the time the commitment would be fully recognized in the operating budget, the expenditures would have already been made. Although decisionmakers would consider the up-front costs of an investment in the capital budget, this budgetary component would not be subject to resource constraints or balanced budget requirements, thereby diminishing the incentives to carefully weigh total costs and benefits. This loss of budget control would be evident in two ways. First, under Budget Enforcement Act provisions, investment spending would be transformed from a discretionary decision in the current year to a stream of sunk mandatory payments in future years to finance the depreciation charge. This would diminish budgetary flexibility in the discretionary portion of the budget. Second, without the establishment of some new method of control, depreciation of investments would nearly eliminate budgetary constraints on current investments. Since assets are only depreciated after they have been fully constructed and put into service, outlays for current investments would not be recognized in the operating budget until the annual depreciation charges began. For example, spending on the recently cancelled Superconducting Super Collider would not have been included in any prior year's budget nor have been subject to any spending cap because it was never put into service. In addition, all previous spending would appear in the budget in the year it was cancelled, setting up a perverse incentive to continue the program rather than to absorb the accumulated past spending in 1 year. Depreciation could be applied to the federal budget process only if it were accompanied by new methods of control that would provide discipline for making up-front commitments that would not destroy budgetary integrity. For example, when New Zealand included depreciation in its budgetary process, it substantially reformed its budget process to include new controls on agencies. These controls included the imposition of asset caps and the establishment of output contracts which established performance goals for agency heads. A major disadvantage to using depreciation in the federal budget cited by budget experts is its effect on the quality of budget estimates. They are concerned that depreciation of investments would make budget estimates uncertain and/or unreliable. Determining any asset's useful life is a complicated technical exercise that is inherently subjective. For example, OECD recently surveyed the useful lives over which capital equipment was depreciated in 14 OECD countries and found wide discrepancies in the average life for the same categories of assets. The range for capital equipment was 11 years in Japan to 26 years in the United Kingdom. Uncertainties about the useful lives for assets with possibly indefinite lives, such as highways, and intangible assets, such as R&D and education, would be even greater. Cash flows provide a more certain and more objective basis for making budgetary decisions. Another major disadvantage cited by budget experts is the claim that depreciation would undermine the usefulness of the budget as a fiscal policy measure. The generally cash-based federal budget deficit is currently designed to provide an indication of the level of federal borrowing. Budget decisionmakers consider, among other things, the effect of federal borrowing on the economy in general and the national credit markets in particular. If depreciation, a noncash cost allocation, is recorded in the budget in lieu of actual cash payments, budgetary decisions would no longer be connected to their impact on the government's borrowing. We recognize that there are already departures from a cash-based budget process when the cash basis fails to recognize the government's full commitment up front. Credit reform, for example, is a revised method, specified in the Federal Credit Reform Act of 1990, of controlling and accounting for credit programs in the budget. It requires that the full cost of credit programs over their entire lives be included in the budget up front so that the full cost is considered when making budget decisions. However, changes in the treatment of the investment spending we reviewed would do the opposite. For such spending, departing from the cash basis of budgeting by budgeting depreciation would actually spread the government's commitment over time rather than recognizing it when it is made. Finally, budget experts mentioned the difficulty of depreciating assets that are not owned by the federal government. Many of the investment expenditures of the federal government are made in the form of grants for assets or intangibles that the federal government does not own. There is currently no provision in any accounting standard for depreciating assets that are not owned. Grants are normally accounted for as current expenditures. Despite the disadvantages cited in using depreciation for budget or resource allocation decisions, there is widespread agreement in the literature and among the budget experts and program analysts we interviewed that depreciation can be a useful analytical tool for certain other purposes. For example, information on depreciation costs may be one factor considered in making budgetary decisions by serving as a reminder that aging assets may require replacement or maintenance. Depreciation may also be used to measure the operating cost of an activity. We have previously reported that depreciation is not a practical alternative for the Congress and the administration to use in making decisions on the appropriate level of spending intended to enhance the nation's long-term economic growth. While depreciation is used in estimating the level of the nation's economic wealth, we believe that these estimates are not useful in determining future federal spending. However, we have reported that an investment component in the federal budget, with targets for appropriate levels of investment, could be more useful to the Congress and the President regarding decisions on future investments. Setting an investment target would require policymakers to evaluate the current levels of investment and consumption spending and would encourage a conscious decision about an appropriate overall level of investment. In our view, unlike a focus on incremental depreciation charges, this approach has the advantage of focusing budget decisionmakers on the overall level of investment supported in the budget without losing sight of the unified budget deficit's impact on the economy. It also has the advantage of building on the current congressional budget process as the framework for making decisions. And it does not raise the budget control and other practical measurement problems posed by the use of depreciation.
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GAO reviewed whether: (1) federal agencies are depreciating transportation infrastructure, research and development (R&D), and human capital investments for accounting and budgeting purposes; and (2) depreciation of these investments could be useful in federal budgeting. GAO found that: (1) the federal government generally does not depreciate transportation infrastructure, R&D, and human capital investments for accounting or budgeting purposes; (2) Congress and the Administration are considering budgeting alternatives to decrease the annual federal deficit and increase long-term federal investments; (3) budget and accounting experts do not support depreciating these investments for budgeting purposes, since it is difficult to determine the value and useful life of such investments; (4) depreciation in accounting is complex and involves such key factors as the asset's value, its useful life, and its salvage value; (5) federal agencies do not depreciate assets they do not own because it is difficult to link federal grant money to the value of a specific asset; (6) although economists depreciate infrastructure and R&D investments to generate national economic wealth estimates, the problems of determining ownership or control of assets are not relevant in these analyses; and (7) private businesses use depreciation primarily to match revenues with expenses for a given period and for tax purposes.
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The Homeland Security Act of 2002 outlines DHS's responsibilities for initiatives supporting both a homeland security and a non-homeland security mission. DHS's homeland security mission is to prevent, reduce vulnerability to, and recover from terrorist attacks within the United States. DHS's non-homeland security mission--also referred to as non-terrorism-related responsibilities--includes programs such as the Coast Guard's marine safety responsibilities and the Emergency Preparedness and Response Directorate's natural disaster response functions. GAO has previously identified strategic planning as one of the critical success factors for new organizations. As part of its transformation, we noted that DHS should engage in strategic planning through the involvement of stakeholders; assessment of internal and external environments; and an alignment of activities, core processes, and resources to support mission-related outcomes. We have reported that the mission and strategic goals of a transforming organization like DHS must become the focus of the transformation, define its culture, and serve as the vehicle for employees to unite and rally around. The mission and strategic goals must be clear to employees, customers, and stakeholders to ensure they see a direct personal connection to the transformation. Congress enacted GPRA to focus the federal government on achieving results and providing objective, results-oriented information to improve congressional decision making. Under GPRA, strategic plans are the starting point and basic underpinning for results-oriented management. GPRA requires that an agency's strategic plan contain six key elements, as shown in table 1. In addition, GPRA requires agencies to consult with Congress and solicit the input of others as they develop these plans. The National Strategy for Homeland Security, a foundation of DHS's strategic plan, set forth overall objectives to prevent terrorist attacks within the United States, reduce America's vulnerability to terrorism, and minimize the damage and assist in the recovery from attacks that may occur. The strategy sets forth a plan to improve homeland security through the cooperation of federal, state, local, and private sector organizations in an array of functions, with DHS having a prominent role in coordinating these functions. In addition, the strategy states that the United States "must carefully weigh the benefit of each homeland security endeavor and only allocate resources where the benefit of reducing risk is worth the amount of additional cost." We have advocated a risk management approach to guide the allocation of resources and investments for improving homeland security. Specifically, a risk management approach would provide a decision support tool to help DHS establish and prioritize security program requirements, planning, and resource allocations. DHS's own strategic planning process began in July 2003, with the creation of the Strategic Plan Development Group. The group consisted of officials from 15 separate DHS components and offices, including general counsel and directors of strategic planning from across DHS. By the fall of 2003, the group had created a draft strategic plan with goals and objectives for each component. However, according to officials involved, the group members were authorized to represent their component agencies but not to negotiate priorities in order to create departmentwide goals. Such a discussion was needed to develop a departmentwide document. Consequently, following the work of the Strategic Plan Development Group, DHS's Deputy Secretary brought DHS senior leaders together in December 2003 to develop DHS's vision, mission, and strategic goals and achieve senior leadership ownership of the strategic plan. DHS issued its first departmentwide strategic plan in February 2004. The plan includes DHS's vision and mission, core values, and guiding principles. In addition, the plan describes DHS's seven strategic goals and corresponding objectives. A summary paragraph that describes the general approaches DHS will take to achieve each objective is also included. According to several senior DHS officials, the strategic plan was the primary guidance followed for DHS's management integration. In addition to the strategic plan, DHS officials identified four other documents as the key planning documents for the department. These documents are as follows. Fiscal Year 2005 Performance Budget Overview. This is the overview of DHS's Congressional Budget Justification for fiscal year 2005 and serves as the overview of DHS's fiscal year 2005 annual performance plan, in compliance with GPRA. The document describes the performance levels associated with the department's Fiscal Year 2005 President's Budget to Congress. For each strategic goal it includes means and strategies, as well as performance goals, measures, and targets. In addition, this document identifies the program and lead organization responsible for each performance goal. DHS's Fiscal Year 2005-2009 Future Years Homeland Security Program (FYHSP). Developed pursuant to Section 874 of the Homeland Security Act, the fiscal year 2005-2009 FYHSP, dated May 2004, is a 5-year resource plan that outlines departmental priorities and the ramifications of program and budget decisions. The FYHSP includes a general discussion of the nation's threats and vulnerabilities, including a description of current and future terrorist techniques and tactics; types of weapons and threats terrorists may use; and potential terrorist targets and timing of an attack. In addition, the FYHSP includes a brief discussion of the inflation factors and economic assumptions based on underlying guidance provided by OMB. The FYHSP lays out projected resource requirements through fiscal year 2009 for each strategic goal and includes a table aligning programs to the strategic goals. Finally, the FYHSP includes a description of performance priorities for each strategic goal. DHS's 2006-2010 FYHSP was issued to Congress on March 4, 2005. It is designated "For Official Use Only," and is thus not publicly available. DHS expects to update the FYHSP annually. DHS's Milestones Report. The Milestones Report is an internal DHS planning document containing performance goals linked to the long-term strategic goals described in the strategic plan. For each performance goal, the Milestones Report provides annual milestones for fiscal years 2005 through 2009. In addition, the Milestones Report aligns specific programs with the strategic goals and identifies what percentage of program funding is allocated to addressing these strategic goals. DHS's themes and owners papers. The themes and owners papers are internal planning documents that address DHS's top seven priorities during its second year of existence, March 2004 through March 2005, as identified by the former Secretary of Homeland Security. DHS directorates were identified as the "owner," or lead group, for addressing a "theme," or priority, and directorate officials submitted a proposal detailing how they would address the theme in the coming year. The themes addressed are (1) stronger information sharing and infrastructure protection, (2) standards for interoperable equipment, (3) integrated border and port security systems, (4) new technologies and tools, (5) more prepared communities, (6) improved customer service for immigrants, and (7) 21st century department. DHS has made considerable progress in its planning efforts, but future efforts can be improved. While DHS's planning documents discuss the need for stakeholder coordination during program implementation, stakeholder involvement was limited during the strategic planning process. While the strategic plan included five of the six GPRA-required elements, it did not describe the relationship of annual goals to long-term goals. However, DHS's planning process continues to develop and mature as the department's transformation continues. The process of developing DHS's strategic plan and other strategic planning documents involved minimal consultation with key stakeholders, including Congress, other federal agencies, state and local governments, and the private sector. GPRA requires that agency officials solicit the input of stakeholders as they develop their strategic plans. Further, stakeholder involvement during the planning process is important to ensure DHS's efforts and resources are aligned with other federal and nonfederal partners with shared responsibility for homeland security and that they are targeted at the highest priorities. Such involvement is also important to ensure stakeholders help identify and agree on how their daily operations and activities contribute to DHS's mission. Additionally, DHS's planning documents describe areas where DHS needs to coordinate with stakeholders to implement its programs, achieve its goals and objectives, and meet its homeland security and non-homeland security responsibilities. The importance of consultation to DHS was recently underscored in GAO's High-Risk Series: An Update, in which we designated as high risk the establishment of appropriate and effective information-sharing mechanisms to improve homeland security. While this area has received increased attention, the federal government still faces formidable challenges sharing information among stakeholders in an appropriate and timely manner to minimize risk. Though DHS officials briefed congressional stakeholders on the strategic planning progress, they did not consult directly with Congress while developing the department's mission statement or strategic goals. DHS officials said that when briefed, congressional stakeholders requested that the strategic plan include more detail, including specific performance goals and measures. However, according to DHS officials, these goals and measures were not included in order to meet OMB's time frame for issuing the plan. To meet this time frame, DHS decided to keep the plan's content at a high level and focus on achieving broad consensus among agency components on DHS's mission and long-term strategic goals and objectives. Nevertheless, DHS officials acknowledged that Congress should be more involved in future planning efforts. As we previously reported, Congress needs to be considered a partner in shaping agency goals at the outset, since it is a key user of performance information and to ensure that congressional priorities are addressed in the planning documents. We have suggested that agencies consult with congressional stakeholders at least once every new Congress in order to clarify performance expectations. Further, DHS officials said they did not consult with other federal agencies responsible for shared homeland security initiatives in developing the strategic plan. We have reported that a focus on results implies that federal programs contributing to the same or similar results should be closely coordinated to ensure that goals are consistent. Stakeholder consultation in strategic planning efforts can help create a basic understanding of the competing demands that confront most agencies, the limited resources available to them, and how those demands and resources require careful and continuous balancing. The National Strategy for Homeland Security identifies six federal agencies responsible for 43 homeland security initiatives. While DHS was identified as the agency with lead responsibility for a majority of these initiatives, there were multiple lead agencies for 12 of these initiatives. For example, DHS and the State Department share lead responsibility for the initiative "create 'smart borders.'" As part of this initiative, the strategy states that DHS would improve information provided to consular offices so that individual applicants can be checked in databases and would require visa-issuance procedures to reflect threat assessments. These shared initiatives require that DHS look beyond its organizational boundaries and coordinate with other agencies to ensure that their efforts are aligned in order to meet consistent goals. However, to ensure that the shared initiatives have common goals, and that the goals are appropriate, consultation during the planning stage is vital. Finally, DHS had limited consultation with nonfederal stakeholders, such as state and local governments and the private sector, in its strategic planning process. Nonfederal stakeholder involvement in DHS's strategic planning process is vital considering that state and local governments have primary responsibility as first responders for homeland security and approximately 85 percent of the nation's critical infrastructure is privately owned. DHS officials explained that expanded involvement of nonfederal stakeholders was not practical within OMB's time frame for completing the strategic plan. Instead, DHS provided a draft of the strategic plan to a departmental advisory group, the Homeland Security Advisory Council, for its review and comment. Further, DHS component agency planning officials said that instead of consulting directly with nonfederal stakeholders, officials from DHS components were expected to represent stakeholder views when providing their input to the strategic plan. For example, officials in DHS's Private Sector Office were expected to represent the opinions of private sector officials based on the office's work with private sector representatives. DHS's strategic plan addressed five of the six GPRA-required elements, but did not include a description of the relationship between annual and long- term goals. We have reported that this linkage is critical for determining whether an agency has a clear sense of how it will assess progress toward achieving the intended results for its long-term goals. DHS and OMB officials said the decision to keep the content of the strategic plan at a high level, and not include a discussion of annual performance goals, was necessary to achieve broad consensus among agency components on DHS's mission and long-term strategic goals. Although the Performance Budget Overview linked specific annual goals and performance measures to the long-term strategic goals, not including a description of how the annual goals relate to the long-term goals in the strategic plan makes it difficult for DHS and its stakeholders to identify how their roles and responsibilities contribute to DHS's mission and potentially limits Congress's and other key stakeholders' ability to assess the feasibility of DHS's long-term goals. OMB continues to work with DHS to develop performance measures and goals that are critical to DHS's integrated mission and reinforce the crosscutting responsibilities of component agencies. Several of the GPRA-required elements addressed in DHS's strategic plan could be further developed through the implementation of additional good strategic planning practices. Specifically, DHS's plan describes long-term agencywide goals and objectives but does not include a timeline for achieving these goals. For example, the first strategic goal in DHS's strategic plan is "Awareness: Identify and understand threats, assess vulnerabilities, determine potential impacts, and disseminate timely information to our homeland security partners and the American public." There are four objectives related to this goal, but there is no description of when to expect results or when a goal assessment would be completed. However, the Milestones Report includes a timeline for expected results of programs that address the long-term goals, with performance measures and targets for each long-term goal through fiscal year 2009. Adding this information to the strategic plan would therefore require little additional effort and would make the plan itself a more useful document. In addition, the strategic plan generally describes strategies and approaches to achieve the long-term strategic goals but does not include the specific budgetary, human capital, or other resources needed. For example, the first objective under the second strategic goal, "Prevention," states that DHS plans to "secure our borders against terrorists, means of terrorism, illegal drugs, and other illegal activity." The approach to achieve this objective requires "the appropriate balance of personnel, equipment and technology." However, the description does not include details on the specific personnel, equipment, and technology that would be needed. Although the sensitive nature of some homeland security information may limit the level of detail, including such resource-related information in the strategic plan is critical for understanding the viability of the strategies presented to achieve the long-term goals. Further, the impact of program evaluations on the development of strategic goals could be discussed in greater detail in the strategic plan. Inclusion of these components is necessary to ensure the validity and reasonableness of DHS's goals and strategies as well as for identifying factors likely to affect performance. Evaluation can be a critical source of information for Congress and others in assessing (1) the appropriateness and reasonableness of goals; (2) the effectiveness of strategies by supplementing performance management data with impact evaluation studies; and (3) the implementation of programs, such as identifying the need for corrective action. Rather than identifying specific program evaluations and providing a schedule of evaluations, the strategic plan states only that DHS planned to (1) integrate strategy and execution; (2) assess performance, evaluate results, and report progress; (3) collaborate; and (4) refine. The plan did not include a description of the evaluations used to develop DHS's strategic goals, nor did DHS address how future evaluations would be used to revise the goals and objectives. Finally, DHS identified some key factors that may affect its ability to achieve its strategic goals and objectives, an element required by GPRA. However, based on our prior review of agency strategic plans, this element could be further developed with an explanation of the actions DHS intends to take to mitigate these factors. For example, DHS identified the need for "international cooperation" as a key factor that can significantly affect the achievement of its goals. To make its plan more useful, DHS could include in its next update a discussion of how the department might work together with other federal agencies to help obtain international cooperation in achieving shared goals. DHS planning documents specify that DHS's homeland security mission-- which emphasizes counterterrorism efforts--is the key driver of planning and budgeting decisions. For example, the fiscal year 2005 FYHSP, DHS's long-term resource allocation plan, states, "the Department's overriding priority is to defend and protect the homeland from terrorism." In addition, the DHS strategic plan states that the DHS strategic goals and objectives are directly linked to accomplishing the three objectives of the National Strategy for Homeland Security: (1) prevent terrorist attacks within the United States, (2) reduce America's vulnerability to terrorism, and (3) minimize the damage and recover from attacks that do occur. However, these planning documents also address DHS's non-homeland security mission in areas such as immigration services and disaster relief. For example, see the following. DHS's strategic plan includes the following strategic goal: "Service: Serve the public effectively by facilitating lawful trade, travel, and immigration." The focus of this goal is to improve service to those individuals immigrating to and visiting the United States. The Milestones Report includes the following performance goal: "Eliminate the application backlog by the end of FY 2006. Achieve 6 month cycle time for all applications." This goal focuses specifically on improving the efficiency of DHS's processing of citizenship and immigration applications. The Fiscal Year 2005 Performance Budget Overview includes the following performance measure: "international air passengers in compliance with agricultural quarantine regulations (percent compliant)." The focus of this measure is to safeguard against potentially dangerous nonnative species entering the United States. In addition, planning officials in DHS's component agencies that address the non-homeland security mission said these responsibilities were fairly represented in the planning process and documents. They attributed this, in part, to the efforts of senior leadership. For example, prior to a strategic planning meeting in December 2003 for senior officials, senior leadership developed "straw man" mission statements that included both homeland security and non-homeland security missions. According to DHS officials responsible for planning, this was done to ensure that one role was not neglected for the sake of another and both were represented in the final mission statement. Given the enormity and importance of DHS's transformation, having a strategic plan that outlines and defines DHS's mission and goals is vital. While DHS has made progress in its efforts to date, improvements to its strategic planning process would help to ensure DHS's efforts and resources are aligned with other federal and nonfederal partners with shared responsibility for homeland security. Earlier and more comprehensive stakeholder involvement in DHS's planning process is perhaps the most important area for improvement. Consultation with stakeholders during the planning process creates a shared understanding of what needs to be achieved, resulting in more useful and transparent planning documents and helping ensure the success of stakeholder partnerships. Just as important, stakeholder consultation in strategic planning efforts can help create a basic understanding of the competing demands that confront most agencies, the limited resources available to them, and how those demands and resources require careful and continuous balancing. Congress enacted GPRA to focus the federal government on achieving results and providing objective, results-oriented information to improve congressional decision making. While the body of DHS's strategic planning documents address most of the required elements of GPRA, not having all of the required elements in its strategic plan limits Congress's and other key stakeholders' ability to assess the feasibility of DHS's long-term goals. While DHS followed a number of good planning practices, by adopting others it could improve the strategic plan's usefulness with little extra effort. To make DHS a more results-oriented agency and allow for public oversight and accountability, we recommend that the Secretary of Homeland Security take the following three actions. First, ensure that DHS's next strategic planning process includes direct consultation with external stakeholders, including Congress, federal agencies, state and local governments, and the private sector. Second, we recommend that the Secretary of Homeland Security ensure that DHS's next strategic plan--the agency's primary public planning document--includes a description of the relationship between annual performance goals and long-term goals, as required by GPRA. Finally, we recommend that the Secretary of Homeland Security ensure that DHS's next strategic plan further develop the GPRA-required elements addressed by adopting additional good strategic planning practices. Specifically, the Secretary should ensure that the strategic plan includes a timeline for achieving long-term goals; a description of the specific budgetary, human capital, and other resources needed to achieve those goals; a schedule of program evaluations planned; and a discussion of strategies to ameliorate the effect of any key external factors. On February 25, 2005, we provided a draft of this report to the Secretary of Homeland Security. On March 14, 2005, we received written comments from DHS that are reprinted in appendix II. In addition, we received technical comments, which we incorporated where appropriate. DHS generally agreed with our recommendations, and provided additional comments for our consideration. While DHS officials acknowledged that expanded involvement of nonfederal stakeholders was not practical within OMB's time frame, they pointed out that they sought to consult with nonfederal stakeholders by providing a draft to the Homeland Security Advisory Council for its review and comment. We revised the draft to acknowledge this consultation. DHS officials stated that they plan to seek more interaction with nonfederal stakeholders during the next plan revision. Further, in response to our recommendation, DHS implied that its FYHSP includes information on annual performance goals and long-term goals, suggesting that this information need not be included in the strategic plan. However, the FYHSP contains information regarding the programs that support its strategic goals rather than a description of how the annual performance goals relate to the long-term goals. Moreover, we continue to believe that this information should be contained in the strategic plan--as required by GPRA--rather than in separate documents to provide a readily accessible and clear linkage of the department's annual goals to its overall strategic goals. As we noted earlier, the FYHSP is not a public document, available only for official use, making it of limited value for accountability purposes. Additionally, DHS was concerned that our recommendation to adopt a number of good planning practices implied that it had not used good strategic planning practices. We have added language to make clear that we recognize that DHS employed a number of good planning practices and that it should adopt additional ones in the future. As agreed 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 Secretary of Homeland Security and other interested parties. Copies will also be available at no charge on GAO's Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512-6543 or [email protected] or Kimberly Gianopoulos at [email protected]. Major contributors to this report included Benjamin Crawford, Chelsa Gurkin, and Amy W. Rosewarne. The objectives of this report were to assess (1) the extent to which the Department of Homeland Security's (DHS) planning process and documents address required elements of the Government Performance and Results Act of 1993 (GPRA) and reflect good strategic planning practices and (2) whether DHS's planning process and documents reflect attention to homeland security and non-homeland security mission responsibilities. To meet these objectives, we reviewed numerous DHS planning documents and related material and interviewed numerous DHS officials. Our review of planning materials included the Strategic Plan, Fiscal Year 2005 Performance Budget Overview, Fiscal Year 2005-2009 Future Years Homeland Security Program, Milestones Report, and themes and owners papers. In addition, we reviewed the National Strategy for Homeland Security. To meet our first objective, we relied on requirements contained in GPRA and accompanying committee report language and planning practices based on prior GAO work, guidance to agencies from the Office of Management and Budget (OMB) for developing strategic plans, and DHS internal planning guidance. We then reviewed DHS's planning documents to identify where the GPRA-required elements could be found. To meet our second objective, we reviewed these planning documents to determine if they addressed both DHS's homeland security and non-homeland security mission responsibilities. In addition, we interviewed officials at OMB, as well as DHS officials responsible for agencywide planning in its Office of the Deputy Secretary and Office of Program, Analysis and Evaluation. We also interviewed officials responsible for planning in DHS's directorates and component agencies. Specifically, we met with officials in the Border and Transportation Security Directorate, the Science and Technology Directorate, the Federal Emergency Management Agency (part of the Emergency Preparedness and Response Directorate), the Coast Guard, the Secret Service, the Transportation Security Administration, the U.S. Citizenship and Immigration Services, the Private Sector Office, and the Office of State and Local Government Coordination. To meet our first objective, we interviewed officials about the process used to create the planning documents. To meet our second objective, we interviewed officials about the process for ensuring accountability for DHS's homeland security and nonhomeland security mission responsibilities. Written comments from DHS are included in appendix II. We conducted our work from April 2004 through February 2005 in accordance with generally accepted government auditing standards. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO's Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select "Subscribe to Updates."
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The creation of the Department of Homeland Security (DHS) was the largest government reorganization in over 50 years, involving 170,000 employees and a $40 billion budget. Given the magnitude of this effort, strategic planning is critical for DHS to ensure that it meets the nation's homeland security challenges. GAO was asked to assess the extent to which DHS's planning process and documents (1) address required elements of the Government Performance and Results Act of 1993 (GPRA) and other good strategic planning practices and (2) reflect its homeland and non-homeland security mission responsibilities. DHS has made considerable progress in its planning efforts, releasing its first strategic plan in 2004 that details its mission and strategic goals. Nevertheless, opportunities for improvement exist. The creation of DHS brought together 22 agencies to coordinate the nation's homeland security efforts and to work with Congress and numerous other organizations, including federal agencies, state and local governments, and the private sector, to further this mission. Although DHS planning documents describe programs requiring stakeholder coordination to implement, stakeholder involvement in the planning process itself was limited. Involving stakeholders in strategic planning efforts can help create an understanding of the competing demands and limited resources, and how those demands and resources require careful and continuous balancing. As DHS updates its strategic plan, earlier and more comprehensive stakeholder consultation will help ensure that DHS's efforts and resources are targeted at the highest priorities and that the planning documents are as useful as possible to DHS and its stakeholders. While DHS's strategic plan addresses five of the six GPRA-required elements, it does not describe the relationship between annual and long-term goals. This linkage is crucial for determining whether an agency has a clear sense of how it will assess progress toward achieving the intended results for its long-term goals. While DHS's strategic planning documents address most of the required elements of GPRA, not including them in the strategic plan makes it difficult for DHS and its stakeholders to identify how their roles and responsibilities contribute to DHS's mission and potentially hinders Congress's and other key stakeholders' ability to assess the feasibility of DHS's long-term goals. Additionally, several of the GPRA-required elements addressed in the strategic plan could be further developed through the adoption of additional good strategic planning practices. For example, identifying the specific budgetary, human capital, and other resources needed to achieve its goals could demonstrate the viability of the strategies and approaches presented for achieving its long-term goals. Finally, although DHS's priority is its homeland security mission--which emphasizes deterring terrorism in the United States--DHS's planning documents clearly address its responsibility for non-homeland security mission programs as well, such as its response to natural disasters. In addition, DHS planning officials said that non-homeland security responsibilities were represented in the planning process and documents due, in part, to the commitment of top leadership.
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NOAA has a process for updating its flyout charts, but this process is not established in policy. NOAA's process for updating its flyout charts involves obtaining updated information on the health of operational satellites from internal specialists and program based studies, such as satellite availability assessments; obtaining updated information on the launch schedules for new satellites; having relevant individuals and entities review the updated charts; and obtaining approval from the Assistant Administrator of the National Environmental Satellite, Data, and Information Service (NESDIS) to publish the new chart on its public facing website. This process is triggered at least once a year in preparation for the budget process or more often when important changes occur, such as a loss of use of a satellite or when a budget decision affects a launch date. Officials estimated that it can take several weeks to prepare, review, and obtain consensus to publish the new charts. This process is partially documented in a draft policy from June 2011. NESDIS officials stated that the draft policy serves as documentation of the agency's process; however, the policy was never finalized and is currently out-of-date because several details have changed since 2011. For example, the outdated draft does not include the name of the office responsible for updating the flyout charts, or define the use of fuel limited life to estimate the lifespan of operational satellites. According to the NESDIS Assistant Administrator, the agency recently appointed a new director with responsibility for updating and finalizing the policy. However, NESDIS officials have not yet established a schedule for releasing the updated policy. Without a revised and finalized policy in place to govern the flyout chart process, NOAA runs an increased risk that its practices will be inconsistent and unclear. Using the process outlined in NOAA's draft policy, program officials have updated the geostationary and polar-orbiting satellite flyout charts three times since March 2014. Key changes included adding newly planned satellites; removing a satellite that reached the end of its life; and adjusting planned dates for when satellites would launch, begin operations, and reach the end of their lives. For example, in one set of changes between April 2015 and January 2016, NOAA (1) delayed the GOES-R launch date from March to October 2016, resulting in a corresponding move in its estimated end-of-life, and (2) added 6-month on-orbit checkout periods to the next three satellites in the series, called GOES-S, T, and U satellites. Figure 1 shows the changes for NOAA's geostationary satellites between April 2015 and January 2016. While NOAA regularly updates its flyout charts and most of the data on specific satellites were aligned with supporting program documents, the agency has not consistently ensured that its charts were supported by stringent analysis, accurate, clearly communicated, and fully documented. As specified by relevant guidance to agencies for facilitating congressional decision-making and enforcing government internal controls, agencies should ensure that the information presented to Congress is accurate, clear, and supported by documentation. Our review of changes to the flyout charts since March 2014 found that most of the updates to the flyout charts accurately reflected relevant information from satellite program offices at the time they were published; and were subject to internal review before they were finalized as evidenced by summary packages which can include e-mails, documents tracking the changes, and the official approval of the charts by the Assistant Administrator. However, in its efforts to provide updated flyout charts to Congress, the agency has not consistently ensured that the data were (1) supported by stringent analyses of the satellites' health and availability; (2) accurate and consistent with supporting program data; (3) clear in how a satellite's extended life is portrayed; and (4) fully documented. More specifically: Stringent analysis: NOAA does not require regular satellite availability assessments for any of its environmental satellite programs. Satellite managing agencies often perform technical assessments of health and future availability of operational satellites to aid in planning and budgeting. For example, the Air Force requires satellite programs to complete an independent assessment of satellite and constellation health each year as part of its budget preparations. While NOAA conducts an annual assessment for its JPSS program, it does not conduct such assessments for its GOES-R program. Without requiring regular availability assessments for all satellites, NOAA risks not having timely information on the probability of continued success of its operational satellites for program budgeting purposes. Accuracy: NOAA's flyout chart updates are not always accurate and consistent with agency documentation including program schedules for future satellites and polar availability assessments. Out of 26 instances where we compared flyout chart data to underlying program data for a particular satellite, we identified 2 instances where the flyout charts did not accurately depict the underlying program schedules. For example, the flyout charts showed launch dates for two satellites as 4 months earlier and 3 months later than program data. Both of these issues were later corrected when the next chart was updated 6- 12 months later. However, they were inaccurate at the time they were provided to Congress. In addition, NOAA's updates were at times inconsistent with the polar satellite availability assessment data. For example, NOAA's January 2016 flyout chart depicts JPSS-1 lasting through March 2024 while a 2015 availability assessment shows only a 55 percent probability that the satellite will be fully functional in 2024. JPSS program officials explained that polar-orbiting availability assessments are used to only show degrading health over time, while the flyout charts portray expected satellite lifespans. However, we believe it is not accurate to show a satellite as functioning on the flyout chart when underlying analyses show that the satellite is unlikely to be fully functioning. A part of the reason for this lack of consistency is that NOAA does not have a policy in place that requires taking steps to ensure the accuracy of its charts. Until NOAA ensures its flyout charts correctly represent the best available knowledge on the health and availability of the satellite, the agency runs an increased risk that its charts will not be useful or trusted to inform the budget and appropriations processes and provide program updates. Clarity: NOAA does not clearly and consistently depict how long a satellite might last once it is beyond its design life. For example, NOAA received a contractor study in 2005 showing that its geostationary satellites were likely to last a total of 10 years after launch, which was beyond the initial 7-year design life. Although the study was conducted in 2005, the agency did not update the satellites' expected lives on the flyout charts until 2015. Similarly, in its 2015 and 2016 charts, NOAA shows its expectation that the NOAA-18 and 19 satellites would last 1 more year by extending the expected operation of the satellites by 1 year, even though the polar availability assessments show that they will likely last longer. In addition, in 2015 and 2016, NOAA adjusted its flyout charts to show extended life on three GOES satellites and the Suomi National Polar-orbiting Partnership (S-NPP) satellite using an extension labeled as "fuel limited life" in 2015. The agency later explained that this term is intended to show the maximum possible life assuming all instruments and the spacecraft continue to function, and not the satellite's expected life. However, the agency did not clearly define this term on its charts, thereby allowing readers to assume that the agency expects the satellites to last through the end of the fuel-limited life period. Part of the reason that NOAA does not consistently describe how long a satellite is expected to last is that the agency does not have a policy in place requiring a standard approach or nomenclature. Until the agency establishes a consistent approach to describing a satellite's extended life, it is at risk that its charts will be misconstrued, including by those making budget and appropriations decisions. Documentation: While standard internal controls and NOAA's draft policy calls for documenting the reasons for changes to the flyout charts and the executive approval for those changes, NOAA does not consistently document the justification for its updates. For example, of the six geostationary and polar summary packages we received by NOAA, three included justification for at least one key change and three did not include key program documentation for the changes to the flyout charts. Furthermore, based on the 27 key changes we noted on the flyout charts between March 2014 and January 2016, 9 were justified in NOAA documentation and 18 were not. Program officials explained that documentation supporting each change exists and is widely circulated and vetted; however, we were unable to find this documentation in the packages provided by NOAA. Part of the reason for the inconsistencies is that NOAA does not have a policy in place requiring the creation and approval of standard justification packages. Until the agency documents and maintains a standard justification and approval package for each update, it risks not having all of the information it needs to justify a change to its flyout charts. While NOAA has a process in place for updating its flyout charts and it regularly updates them, the agency's process has multiple shortcomings and is not established in policy. Between March 2014 and January 2016, agency officials revised the flyout charts three times to add newly planned satellites; remove a satellite that ceased operations; and change the expected dates for launch, beginning operations, and end-of-life. In its efforts to update its flyout charts, NOAA provides regular updates that are mostly consistent with supporting documentation. However, the agency does not require its satellite programs to conduct regular assessments of satellite availability, which could aid in determining how long its satellites will likely last. Moreover, the information in the flyout charts is not always consistent with supporting agency documentation; is not always consistent in how it presents a satellite's extended life; and is not always supported by a complete justification package. Part of the reason for these issues is that NOAA has not established a policy that includes these steps. Until NOAA addresses the shortfalls in its practices and updates its policy to help ensure the flyout charts are accurate, consistent, and well-documented, it runs an increased risk that its flyout charts will be misleading to Congress and may lead to less-than-optimal decisions. Given the importance of providing accurate and clear information to facilitate congressional decision making and inform the public, we are making the following five recommendations to the Secretary of Commerce. Specially, we recommend that the Secretary direct NOAA's Assistant Administrator for Satellite and Information Services to take the following actions for its geostationary and polar-orbiting satellite programs: Require satellite programs to perform regular availability assessments and use these analyses to inform the flyout charts and support its budget requests. Ensure that flyout chart updates are consistent with supporting data from the program and from satellite availability assessments. Establish and implement a consistent approach to depicting satellites that are expected to last beyond their design lives. For each flyout chart update, maintain a complete package of documentation on the reasons for any changes and executive approval of the changes. Revise and finalize the draft policy governing how flyout charts are to be updated to address the shortfalls with analysis, accuracy, consistency, and documentation noted in the above recommendations. We provided a draft of this report to the Department of Commerce for review and comment. We received NOAA's written comments from the Department of Commerce, which are reproduced in appendix II. NOAA concurred with all five of our recommendations and noted that it plans to implement a more consistent approach in updating its flyout charts. The agency added that our review provided valuable feedback concerning how we and Congress use the charts, and underscored the importance of ensuring that viewers understand that complex operational and acquisition decisions cannot be depicted in a single graphic. NOAA also provided technical comments, which we have incorporated into our report and the briefing slides in appendix I, as appropriate. In response to our first recommendation to require satellite programs to perform regular availability assessments and use them to inform the flyout charts, NOAA concurred and noted that operations personnel perform regular health and status monitoring for satellites under their command and control, make predictions of fuel-limited life, and post status updates to the operational satellite web pages. NOAA also noted that upcoming JPSS and GOES-R satellites will transmit more health data which will enable more complete availability assessments in the future. We acknowledge that performing health and status monitoring of satellites in orbit is important. Further, conducting availability assessments for all satellites should help the agency understand the potential instrument failure before the end of fuel-limited life and enable timely and accurate information for program and budget planning. In response to our second recommendation to ensure that flyout chart updates are consistent with supporting data, NOAA concurred while acknowledging the risk of a reader reaching inaccurate conclusions from its flyout charts. NOAA explained that its flyout charts are not meant to be a replacement for more detailed charts and documentation, which are made available to Congress. We believe that this risk would be reduced if the charts were checked to ensure they accurately reflect the underlying data. NOAA also concurred with our third recommendation to establish and implement a consistent approach to depicting satellites expected to last beyond their design lives. Prior to providing this report, we obtained comments from NOAA on the recommendations in our briefing provided to subcommittee staff on May 31, 2016. While NOAA initially partially concurred with this recommendation in the briefing, NOAA subsequently concurred and acknowledged the need to establish a consistent approach across satellites. The agency concurred with our fourth recommendation to maintain a complete package of documentation on the reasons for any changes to the flyout charts and the approval of those changes. NOAA stated that it updated its draft policy governing its flyout chart process to include a requirement to maintain documentation for flyout chart changes. The agency stated that while it has not maintained more detailed information, it will now do so. NOAA also concurred with the fifth recommendation to finalize its draft policy governing how flyout charts are to be updated. The agency noted that the new policy is in internal coordination and should be formally approved very soon. We believe that addressing our recommendations to improve processes and policies will help ensure that the flyout charts NOAA uses to inform Congress and other stakeholders are supported by strong analyses, accurately reported, and clearly communicated. We are sending copies of this report to interested congressional committees, the Secretary of Commerce, the Director of the Office of Management and Budget, 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 staffs have any questions on the matters discussed in this report, please contact me at (202) 512-9286 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. In addition to the contact named above, Colleen Phillips (Assistant Director), Torrey Hardee (Analyst in Charge), Chris Businsky, Shaun Byrnes, Rebecca Eyler, Franklin Jackson, and Umesh Thakkar made key contributions to this report.
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NOAA manages two weather satellite programs that provide critical environmental data used in weather forecasts and warnings: a geostationary and a polar-orbiting satellite program. The agency is acquiring the next generation of satellites to replace existing satellites that are approaching the end of their expected lives. NOAA regularly publishes timelines, called flyout charts, depicting its expectations for how long its operational satellites will last and when it plans to launch new satellites. These charts are used to support budget requests, provide status reports, facilitate appropriations discussions with congressional committees, and inform the public. GAO was asked to review NOAA's recent flyout charts. GAO's objectives were to (1) describe NOAA's process for updating its satellite flyout charts; (2) identify changes NOAA has made to its flyout charts in recent years and the justification for those changes; and (3) assess NOAA's recent efforts to update its flyout charts. To do so, GAO reviewed agency policies and procedures for updating its charts; analyzed changes made to the charts since March 2014; and compared NOAA's approach to Air Force practices, internal control standards, and program documentation. The National Oceanic and Atmospheric Administration's (NOAA) process for updating its flyout charts involves obtaining updated information on the health of operational satellites and schedules for new satellites, having relevant individuals review the updated charts, and obtaining approval from a senior NOAA official to publish the charts. This process is partially documented in a 2011 draft policy. NOAA updated the geostationary and polar-orbiting flyout charts three times between March 2014 and January 2016. Key changes included adding newly planned satellites; removing a satellite that reached the end of its life; and adjusting planned dates for when satellites would launch, begin operations, and reach the end of their lives. For example, in one set of changes between April 2015 and January 2016, NOAA extended the life of older polar orbiting satellites by 1 year, added a new fuel limited life period to its most recently launched satellite (called S-NPP), and changed the launch date and the end-of-life date for another satellite (called JPSS-2), as shown below. While NOAA has regularly updated its flyout charts and most of the data on specific satellites were aligned with supporting program documents, it has not consistently ensured that the data were supported by stringent analysis, consistent with underlying program data, clearly communicated, and fully documented. For example, unlike the Air Force, NOAA does not require regular availability assessments for its satellite programs. Also, NOAA's flyout chart updates are not always accurate and consistent with program schedules and polar availability assessments. Further, NOAA does not fully document its changes to the charts. For example, GAO's assessment of 27 key changes between March 2014 and January 2016 showed that 9 were justified in NOAA documentation and 18 were not. Part of the reason for these issues is that NOAA has not established a clear policy to standardize its approach. Until NOAA addresses the shortfalls in its practices and revises and finalizes its draft policy to help ensure the charts are accurate, consistent, and well documented, it runs an increased risk that its flyout charts will be misleading to Congress and may lead to less-than-optimal decisions. GAO recommends that NOAA take steps to improve the accuracy and consistency of its flyout charts, and to revise and finalize the draft policy for updating its flyout charts to address the shortfalls GAO noted. NOAA agreed with GAO's recommendations and identified plans to implement them.
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The National Defense Authorization Act for Fiscal Year 2002 extended the authority of the Defense Base Closure and Realignment Act of 1990, with some modifications, to authorize an additional BRAC round in 2005. The legislation also required that DOD provide Congress in 2004, as part of its budget justification documents, a 20-year force structure plan, a worldwide infrastructure inventory, a description of the infrastructure necessary to support the force structure plan, a discussion of categories of excess infrastructure and infrastructure capacity, an economic analysis of the effect of BRAC on reducing excess infrastructure, and a certification that there is a need for BRAC in 2005 and that annual net savings will be realized by each military department not later than fiscal year 2011. The legislation also stipulated that if the certification is provided in DOD's submission to Congress, GAO is to prepare an evaluation of the force structure plan, the infrastructure inventory, the final selection criteria, and the need for an additional BRAC round, and to report to Congress not later than 60 days after the force structure plan and the infrastructure inventory are submitted to Congress. The 2002 legislation also required the Secretary of Defense to publish in the Federal Register the selection criteria proposed for use in the BRAC 2005 round and to provide an opportunity for public comment. The proposed selection criteria were published on December 23, 2003, with a public comment period ending January 30, 2004. The final criteria were published on February 12, 2004. Closing unneeded defense facilities has historically been difficult because of public concern about the economic effects of closures on communities and the perceived lack of impartiality in the decision-making process. Legislative restrictions effectively precluded bases from being closed between 1977 and 1988. However, legislation enacted in 1988 supported the tasking of a special commission chartered by the Secretary of Defense to identify bases for realignment and closure and provided relief from certain statutory provisions that had hindered DOD's previous efforts. With this legislation, a base realignment and closure round was initiated in 1988. Congress later passed the Defense Base Closure and Realignment Act of 1990, which created an independent commission and authorized three BRAC rounds in 1991, 1993, and 1995. The four commissions generated 499 recommendations--97 major closures, and hundreds of smaller base realignments, closures, and other actions. However, DOD recognized at the time it was completing its recommendations for the 1995 BRAC round that excess infrastructure would remain after that round and that additional closures and realignments would be needed in the future. Subsequent Defense Science Board and Quadrennial Defense Review studies, and others, echoed the need for one or more future additional BRAC rounds, but congressional action to authorize a future BRAC round did not occur for several years, in part because of concerns over how some decisions were made in the 1995 BRAC round. Ultimately, the National Defense Authorization Act for Fiscal Year 2002 extended the authority of the Defense Base Closure and Realignment Act of 1990, authorizing another round of base realignments and closures in 2005. Some key requirements mandated by the 1990 act or procedures adopted by DOD in implementing it to ensure the fairness and objectivity of the base closing process include: All installations must be compared equally against selection criteria and a current force structure plan developed by the Secretary of Defense. Decisions to close military installations with authorization for at least 300 civilian personnel must be made under the BRAC process. Decisions to realign military installations authorized for at least 300 civilian personnel that involve a reduction of more than 1,000, or 50 percent or more of the civilian personnel authorized, also must undergo the BRAC process. Selection criteria for identifying candidates for closure and realignment must be made available for public comment before being finalized. All components must use specific models for assessing (1) the cost and savings associated with BRAC actions and (2) the potential economic impact on communities affected by those actions. Information used in the BRAC decision-making process must be certified--that is, certified as accurate and complete to the best of the originator's knowledge and belief. This requirement was designed to overcome concerns about the consistency and reliability of data used in the process. An independent commission is required to review DOD's proposed closures and realignments and to finalize a list of proposed closures and realignments to be presented to the President and, subject to the President's approval, to Congress. The BRAC Commission is required to hold public hearings. The BRAC process imposes specific time frames for completing specific portions of the process (see app. I for time frames related to the 2005 BRAC round). The President and Congress are required to accept or reject the Commission's recommendations in their entirety. In addition to GAO's role in monitoring the BRAC process, service audit agencies and DOD Inspector General (IG) personnel are extensively involved in auditing the process to better ensure the accuracy of data used in decision-making and enhance the overall integrity of the process. Our work in examining lessons learned from prior BRAC rounds found general agreement that the prior legislation and the framework it outlined served the process well, and general agreement that it should provide a useful framework for a future round. That is not to say that the previous process was perfect or entirely devoid of concerns over the role of politics in the process. As we have previously noted, we recognize that no public policy process, especially none as open as BRAC, can be completely removed from the U.S. political system. However, the elements of the process noted above provide several checks and balances to keep political influences to a minimum. That said, the success of these provisions requires that all participants of the process adhere to the rules and procedures. GAO has played a long-standing role in the BRAC process. As requested by congressional committees (1988 BRAC round) or mandated by law since 1990, we have served as an independent and objective observer of the BRAC process and have assessed and reported on DOD's decision-making processes leading up to proposed realignment and closure recommendations in each of the four prior rounds. To make informed and timely assessments, we have consistently operated in a real-time setting since the 1991 BRAC round and have had access to significant portions of the process as it has evolved, thus affording the department an opportunity to address any concerns we raised on a timely basis. By mandate, our role in the BRAC 2005 round remains the same, and we have been observing the process since DOD began work on the 2005 round. Finally, I also want to recognize the important role played by the DOD Inspector General and the military services' audit agencies in the BRAC process. GAO has been called upon to examine various issues associated with prior BRAC rounds, including the one held in 1988. The 1990 BRAC legislation, which governed the 1991, 1993, and 1995 rounds, specifically required that we provide the BRAC Commission and Congress a detailed analysis of the Secretary of Defense's recommendations and selection process. Legislation authorizing the 2005 BRAC round retained the requirement for a GAO review of the Secretary's recommendations and selection process, with a report to the congressional defense committees required no later than July 1, 2005, 45 days after the latest date by which the Secretary must transmit to the congressional defense committees and the BRAC Commission his recommendations for closures or realignments. The tight time frame under which we have to report our findings on the department's BRAC selection process and recommendations necessitates that we have access to the BRAC decision-making processes as they are unfolding within DOD. During the past rounds, DOD and its components have granted us varying degrees of access to their processes a year or more in advance of the Secretary's public release of his recommendations for closures and realignments. This has greatly facilitated our ability to monitor the process as it was unfolding and has provided us with opportunities to address issues and potential problem areas during the process. Furthermore, it has aided our ability to complete some detailed analysis of individual recommendations in the time available after the Secretary's proposed closures and realignments were finalized and made public. We have been observing the 2005 BRAC process since DOD's initial work began on the 2005 round. From our vantage point, we are looking to see to what extent DOD follows a clear, transparent, consistently applied process, one where we can see a logical flow between DOD's analysis and its decision-making. Although we do not attend or participate in deliberative meetings involving BRAC, we are permitted access to the minutes of these meetings and to officials involved in the process. I also want to acknowledge the key roles played by the DOD Inspector General and service audit agencies to help ensure the accuracy of data used in BRAC decision-making. These agencies play a front-line role in checking the accuracy of data obtained in BRAC data calls, as well as verifying data entries and output pertaining to the cost and analytical models used as part of the BRAC process. They also identify and refer any errors to defense components on a real-time basis, to facilitate corrective actions. We coordinate regularly with these other audit agencies, and in selected instances we observe the work of these audit agencies in checking the data used as part of BRAC decision-making. Another part of our role involves assessing and reporting on the status of prior BRAC recommendations. These reports provide insights into the long and tedious process of transferring unneeded base property to other federal recipients and communities for future reuse. While the actual closures and realignments of military bases in the prior rounds were completed by 2001, the processes of environmental cleanup and property transfer continue today and will most likely continue for several more years. As of September 30, 2003, DOD data show that the department has transferred over 280,000 acres of unneeded property to other users but has about 220,000 acres that have yet to be transferred. While the progress of property transfer varies among the affected bases and is dependent upon a number of factors, our work has shown that environmental cleanup has long been a key factor in slowing the transfer process. We are currently in the process of updating our prior work on the implementation actions associated with the prior BRAC rounds. Our key BRAC reports, which can be accessed at www.gao.gov, are listed in appendix II of this statement. The legislation authorizing a BRAC round in 2005 also requires that DOD provide information on a number of BRAC-related issues in 2004, and that GAO report to Congress not later than 60 days after the department submits this information to Congress. Since DOD has published its selection criteria for the 2005 round, I can provide you with some observations in that area. We expect to complete our full assessment of other issues within 60 days of receiving DOD's report. Therefore, I can make only preliminary and general observations about some of the issues, such as excess capacity, certification of annual net savings by 2011, and economic impact. The department's final selection criteria essentially follow a framework similar to that employed in prior BRAC rounds, with specificity added in selected areas in response to requirements contained in the 2002 legislation. The 2002 legislation required that DOD give priority to military value and consider (1) the impact on joint warfighting, training, and readiness; (2) the availability and condition of training areas suitable for maneuver by ground, naval, or air forces throughout diverse climates and terrains, and staging areas for use by the armed forces in homeland defense missions; and (3) the ability to accommodate contingency, mobilization, and future force requirements. The legislation also required DOD to give consideration to other factors, many of which replicated criteria used in prior BRAC rounds. Further, the legislation required DOD to consider cost impacts to other federal entities as well as to DOD in its BRAC decision-making. Additionally, the National Defense Authorization Act for Fiscal Year 2004 required DOD to consider surge requirements in the 2005 BRAC process. Table 1 compares the 1995 BRAC criteria with that adopted for 2005, with changes highlighted in bold. Our analysis of lessons learned from prior BRAC rounds affirmed the soundness of these basic criteria and generally endorsed their retention for the future, while recognizing the potential for improving the process by which the criteria are used in decision-making. Adoption of these criteria adds an element of consistency and continuity in approach with those of the past three BRAC rounds. The full analytical sufficiency of the criteria will best be assessed through their application, as DOD completes its data collection and analysis. Notwithstanding our endorsement of the criterion framework, on January 27, 2004, we sent a letter to DOD that identified two areas where we believed the draft selection criteria needed greater clarification in order to fully address the special considerations called for in the 2002 legislation. Specifically, we noted that the criterion related to costs and savings did not indicate the department's intention to consider potential costs to other DOD activities or federal agencies that may be affected by a proposed closure or realignment recommendation. Also, we noted that it was not clear to what extent the impact of costs related to potential environmental restoration, waste management, and environmental compliance activities would be included in cost and savings analyses of individual BRAC recommendations. We suggested that DOD could address our concerns by incorporating these considerations either directly, in its final criteria, or through later explanatory guidance. DOD decided to address our concerns through clarifying guidance. DOD faced a difficult task in responding to a congressional mandate that it report on excess capacity, without compromising the integrity of the 2005 BRAC process. In this regard, DOD opted to use a methodology that would give some indication of excess capacity but would not be directly linked to the capacity analysis being performed as part of the 2005 BRAC process. DOD officials indicated that they would build on the approach they used in their 1998 report to estimate excess base capacity and address other BRAC issues. In November 1998, we reported that DOD's analysis gave only a rough indication of excess base capacity because it had a number of limitations. In addition, the methodology did not consider any additional excess capacity that might occur by looking at facilities or functions on a cross-service basis, a priority for the 2005 round. To estimate excess capacity in 1998, the military services and the Defense Logistics Agency (DLA) compared capacity for a sample of bases in 1989 with projected capacity for a sample of bases in 2003, after all scheduled BRAC actions were completed. The services and DLA categorized the bases according to their primary missions, and they defined indicators of capacity, or metrics, for each category. Varied metrics were used to depict capacity. For example, metrics included maneuver acres per brigade for Army training bases, square feet of parking apron space for active and reserve Air Force bases, or capacity direct labor hours as compared with budgeted or programmed direct labor hours for Navy aviation depots. DOD officials are building on this methodology to compare 1989 data with more recent data in order to estimate current excess capacity as a means of meeting their 2004 reporting requirement. That methodology, while providing an indication of excess capacity, has a number of limitations that make it difficult to be precise when trying to project a total amount of excess capacity across DOD. In addition to the factors already noted, GAO and the Congressional Budget Office previously reported that by using 1989 as a baseline DOD did not take into account the excess capacity that existed in that year, which was prior to the base closures of the prior four rounds. As a result, the percentage of excess increased capacity reported may be understated or overstated for functional areas considered. Furthermore, the Congressional Budget Office reported that the approach could understate the capacity required if some types of base support were truly a fixed cost, regardless of the size of the force. Another limitation of DOD's methodology is that each installation could be counted only in one category even though it might have multiple functions. For example, an Air Force base that has a depot and a fighter wing could only be categorized in one functional area. While the prior BRAC rounds have focused solely on reducing excess capacity, DOD officials have stated this is not the sole focus of the 2005 BRAC round. DOD officials have noted that the 2005 round aims to further transform the military by rationalizing base infrastructure to the force structure, enhancing joint capabilities and seeking crosscutting solutions and alternatives for common business-oriented support functions, as well as eliminating excess capacity. A complete assessment of capacity and opportunities to reduce it must await the completion of DOD's ongoing official analyses under BRAC 2005. Nevertheless, we believe sufficient indicators of excess capacity exist, as well as opportunities to otherwise achieve greater efficiencies in operations, to justify proceeding with the upcoming round. DOD financial data indicate that the department has generated net savings of about $17 billion through fiscal year 2001--the final year of the prior BRAC rounds---and is accruing additional, annually recurring savings of about $7 billion thereafter. We have consistently affirmed our belief that the prior BRAC rounds have generated substantial net savings--primarily in the form of future cost avoidances--for the department. While these amounts are substantial, we have, at the same time, viewed these savings estimates as imprecise for a variety of reasons, such as weaknesses in DOD's financial management systems that limit its ability to fully account for the costs of its operations; the fact that DOD's accounting systems, like other accounting systems, are oriented to tracking expenses and disbursements, not savings; the exclusion of BRAC-related costs incurred by other agencies; and inadequate periodic updating of the savings estimates that are developed. DOD, in its 1998 report to Congress, indicated that it had plans to improve its savings estimates for the implementation of future BRAC rounds. We have also recommended that DOD improve its savings estimates for future BRAC rounds, such as the 2005 round. DOD has not yet acted on our recommendation, but DOD officials told us that they intend to implement a system to better track savings for the upcoming round. As required by the fiscal year 2002 legislation, DOD is required to certify for the upcoming 2005 BRAC round that it will achieve "annual net savings" for each military department by 2011. Using precise terminology is critical in statements regarding BRAC savings, because it can make a big difference in specifying when savings will actually occur and the nature of those savings. According to DOD officials, "annual net savings" essentially refer to the estimated savings that are generated from BRAC in a given year that are greater than the costs incurred to implement BRAC decisions in that same year. Another way of looking at net savings is to consider the point at which cumulative savings exceed the cumulative costs of implementing BRAC decisions over a period of years. Experience has shown that the department incurs significant upfront investment costs in the early years of a BRAC round, and it takes several years to fully offset those cumulative costs and begin to realize cumulative net savings. The difference in the terminology is important to understand because it has a direct bearing on the magnitude and assessment of the savings at any given time. For example, as shown in table 2, initial annual net savings reported by the department as a whole in the 1995 BRAC round did not begin to occur until fiscal year 2000, or the fifth year of implementation; in each of the prior years, the costs had exceeded the estimated savings. On the other hand, as shown in table 2, there were no cumulative net savings as of fiscal year 2001, the sixth and final year of BRAC implementation. Cumulative net savings did not occur in this case until fiscal year 2002, based on DOD's data. DOD financial data suggest that, assuming conditions similar to those of the 1993 and 1995 rounds, annual net savings for each of the military departments for the 2005 round could be achieved by 2011--that is, by 2011 savings could exceed closure-related costs for that year. While we believe that the potential exists for significant savings to result from the 2005 BRAC round, we are not in a position to say conclusively at this point to what extent DOD will realize annual net savings by 2011. In addition to the imprecision of DOD's data, there simply are too many unknowns at this time, such as the specific timing of individual closure or realignment actions that affect savings estimates and the implementation costs that may be required. The savings to be achieved depend on the circumstances of the various recommended closures and realignments as put forth by the 2005 BRAC Commission and on the implementation of those recommendations. Further, DOD has gone on record stating that the upcoming round is more than just an exercise of trimming its excess infrastructure. DOD is also seeking to maximize joint utilization and further its transformation efforts. To what extent these goals may affect savings is also unknown at this point. And finally, to what extent forces that are currently based overseas may be redeployed to the United States and what effect that redeployment may have on BRAC and subsequent savings remain unknown as well. Notwithstanding the issues we raise that could affect savings, and the point at which savings would exceed the costs associated with implementing recommendations from a 2005 BRAC round, we continue to believe that it is vitally important for DOD to improve its mechanisms for tracking and updating its savings estimates. DOD, in its 1998 report to Congress on BRAC issues, cited proposed efforts that, if adopted, could provide for greater accuracy in the estimates. Specifically, the department proposed to develop a questionnaire that each base affected by future BRAC rounds would complete annually during the 6-year implementation period. Those bases that are closing, realigning, or receiving forces because of BRAC would complete the questionnaire. DOD would request information on costs, personnel reductions, and changes in operating and military construction costs in order to provide greater insight into the savings created by each BRAC action. DOD suggested that development of such a questionnaire would be a cooperative effort involving the Office of the Secretary of Defense, the military departments, the defense agencies, the Office of the DOD Inspector General, and the service audit agencies. This proposal recognizes that better documentation and updating of savings will require special efforts parallel to the normal budget process. We strongly endorse such action. If the department does not take steps to improve its estimation of savings in the future, then previously existing questions about the reliability, accuracy, and completeness of DOD's savings estimates will likely continue. We intend to examine DOD's progress in instituting its proposed improvements during our review of the 2005 BRAC process. While the short-term impact can be very traumatic, several factors, such as the strength of the national and regional economies, play a role in determining the long-term economic impact of the base realignment or closure process on communities. Our work has shown that recovery for some communities remains a challenge, while other communities surrounding a base closure are faring better. Most are continuing to recover from the initial economic impact of a closure, allowing for some negative effect from the economic downturn in recent years. Our analysis of selected economic indicators has shown over time that the economies of BRAC-affected communities compare favorably with the overall U.S. economy. We used unemployment rates and real per capita income rates as broad indicators of the economic health of those communities where base closures occurred during the prior BRAC rounds. We identified 62 communities surrounding base realignments and closures from all four BRAC rounds for which government and contractor civilian job losses were estimated to be 300 or more. We previously reported that as of September 2001, of the 62 communities surrounding these major base closures, 44 (71 percent) had average unemployment rates lower than the (then) average 9-month national rate of 4.58 percent. We are currently updating our prior assessments of economic recovery, attempting to assess the impact of the recent economic downturn on affected BRAC communities we had previously surveyed. What we are seeing is that, in keeping with the economic downturn in recent years, the average unemployment rate in 2003 increased for 60 of the 62 communities since 2001. However, the year 2003 unemployment rate data indicated that the rates for many of these BRAC communities continue to compare favorably with the U.S. rate of 6.1 percent. That is, 43 (69 percent) of the communities had unemployment rates at or below the U.S. rate. As with unemployment rates, we had also previously reported that annual real per capita income growth rates for BRAC-affected communities compared favorably with national averages. From 1996 through 1999, 53 percent, or 33, of the 62 areas had an estimated average real per capita income growth rate that was at or above the average of 3.03 percent for the nation at that time. Data included in our 2002 report were the latest available at that time, recognizing time lags in data availability. Our recent analysis has also noted that changes in the average per capita income growth rate of affected communities over time compared favorably and were similar to corresponding changes at the national level. Our more recent analysis indicates that 30 of the 62 areas examined (48.4 percent), had average income growth rates higher than the average U.S. rate of 2.2 percent between 1999 and 2001, which represents a drop from the rate during the previous time period. We have previously reported on our discussions with various community leaders who felt the effects of base closures. These discussions identified a number of factors affecting economic recovery from base closures, including: robustness of the national economy, diversity of the local economy, regional economic trends, natural and labor resources, leadership and teamwork, public confidence, government assistance, and reuse of base property. If history is any indicator, these factors are likely to be equally applicable in dealing with the effects of closures and realignments under BRAC 2005. This concludes my statement. I would be pleased to answer any questions you or other Members of the Subcommittee may have at this time. For further information regarding this statement, please contact Barry W. Holman at (202) 512-8412. Individuals making key contributions to this statement include Paul Gvoth, Michael Kennedy, Warren Lowman, Tom Mahalek, David Mayfield, James Reifsnyder, Cheryl Weissman, and Dale Wineholt. U.S. General Accounting Office, Military Base Closures: Better Planning Needed for Future Reserve Enclaves (GAO-03-723, June 27, 2003). U.S. General Accounting Office, Military Base Closures: Progress in Completing Actions from Prior Realignments and Closures (GAO-02-433, Apr. 5, 2002). U.S. General Accounting Office, Military Base Closures: Overview of Economic Recovery, Property Transfer, and Environmental Cleanup (GAO-01-1054T, Aug. 28, 2001). U.S. General Accounting Office, Military Base Closures: DOD's Updated Net Savings Estimate Remains Substantial (GAO-01-971, July 31, 2001). U.S. General Accounting Office, Military Bases: Status of Prior Base Realignment and Closure Rounds (GAO/NSIAD-99-36, Dec. 11, 1998). U.S. General Accounting Office, Military Bases: Review of DOD's 1998 Report on Base Realignment and Closure (GAO/NSIAD-99-17, Nov. 13, 1998). U.S. General Accounting Office, Military Bases: Lessons Learned From Prior Base Closure Rounds (GAO/NSIAD-97-151, July 25, 1997). U.S. General Accounting Office, Military Bases: Closure and Realignments Savings Are Significant, but Not Easily Quantified (GAO/NSIAD-96-67, Apr. 8, 1996). U.S. General Accounting Office, Military Bases: Analysis of DOD's 1995 Process and Recommendations for Closure and Realignment (GAO/NSIAD-95-133, Apr. 14, 1995). U.S. General Accounting Office, Military Bases: Analysis of DOD's Recommendations and Selection Process for Closures and Realignments (GAO/NSIAD-93-173, Apr. 15, 1993). U.S. General Accounting Office, Military Bases: Observations on the Analyses Supporting Proposed Closures and Realignments (GAO/NSIAD- 91-224, May 15, 1991). U.S. General Accounting Office, Military Bases: An Analysis of the Commission's Realignment and Closure Recommendations (GAO/NSIAD-90-42, Nov. 29, 1989). 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 National Defense Authorization Act for Fiscal Year 2002 authorized an additional Base Realignment and Closure (BRAC) round in 2005. The legislation requires the Department of Defense (DOD) to provide Congress in early 2004 with a report that addresses excess infrastructure and certifies that an additional BRAC round is needed and that annual net savings will be realized by each military department not later than fiscal year 2011. GAO is required to assess this information as well as the selection criteria for the 2005 round and report to Congress within 60 days of DOD's submission. The legislation also retains the requirement for GAO to assess the BRAC 2005 decisionmaking process and resulting recommendations. This testimony addresses (1) the BRAC process from a historical perspective, (2) GAO's role in the process, and (3) GAO's initial observations on key issues DOD is required to address in preparation for the 2005 round. Because DOD had not submitted its required 2004 report at the time we completed this statement, this testimony relies on our prior work that addressed issues associated with excess capacity and BRAC savings. GAO's work in examining lessons learned from prior BRAC rounds found that the prior legislation and the framework it outlined served the process well, and that it should provide a useful framework for a future round. Furthermore, the legislation and its implementation provided for checks and balances to ensure the integrity of the process. GAO has played a long-standing role as an independent and objective observer of the BRAC process. GAO has operated in a real-time setting and has had access to significant portions of the process as it has evolved, thus affording DOD an early opportunity to address any concerns GAO might identify. GAO's role in the 2005 round remains the same, and GAO has been observing the process since DOD began work on the 2005 round. Timely access to DOD data is key to fulfilling GAO's role. GAO's initial observations on key issues DOD is required to address in its 2004 report are as follows. The selection criteria for the 2005 round are basically sound and provide a good framework for assessing alternatives. Nevertheless, GAO provided DOD with comments on the draft criteria that focused on the need for clarification of how DOD intends to consider total costs to DOD and other federal agencies and environmental costs in its analyses. The department has indicated that it would be issuing clarifying guidance. DOD plans to estimate its excess capacity using a methodology that it used in 1998 for similar purposes. While this methodology provides a rough indication of excess capacity for selected functional areas, it has a number of limitations that create imprecision when trying to project a total amount of excess capacity across DOD. A more complete assessment of capacity and the potential to reduce it must await the results of the current BRAC analyses being conducted by DOD during the 2005 round. DOD financial data suggest that, assuming conditions similar to those in the 1993 and 1995 BRAC rounds, each military department could achieve annual net savings by 2011. While we believe that the potential exists for significant savings to result from the 2005 round, there are simply too many unknowns at this time to say conclusively to what extent annual net savings will be realized by 2011. For example, in 2005 DOD is placing increased emphasis on jointness and transformation and is likely to use BRAC to incorporate any force redeployments from overseas locations that may result from ongoing overseas basing reassessments. This suggests a need for caution in projecting the timing and amount of savings from a new BRAC round.
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The AOC's authority to contract for goods and services is vested by statute in the agency head who has delegated this responsibility to the Chief Administrative Officer (CAO). The CAO has responsibility to, among other things, administer the procurement function on behalf of AOC. AMMD, which falls under the CAO, is authorized to enter into contracts on behalf of the agency. AMMD is the primary office responsible for developing contracting policies and procedures, appointing contracting officers, and awarding and overseeing contracts. Requirements for goods and services are identified by AOC's operational units, which consist of various jurisdictions and offices that handle the day-to-day operations including the support, maintenance, and operations of buildings as well as construction and renovation projects. While AMMD has the primary responsibility of awarding and administering contracts, AMMD often works with the AOC's jurisdictions and offices to assist in monitoring the progress of contracts awarded to support AOC's various projects, such as the restoration of the Capitol Dome. From fiscal years 2011 through 2015, AOC obligated, on average, $326 million annually to procure goods and services. During the 5-year period, as figure 1 shows, the level of contracting actions has generally declined while obligations on contracts and orders varied. There was a substantial increase in obligations between fiscal years 2014 and 2015 when AOC awarded a contract to begin construction for the Cannon building renewal project. The vast majority of AOC's spending to procure goods and services stems from the agency's jurisdictions listed below in figure 2. Among the jurisdictions, the Capitol Power Plant and the House Office Buildings collectively accounted for 55 percent of AOC's fiscal year 2015 contract obligations. As a legislative branch agency, AOC is subject to some but not all of the procurement laws applicable to government agencies. For example, both AOC and executive branch agencies are subject to the Buy American Act and the Contracts Disputes Act of 1978. Additionally, in some instances AOC has adopted certain procurement policies and regulations it would not otherwise be subject to. For example, although not subject to the Small Business Act, AOC worked with the Small Business Administration to establish a small business subcontracting and set-aside program to help the AOC more fully utilize small businesses. In addition, AOC has adopted certain characteristics and clauses of the FAR. For example, AOC incorporates FAR clauses related to contract changes, inspections, differing site conditions, availability of funds, and terminations. According to AOC officials, incorporating FAR clauses into AOC contracts offers significant benefits because the contract clauses have been drafted and reviewed by subject matter experts across the government and are familiar to government contractors. According to AOC officials, federal case law is usually available to address any contract interpretation issues. Our previous work has shown that acquisition planning, market research, and competition are key foundations for successful acquisition outcomes. Acquisition planning is the process by which agencies establish requirements and develop a plan to meet those requirements. Generally, project and contracting officials share responsibility for acquisition planning activities intended to produce a comprehensive plan for fulfilling the agency's needs in a timely manner and at a reasonable cost. Our past work has found that acquisition planning is strengthened by documenting decisions to guide existing acquisitions and capturing important lessons and other considerations that can be used to inform future procurements. Market research is the process of collecting and analyzing data about capabilities in the market that could satisfy an agency's needs. It is a critical step in informing decisions about how best to acquire goods and services. Effective market research can help agencies determine the availability of vendors to satisfy requirements and improve the government's ability to negotiate fair and reasonable prices. Competition is the cornerstone of a sound acquisition process and a critical tool for achieving the best return on investment for taxpayers. Using full and open competitive procedures to award contracts means that all responsible contractors are permitted to submit offers. The benefits of competition in acquiring goods and services from the private sector are well established. Competitive contracts can help save taxpayer money, conserve scarce resources, improve contractor performance, curb fraud, and promote accountability for results. AOC developed a contracting manual to provide guidance for agency officials responsible for purchasing goods and services. The manual was implemented in April 2014 and includes guidelines on topics similar to those included in the FAR. AOC's contracting manual outlines procedures and guidance for acquisition planning, market research, and competition. In general, for the 21 contracts and orders we reviewed, AOC officials implemented procedures related to these critical functions, such as documenting justifications for the use of noncompetitive procedures, in a manner consistent with the manual. AOC has identified competition as a key objective, and the agency tracks the number of sole-source awards and percentage of dollars obligated under sole-source awards. However, the agency conducts limited analysis of the factors driving the number of sole-source awards or the level of competition achieved across different product types. Such analysis could help identify where additional management attention may be needed to maximize competition to the fullest extent. In 2014, AOC issued a contracting manual that incorporates statutes and federal regulations applicable to the AOC, as well as internal policies in order to provide uniform policies across the agency and guidance to personnel. The AOC Inspector General had previously found that while AOC had developed procurement policies, orders, and procedures, they were not consolidated in one location, which made it difficult for AOC staff to access. The manual covers topics central to AOC day-to-day contracting functions, such as acquisition planning, market research, and competition, all of which we have previously found to be key aspects of a sound acquisition process. AOC started requiring written acquisition plans in August 2012, approximately 18 months prior to the publication of the contracting manual. Though AOC staff engaged in acquisition planning to inform procurement decisions before August 2012, plans were not consistently documented, according to contracting officers. Further, AMMD officials stated that another reason they started requiring acquisition plans was to help enforce acquisition timeframes agreed upon by the office that needed the acquisition and contracting officers. According to officials, the requiring offices consistently missed important deadlines, oftentimes resulting in lengthy acquisition cycles. As a result, AMMD implemented the requirement for written acquisition plans to help alleviate this problem. AMMD officials believe that requiring written acquisition plans has helped shorten acquisition timeframes. AOC developed a template to assist staff in preparing written acquisition plans which, in turn, helps to ensure key information is considered and captured for each acquisition. AMMD officials are considering options to revise the template staff use to document acquisition plans so that it is more adaptable to the specific circumstances of a procurement. As shown in table 1, the AOC manual shares some common acquisition planning principles with the FAR. On all the contracts and orders we reviewed, we found that the AOC conducted acquisition planning. AOC's practices generally met the agency's requirements for acquisition planning, including preparing written acquisition plans, addressing the prospects for competition, and involving the appropriate stakeholders in the planning process, among other things. Of the 21 contracts and orders that we reviewed, seven files required written acquisition plans, based on the dollar threshold outlined in the contracting manual, as well as timing of the requirement, and five of those seven files had written acquisition plans. For the remaining two files that required acquisition plans, AMMD officials cited an administrative oversight and a requirement to use a mandatory service provider as the reasons for not preparing a written acquisition plan. In addition, we found that two other files contained written acquisition plans even though they were not required. The contracting officer on one of those projects, the Refrigeration Plant Revitalization project, stated that while not required, a written acquisition plan was completed due to the cost, complexity, and visibility of the project. The AOC's contracting manual requires that a written plan be completed well in advance of when an acquisition is needed but does not establish timeframes for how far in advance acquisition plans should be completed. AMMD officials noted that the nature and complexity of the acquisition--such as a new or recurring requirement--determines the extent of advance preparation needed to develop the acquisition plan. As a result, AOC did not establish specific timeframes in the contracting manual. As shown in table 2, AOC has implemented market research policies in its manual that shares some common principles with the FAR. In our review of AOC practices, we found that they generally met the requirements to conduct and document market research activity. We found that AOC employs a number of different ways of conducting market research that reflect what is in the contracting manual. For instance, AOC will often invite vendors to a potential construction worksite before publicizing a solicitation. This helps AOC identify potential qualified vendors and also allows vendors an opportunity to learn more about the requirement and determine if they want to make an offer on a project. We found that AOC held industry days for 5 of the 21 contracts and orders we reviewed for projects such as the Cannon Renewal project, the Dome Restoration project and the replacement of the skylight in the Hart Building, among others. Another example of market research that AOC performed was the use of a "sources sought" notification to determine the capabilities of the marketplace. For the 21 contracts and orders in our sample, we found that market research was documented in different ways. For instance, if a contract had an acquisition plan associated with it, the market research performed for that requirement would be documented in the acquisition plan. Additionally, we found contracting officers would document what research was performed and the results of those searches in memoranda contained in the contract files. AMMD officials stated that they are taking action to improve the quality of market research conducted, which is typically performed by the requiring office. AMMD plans to provide market research training in 2016 to enhance staff's knowledge of how to conduct and document effective market research. AOC's market research training is expected to focus on documenting market research, using a standardized template to capture the steps taken, and results of market research efforts. AOC's contracting manual promotes full and open competition in the procurement process. Under full and open competition all responsible suppliers are provided an opportunity to compete for the agency's contracts. AOC's manual shares some common competition principles with the FAR as highlighted in table 3. Within our sample of contracts and orders, we found that AOC generally met its competition requirements as provided for in the agency's contracting manual. Ten of the 21 contracts and orders we reviewed were competed and received more than one offer. In our previous work, we have reported that competitions that yield only one offer in response to a solicitation deprive agencies of the ability to consider alternative solutions in a reasoned and structured manner. All 11 of the non- competed contracts and orders we reviewed were awarded using non- competitive procedures based on exceptions cited in the AOC contracting manual. Specifically, Two contracts for janitorial services were awarded without full and open competition because of statutory provisions requiring that agencies use a list of specified providers for these services. Three task orders were awarded under base contracts that had originally been competed. In these three cases, since the original base contracts were awarded to only one vendor, any task order awarded under the base contracts is not required to be competed. Four contracts were awarded non-competitively because only one supplier was available. For example, when AOC was seeking to award a contract for the audio listening systems used as part of guided tours at the Capitol Visitor Center, AOC evaluated three vendors and determined that it was more cost effective and a better value to the government to maintain and replace the existing brand of listening devices instead of purchasing a new system. One contract was awarded non-competitively to develop continuity of operations plans in case of emergencies. The justification stated that open competition would publicly reveal sensitive information that could pose a security risk. As a result, AOC awarded the contract to a firm that had been used previously in order to limit the number of individuals with access to information on security risks and vulnerabilities. One contract to provide construction administration services, such as field observations, was awarded to the company that had designed and prepared all drawings and specifications for the project. The AOC believed that this company had the requisite technical expertise and therefore was in a unique position to provide the necessary evaluations and review of the documents. AOC has taken steps to gauge its effectiveness in implementing the agency's policy to promote competition in the procurement process; however, currently it conducts limited analysis in this area. AOC leadership considers competition to be a key priority for the agency. The AOC contracting manual also emphasizes the importance of competition and recognizes market research as a means to evaluate competition. Our analysis of AOC procurement data showed that the agency competed approximately 50 percent of its contract obligations for the past 3 fiscal years--compared to 65 percent for the federal government overall. Federal internal control standards call for agencies to establish mechanisms to track and assess performance against their objectives. In addition, our prior work has shown that for policies and processes to be effective, they must be accompanied by controls and incentives to ensure they are translated into practice. The AOC began to collect competition data in fiscal year 2012. AOC has implemented mechanisms to track data on the number of non-competed awards and dollars obligated. In addition, AOC tracks competition levels across its organizational units as well as the agency's use of allowable exceptions to competition. For example, AOC's data shows that in fiscal year 2015, the primary basis for awarding noncompetitive contracts was the only one responsible source exception to competition--meaning that only one vendor could fulfill the requirement. While this is a good first step to gaining insight into the agency's competition efforts, additional analyses could provide key information that highlights trends in AOC's overall competition levels, the factors driving the use of the only one responsible source exception such as the quality of AOC's market research, the types of goods and services that AOC is most successful in competing, and areas where focused attention may be needed. AOC officials did not dispute the value of further analyzing data about the agency's competition efforts, but noted they have not previously identified the need to conduct analyses beyond their current efforts. Tracking competition data instills accountability at all levels and ensures that AOC leadership has the information readily available to make decisions rather than rely on ad hoc means. Routinely tracking its procurements at a more granular level--such as competition across goods and services--also would provide AOC leadership with important information to identify successful competition strategies that can be replicated across the agency and help the agency focus its resources to maximize competition. AOC uses various approaches to monitor contractors' progress and work quality and address contractor performance, but does not have suspension and debarment procedures. AOC, like other agencies, primarily relies on contracting officers and COTRs who use oversight tools such as inspection reports and periodic progress meetings to monitor contracts. When AOC identifies contractor performance problems using these tools, AOC has a variety of approaches at its disposal to help address performance issues, such as providing written notice to the contractor highlighting the problem and seeking action to address the performance issue. If a contractor does not take action to improve performance, AOC may then invoke a number of contractual provisions including the collection of liquidated damages from the contractor. Although AOC has tools and resources at its disposal to manage and correct deficiencies on a contract-by-contract basis, AOC does not have a suspension and debarment process that allows it to exclude an individual or firm from receiving future AOC contracts. AOC uses a number of oversight tools to monitor contractor performance and protect the government against substandard work from the contractor. AOC's monitoring approaches are generally applicable to all the agency's projects. Depending on the type of project and severity of the deficiency, AOC may employ some or all approaches in any sequence it deems appropriate to seek immediate remedies or damages. As described below, across our sample of contracts and orders, we observed AOC's use of a variety of approaches, including oversight tools, performance communications and some of the available contractual provisions to monitor and address contractor performance, as shown in figure 3. Tools identified by AOC officials to oversee contracts include onsite representatives, daily progress reports, inspection reports, and progress meetings, as described in table 4. These oversight tools can help AOC identify instances of poor workmanship, safety issues, or timeliness problems, among other things. the contractor at a progress meeting and requested a recovery plan. June-August 2014: AOC issued 2 letters of concern due to continued schedule delays and overall project management concerns. January 2015: AOC gave the contractor a negative interim performance rating related to schedule and management areas to emphasize the importance of the situation. resolved through routine communication, AOC may then issue a notice to comply to the contractor, which formally notifies a contractor that it is not complying with one or more contract provisions. Based on our review, these notices are generally issued by the COTR, lay out the specific performance concern or contract compliance issue, and request corrective action by the contractor within a specified time frame. AOC may issue multiple notices on the same matter before it is fully addressed. The notice to comply does not always indicate a performance problem but could also be issued for noncompliance with administrative contract requirements, such as failure to submit progress reports. The 53 notices to comply that we reviewed from our sample of contracts and orders typically addressed safety, work quality, or administrative contract compliance concerns. superintendent was replaced among other actions, and performance improved significantly, recovering lost time. October 2015: AOC gave the contractor a more favorable interim performance rating in these two areas in recognition of the improvement. Letter of Concern: If performance issues are not resolved through routine communication or notices to comply, AOC officials said the agency may then issue a letter of concern to a contractor. Based on our review, letters of concern are very similar to notices to comply, as they typically lay out a specific concern and request corrective action within a specified time frame. The main difference between a notice and letter is that letters are issued by the contracting officer instead of the COTR. The 27 AOC letters that we reviewed also addressed many of the same types of issues as notices to comply--safety, work quality, and personnel or schedule concerns. Contractor Performance Assessments: AOC routinely assesses contractor performance on an interim and final basis in government- wide contractor performance systems, and the ratings are available to other federal agencies through the Past Performance Information Retrieval System. In completing past performance evaluations, AOC officials rate the contractor on various elements such as the quality of the product or service delivered, schedule timeliness, and cost control. AOC officials said that contractor performance assessments are one of the most valuable methods available to incentivize a contractor to improve performance because a negative assessment could limit the contractor's ability to be awarded future contracts from AOC or other federal agencies. AOC also has a variety of contractual provisions it can invoke if it determines that a contractor has failed to meet some or all of its contractual requirements. For example, certain provisions allow AOC to seek damages from poorly performing contractors. Contract Disputes: The Contract Disputes Act of 1978 outlines the process for resolving disputes between a contractor and the government. AOC policy calls for seeking an amicable resolution before invoking procedures identified in the Contract Disputes Act. When all attempts to settle the dispute amicably fail, AOC must issue a contracting officer's final decision on the matter. All of the contracts we reviewed included the relevant contract clause that sets forth this process for resolving disputes. However, none of the contracts that we reviewed involved a dispute between the contractor and the government that required invoking the processes laid out by the disputes clause. Liquidated Damages: To protect itself from construction delays, the AOC contracting manual requires that all construction contracts valued over $50,000 include a liquidated damages clause. The liquidated damages clause provides that if the contractor fails to complete the work within the time specified in the contract, the contractor pays the government a daily fixed amount for each day of delay until the work is completed or accepted. According to its guidance, AOC generally determines the daily fixed amount based on the dollar value of the contract. For the 7 construction contracts in our sample that met the applicable threshold for liquidated damages, daily rates ranged from $200 a day to $28,201 a day. However, AOC had not invoked the clause for any of these contracts. Further, Congress recently enacted legislation prohibiting the AOC from using funds made available by the Consolidated Appropriations Act, 2016, to make incentive or award payments to contractors for work on contracts that are behind schedule or over budget, unless certain determinations are made. Termination for Default: When poor contractor performance cannot be corrected through other means, AOC may take additional steps and ultimately terminate the contract for default. AOC would start the process using either a cure notice or a show-cause notice. A cure notice provides the contractor typically at least 10 days to correct the issues identified in the notice or otherwise fulfill the requirements. A show-cause notice notifies the prime contractor that the AOC intends to terminate for default unless the contractor can show cause why they should not be terminated. Typically, a show-cause notice calls the contractor's attention to the contractual liabilities, if the contract is terminated for default. None of the contracts in our sample resulted in a cure notice or show-cause notice; however, AOC officials said that these have been used in a couple of instances from fiscal years 2013 through 2015. For example, AOC issued a cure notice in 2013 to a contractor due to repeated poor quality control that delayed progress on the project. The cure notice followed repeated attempts by AOC to address the issues with the contractor through other methods, including issuing five letters of concern in the 6-month period leading up to the cure notice. AOC currently has no agency-wide process for suspending or debarring individuals or firms that the agency has determined lack the qualities that characterize a responsible contractor. In the absence of such a process, AOC does not have a mechanism that allows it to determine in advance of a particular procurement that an individual or firm lacks present responsibility and therefore should not receive AOC contracts. The FAR and the AOC contracting manual provide that contracts should be awarded only to individuals or firms that are responsible prospective contractors. A responsible contractor is one that has the financing, workforce, equipment, experience and other attributes needed to perform the contract successfully. Similar to executive branch agencies, contracting officers at AOC are required to review these factors prior to the award of any contract. In addition, contracting officers must review the excluded parties list in the governmentwide System for Award Management (SAM), which is maintained by the General Services Administration, to determine whether the contractor in line for an award has been suspended, debarred, or proposed for debarment by any other agency. A suspension temporarily disqualifies a contractor from federal contracting while a debarment excludes a contractor for a fixed period, generally up to 3 years. Although AOC officials must check the list of excluded parties in SAM, and as a matter of policy AOC declines to award contracts to excluded firms or individuals, AOC has no procedure for taking its own suspension or debarment actions or adding firms to the list of excluded parties. Our prior work has found that there are several agencies, like AOC, that lack an effective suspension and debarment process. In August 2011, we reported that six executive branch agencies had not taken any suspension or debarment actions within the past 5 years despite spending significant amounts of appropriated funds buying goods and services. By contrast, four other agencies had active suspension and debarment programs, and we identified three factors that these agencies had in common. First, these four agencies had detailed suspension and debarment policies and procedures. Second, they had identified specific staff responsible for the function. And third, they had an active process for referring matters that might lead to a suspension or debarment to the appropriate agency official. Consistent with the findings from our prior work, in a September 2012 management letter, the AOC Inspector General proposed that AOC develop a suspension and debarment process as a means to deal with "unscrupulous or ineffective contractors." According to AOC officials, the agency declined to implement that recommendation, largely because without being subject to the FAR, AOC believed it could only debar contractors from doing business with AOC, and it was thought that the small number of actions anticipated would likely not justify the cost of developing a new process. However, we do not believe that this is a convincing reason. GAO, which is also a legislative branch agency, established a suspension and debarment process in 2012. For our process, we follow the policies and procedures on debarment and suspension contained in the FAR. Our process identifies new roles and responsibilities for existing offices and officials within the agency. As part of our process, we would report on the list of excluded parties, the names of all contractors we have debarred, suspended, or proposed for debarment. Although debarment, suspension, or proposed debarment of a contractor taken by GAO would have mandatory application only to GAO, listing a contractor on the excluded parties list provides an indication to other federal agencies that they need to thoroughly assess whether the contractor is sufficiently responsible to be solicited or awarded a contract. In addition, one of the advantages of a suspension and debarment process is that an agency can address issues of contractor responsibility and provide the agency and contractors with a formal process to follow. When we shared our experience with them, officials at AOC did not identify any reasons why a similar approach could not be taken at their agency. With more than half of AOC's budget authority currently being spent on contracting, acquisition clearly plays a central role in achieving AOC's mission. AOC has taken initial steps to establish an efficient and effective acquisition function by issuing the AOC contracting manual. The manual will help promote full and open competition in AOC's procurement process. AOC is taking action to improve the quality of its market research which, in turn, can help enhance competition. The agency only recently started to collect competition data to inform its progress, but AOC is not fully using these data to determine the extent of its overall competition efforts and identify areas where additional focus is needed to ensure the agency is obtaining competition to the maximum extent possible. AOC is using several tools to provide oversight and hold contractors accountable; however, it lacks suspension and debarment processes that could help further protect the federal government's interests. Given the high-profile nature of AOC's mission, because of the congressional clients AOC serves, and the buildings it is responsible for, such a process would help to ensure that contracts are awarded only to responsible sources. Implementing policies and procedures for suspension and debarment would build upon AOC's existing accountability framework and would further foster an environment that seeks to hold the entities they deal with accountable. To further enhance the acquisition function, we recommend that the Architect of the Capitol take the following two actions: Explore options for developing a more robust analysis of AOC's competition levels, including areas such as the trends in competition over time, the use of market research to enhance competition, and the types of goods and services for which competition could be increased; Establish a process for suspensions and debarments that is suitable for the AOC's mission and organizational structure, focusing on policies, staff responsibilities, and a referral process. We provided a draft of this report to AOC for review and comment. AOC provided written comments on the draft, which are reprinted in appendix II. AOC agreed with our findings, concurred with our recommendations and noted it is taking steps to implement them. We also received technical comments from AOC, which we incorporated throughout our report as appropriate. We are sending copies of this report to the appropriate congressional committees and to the Architect of the Capitol. This 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 concerning this report, please contact me at (202) 512-4841 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. Staff who made key contributions to this report are listed in appendix III. Our objectives were to assess (1) the extent to which AOC has developed and implemented acquisition policies and processes to guide its contracting function, and (2) the tools used by AOC to monitor and address contractor performance. To address these objectives, we used data from AOC's financial management system to identify contracts and orders with obligations during fiscal years 2013 through 2015. We selected a non-generalizable sample of 21 contracts and orders, during this timeframe to obtain insights into AOC's recent contracting practices. To narrow our focus on which contracts to include in our review, we identified contract actions for AOC's largest and most complex projects, which the AOC defines as any project estimated to cost $50 million or more over the life of the project-- the Cannon House Office Building Renewal Project, Cogeneration Plant Project, Capitol Dome Restoration Project, and the Refrigeration Plant Revitalization Project. As Table 2 below shows, the sample represents a mix of large and small dollar awards and types of products and services procured to support various projects across AOC. We excluded any transaction related to real estate rental or electric power payments. We assessed the reliability of AOC's financial management system data by (1) reviewing existing information about the data and the system that produced them, and (2) comparing reported data to information from the contract files we sampled. Based on these steps, we determined that the data obtained from AOC's financial management system were sufficiently reliable for the purposes of this review. To examine AOC's policies that guide its acquisition function, we reviewed its contracting policies and procedures and compared them to what is outlined in the Federal Acquisition Regulation (FAR). While the FAR does not apply to the AOC, it reflects practices widely used throughout the executive branch of the federal government. We focused our review on competition, acquisition planning, and market research as our prior work has shown that these activities are critical to building a strong foundation for successful acquisition outcomes. We reviewed prior GAO reports to identify generally accepted contract management practices for market research, acquisition planning, and competition. We reviewed market research reports, acquisition plans, justifications and approvals for sole-source awards, solicitations, and independent government cost estimates for the contracts and orders in the sample. We analyzed these documents to determine the extent to which acquisition planning and market research was consistent with AOC's guidance. To supplement information obtained from contract files within our sample, we met with contracting officers and contracting officer technical representatives to confirm our understanding of information in the contract files. We also interviewed officials from the Acquisition and Material Management Division on the policies and procedures that guide the acquisition function. To provide insights about the extent to which AOC competes contracts it awards, we used procurement data from AOC's financial management system for fiscal years 2013 through 2015 to calculate its competition rate. Unlike other federal agencies, AOC does not report its procurement data to the Federal Procurement Data System-Next Generation (FPDS- NG), which is the government's procurement database. To provide a basis of comparison, we calculated the governmentwide competition rate using data from FPDS-NG. For both AOC and governmentwide, we calculated the competition rate as the total dollars obligated annually on competitive contract actions as a percentage of total dollars obligated on all contract actions during fiscal years 2013 through 2015. This includes obligations on new contracts, orders, and modifications of existing contracts. Typically, FPDS-NG codes task and delivery orders from competitive single-award contracts as also being competed. In contrast, AOC classifies task and delivery orders derived from a competed single award contract as not competed even though the base contract was competed. In contrast, AOC classifies task and delivery orders derived from a competed single award contract as not competed because the orders are not available for competition, according to an AOC official. We adopted AOC's classification of these orders as not competed. As a result, our determination of AOC's competition rate may be understated. However, AOC and GAO officials agreed the difference is likely not substantial given the small number of single award contracts at AOC. We compared AOC's efforts to assess its competition levels against acquisition best practices and Standards for Internal Control in the Federal Government, which call for continually tracking spending to gain insight about how resources are being used and using the information to assess how agency's objectives are being achieved. To determine how the AOC oversees contractor performance, we reviewed the same sample of 21 contracts and orders, reviewed AOC project management guidance, and interviewed relevant officials. Specifically, we used the sample to gain insight into how AOC oversees contractor performance and resolves any disagreements that may arise during the performance of the contract. We reviewed documentation in the files such as relevant clauses, notices to comply, letters of concern, contractor performance reports, and other key documents used for monitoring and compliance purposes. We also reviewed AOC contracting policies and project management guidance on how the AOC monitors contractor performance. In addition, we reviewed prior GAO work to identify tools available to agencies to monitor and take actions to address or correct deficiencies regarding contractor performance. We also interviewed AOC contracting officials and contracting officer's technical representative about their experiences in monitoring contractor performance. We interviewed officials from the Planning and Project Management division, contracting officers, and contracting officer technical representatives to understand how they ensure compliance with the terms of contracts and resolve disagreements that may arise. We reviewed AOC's contracting procedures to determine whether AOC had a process in place to address contractor performance and ensure it engages with responsible contractors and used previous GAO work on suspension and debarment as the basis for assessing AOC's efforts. We conducted this performance audit from April 2015 to April 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Candice Wright (Assistant Director); Emily Bond; Lorraine R. Ettaro; Victoria C. Klepacz; Julia Kennon; Katherine S. Lenane; Jose A. Ramos; Beth Reed Fritts; Roxanna Sun; and Alyssa Weir also made key contributions to this report.
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The AOC is responsible for the maintenance, operation, and preservation of the buildings and grounds of the U.S. Capitol complex, which covers more than 17.4 million square feet in buildings and 587 acres of grounds. In fiscal year 2015, Congress appropriated $600.3 million to fund AOC's operations, over half of which was used to procure various goods and services ranging from large projects like the restoration of the Capitol Dome, to routine custodial services. GAO was asked to review the AOC's contracting practices. This report examines (1) the extent to which the AOC has developed and implemented acquisition policies and processes to guide its contracting function, and (2) the tools used by the AOC to monitor and address contractor performance. GAO reviewed the AOC's acquisition policies, interviewed contracting officials, and reviewed a non-generalizable sample of 21 contracts and task or delivery orders with dollars obligated in fiscal years 2013 through 2015. The sample consists of a mix of high-value contracts for goods and services. The Architect of the Capitol (AOC) recently implemented a contracting manual that centralizes current law and regulations applicable to the AOC, as well as policies, orders and procedures. As a legislative branch agency, the AOC is not subject to the Federal Acquisition Regulation (FAR) which governs executive branch agencies; however, its manual draws on the FAR and covers topics central to the AOC's day-to-day contracting functions, such as acquisition planning, market research, and competition, all of which are key aspects of a sound acquisition process. In the 21 contracts and task orders GAO reviewed, AOC officials generally followed the policies in the contracting manual related to these critical functions--such as documenting justifications for the use of noncompetitive procedures. The AOC began to collect competition data in fiscal year 2012, but the agency only conducts a limited assessment of its efforts to achieve competition. The AOC manual states it is agency policy to promote competition, and federal internal control standards state that agencies should establish mechanisms to track and assess performance against their objectives. While the AOC monitors data to track the number of sole-source contracts awarded, other analyses are limited. GAO's analysis of the AOC's data found that the agency competed approximately 50 percent of its contract obligations for the past 3 fiscal years--compared to 65 percent for the overall federal government. By examining the factors driving the number of sole-source awards or level of competition across different product types, AOC may be better positioned to identify where additional management attention may be needed to maximize competition. The AOC uses a variety of approaches to monitor contractor performance on its projects, with contracting officers and their technical representatives being the primary officials responsible for providing oversight. The AOC uses a number of methods to address contractor performance problems, as shown in the figure below. While the AOC has tools for addressing poor performance on specific contracts, it does not have a suspension and debarment process in place that could bar irresponsible contractors from working for the AOC or provide notice to other government agencies. Past GAO work has shown that having suspension and debarment procedures is critical to ensuring that the government only does business with responsible contractors. GAO recommends that AOC explore options for developing a more robust analysis of its competition levels and establish a suspension and debarment process suitable to its mission and structure. AOC agreed with GAO's findings and concurred with the two recommendations and noted it is taking steps to implement them.
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In total, 103 schools are currently designated HBCUs. They range in size and scope from 2-year colleges with relatively few programs to 4-year universities offering graduate degrees in several fields and enrolling more than 10,000 students. Although most students who attend are black, about one student in every six is not. Collectively, HBCUs enroll about 16 percent of all black students attending all 2-year and 4-year colleges and universities in the United States. Title IV authorized the Department of Education to bar postsecondary schools with high fiscal year "cohort default rates" from continuing to participate in federal student loan programs. Each year, the Department assesses a school's eligibility on the basis of its three most recent available cohort default rates. In fiscal year 1998, eligibility is based on default rates for fiscal years 1993, 1994, and 1995. A school remains eligible if its cohort default rate is below the statutory threshold, currently 25 percent, in at least 1 of the latest 3 consecutive fiscal years. A school becomes ineligible if its default rate equals or exceeds the default threshold in all 3 fiscal years. The Higher Education Act exempts HBCUs from this threshold requirement through June 1998. In addition to the cohort default rate threshold specified in the Higher Education Act, the Department has established--through regulation--a provision that allows it to start procedures to limit, suspend, or terminate a school's participation in all title IV federal student aid programs if the school's cohort default rate for a single year exceeds 40 percent. The exemption from the statutory threshold for HBCUs does not extend to this provision. Students get federal loans from two major programs: the Federal Family Education Loan Program (FFELP) and William D. Ford Federal Direct Loan Program (FDLP). Loans made under FFELP are provided by private lenders and are ultimately guaranteed against default by the federal government. Loans made under FDLP are provided through schools, and the Department services and collects loans through contractors. FDLP was originally authorized by the Higher Education Amendments of 1992. Since the first loans under FDLP were made in the fourth quarter of fiscal year 1994, the fiscal year 1995 cohort is the first cohort affected by FDLP defaults. Students at HBCUs make extensive use of these loan programs. Although HBCU students accounted for 1.9 percent of fall 1995 enrollments at all 2-year and 4-year public and private schools, they were awarded 3.5 percent of the total dollar volume of student loans under FFELP and FDLP in fiscal year 1996 (see table 1). On average, HBCUs have a higher student loan default rate than non-HBCUs, but the difference has narrowed somewhat. Between fiscal years 1993 and 1995, the aggregate student loan cohort default rate for HBCUs declined from 20.6 percent to 18.5 percent while the rate for non-HBCUs increased from 7.4 percent to 7.8 percent (see fig. 1). Before 1987, little research had been published that identified the factors that could predict high student loan default rates. However, in the past 10 years several empirical research studies have analyzed student borrowers from proprietary (private, for profit) schools as well as from public and private 2-year and 4-year colleges and universities. A key theme derived from these studies is that student loan repayment and default behavior are primarily influenced by individual borrower characteristics rather than by the characteristics of the educational institutions they attend. For example, one study concluded that "student characteristics are of overwhelming importance in correctly predicting defaulters, in contrast to the institutions they attend, or the administrative practices those institutions use to try to curb student defaults." The studies indicate that characteristics playing an important role in determining the level of student default rates are related to students' academic preparation and socioeconomic background. In general, the higher the students' academic preparation and more advantaged the socioeconomic background, the lower the likelihood of defaulting on their student loans. Factors indicating good academic preparation, such as staying in college, earning good grades, and advancing to graduation, significantly decrease the probability of default. Two of the most important factors accounting for different college graduation rates among institutions are actually precollege factors: high school grades and college admissions test scores. The higher the grades and test scores, the greater the incidence of college graduation. Similarly, studies have shown that students who come from a more advantaged socioeconomic background--indicated by higher parental education and income levels and two-parent families--have better high school grades and lower student loan default rates. Students attending 4-year HBCUs are less academically prepared and come from a more disadvantaged socioeconomic background than their counterparts attending all 4-year colleges and universities, according to our analysis of an annual survey of the fall 1996 freshman class. For example, relative to freshmen at all 4-year colleges and universities, HBCU students had a lower high school grade average and needed (or already had) more tutoring or remedial work. In addition, the rate at which students starting at the same school graduated within a 6-year period was lower for HBCUs than for non-HBCUs. Relative to parents of freshmen at all 4-year colleges and universities, parents of 4-year HBCU freshmen were more likely to be divorced or separated, less likely to have a college education, and more likely to earn less than $20,000 a year. These findings help explain why HBCU student loan default rates have generally been higher than the rates for non-HBCUs. Freshmen at HBCUs and 2-year schools reported similar high school grades: they were much less likely to earn A's and much more likely to earn B's and C's than freshmen at all 4-year colleges and universities (see fig. 2). For example, the portion of university freshmen with an A average exceeded the portion of HBCU and 2-year freshmen threefold. In contrast, over a quarter of HBCU and 2-year freshmen had a C average compared with 5 percent of university freshmen. In six subject areas (English, reading, mathematics, social studies, science, and foreign languages), an average of 11 percent of HBCU freshmen had special tutoring or remedial work compared with 7 percent of 2-year, 6 percent of 4-year, and 4 percent of university freshmen (see table 2). In addition, HBCU freshmen were nearly twice as likely to require additional tutoring or remedial work as freshmen at all colleges and universities. A comparison of the average 6-year graduation rate--another measure of academic preparedness--showed a 35-percent rate for 4-year HBCUs compared with 54 percent for 4-year non-HBCUs, a difference of 19 percentage points. The typical marital status of parents of HBCU freshmen differed from that of parents of freshmen at all colleges and universities. Nearly half of all HBCU freshmen (49 percent) reported the marital status of their parents as divorced or separated, while the majority of freshmen at all schools reported that their parents were living together (see fig. 3). Fewer parents of HBCU and 2-year college freshmen had attained a college degree than had parents of 4-year college and university freshmen (see fig. 4). About 20 percent of HBCU and 2-year college freshmen reported that their parents had a college degree, compared with 26 percent or more of 4-year college and university freshmen. Compared with parents of all freshmen, parents of HBCU freshmen were more likely to have lower incomes. The portion of freshmen with parents who had incomes of less than $20,000 ranged from 29 percent for HBCU freshmen to 9 percent for university freshmen (see fig. 5). In contrast, only 22 percent of parents of HBCU freshmen had incomes of $60,000 or more, compared with 52 percent for parents of university freshmen. HBCU freshmen were much more likely to receive Pell grant aid than their counterparts at all schools, another indicator of parental income (see fig. 6). Generally, the lower the parents' income, the greater the amount of financial aid received. Federal Pell grants, available only to undergraduate students, under title IV, are designed to help students who have the greatest financial need. Grants need not be repaid, and the maximum Pell grant award amount for school year 1995-96 was $2,340. Although HBCU students as a group differ substantially from students at all colleges and universities in their academic preparation and socioeconomic backgrounds, our analysis indicates that the same kinds of differences exist among students at individual HBCUs. That is, when HBCUs are divided into groups according to their default rates, the characteristics of students at schools with the highest default rates reflect less academic preparation and more disadvantaged socioeconomic backgrounds. These links between student characteristics and the magnitude of default rates at HBCUs are consistent with the research that has shown certain student characteristics to be linked to student loan defaults. We based our analysis on undergraduate students at 83 4-year HBCUs that conferred bachelor's degrees during the 1993-94 school year and for which the Department had reported student loan default rate statistics for the 1993-95 cohorts. Collectively, the default rate for these HBCUs averaged 20 percent over the 3-year period. We grouped the 83 HBCUs into low, medium, and high default categories to facilitate comparisons of student characteristics among three groups of HBCUs. For the low group, the average default rate was 11.5 percent compared with 31 percent for the high group. Comparing the academic characteristics of students at HBCUs with low, medium, and high default rates for fiscal years 1993-95 showed that students at high-default-rate HBCUs consistently exhibited a lower level of academic preparation than students at HBCUs with low default rates. For example, the 6-year graduation rate for low-default-rate HBCUs was more than 1.4 times higher (at 41 percent) than the 29-percent rate for high-default-rate HBCUs. A similar trend was found for retention of freshmen at HBCUs. Conversely, freshman acceptance rates, an indicator of a school's selectiveness in admitting academically qualified applicants, were lower at HBCUs with low default rates (see fig. 7). For this portion of our analysis, Department of Education data covered only students who had received federal student aid during the 1995-96 school year at the 83 4-year HBCUs. Our comparisons showed that students at high-default-rate HBCUs consistently had more disadvantaged socioeconomic characteristics than students at HBCUs with low default rates. For example, parents' average adjusted gross income for high-default-rate HBCUs was $22,489, about 26 percent lower than the $30,321 average for low-default-rate HBCUs (see fig. 8). Twenty-five percent of the students' parents at high-default-rate HBCUs had adjusted gross income of $30,000 or more, compared with 36 percent for parents of students at low-default-rate HBCUs. Similarly, the extent to which parents' highest education level was college or beyond and to which parents were married and not separated were lower for high-default-rate HBCUs compared with low-default-rate HBCUs (see fig. 9). The Carnegie Foundation for the Advancement of Teaching developed a system to classify American colleges and universities primarily based on their academic missions, such as their highest degree offerings, the numbers of degrees conferred, and in some cases the selectivity of a school's admissions. Although it is an institutional measure, we consider the Carnegie classification to reflect the academic preparation of a school's students based on the level of the degrees it offers and confers and on the selectivity of the students it admits. To facilitate comparisons among 4-year HBCUs included in our review, we consolidated the HBCUs' various Carnegie classifications into two categories: "high" and "low" (see app. III). Our analysis showed that low-default-rate HBCUs had a higher Carnegie classification than high-default-rate HBCUs. HBCUs that have high Carnegie classifications confer more doctoral, master's, or liberal arts degrees or are more restrictive (requiring higher high school grades or college admission test scores) in student admission criteria. There appears to be a strong link between an HBCU with a high Carnegie classification and low student loan default rates. Schools with high Carnegie classifications made up 71 percent of low-default-rate HBCUs compared with only 12 percent of HBCUs with high student loan default rates (see fig. 10). According to Department officials, default reduction measures apply to all schools participating in federal student loan programs and are not specifically aimed at lowering high default rates at HBCUs. These measures were part of the default reduction initiative that the Department introduced in June 1989 in response to the rising default rates in federal student loan programs at that time. These measures, found in statutes, regulations, and guidance, required schools to provide students with loan counseling, take steps to promote repayment among delinquent borrowers, and, for schools whose default rate exceeded certain thresholds, implement a default management plan. Under default-reduction regulations and agency guidance, all schools must perform entrance counseling before releasing loan proceeds to a borrower and exit counseling shortly before a borrower ceases at least half-time study. Entrance counseling is to include exploring all sources of aid, stressing constraints on aid, reviewing requirements for satisfactory academic progress, reminding students to keep lenders informed, reviewing available repayment options, and reviewing the consequences of delinquency and default. Many of the points stressed in entrance counseling are to be reiterated during exit counseling in addition to obtaining such data as the student's expected permanent address, employer's name and address, and the address of next of kin. The Department has no prescribed format for financial aid counseling other than its requirement that a person knowledgeable about financial aid programs be available for answering borrowers' questions after the counseling sessions. Schools are encouraged to use such aids as charts, handouts, videotape, and computer-assisted technology to increase the effectiveness of their counseling sessions. These materials, as well as training for financial aid administrators, are generally available from the Department and some guaranty agencies, lenders, and other postsecondary education organizations. Another default-reduction measure requires guaranty agencies to notify, upon request and within 30 days, a FFELP borrower's school after the borrower has missed a loan payment due date (the loan has gone into delinquency). This provision for alerting a school of a student's loan delinquency is intended to give the school an expeditious opportunity to work with the borrower to avert a default. In FDLP, the Department similarly notifies schools of delinquent borrowers. Schools are encouraged to urge borrowers to resume payments to cure the delinquency or provide advice on applying for a deferment or forbearance. To assist schools in tracking their student loan borrowers, the Department developed a software product, the Institutional Default Prevention System, in 1990. Three HBCUs were among the schools that tested the software before its formal release to general users. In using this system, schools can better maintain information about borrowers who have left the school and can print loan reminder letters to send to them. The Department has provided copies of this software to schools participating in both the FFELP and FDLP, including nearly all HBCUs. For many years, if a school's default rate exceeded 20 percent, the Department required it to implement a default management plan designed to reduce its default rate. The plan typically identified the measures the school was taking, such as revising its admissions policy to enroll more-qualified students, expanding job placement efforts, and conducting additional loan counseling activities. At various times from 1990 through the first half of 1996, the Department required 92 HBCUs to implement a default management plan. Effective July 1996, the Department no longer required high-default-rate schools to submit or implement default management plans because it lacked resources to effectively oversee schools' adherence to the requirement. However, the Department encourages schools to continue to implement default management plans to help prevent students from defaulting on their student loans. In August 1993, we reported that 33 HBCUs had 1988-90 cohort default rates equal to or greater than the 25-percent statutory threshold. The schools could have become ineligible for continued participation in student loan programs if their default rates had persisted at the rates reported, and the Congress did not extend the HBCUs' exemption from the statutory threshold. Based on 1993-95 cohort default rates, 8 of the 33 HBCUs still have default rates over the threshold (see table 3) and remain in the program because of the exemption. Nineteen of the 33 HBCUs have subsequently lowered their default rates and no longer exceed the threshold. Six of the 33 HBCUs no longer participate in federal student loan programs. Of these six HBCUs, two merged with other schools, one was annexed by another HBCU, and three lost accreditation and therefore were no longer eligible to participate in federal student loan programs. Of the 19 HBCUs with lower default rates, 9 had rates that were lower than the 25-percent threshold in all three fiscal years, 1993-95. Five HBCUs had rates that were below the threshold for 2 years, and another five had rates below the threshold in 1 year. All 19 HBCUs had lower 3-year default rate averages for fiscal years 1993-95 than for 1988-90. Appendix IV shows the default rate history for these 19 HBCUs. Compared with 33 HBCUs that exceeded the 25-percent threshold for the 1988-90 cohorts, only 14 HBCUs exceeded the threshold for the 1993-95 cohorts. Of these 14 HBCUs, 8 were schools that were included in the 1988-90 cohorts that still remain at risk and 6 had not been at risk in the 1988-90 cohorts. To determine what default reduction measures HBCUs had taken that might have contributed to the decline in the number of HBCUs exceeding the statutory threshold since our 1993 report, we conducted a telephone survey of selected HBCU financial aid administrators. Our survey sample included 17 HBCUs that exceeded the threshold in 1988-90 but were below the threshold in 1993-95 and, for comparison, the 9 HBCUs that had the lowest average 1993-95 default rates. This sample allowed us to obtain the perspectives of administrators at HBCUs that had formerly had high default rates and those that consistently had low default rates. We asked them what measures their schools had taken to reduce or minimize their student loan default rates. Twenty-two administrators responded to our survey, 14 at HBCUs that formerly had high default rates and 8 at HBCUs that consistently had low default rates. They most often cited loan counseling or early intervention with delinquent borrowers as the measures they had taken to address defaults. In meeting the counseling requirement, the administrators described various practices that, in their opinion, made counseling more effective. These included requiring all incoming students, not just borrowers, to attend loan emphasizing personal finance and debt management; and bringing in outside credible experts, such as a lender or guaranty agency representative, to give presentations to students during counseling sessions. In addition, the policy at several of these HBCUs was to direct students, at the time of their enrollment, to other financial aid resources such as grants, scholarships, and work-study programs, so that students could minimize or avoid indebtedness. While these administrators said that they contacted delinquent borrowers as part of their default prevention effort, a minor difference emerged in how they implemented this measure. About half the administrators at HBCUs that previously had high default rates said that their schools had created a default rate manager position or retained a consultant to track and contact delinquent borrowers. But only one of the administrators at an HBCU that consistently had low default rates reported taking similar action. The Department of Education reviewed a draft of this report and had no formal comments, although it provided several technical suggestions that we incorporated as appropriate. Copies of this report will be provided to appropriate congressional committees, the Secretary of Education, and others who are interested. If you have any questions or wish to discuss this material further, please call me or Joseph J. Eglin, Jr., Assistant Director, at (202) 512-7014. Major contributors include Deborah L. Edwards, Daniel C. Jacobsen, Robert B. Miller, Charles M. Novak, Meeta Sharma, and Edward H. Tuchman. Over the past decade, a growing body of research has established that certain measures of students' academic preparation and socioeconomic status are predictors of how likely students are to default on student loans. In general, research has shown that default rates tend to be higher among students who are not as well prepared academically as others and whose families are not as well off economically. We were asked to address several issues regarding default rates at Historically Black Colleges and Universities (HBCU), including an analysis of these kinds of links. To identify student characteristics that have been shown to predict student loan defaults, we searched for available literature. We selected studies that were published within the past 10 years and that used multivariate analysis to show a link between student characteristics and default rates. Although we did not find many relevant studies that met these criteria, we identified the following four key studies and relied on them: Wellford W. Wilms, Richard W. Moore, and Roger E. Bolus, "Whose Fault Is Default? A Study of the Impact of Student Characteristics and Institutional Practices on Guaranteed Student Loan Default Rates in California," Educational Evaluation and Policy Analysis, Vol. 9, No. 1 (spring 1987), pp. 41-54. Mark Dynarski, Analysis of Factors Related to Default (Princeton, N.J.: Mathematica Policy Research, Inc., April 1991). Laura Green Knapp and Terry G. Seaks, "An Analysis of the Probability of Default on Federally Guaranteed Student Loans," The Review of Economics and Statistics, August 1992. J. Fredericks Volkwein and Bruce P. Szeiest, "Individual and Campus Characteristics Associated with Student Loan Default," Research in Higher Education, Vol. 36, No. 1 (1995). These empirical research studies have collectively analyzed student borrowers from proprietary schools as well as from public and private 2-year and 4-year colleges and universities. These studies showed that default behavior was linked more closely to the characteristics of students rather than schools. We used these and other related studies to identify academic preparation (graduation rates, high school grades, and freshman retention and acceptance rates) and socioeconomic (parental income, level of education, and marital status) characteristics of students that are associated with student loan defaults. Other studies we used include Alexander W. Astin, Lisa Tsui, and Juan Avalos, Degree Attainment Rates at American Colleges and Universities: Effects of Race, Gender and Institutional Type, Higher Education Research Institute, University of California, Los Angeles, September 1996. Alexander W. Astin, The Black Undergraduate: Current Status and Trends in the Characteristics of Freshmen, Higher Education Research Institute, University of California, Los Angeles, July 1990. Shirley L. Mow and Michael T. Nettles, "Minority Student Access to, and Persistence and Performance in, College: A Review of the Trends and Research Literature," Higher Education: Handbook of Theory and Research, Vol. 6 (New York: Agathon Press, 1990). To determine how these academic preparation and socioeconomic characteristics of students enrolled at HBCUs compared with those of students at all colleges and universities, we reviewed the literature and identified one research study that reported academic and socioeconomic information by type of school. This information (except graduation rates) came from The American Freshman: National Norms for Fall 1996, a longitudinal study consisting of an annual survey published by the Higher Education Research Institute, University of California, Los Angeles. Statistics on remedial work were obtained from the prior year's survey, which was the most recent data available at the time we performed our analysis. The fall 1996 freshman survey was based on a sample of 251,232 first-time, full-time students at 494 colleges and universities. The respondents were students enrolled full-time who either graduated from high school in the same year as entering college or had no previous college experience. These students were enrolled in the following 494 public and private colleges and universities: 14 4-year HBCUs, 50 2-year colleges that offered associate's degrees or were known as "terminal vocational" colleges, 363 4-year colleges that offered postbaccalaureate programs but did not award a sufficient number of earned doctoral degrees to be classified as universities, and 67 universities that granted a certain minimal number of earned doctoral degrees. Information on 6-year graduation rates, defined as the percentage of first-time, full-time degree-seeking freshmen who enrolled in fall 1989 and completed their bachelor's degree by fall 1995 at the same school, primarily came from U.S. News and World Report's 1996 America's Best Colleges survey. The 1996 survey was based on the completion of an extensive questionnaire by more than 1,400 accredited 4-year colleges and universities and represented the tenth edition of America's Best Colleges. For the 83 4-year HBCUs examined, we obtained graduation rates for 82 HBCUs, 77 from U.S. News and 5 from the HBCUs directly (1 HBCU did not provide its graduation rate). Also, for 1,050 4-year non-HBCUs, we obtained U.S. News graduation rates in a computerized summary from the Postsecondary Education Opportunity newsletter. For comparison purposes, we calculated two average graduation rates, one for HBCUs and one for non-HBCUs. To determine the extent to which HBCU undergraduate student characteristics associated with loan defaults differed, we classified 4-year HBCUs as those with low, medium, and high default rates. To define these groupings for the 83 HBCUs, we developed a two-part analysis: we (1) calculated a 3-year average default rate for each institution using its 1993-95 cohort rate and (2) used the 3-year average rate to classify HBCUs as low-default if rates were less than 15 percent, medium-default if rates ranged from equal to or greater than 15 percent to less than 25 percent, and high-default if equal to or greater than 25 percent. We obtained student characteristics data from (1) Department of Education records and reports, such as the National Student Loan Data System, the Free Application for Federal Student Aid database for academic year 1995-96, and the Integrated Postsecondary Education Data System surveys on 1995 fall enrollments and on school year 1995-96 institutional characteristics; (2) HBCUs that we contacted, as needed, to obtain student academic preparation characteristics missing from other data sources; and (3) U.S. News & World Report's 1996 America's Best Colleges survey. We obtained information on measures the Department of Education has taken or planned to help HBCUs lower their default rates from federal regulations, Department publications, and interviews with Department officials. We reviewed the Department's Default Management Report for 1993-95 cohorts to determine the current status of the 33 HBCUs identified in our earlier report as having the potential to lose their eligibility to participate in title IV loan programs because of high default rates. To determine the measures HBCUs were taking to reduce their default rates, we conducted a telephone survey of financial aid administrators at 26 HBCUs. Seventeen of these had been among the 33 HBCUs identified in our earlier report as being at risk of losing their eligibility but had subsequently lowered their default rates below the statutory level for at least 1 of the 3 1993-95 cohort years. Two of these HBCUs did not respond to repeated requests for an interview. The financial aid director at another school was on extended leave and the acting director was reluctant to comment since he had been on campus only a few weeks. We also surveyed administrators at nine HBCUs that had the lowest 3-year average default rates among HBCUs for the 1993-95 cohorts. One of these schools did not respond to repeated requests for an interview. Although we did not validate the reliability of the data derived from the sources indicated, these data are readily available and the education community relies on them. We conducted our review between June 1997 and January 1998 in accordance with generally accepted government auditing standards. From our review of research, we identified and selected academic preparation and socioeconomic student characteristics that have been shown to affect student loan default rates and for which data were available. In cases in which characteristics data were unavailable, we judgmentally selected a related characteristic for which data were readily available as a substitute for the characteristic identified in the research. Thus, depending on data availability, the characteristics used to compare HBCUs and all colleges and universities differed from those used to compare high- and low-default-rate HBCUs (see table II.1). Table II.1: Availability of Data on Characteristics That Research Has Shown to Be Useful Indicators of Student Loan Default Characteristic description and relation to default rates Average grade earned in high school: A, B, or C. High grade linked to lower default rate. A noncredit or reduced credit course in higher education designed to increase the student's ability to pursue a course of study leading to a certificate or degree. Little to no remedial education linked to lower default rate. Over 4 years (beginning with fall 1991), the average percentage of first-time, full-time degree-seeking students that reenrolled in the fall of their sophomore year. A measure of the student's ability to stay in college. High retention rate linked to lower default rate. The percentage of first-time, first-year applicants who were accepted for admission in fall 1995. An indicator of a school's selectiveness in admitting academically qualified applicants. Low acceptance rate linked to lower default rate. The percentage of first-time, degree-seeking (freshmen) students who completed a bachelor's degree from the same school within 6 years of fall 1989 initial enrollment. Shown to be a culmination of good academic preparation. High graduation rate linked to lower default rate. Married (living together) or not married (single, divorced, separated, or one or both deceased). Married status linked to lower default rate. Highest level of education completed by either parent. Higher level of education linked to lower default rate. For comparing HBCUs to non-HBCUs, parents' income is the student's estimate of parents' 1995 total income, before taxes. For comparing high- to low-default HBCUs, parents' income is their adjusted gross income as reported on the 1995-96 school year Free Application for Federal Student Aid. Higher income linked to lower default rate. This substitute was used since neither high school grade nor admissions test score data were available to compare high- and low-default-rate HBCUs. The Carnegie Foundation for the Advancement of Teaching has developed a system for classifying, largely based on academic mission, about 3,600 colleges and universities in the United States that are degree-granting institutions and accredited by an agency recognized by the Department of Education. Schools are classified according to their highest level of offering, the number of degrees conferred by discipline, and the amount of federal support for research received by the school, and some categories also rely on the selectivity of the school's admissions. Since the classifications reflect levels and numbers of degrees conferred as well as admissions restrictions, we consider these classifications to be a substitute for student academic preparation. To facilitate making comparisons among the 4-year HBCUs included in our review, we consolidated the various Carnegie classifications for each HBCU into the following two categories: 1. High Carnegie School Classification. Schools we describe as having higher degree levels or being more admissions restrictive and that had one of the following Carnegie classifications: Research Universities I: giving high priority to research, awarding 50 or more doctoral degrees each year, and receiving annually $40 million or more in federal support. Doctoral Universities I: awarding at least 40 doctoral degrees annually in five or more disciplines. Doctoral Universities II: awarding annually at least 10 doctoral degrees in three or more disciplines or 20 or more doctoral degrees in one or more disciplines. Master's (Comprehensive) Universities and Colleges I: awarding 40 or more master's degrees annually in three or more disciplines. Master's (Comprehensive) Universities and Colleges II: awarding 20 or more master's degrees annually in one or more disciplines. Baccalaureate (Liberal Arts) Colleges I: awarding 40 percent or more of their baccalaureate degrees in liberal arts fields and being restrictive in admissions. 2. Low Carnegie School Classification. Schools we describe as having fewer liberal arts degrees, being less admissions restrictive, or being specialized and that had one of the following Carnegie classifications: Baccalaureate Colleges II: awarding less than 40 percent of their baccalaureate degrees in liberal arts fields or being less restrictive in admissions. Theological seminaries, Bible colleges, and other institutions offering degrees in religion. Teachers colleges. The following table lists the default rate history for 19 HBCUs whose 1988-90 rates exceeded the statutory threshold of 25 percent and whose rates had fallen below the threshold for the most current (1993-95) cohort years. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a congressional request, GAO reviewed several issues regarding default rates at historically black colleges and universities (HBCU), focusing on: (1) a comparison of freshman students at HBCUs with those at all colleges and universities in terms of the academic and socioeconomic characteristics that have been linked to student loan defaults; (2) differences in socioeconomic characteristics among 4-year HBCUs, for undergraduate students with higher default rates compared with schools with lower default rates; (3) measures the Department of Education has taken or planned to help HBCUs reduce their student loan default rates; (4) the number of HBCUs that are potentially at risk of losing title IV student loan eligibility because of high default rates in 1993-95, and how many of these were potentially at risk in 1988-90; and (5) measures HBCUs have taken to reduce or minimize their student loan default rates. GAO noted that: (1) HBCUs have enrolled a higher percentage of freshmen who, compared with their peers at all institutions, are less prepared academically and come from more disadvantaged socioeconomic backgrounds; (2) the 1995 graduation rate for 4-year HBCUs (35 percent) was substantially below that of non-HBCU students (54 percent); (3) students at HBCUs were twice as likely to come from a home where parents were divorced or separated, and their parents generally had lower education and income levels than parents of students at all colleges and universities; (4) when the analysis is narrowed to only HBCUs, the same pattern is found; (5) in general, HBCUs with lower default rates enrolled students with more academic preparation and higher socioeconomic levels; (6) parents of students receiving federal financial aid at HBCUs with lower default rates generally had higher average adjusted gross incomes and more education and were more likely to be married; (7) the Department of Education employs a number of measures to help schools reduce student loan defaults; (8) these measures apply to all schools, as the Department has no separate or specific default reduction program for HBCUs; (9) the Department's primary efforts were introduced in 1989 as its default reduction initiative and include such activity as supporting schools' efforts to provide financial aid counseling to student borrowers and followup with delinquent borrowers; (10) according to the most recent computations available (for 1993-95), 14 HBCUs were potentially at risk of losing their student loan program eligibility because their default rates remained at or above 25 percent for 3 consecutive years; (11) this is fewer than the 33 HBCUs that GAO reported in August 1993 as potentially at risk on the basis of their 1988-90 default rates; (12) of these 33 HBCUs, 8 remained potentially at risk on the basis of their 1993-95 default rates (6 more subsequently became potentially at risk), 19 were no longer at risk and were eligible to participate in federal student loan programs, and 6 were no longer participating in the program; (13) financial aid administrators at 22 HBCUs GAO surveyed cited default reduction measures promoted by the Department--loan counseling and early intervention with delinquent borrowers--as the default reduction measures they most often used in managing their student loan default rates; and (14) this survey included administrators at 14 of the 33 HBCUs that GAO previously reported could be at risk of losing their student loan eligibility--if they were not subject to the exemption--based on their 1988-90 default rates.
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Within USDA, FNS has overall responsibility for overseeing the school- meals programs, which includes promulgating regulations to implement authorizing legislation, setting nationwide eligibility criteria, and issuing guidance. School-meals programs are administered at the state level by a designated state agency that issues policy guidance and other instructions to school districts providing the meals to ensure awareness of federal and state requirements. School districts are responsible for completing application, certification, and verification activities for the school-meals programs, and for providing children with nutritionally balanced meals each school day. The designated state agency conducts periodic reviews of the school districts to determine whether the program requirements are being met. Schools and households that participate in free or reduced-price meal programs may be eligible for additional federal and state benefits. Household income levels determine whether children qualify for free or reduced-price meals. Children from families with incomes at or below 130 percent of the federal poverty level are eligible for free meals; the income threshold for a family of four was $28,665 in the 2010-2011 school year. Those with incomes between 130 percent and 185 percent of the federal poverty level are eligible for reduced-price meals. Income is any money received on a recurring basis--including, but not limited to, gross earnings from work, welfare, child support, alimony, retirement, and disability benefits--unless specifically excluded by statute. In addition, students who are in households receiving benefits under certain public-assistance programs--specifically, SNAP, Temporary Assistance for Needy Families (TANF), or Food Distribution Program on Indian Reservations (FDPIR)--or meet certain approved designations (such as students who are designated as homeless, runaway, or migrant; or who are foster children) are eligible for free school meals regardless of income. In May 2014, we reported that USDA had taken several steps to implement or enhance controls to identify and prevent ineligible beneficiaries from receiving school-meals benefits. USDA worked with Congress to develop legislation to automatically enroll students who receive SNAP benefits for free school meals; SNAP has a more-detailed certification process than the school-meals program. For our May 2014 report, USDA officials told us that they were emphasizing the use of direct certification, because, in their opinion, it helps prevent certification errors without compromising access. Direct certification reduces the administrative burden on SNAP households, as they do not need to submit a separate school- meals application. It also reduces the number of applications school districts must review. The number of school districts directly certifying SNAP-participant children increased from the 2008 through 2013 school years. For example, during the 2008-2009 school year, 78 percent of school districts directly certified students, and by the 2012- 2013 school year, this percentage had grown to 91 percent of school districts, bringing the estimated percentage of SNAP-participant children directly certified for free school meals to 89 percent. USDA was also conducting demonstration projects in selected states and school districts to explore the feasibility of directly certifying children that participate in the Medicaid program. USDA requires state agencies that administer school-meals programs to conduct regular, on-site reviews--referred to as "administrative reviews"--to evaluate school districts that participate in the school- meals programs. Starting in the 2013-2014 school year, USDA increased the frequency with which state agencies complete administrative reviews from every 5 years to every 3 years. As part of this process, state agencies are to conduct on-site reviews of school districts to help ensure that applications are complete and that the correct eligibility determinations were made based on applicant information. School districts that have adverse findings in their administrative reviews are to submit a corrective-action plan to the state agency, and the state agency is to follow up to determine whether the issue has been resolved. In February 2012, USDA distributed guidance to state administrators to clarify that school districts have the authority to review approved applications for free or reduced-price meals for school-district employees when known or available information indicates school- district employees may have misrepresented their incomes on their applications. In our May 2014 report, we identified opportunities to strengthen oversight of the school-meals programs while ensuring legitimate access, including clarifying use of for-cause verification, studying the feasibility of electronic data matching to verify income, and verifying a sample of households that are categorically eligible for assistance. As described in USDA's eligibility manual for school meals, school districts are obligated to verify applications if they deem them to be questionable, which is referred to as for-cause verification. We reported in May 2014 that officials from 11 of the 25 school districts we examined told us that they conduct for-cause verification. These officials provided examples of how they would identify suspicious applications, such as when a household submits a modified application-- changing income or household members--after being denied, or when different households include identical public-assistance benefit numbers (e.g., if different households provide identical SNAP numbers). However, officials from 9 of the 25 school districts we examined told us that they did not conduct any for-cause verification. For example, one school-district official explained that the school district accepts applications at face value. Additionally, officials from 5 of the 25 school districts told us they only conduct for-cause verification if someone (such as a member of the public or a state agency) informs them of the need to do so on a household. Although not generalizable, responses from these school districts provide insights about whether and under what conditions school districts conduct for-cause verifications. In April 2013, USDA issued a memorandum stating that, effective for the 2013-2014 school year, all school districts must specifically report the total number of applications that were verified for cause. However, the outcomes of those verifications would be grouped with the outcomes of applications that have undergone standard verification. As a result, we reported in May 2014 that USDA would not have information on specific outcomes, which it may need to assess the effectiveness of for-cause verifications and to determine what actions, if any, are needed to improve program integrity. While USDA had issued guidance specific to school- district employees and instructs school districts to verify questionable applications in its school-meals eligibility manual, we found that the guidance did not provide possible indicators or describe scenarios that could assist school districts in identifying questionable applications. Hence, in May 2014, we recommended that USDA evaluate the data collected on for-cause verifications for the 2013-2014 school year to determine whether for-cause verification outcomes should be reported separately and, if appropriate, develop and disseminate additional guidance for conducting for-cause verification that includes criteria for identifying possible indicators of questionable or ineligible applications. USDA concurred with this recommendation and in January 2015 told us that FNS would analyze the 2013-2014 school year data to determine whether capturing the results of for-cause verification separately from the results of standard verification would assist the agency's efforts to improve integrity and oversight. USDA also said that FNS would consider developing and disseminating additional guidance, as we recommended. In addition to for-cause verification, school districts are required to annually verify a sample of household applications approved for free or reduced-price school-meals benefits to determine whether the household has been certified to receive the correct level of benefits--we refer to this process as "standard verification."limited to approved applications considered "error-prone." Error-prone is statutorily defined as approved applications in which stated income is within $100 of the monthly or $1,200 of the annual applicable income- eligibility guideline. Households with reported incomes that are more than $1,200 above or below the free-meals eligibility threshold and more than $1,200 below the reduced-price threshold would generally not be subject to this verification process. In a nongeneralizable review of 25 approved civilian federal-employee household applications for our May 2014 report, we found that 9 of 19 households that self-reported household income and size information were not eligible for free or reduced-price-meal benefits they were receiving because their income exceeded eligibility guidelines. Two of these 9 households stated in their applications annualized incomes that were within $1,200 of the eligibility guidelines and, therefore, could have been selected for standard verification as part of the sample by the district; however, we determined that they were not selected or verified. The remaining 7 of 9 households stated annualized incomes that fell below $1,200 of the eligibility guidelines and thus would not have been subject to standard verification. For example, one household we reviewed submitted a school-meals application for the 2010-2011 school year seeking school-meals benefits for two children. The household stated an annual income of approximately $26,000 per year, and the school district appropriately certified the household to receive reduced-price-meal benefits based on the information on the application. However, we reviewed payroll records and determined that the adult applicant's income at the time of the application was approximately $52,000--making the household ineligible for benefits. This household also applied for and received reduced-meal benefits for the 2011-2012 and 2012-2013 school years by understating its income. Its 2012-2013 annualized income was understated by about $45,000. Because the income stated on the application during these school years was not within $1,200 per year of the income-eligibility requirements, the application was not deemed error-prone and was not subject to standard verification. Had this application been subjected to verification, a valid pay stub would have indicated the household was ineligible. One method to identify potentially ineligible applicants and effectively enforce program-eligibility requirements is by independently verifying income information with an external source, such as state payroll data. States or school districts, through data matching, could identify households that have income greater than the eligibility limits and follow up further. Such a risk-based approach would allow school districts to focus on potentially ineligible families while not interrupting program access to other participants. Electronic verification of a sample of applicants (beyond those that are statutorily defined as error-prone) through computer matching by school districts or state agencies with other sources of information--such as state income databases or public- assistance databases--could help effectively identify potentially ineligible applicants. In May 2014, we recommended that USDA develop and assess a pilot program to explore the feasibility of computer matching school-meal participants with other sources of household income, such as state income databases, to identify potentially ineligible households--those with income exceeding program-eligibility thresholds--for verification. We also recommended that, if the pilot program shows promise in identifying ineligible households, the agency should develop a legislative proposal to expand the statutorily defined verification process to include this independent electronic verification for a sample of all school-meals applications. USDA concurred with our recommendations and told us in January 2015 that direct-verification computer matching is technologically feasible with data from means-tested programs, and that data from SNAP and other programs are suitable for school-meals program verification in many states. USDA said that FNS would explore the feasibility of using other income-reporting systems for program verification without negatively affecting program access for eligible students or violating statutory requirements. Depending on the results of the pilot program, USDA said that FNS would consider submitting a legislative proposal to expand the statutorily defined verification process, as we recommended. In May 2014, we found that ineligible households may be receiving free school-meals benefits by submitting applications that falsely state that a household member is categorically eligible for the program due to participating in certain public-assistance programs--such as SNAP--or meeting an approved designation--such as foster child or homeless. Of the 25 civilian federal-employee household applications we reviewed, 6 were approved for free school-meals benefits based on categorical eligibility. We found that 2 of the 6 were not eligible for free or reduced- price meals and 1 was not eligible for free meals, although that household may have been eligible for reduced-price meals. For example, one household applied for benefits during the 2010-2011 school year--providing a public-assistance benefit number--and was approved for free-meal benefits. However, when we verified the information with the state, we learned that the number was for medical- assistance benefits--a program that is not included in categorical eligibility for the school-meals programs. On the basis of our review of payroll records, this household's annualized income of at least $59,000 during 2010 would not have qualified the household for free or reduced- price-meal benefits. This household applied for school-meals benefits during the 2011-2012 and 2012-2013 school years, again indicating the same public-assistance benefit number--and was approved for free-meal benefits. Figure 1 shows the results of our review. Because applications that indicate categorical eligibility are generally not subject to standard verification, these ineligible households would likely not be identified unless they were selected for for-cause verification or as part of the administrative review process, even though they contained inaccurate information. These cases underscore the potential benefits that could be realized by verifying beneficiaries with categorical eligibility. In May 2014, we recommended that USDA explore the feasibility of verifying the eligibility of a sample of applications that indicate categorical eligibility for program benefits and are therefore not subject to standard verification. USDA concurred with this recommendation and told us in January 2015 that FNS would explore technological solutions to assess state and local agency capacity to verify eligibility of a sample of applications that indicate categorical eligibility for school-meals-program benefits. In addition, USDA said that FNS would clarify to states and local agencies the procedures for confirming and verifying the application's status as categorically eligible, including for those who reapply after being denied program benefits as a result of verification. Chairman Roberts, Ranking Member Stabenow, and Members of the Committee, this concludes my prepared remarks. I look forward to answering any questions that you may have at this time. For further information on this testimony, please contact Stephen Lord 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 testimony include Jessica Lucas-Judy, Assistant Director; Marcus Corbin; Ranya Elias; Gabrielle Fagan; Colin Fallon; Kathryn Larin; Olivia Lopez; Maria McMullen; and Daniel Silva. 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 fiscal year 2014, 30.4 million children participated in the National School Lunch Program and 13.6 million children participated in the School Breakfast Program, partly funded by $15.1 billion from USDA. In May 2014, GAO issued a report on (1) steps taken to help identify and prevent ineligible beneficiaries from receiving benefits in school-meal programs and (2) opportunities to strengthen USDA's oversight of the programs. This testimony summarizes GAO's May 2014 report ( GAO-14-262 ) and January 2015 updates from USDA. For the May 2014 report, GAO reviewed federal school-meals program policies, interviewed program officials, and randomly selected a nongeneralizable sample that included 25 approved applications from civilian federal-employee households out of 7.7 million total approved applications in 25 of 1,520 school districts in the Dallas, Texas, and Washington, D.C., regions. GAO performed limited eligibility testing using civilian federal-employee payroll data from 2010 through 2013 due to the unavailability of other data sources containing nonfederal-employee income. GAO also conducted interviews with households. GAO referred potentially ineligible households to the USDA Inspector General. In its 2014 report, GAO recommended that USDA explore the feasibility of (1) using computer matching to identify households with income that exceeds program-eligibility thresholds for verification and (2) verifying a sample of categorically eligible households. USDA generally agreed with the recommendations and has actions under way to address them. In May 2014, GAO reported that the U.S. Department of Agriculture (USDA) had taken several steps to implement or enhance controls to identify and prevent ineligible beneficiaries from receiving school-meals benefits. For example: USDA worked with Congress to develop legislation to automatically enroll students who receive Supplemental Nutritional Assistance Program benefits for free school meals; this program has a more-detailed certification process than the school-meals program. Starting in the 2013-2014 school year, USDA increased the frequency with which state agencies complete administrative reviews of school districts from every 5 years to every 3 years. As part of this process, state agencies review applications to determine whether eligibility determinations were correctly made. In its May 2014 report, GAO identified opportunities to strengthen oversight of the school-meals programs while ensuring legitimate access, such as the following: If feasible, computer matching income data from external sources with participant information could help identify households whose income exceeds eligibility thresholds. As of May 2014, school districts verified a sample of approved applications deemed "error-prone"--statutorily defined as those with reported income within $1,200 of the annual eligibility guidelines--to determine whether the household is receiving the correct level of benefits (referred to as standard verification in this testimony). In a nongeneralizable review of 25 approved applications from civilian federal households, GAO found that 9 of 19 households that self-reported household income and size information were ineligible and only 2 could have been subject to standard verification. Verifying a sample of categorically eligible applications could help identify ineligible households. GAO reported that school-meal applicants who indicate categorical eligibility (that is, participating in certain public-assistance programs or meeting an approved designation, such as foster children) were eligible for free meals and were generally not subject to standard verification. In a nongeneralizable review of 25 approved applications, 6 households indicated categorical eligibility, but GAO found 2 were ineligible.
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SSA's disability programs provide cash benefits to people with long-term disabilities. The DI program provides monthly cash benefits and Medicare eligibility to severely disabled workers; SSI is an income assistance program for blind and disabled people. The law defines disability for both programs as the inability to engage in substantial gainful activity because of a severe physical or mental impairment that is expected to last at least 1 year or result in death. Both DI and SSI are administered by SSA and state disability determination services (DDS). SSA field offices determine whether applicants meet the nonmedical criteria for eligibility and at the DDSs, a disability examiner and a medical consultant (physician or psychologist) make the initial determination of whether the applicant meets the definition of disability. Denied claimants may ask the DDS to reconsider its finding and, if denied again, may appeal to an ALJ within SSA's Office of Hearings and Appeals (OHA). The ALJ usually conducts a hearing at which applicants and medical or vocational experts may testify and submit new evidence. Applicants whose appeals are denied may request review by SSA's Appeals Council and may further appeal the Council's decision in federal court. Between fiscal years 1986 and 1996, the increasing number of appealed cases has caused workload pressures and processing delays. During that time, appealed cases increased more than 120 percent. In the last 3 years alone, average processing time for appealed cases rose from 305 days in fiscal year 1994 to 378 days in fiscal year 1996 and remained essentially the same for the first quarter of fiscal year 1997. In addition, "aged" cases (those taking 270 days or more for a decision) increased from 32 percent to almost 43 percent of the backlog. In addition to the backlog, high ALJ allowances (in effect, "reversals" of DDS decisions to deny benefits) have been a subject of concern for many years. Although the current ALJ allowance rate has dropped from 75 percent in fiscal year 1994, ALJs still allow about two-thirds of all disability claims they decide. Because chances for award at the appeals level are so favorable, there is an incentive for claimants to appeal. For several years, about three-quarters of all claimants denied at the DDS reconsideration level have appealed their claims to the ALJ level. In 1994, SSA adopted a long-term plan to redesign the disability decision-making process to improve its efficiency and timeliness. As a key part of this plan, SSA developed initiatives to achieve similar decisions on similar cases regardless of whether the decisions are made at the DDS or the ALJ level. In July 1996, several of these initiatives, called "process unification," were approved for implementation by SSA's Commissioner. SSA expects that process unification will result in correct decisions being made at the earliest point possible, substantially reducing the proportion of appealed cases and ALJ allowance rates as well. Because SSA expects that implementation of its redesigned disability decision-making process will not be completed until after the year 2000, SSA developed a Short Term Disability Project Plan (STDP) to reduce the existing backlog by introducing new procedures and reallocating staff. STDP is designed to expedite processing of claims in a way that will support redesign and achieve some near-term results in reducing the backlog. SSA expects that STDP's major effect will come primarily from two initiatives--regional screening unit and prehearing conferencing activities. In the screening units, DDS staff and OHA attorneys work together to identify claims that could be allowed earlier in the appeals process. Prehearing conferencing shortens processing time for appealed cases by assigning OHA attorneys to perform limited case development and review cases to identify those that could potentially be allowed without a formal hearing. The plan called for reducing the backlog to 375,000 appealed cases by December 31, 1996. Despite SSA attempts to reduce the backlog through its STDP initiatives, the agency did not reach its goal of reducing this backlog to 375,000 by December 1996. SSA attributes its difficulties in meeting its backlog target to start-up delays, overly optimistic projections of the number of appealed cases that would be processed, and an unexpected increase in the number of appealed cases. The actual backlog in December was about 486,000 cases and has risen in the last few months to 491,000 cases, still about 116,000 over the goal. Although SSA did not reach its backlog goal, about 98,000 more cases may have been added to the backlog if STDP steps had not been undertaken. The contribution made by STDP underscores the need for SSA to continue its short-term effort while moving ahead to address the disability determination process in a more fundamental way in the long term. In addition to the backlog problem, SSA's decision-making process has produced a high degree of inconsistency between DDS and ALJ awards, as shown in table 1. Although award rates representing DDS decision-making vary by impairment, ALJ award rates are high regardless of the type of impairment. For example, sample data showed that DDS award rates ranged from 11 percent for back impairments to 54 percent for mental retardation. In contrast, ALJ award rates averaged 77 percent for all impairment types with only a smaller amount of variation among impairment types. SSA's process requires adjudicators to use a five-step sequential evaluation process in making their disability decisions (see table 2). Although this process provides a standard approach to decision-making, determining disability often requires that a number of complex judgments be made by adjudicators at both the DDS and ALJ levels. Social Security Disability: SSA Actions to Reduce Backlogs and Achieve More Consistent Decisions Deserve High Priority Questions asked in the sequential process Is the claimant engaging in substantial gainful activity? Does the claimant have an impairment that has more than a minimal effect on the claimant's ability to perform basic work tasks and is expected to last at least 12 months? Do the medical facts alone show that the claimant's impairment meets or equals the medical criteria for an impairment in SSA's Listing of Impairments? Comparing the claimant's residual functional capacity with the physical and mental demands of the claimant's past work, can the claimant perform his or her past work? Based on the claimant's residual functional capacity and any limitations that may be imposed by the claimant's age, education, and skill level, can the claimant do work other than his or her past work? As the application proceeds through the five-step process, claimants may be denied benefits at any step, ending the process. Steps 1 and 2 ask questions about the claimant's work activity and the severity of the claimant's impairment. If the reported impairment is judged to be severe, adjudicators move to step 3. At this step, they compare the claimant's condition with a listing of medical impairments developed by SSA. Claimants whose conditions meet or are medically equivalent to the listings are presumed by SSA to be unable to work and are awarded benefits. Claimants whose conditions do not meet or equal the listings are then assessed at steps 4 and 5, where decisions must be made about the claimant's ability to perform prior work and any other work that exists in the national economy. To do this, adjudicators assess the claimant's capacity to function in the workplace. evidence, including physician opinions and reported symptoms, such as pain. Mental impairment assessments include judgments about the claimant's ability to understand, remember, and respond appropriately to supervision and normal work pressures. For physical impairments, adjudicators judge the claimant's ability to walk, sit, stand, and lift. To facilitate this, SSA has defined five levels of physical exertion ranging from very heavy to sedentary. However, for those claimants unable to perform even sedentary activities, adjudicators may determine that a claimant can perform "less than a full range of sedentary" activities, a classification that often results in a benefit award. Our analysis found that differing functional assessments by DDSs and ALJs are the primary reason for most ALJ awards. Since most DDS decisions use all five steps of the sequential evaluation process before denying a claim, almost all DDS denial decisions appealed to ALJs included such a functional assessment. On appeal, the ALJ also follows the same sequential evaluation process as the DDS and also assesses the claimant's functional abilities in most awards they make. Data from SSA's ongoing ALJ study indicate that ALJs are much more likely than DDSs to find that claimants have severe limitations in functioning in the workplace (see table 3). contrast, reviewers using the DDS approach found that less than 6 percent of the cases merited this classification. Functional assessment also played a key role in a 1982 SSA study, which controlled for differences in evidence. This study indicated that DDS and ALJ decisionmakers reached different results even when presented with the same evidence. As part of the study, selected cases were reviewed by two groups of reviewers--one group reviewing the cases as ALJs would and the other reviewing the cases as DDSs would. Reviewers using the ALJ approach concluded that 48 percent of the cases should have received awards, while reviewers using the DDS approach concluded that only 13 percent of those same cases should have received awards. The use of medical expertise appears to influence the decisional differences at the DDS and ALJ levels. At the DDS level, medical consultants are responsible for making functional assessments. In contrast, ALJs have the sole authority to determine functional capacity and often rely on claimant testimony and the opinions of treating physicians. Although ALJs may call on independent medical experts to testify, our analysis shows that they do so in only 8 percent of the cases resulting in awards. To help reduce inconsistency, SSA issued nine rulings on July 2, 1996, which were written to address pain and other subjective symptoms, treating source opinions, and assessing functional capacity. SSA also plans to issue a regulation to provide additional guidance on assessing functional capacity at both the DDS and ALJ levels, specifically clarifying when a "less than sedentary" classification is appropriate. In addition, based on the nine rulings, SSA completed nationwide process unification training of over 15,000 adjudicators and quality reviewers between July 10, 1996, and February 26, 1997. In the training, SSA emphasized that it expects the "less than sedentary" classification would be used rarely. In the longer term, SSA plans to develop a simplified decision-making process, which will expand the role of functional capacity assessments. Because differences in functional capacity assessments are the primary reason for inconsistent decisions, SSA should proceed cautiously with its plan to expand the use of such assessments. Procedures at the DDS and ALJ levels limit the usefulness of the DDS decision as a foundation for the ALJ decision. Often, ALJs are unable to rely on DDS decisions because they lack supporting evidence and explanations of the reasons for denial, laying a weak foundation for the ALJ decision if the case is appealed. Moreover, although SSA requires ALJs to consider the DDS medical consultant's assessment of functional capacity, procedures at the DDS level do not ensure that such assessments are clearly explained. In a 1994 study, SSA found that written explanations of critical issues at the DDS level were inadequate in about half of the appealed cases that turned on complex issues. Without a clear explanation of the DDS decision, the ALJ could neither effectively consider it nor give it much weight. At the ALJ level, claimants are allowed to claim new impairments and submit new or additional evidence, which also affects consistency between the two levels. Moreover, in about 10 percent of cases appealed to the ALJ level, claimants switch their primary impairment from a physical claim to a mental claim. In addition, data from a 1994 SSA study show that claimants submit additional evidence to the ALJ in about three-quarters of the sampled cases and that additional evidence was an important factor in 27 percent of ALJ allowances. To address the documentation issues, SSA plans to take steps to ensure that DDS decisions are better explained and are based on a more complete record so that they are more useful if appealed. On the basis of feedback during the process unification training, SSA plans further instructions and training in May 1997 for the DDSs on how and where in the case files they should explain how they reached their decisions. SSA also plans to issue a regulation clarifying the weight given to the DDS medical consultants' opinions at the ALJ level. To deal with the potential effect of new evidence, SSA plans to return to the DDSs about 100,000 selected cases a year for further consideration when new evidence is introduced at the ALJ level. In cases where the DDS would award benefits, the need for a more time-consuming and costly ALJ decision would be avoided. SSA plans to implement this project in May 1997. Moreover, SSA's decision to limit such returns to about 100,000 cases may need to be reassessed in light of the potential benefits that could accrue from this initiative. Although SSA has several quality review systems to examine disability decisions, none is designed to identify and reconcile factors that contribute to differences between DDS and ALJ decisions. For example, although ALJs are required to consider the opinion of the DDS medical consultant when making their own assessment of a claimant's functional capacity, such written DDS opinions are often lacking in the case files. Quality reviews at the DDS level do not focus effectively on whether or how well these opinions are explained in the record, despite the potential importance of such medical opinion evidence at the ALJ level. Moreover, SSA reviews too few ALJ awards to ensure that ALJs give appropriate consideration to the medical consultants' opinions or to identify means to make them more useful to the ALJs. Feedback on these issues could help improve consistency by making the DDS decision a more useful part of the overall adjudication process. To improve consistency, SSA is completing work on a notice of proposed rulemaking, with a target issue date of August 1997 for a final regulation, to establish the basis for reviewing ALJ awards, which would require ALJs to take corrective action on remand orders from the Appeals Council before benefits are paid. SSA has just started conducting preliminary reviews of ALJ awards, beginning with 200 cases a month. After the regulation is issued, they plan to increase the number of cases per month. SSA has set a first-year target of 10,000 cases to be reviewed, but this reflects only about 3 percent of approximately 350,000 award decisions made by ALJs in 1996. Ultimately, SSA plans to implement quality review measures to provide consistent feedback on the application of policy. By doing this, the agency hopes to ensure that the correct decision is made at the earliest point in the process. 18 who are likely to improve and for all low-birthweight babies within the first year of life. In addition, SSA is required to redetermine, using adult criteria, the eligibility of all 18-year-olds on SSI beginning on their 18th birthdays and to readjudicate 332,000 childhood disability cases by August 1997. Finally, thousands of noncitizens and drug addicts and alcoholics could appeal their benefit terminations, further increasing workload pressures. Despite SSA's Short Term Disability Project Plan, the appealed case backlog is still high. Nevertheless, because the backlog would have been even higher without STDP, SSA will need to continue its effort to reduce the backlog to a manageable level until the agency, as a part of its long-term redesign effort, institutes a permanent process to ensure timely and expeditious disposition of appeals. In addition, SSA is beginning to move ahead with more systemwide changes in its redesign of the disability claims process. In particular, it is on the verge of implementing initiatives to redesign the process, including ones for improving decisional consistency and the timeliness of overall claims processing. However, competing workload demands could jeopardize SSA's ability to make progress in reducing inconsistent decisions. We urge the agency to follow through on its initiatives to address the long-standing problem of decisional inconsistency with the sustained attention required for this difficult task. To do so, SSA, in consultation with this Subcommittee and others, will need to sort through its many priorities and do a better job of holding itself accountable for meeting its deadlines. Otherwise, plans and target dates will remain elusive goals and may never yield the dual benefits of helping to restore public confidence in the decision-making process and contributing to permanent reductions in backlog. Mr. Chairman, this concludes my prepared statement. At this time, I will be happy to answer any questions you or the other Subcommittee members may have. For more information on this testimony, please call Cynthia Bascetta, Assistant Director, at (202) 512-7207. Other major contributors are William Hutchinson, Senior Evaluator; Carol Dawn Petersen, Senior Economist; and David Fiske, Ellen Habenicht, and Carlos Evora, Senior Evaluators. Appealed Disability Claims: Despite SSA's Efforts, It Will Not Reach Backlog Reduction Goal (GAO/HEHS-97-28, Nov. 21, 1996). Social Security Disability: Backlog Reduction Efforts Under Way; Significant Challenges Remain (GAO/HEHS-96-87, July 11, 1996). Social Security Disability: Management Action and Program Redesign Needed to Address Long-Standing Problems (GAO/T-HEHS-95-233, Aug. 3, 1995). Disability Insurance: Broader Management Focus Needed to Better Control Caseload (GAO/T-HEHS-95-233, May 23, 1995). Social Security: Federal Disability Programs Face Major Issues (GAO/T-HEHS-95-97, Mar. 2, 1995). Social Security Disability: SSA Quality Assurance Improvements Can Produce More Accurate Payments (GAO/HEHS-94-107, June 3, 1994). Social Security: Most of Gender Difference Explained (GAO/HEHS-94-94, May 27, 1994). Social Security: Disability Rolls Keep Growing, While Explanations Remain Elusive (GAO/HEHS-94-34, Feb. 8, 1994). Social Security: Increasing Number of Disability Claims and Deteriorating Service (GAO/HRD-94-11, Nov. 10, 1993). Social Security: Rising Disability Rolls Raise Questions That Must Be Answered (GAO/T-HRD-93-15, Apr. 22, 1993). Social Security Disability: Growing Funding and Administrative Problems (GAO/T-HRD-92-28, Apr. 27, 1992). Social Security: Racial Difference in Disability Decisions Warrants Further Investigation (GAO/HRD-92-56, Apr. 21, 1992). Social Security: Results of Required Reviews of Administrative Law Judge Decisions (GAO/HRD-89-48BR, June 13, 1989). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed the Social Security Administration's (SSA) actions to reduce the current backlog of cases appealed to the agency's administrative law judges, focusing on: (1) how functional assessments, differences in procedures, and quality review contribute to inconsistent results between different decisionmakers; and (2) SSA'a strategy to obtain greater decisional consistency. GAO noted that: (1) GAO's work shows that while SSA has developed broad-based plans to improve the management of its disability programs, many initiatives are just beginning and their effectiveness can be assessed only after a period of full-scale implementation; (2) for example, in the short term, SSA has taken action to try to deal with the backlog crisis, but it is still about 116,000 cases over its December 1996 goal of 375,000 cases; (3) in the longer term, SSA needs to come to grips with the systemic factors causing inconsistent decisions, which underlie the current high level of appealed cases and, in turn, the backlog crisis; (4) for example, GAO found that differences in assessments of functional capacity, different procedures, and weaknesses in quality reviews contribute to inconsistent decisions; and (5) although SSA is on the verge of implementing initiatives to deal with these factors, GAO is concerned that other congressionally mandated workload pressures, such as significantly increasing the number of continuing disability reviews and readjudicating childhood cases, could jeopardize the agency's ability to move ahead with its initiatives to reduce inconsistent decisions.
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For the 2020 Census, the Bureau intends to limit its per-household cost to not more than that of the 2010 Census, adjusted for inflation. To achieve this goal, the Bureau is significantly changing how it conducts the census, in part by re-engineering key census-taking methods and infrastructure. The Bureau's innovations include (1) using the Internet as a self-response option; (2) verifying most housing unit addresses using "in-office" procedures rather than costly field canvassing; (3) in certain instances, replacing enumerator-collected data with administrative records (information already provided to federal and state governments as they administer other programs) and, (4) re-engineering field data collection methods. The Bureau's various initiatives have the potential to make major contributions toward limiting cost increases. In October 2015, the Bureau estimated that with its new approach it can conduct the 2020 Census for a life-cycle cost of $12.5 billion, $5.2 billion less than if it were to repeat the design and methods of the 2010 Census (both in constant 2020 dollars). Table 1 below shows the Bureau's estimated cost savings it hopes to achieve in 4 innovation areas. Sufficient testing, while important to the success of any census, is even more critical for the Bureau's preparations for 2020. To help control costs and maintain accuracy, the 2020 Census design includes new procedures and technology that have not been used extensively in earlier decennials, if at all. While these innovations show promise for a more cost-effective head count, they also introduce new risks. As we have noted in our prior work, it will be important to thoroughly test the operations planned for 2020 to ensure they will (1) produce needed cost savings, (2) function in concert with other census operations, and (3) work at the scale needed for the national head count. The Bureau's failure to fully test some key operations prior to the 2010 Census was a key factor that led us to designate that decennial as one of our high-risk areas. The 2016 test was the latest major test of NRFU in the Bureau's testing program. In 2014, the Bureau tested new methods for conducting NRFU in the Maryland and Washington, D.C., area. In 2015, the Bureau assessed NRFU operations in Maricopa County, Arizona. In 2018, the Bureau plans to conduct a final "End-to-End" Test which is essentially a dress rehearsal for the actual decennial. The Bureau needs to finalize the census design by the end of fiscal year 2017 so that key activities can be included in the End-to-End Test. The Bureau plans to conduct additional research and testing through 2018 in order to further refine the design of the 2020 Census but recently decided to alter its approach. On October 18, 2016, the Bureau announced plans to stop two field test operations planned for fiscal year 2017 to mitigate risks from funding uncertainty. The Bureau said it would stop all planned field activity, including local outreach and hiring, at its test sites in Puerto Rico, North and South Dakota, and Washington State. The Bureau will not carry out planned field tests of its mail out strategy and NRFU in Puerto Rico. The Bureau also cancelled plans to update its address list in the Indians lands and surrounding areas in the three states. However, the Bureau said it will continue with other planned testing in fiscal year 2017, such as that focusing on systems readiness and internet response. Further, the Bureau said it would consider incorporating the stopped field activity elements within the 2018 End-to-End Test. The Bureau maintains that stopping the 2017 Field Test will help prioritize readiness for the 2018 End-to-End Test, and mitigate risk. Nevertheless, as we noted in our November 2016 testimony, it represents a lost opportunity to test, refine, and integrate operations and systems, and puts more pressure on the 2018 End-to-End Test to demonstrate that enumeration activities will function as needed for 2020. NRFU generally proceeded according to the Bureau's operational plans. For example, the Bureau demonstrated procedures for quality assurance and training. On the other hand, according to preliminary 2016 Census Test data, there were 19,721 NRFU cases coded as non-interviews in Harris County, Texas and 14,026 in L.A. County, California, or about 30 and 20 percent of the test workload respectively. According to the Bureau, non-interviews are cases where no data or insufficient data were collected, either because enumerators made six attempted visits without success (the maximum number the Bureau allowed), or visits were not completed due to, for example, language barriers or dangerous situations. In such cases for the 2020 Census, the Bureau may have to impute attributes of the household based on the demographic characteristics of surrounding housing units as well as administrative records. According to Bureau officials, they are not certain why there were so many non-interviews for the 2016 Census Test and are researching potential causes. Bureau officials told us that they expect higher numbers of non-interviews during tests in part, because, compared to the actual enumeration the Bureau conducts less outreach and promotion. While the 2016 Census Test interview rate is not necessarily a precursor to the 2020 non-interview rate, because of its relationship to the cost and quality of the census, it will be important for the Bureau to better understand the factors contributing to it. Bureau officials hypothesized that another contributing factor could be related to NRFU methods used in the 2016 Census Test compared to earlier decennials. For the 2010 and prior censuses, enumerators collected information during NRFU using pencil and paper. Enumerators may have visited a housing unit more than the six maximum allowable visits to obtain an interview but did not record all of their attempts, thus enabling them to achieve a higher completion rate. For the 2020 Census, and as tested in 2016, the Bureau plans to collect data using mobile devices leased from a contractor, and an automated case management system to manage each household visit (see figure 1). The Bureau believes that this approach will provide a faster, more accurate, and more secure means of data collection. Unlike previous censuses and one prior test, enumerators in the 2016 Census Test did not have an assigned set of cases that they alone would work until completion. Instead, the Bureau relied on an enhanced operational control system that was designed to provide daily assignments and street routing of NRFU cases to enumerators in the most optimal and efficient way. At the same time, the mobile device and automated case management system did not allow an enumerator to attempt to visit a housing unit more than once per day, reopen a closed case, or exceed the maximum allowable six attempts. One factor we observed that may have contributed to the non-interview rate was that enumerators did not seem to uniformly understand or follow procedures for completing interviews with proxy respondents (a proxy is someone who is a non-household member, at least 15 years old, and knowledgeable about the NRFU address). According to the 2016 Census Test enumerator training manual, when an eligible respondent at the address cannot be located, the automated case management system on the mobile device will prompt the enumerator when to find a proxy to interview, such as when no one is home or the housing unit appears vacant. In such circumstances, enumerators are to find a neighbor or landlord to interview. However, in the course of our site visits, we observed that enumerators did not always follow these procedures. For example, we observed that one enumerator, when prompted to find a proxy, looked to the left and then right and, finding no one, closed the case. Similarly, another enumerator ignored the prompt to find a proxy and explained that neighbors are usually not responsive or willing to provide information about the neighbor and did not seek to find a proxy. Enumerators we interviewed did not seem to understand the importance of obtaining a successful proxy interview and many appeared to have received little encouragement during training to put in effort to find a proxy. Proxy data for occupied households are important to the success of the census because the alternative is a non-interview. In 2010 about one- fourth of the NRFU interviews for occupied housing units were conducted using proxy data. We shared our observations with Bureau officials who told us that they are aware that enumerator training for proxies needs to be revised to convey the importance of collecting proxy data when necessary. Converting non-interviews by collecting respondent or proxy data can improve interview completion rates, and ultimately the quality of census data. The Bureau told us it will continue to refine procedures for 2020. According to the Bureau, its plans to automate the assignment of NRFU cases have the potential to deliver significant efficiency gains. At the same time, improving certain enumeration procedures and communicating better could produce additional efficiencies by enabling the Bureau to be more responsive to situations enumerators encounter in the course of their follow-up work. Enumerators were unable to access recently closed incomplete cases. Under current procedures, if an enumerator is unable to make contact with a household member, the case management system closes that case to be reattempted at a later date, perhaps by a different enumerator; assuming fewer than six attempts have been made. Decisions on when re-attempts will be made--and by whom--are automated and not designed to be responsive to the immediate circumstances on the ground. This is in contrast to earlier decennials when enumerators, using paper-based data collection procedures, had discretion and control over when to re-attempt cases in the area where they were working. According to the Bureau, leaving cases open for re- attempts can undermine the efficiency gains of automation when enumerators depart significantly from their optimized route, circling back needlessly to previously attempted cases rather than progressing through their scheduled workload. During our test site observations, however, we found how this approach could lead to inefficiencies in certain circumstances. For example, we observed enumerators start their NRFU visits in the early afternoon as scheduled, when many people are out working or are otherwise away. If no one answered the door, those cases were closed for the day and reassigned later. However, if a household member returned while the enumerator was still around, the enumerator could not reopen the case and attempt an interview. We saw this happen at both test site locations, typically in apartment buildings or at apartment-style gated communities, where enumerators had clear visibility of a large number of housing units and could easily see people arriving home. Bureau officials acknowledged that closing cases in this fashion represented a missed opportunity and plan to test greater flexibilities as part of the 2018 End-to-End Test. Programming some flexibility into the mobile device--if accompanied with adequate training on how and when to use it--should permit some interviews to be completed without having to deploy staff to the same case on subsequent days. This in turn could reduce the cost of follow-up attempts and improve interview completion rates. Enumerators did not understand procedures for visits to property managers. Property managers are a key source of information on non- respondents when enumerators cannot find people at home. They can also facilitate access to locked buildings. Further, developing a rapport with property managers has helped the NRFU process, such as when repeated access to a secured building or residential complex is needed on subsequent days by different enumerators. In response to problems observed during the Bureau's 2014 and 2015 Census tests and to complaints from property managers about multiple uncoordinated visits by enumerators, the Bureau's 2016 Census Test introduced specific procedures to conduct initial visits to property managers in large multi-unit apartment buildings. The procedures sought to identify up front which, if any, units needing follow-up were vacant, eliminating the need for enumerators to collect this information from property managers with subsequent visits on a case-by-case basis. According to Bureau officials, the automated case management system was designed to allow for an enumerator to make up to three visits to property managers to remove vacant units. According to the Bureau, the 2016 Census Test demonstrated that vacant units could quickly be removed from the NRFU workload using these procedures in cases where a property manager was readily available; however, in other cases the procedures caused confusion. For example, whenever an initial visit was unsuccessful, all of the cases at that location--up until then collated into only one summary row of the enumerator's on-screen case list--would suddenly expand and appear as individual cases to be worked, sometimes adding several screens and dozens of cases to the length of the list, which the enumerators we spoke with found confusing. Furthermore, without the knowledge of which units were vacant, enumerators may have unnecessarily visited these units and increased the cost and the time required to complete NRFU. During debriefing sessions the Bureau held, enumerators and their supervisors identified training in these procedures as an area they felt needed greater attention in the future. Bureau officials said that they are pleased that the test demonstrated their progress in automating case management at multi-unit locations, but at the same time, they recognize the need to better refine the initial property manager contact procedures and integrate multi-unit procedures into the training. During our field visits, we encountered several instances where enumerators had been told by a respondent or otherwise learned that returning at a specific time on a later date would improve their chance of obtaining an interview from either a household respondent or a property manager. According to the Bureau, while there was a mechanism for capturing and using this information, it was not uniformly available to the enumerators, nor did the enumerators always use the mechanism when appropriate. As a result, the Bureau's 2016 Census Test and automated case management system did not have an efficient way to leverage that information. Attempting to contact non-responding households at times respondents are expected to be available can increase the completion rate and reduce the need to return at a later date or rely on proxy interviews as a source of information. The Bureau's automated case management system used estimated hour- by-hour probabilities for the best time to contact people when making enumerator assignments. The estimation relied on various administrative records, information from other Bureau surveys that had successful contacts in the past, as well as area characteristics. The 2016 Census Test did not have a way to change or update these estimates when cases were subsequently reassigned. The assigned time windows were intended to result in more productive visits and reduce costs. When enumerators identified potentially better times to attempt a contact, they were instructed to key this information into their mobile devices. For example, one enumerator keyed in a mother's request to come back Thursday afternoon when her kids were in camp, while others keyed in information like office hours and telephone contact numbers obtained from signs on the property they had seen for property managers. However, according to the Bureau this updated information went unused, and we met enumerators who had been assigned to enumerate addresses at the same unproductive time after they had written notes documenting other better times to visit. Another enumerator reported visiting a property manager who complained that the enumerator was not honoring the manager's earlier request made during a prior enumeration attempt that an enumerator return during a specified time window. Such repeat visits can waste enumerator time (and miles driven), and contribute to respondent burden or reduced data quality when respondents become annoyed and may become less cooperative. We discussed our preliminary observation with Bureau managers at the test sites, who expressed frustration that the automated case management system did not allow them to use the locally-obtained data on when to contact people whom they found in enumerator notes in a way to affect future case assignment. Headquarters staff told us that while they have not fully evaluated this yet, they are concerned that providing local managers with too much flexibility to override the results of optimized case and time assignments would undermine the efficiency gains achievable by the automation. They also explained that enumerators were provided the capability to record what day or what time of day for follow-up. This information could have been used by the automated case management system to better target the timing of future assignments. However, they acknowledged that this procedure may not have been explained during enumerator training. Reviewing the enumerator training manual, we confirmed that there were no procedures to allow enumerators to systematically record what day or what time of day to follow-up at a housing unit. Bureau officials have said that this is another area they are looking into and plan to address. The key innovations the Bureau plans for 2020 show promise for controlling costs and maintaining accuracy, although there are significant risks involved. The Bureau is aware of these risks, and robust testing can help manage them by assessing the feasibility of key activities, their capacity to deliver desired outcomes, and their ability to work in concert with one another under operational conditions. Going forward, to help ensure a cost-effective enumeration, it will be important for the Bureau to improve its NRFU procedures by addressing the challenges identified during the 2016 Test, updating related training materials as needed, and completing these efforts in time to be included in the Bureau's End-to-End Test scheduled for 2018. The challenges we observed include (1) reducing high non-interview rates, (2) difficulty accessing recently closed, incomplete cases, (3) the need to improve coordination with managers of multi-unit properties, and (4) the need to better leverage operational information collected by enumerators. Resolving these issues should help the Bureau improve its ability to collect quality data and reduce the cost of unnecessary follow-up visits during NRFU. We recommend that the Secretary of Commerce and Under Secretary for Economic Affairs direct the Census Bureau to take the following actions: 1. Determine the cause(s) for non-interviews experienced during the non-response follow-up operation and revise and test what, if any, changes need to be made to operational procedures, training, or both, including making contact with proxy respondents. 2. Revise and test operational procedures for accessing incomplete closed cases and revise and test training material to reflect when this flexibility to access incomplete closed cases should be used by the enumerator. 3. Revise and test operational procedures and relevant training materials for initial property manager visits to ensure procedures and training material are communicated to and understood by enumerators and their supervisors. 4. Revise and test procedures on how to better leverage enumerator- collected information on the best time or day to conduct interviews, and ensure enumerators are properly trained on these procedures. We provided a draft of this report to the Secretary of the Department of Commerce for comment. In its written comments, reproduced in appendix I, the Department of Commerce agreed with our findings and recommendations. The Census Bureau also provided technical comments that we incorporated, as appropriate. We are sending copies of this report to the Secretary of Commerce, the Counselor to the Secretary with Delegated Duties of the Undersecretary of Commerce for Economic Affairs, the Director of the U.S. Census Bureau, and interested congressional committees. The report also will be available at no charge on our website at http://www.gao.gov. If you have any questions about this report please contact me at (202) 512-2757 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. The GAO staff that made major contributions to this report are listed in appendix II. Robert Goldenkoff, (202) 512-2757 or [email protected]. In addition to the contact named above, Lisa Pearson, Assistant Director; Mark Abraham, Shea Bader, Richard Hung, Donna Miller, Ty Mitchell, Cynthia Saunders; A.J. Stephens, and Timothy Wexler made significant contributions to this report.
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With a life-cycle cost of about $12.3 billion, the 2010 Census was the most expensive enumeration in U.S. history. To help control costs and maintain accuracy, the 2020 Census design includes new procedures and technology that have not been used extensively in earlier decennials, if at all. While these innovations show promise for a more cost-effective head count, they also introduce risks. As a result, it will be important to thoroughly test the operations planned for 2020. The objective of this report is to assess key NRFU operations performed during the 2016 Census Test to identify any lessons learned that could have a potential impact on pending design decisions for the 2020 Census. To assess NRFU operations GAO visited both test locations and observed enumerators conducting NRFU interviews, and reviewed relevant documents including the test plan and enumerator training manuals. The Census Bureau (Bureau) recently completed its 2016 Census Test in Los Angeles County, California, and Harris County, Texas. One primary focus of the test was to assess the methodology for non-response follow-up (NRFU), where enumerators personally visit households that do not self-respond to the census. GAO found that during the 2016 Census Test, NRFU generally proceeded according to the Bureau's operational plan. However, data at both test sites indicate that the Bureau experienced a large number of non-interviews. Non-interviews are cases where either no data or insufficient data are collected. Bureau officials are not certain why there were so many non-interviews for the 2016 Census Test and are researching potential causes. Going forward, it will be important for the Bureau to better understand the factors that contributed to the non-interview rate because of its relationship to the cost and quality of the census. GAO also found that refining certain enumeration procedures and training enumerators better could produce additional efficiencies by enabling the Bureau to be more responsive to situations enumerators encounter on the ground. For example, enumerators, by design, were unable to access on the mobile device recently closed, incomplete cases. Bureau officials acknowledged that closing cases in this fashion represented a missed opportunity and plan to test greater flexibilities as part of the 2018 End-to-End Test. Programming some flexibility into the mobile device--if accompanied with adequate training on how and when to use it--should permit enumerators to complete some interviews and reduce the cost of follow-up attempts. Further, enumerators did not always understand procedures for visiting property managers in multi-unit buildings. Specifically, the 2016 Census Test demonstrated that vacant units could quickly be removed from the NRFU workload where a property manager was readily available to provide that information; however, in other cases the procedures confused enumerators and they did not understand how to proceed. Without the knowledge of which units were vacant, enumerators may have unnecessarily visited some vacant units and thereby increased the cost of NRFU. During GAO's field visits, GAO encountered several instances where enumerators learned that returning at a specific time on a later date would improve their chance of obtaining an interview from either a household respondent or a property manager. However, the Bureau's 2016 Census Test and automated case management system did not have an efficient way to leverage that information. Attempting contact at non-responding households at times respondents are expected to be available increases the completion rate and reduces the need to return. GAO recommends the Secretary of Commerce direct the Bureau to: (1) determine causes for non-interviews, and revise and test what, if any, changes need to be made to operational procedures and training; (2) revise and test procedures and training on accessing closed cases, (3) revise and test procedures and training for initial property manager visits; and (4) revise and test procedures and training for how to use enumerator-collected data on the best time or day to conduct an interview. The Department of Commerce agreed with GAO's recommendations, and the Bureau provided technical comments that were incorporated, as appropriate.
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NARA's mission is to safeguard and preserve the records of the U.S. government, ensuring that the people can discover, use, and learn from this documentary heritage. In this way, NARA is to ensure continuing access to the essential documentation of the rights of American citizens and the actions of their government. In carrying out this mission, NARA (among other things) is to provide guidance and assistance to federal officials on the management of records; determine the retention and disposition of records; store agency records in federal records centers from which agencies can retrieve them; receive, preserve, and make available permanently valuable federal and presidential records in archives; and centrally file and publish federal laws and administrative regulations, the President's official orders, and the structure, functions, and activities of federal agencies through the daily Federal Register. Table 1 summarizes NARA's organizations, their missions, and the levels of staff in each (expressed as full-time equivalent--FTE). NARA's Agency Services group includes the Federal Records Centers Program, with approximately 1,100 FTE. The placement of this program within the larger NARA organization is depicted in figure 1. In carrying out its responsibilities to store and archive federal records under the Federal Records Act and its implementing regulations, the Federal Records Centers Program provides storage facilities for federal agencies. Specifically, chapters 21, 29, and 31 of title 44 of the United States Code, and Parts 1232 and 1234 of title 36 of the Code of Federal Regulations authorize NARA to establish, maintain, and operate records centers for federal agencies. Further, 36 C.F.R. Part 1234 Subparts B, C, and D describe facility standards related to quality, effectiveness, durability, and safety; the handling of deviations from NARA's facility standards; and facility approval and inspection requirements. These standards are applicable to all records storage facilities that federal agencies use to store, service, and dispose of records. To carry out these responsibilities, NARA developed an internal policy directive that outlines the procedures its officials should use to ensure the compliance of records storage facilities. 36 C.F.R. Part 1234 also includes provisions allowing NARA to grant waivers from meeting the standards set forth in the regulations for records storage facilities. In these instances, waivers are allowed when the storage systems, methods, or devices are demonstrated to have facility standards that are equivalent or superior to 36 C.F.R. Part 1234 standards for quality, strength, fire resistance, effectiveness, durability, and safety, among other things. Underground facilities may obtain waivers from regulatory requirements that pertain to the roofs of aboveground facilities. Agencies can request a waiver by providing: a statement identifying the 36 C.F.R. Part 1234 provision for which the waiver is requested, in addition to a description of the proposed alternative, and an explanation of how it is equivalent or superior to the NARA requirement; and supporting documentation demonstrating that the alternative does not provide less protection for federal records than what is required by the 36 C.F.R. Part 1234 standard, which may include certifications from a licensed fire protection engineer or a structural or civil engineer, as appropriate; reports of independent testing; reports of computer modeling; and/or other relevant information. According to 36 C.F.R. Part 1234, NARA is to review the waiver request and supporting documentation, and in some circumstances, consult with the appropriate industry body or qualified experts, such as a fire- suppression specialist, before making a determination. If NARA is in agreement with the proposed waiver and the supporting documentation, it is to grant the waiver and notify the requesting agency. However, if NARA evaluates the waiver request and the supporting documentation unfavorably, it is not to approve the waiver. The Federal Records Centers Program is financed through a revolving fund, which in fiscal year 2012 earned revenue totaling approximately $185 million. Revenues for the fund are generated from the fees that NARA charges federal agencies for storing, servicing, and ultimately disposing of temporary federal records on their behalf, based on a standard fee schedule. NARA develops the fees annually for the upcoming fiscal year. In November 2011, a presidential memorandum on managing government records was issued to the heads of executive departments and agencies. The purpose of the memorandum was to begin an executive branch-wide effort to reform records management policies and practices and to develop a 21st-century framework for the management of government records. Specifically, the memorandum stated, among other things, that all agencies were required to designate a Senior Agency Official to oversee a review of their records management program. The Senior Agency Official would be responsible for coordinating with the Agency Records Officer and appropriate agency officials to ensure the agency's compliance with records management statues and regulations. In January 2012 and March 2012, NARA's Inspector General reported on one of NARA's federal records centers, the Washington National Records For example, the Center, and found that it had numerous weaknesses.Inspector General reported that formalized procedures were not in place to properly track and resolve problems with records received, stored, or removed from the center; documented procedures did not exist for many of the center's operations; and periodic inventories of the records held at the center were not conducted. In order to address the weaknesses cited above, the Inspector General made recommendations, which included developing a problem resolution process and mechanism for tracking all problems at the center until they are resolved, ensuring a formal tracking mechanism is implemented for new records received, and ensuring a systematic and repeatable process is in place to perform periodic inventories of the records held at the Washington National Records Center. NARA concurred with these recommendations and began taking actions to address them. Specifically, the Archivist ordered all federal records centers operated by NARA to assess their operations during a 1-day stand down. In addition, NARA officials stated that they established a Washington National Records Center oversight group to ensure that the center leadership participated in plans, actions, and results related to resolving record storage issues. However, as of May 2013, NARA was in the process of addressing the recommendations. Federal agencies are to store records in three types of facilities: federal records centers that are managed by NARA, agency records centers, and commercial records storage facilities. Each of these types of facilities is authorized by 36 C.F.R. Part 1234, which also requires agencies to notify NARA when they use agency records centers or commercial facilities to store federal records. While NARA is aware of the extent to which agencies use the federal records centers that it manages, its awareness of the extent to which agencies' use their own and commercial records storage facilities is incomplete. As of May 2013, NARA manages 18 federal records centers located across the United States. These centers consist of a total of 24 facilities where records are actually stored. Each facility includes storage areas, which NARA refers to as bays. (According to NARA, the typical bay is approximately the size of a football field.) Collectively, the facilities provide a total of 162 bays that are used by approximately 200 entities. Table 2 provides a listing of NARA's federal records centers and their related facilities, and the number of bays at each facility. In addition to the federal records centers that NARA operates, agencies also are authorized to establish and operate their own centers for storing records. As of May 2013, NARA had identified 18 records centers that were being operated by six federal agencies or offices: the Department of Energy, the Department of Veterans Affairs, the Federal Bureau of Investigation, the National Geospatial-Intelligence Agency, the National Reconnaissance Office, and the Transportation Security Administration's Office of Law Enforcement - Federal Marshal Records Center. These agencies varied in the number of storage facilities that they operated-- ranging from 7 at the Federal Bureau of Investigation to 1 facility at each of three other agencies (the Department of Veterans Affairs, the National Reconnaissance Office, and the Transportation Security Administration's Office of Law Enforcement). Table 3 identifies the number of records storage facilities operated by each of the agencies. Federal agencies are also authorized to use private sector commercial facilities for records storage, retrieval, and disposition. As of May 2013, agencies reported to NARA that 22 such facilities, operated by 12 vendors, are under contract with and provide storage services for 11 federal agencies or entities. These federal agencies or offices are the Bureau of Public Debt, Centers for Medicare and Medicaid Services, Commodities Futures Trading Commission, Department of Veterans Affairs, Environmental Protection Agency, Federal Aviation Administration, Federal Energy Regulatory Commission, Federal Public Defender, Naval Sea Systems Command, United States Customs and Border Protection, and the United States International Trade Commission. Table 4 identifies each vendor and their facilities that provide records storage services to federal agencies. To determine whether all agencies were storing their records in one of the three types of allowable facilities, NARA collected data and compiled a database of agencies and the records storage facilities that they use. Specifically, in 2008, NARA officials sent letters to agencies' records managers that asked them to provide a list of all records storage facilities used. Subsequently, NARA sought to obtain information about where agencies were storing their records by sending follow-up letters and by including a question regarding the storage of federal records in a voluntary annual survey of agencies' records management practices. However, the database was unreliable because it did not include complete, current, and valid data. Specifically, NARA's database of agencies' records storage facilities included a reporting status for about 260 agencies, but did not have a date associated for when 47 of these agencies reported. Additionally, the data were derived primarily from information agencies submitted to NARA in 2008 and 2009, thereby rendering it outdated. Also, the self-reported nature of agencies' data raised questions about the validity of the data they provided. NARA officials responsible for determining where agencies store records acknowledged that the data about agencies' and the records storage facilities they use are incomplete, outdated, and of questionable validity. The officials attributed this situation to agencies' not reporting data to NARA because they were unfamiliar with the 36 C.F.R. Part 1234 requirement to notify NARA when they use agency records centers or commercial facilities to store federal records, as well as NARA having insufficient staff to ensure that all agencies report the required data, keep the data current, and verify the data agencies provide. NARA officials responsible for communicating records storage requirements to agencies stated that the Senior Agency Officials for records could provide NARA with points of contact that can help identify all the facilities where agencies store their records. Nevertheless, until NARA ensures that it has complete, current, and valid data on agencies' records storage facilities, it cannot be certain that agencies are using one of the three types of authorized facilities. In carrying out its responsibilities to store and archive federal records, Title 44 of the United States Code authorizes NARA to establish, maintain, and operate records centers for federal agencies; approve agency records centers; and promulgate standards, procedures, and guidelines to federal agencies with respect to the storage of their records in commercial records storage facilities. Regulations implementing the statute, at 36 C.F.R. Part 1234, specify the minimum structural, environmental, property, and life-safety standards that a records storage facility must meet when the facility is used for the storage of federal records. For example, facilities must be designed in accordance with the applicable national, regional, state, or local building codes to provide protection from building collapse or failure of essential equipment. Further, a floor load limit must be established for the records storage area by a licensed structural engineer, and the facility must be 5 feet above and 100 feet from any 100-year flood plain areas, or be protected by an appropriate flood wall that conforms to local or regional building codes. In addition, NARA's Review of Records Storage Facilities policy directive outlines the procedures for NARA to ensure records centers comply with 36 C.F.R. Part 1234 specifications. Specifically, the directive requires NARA to conduct inspections of its federal records centers and agencies' records centers to validate those facilities as compliant. In addition, 36 C.F.R. Part 1234 requires that agencies ensure that their own or NARA officials have the right to inspect commercial records storage facilities for compliance with the facility requirements. If a commercial facility fails an inspection, federal agencies that store records at the facility are required to bring the facility into compliance with the standards within 6 months or to transfer their documents to a compliant facility within 18 months. Standard practices in program management call for documenting the scope of a project as well as milestones and time frames for timely completion and implementation of repairs or transfers to ensure results are achieved. NARA conducted inspections of 23 of its 24 federal records center facilities from February 2005 through January 2013 and determined that 20 of the facilities were compliant with 36 C.F.R. Part 1234. It also determined that 2 facilities were partially compliant because they included at least 1 storage bay that did not satisfy the regulation. Specifically, NARA found that 2 of the 16 bays at the Lenexa, Kansas facility and 6 of the 17 bays at the Lee's Summit, Missouri facility were noncompliant because they included shelves that were determined to be too weak to meet the load requirements for records storage shelving and racking systems. Further, it found that all 7 bays at the San Francisco, California records center were noncompliant because, contrary to the regulation, there were pipes (other than sprinkler pipes) that ran through the records storage areas which lacked supplemental protective measures such as The remaining facility consisting of 1 bay at the Anchorage, drip pans.Alaska center was not inspected; however, NARA had considered the facility to be noncompliant and had planned to relocate the records being stored there. Table 5 summarizes the compliance status of each federal records center facility. As of July 2013, NARA indicated that it had plans to address the deficiencies at the noncompliant federal records centers, although it had not established schedules for doing so at the San Francisco and Anchorage facilities. For example, to correct the shelving at the Lenexa and Lee's Summit facilities, NARA had plans to contract for a detailed inspection of the existing shelving, prepare a report identifying necessary repairs, and then conduct the repairs and/or replacement of the noncompliant shelves. It expected to award a contract for this work in August 2013 and to complete the work within the following 6 months. In addition, NARA officials responsible for facility compliance had developed a plan for corrective actions at the San Francisco facility. This plan calls for the installation of water sensing cables and protective drip pans and guttering to provide supplemental protection of pipes that run through records storage areas. However, the plan does not include a schedule for completing these tasks consistent with standard practices for program management. NARA officials responsible for facility compliance attributed the lack of a schedule to uncertainty about the availability of funding and personnel resources to execute the plan. Further, NARA facility managers developed plans to replace the existing Anchorage, Alaska facility with a newly constructed facility. However, NARA did not have a schedule for completing the construction because it had not secured funding to construct the new facility. While NARA has stated that it plans to bring all of its federal records center facilities into compliance with applicable regulations, the agency has not established a schedule for doing so at all facilities. Thus, although NARA has determined that the vast majority of the space (i.e., bays) in which its facilities store records is fully compliant with applicable standards, NARA has not established a basis for tracking and reporting progress toward resolving deficiencies at all of its facilities that do not yet fully meet the standards. Agencies must obtain approval from NARA to store federal records at their own or a commercial records storage facility and, to do so, must provide documentation to show that the facility satisfies the requirements After a facility is approved, agencies are able to of 36 C.F.R. Part 1234.store federal records at the facility and an inspection may be conducted to ensure that the facility meets the requirements of the standard. According to NARA officials responsible for determining facility compliance, inspections have been an important means of determining whether facilities are in fact compliant with the requirements. NARA has approved 10 of the 18 agency facilities that agencies have reported using. According to NARA officials, the remaining 8 centers were not approved because the agencies that operate them did not provide NARA with sufficient documentation to support approval. NARA has approved all 22 identified commercial facilities. However, of the 10 approved agency records centers, 1 had been inspected; and of the 22 approved commercial facilities, 13 had been inspected (1 inspection was deemed unfavorable and the facility was removed from the approved list). For the 9 agency records centers and 10 commercial facilities that had not been inspected, NARA provided a schedule for doing so. According to this schedule, NARA plans to inspect 4 facilities per fiscal year from fiscal years 2014 through 2017, with the remaining 3 facilities scheduled for inspection in fiscal year 2018. For the commercial facilities, NARA had scheduled all 10 of the remaining facilities, with the last of these inspections planned in fiscal year 2017. Until all facilities are inspected, NARA cannot be reasonably assured that agencies are storing federal records in facilities that comply with standards, thus increasing the risk that these records will be damaged. In keeping with NARA's mission to safeguard and preserve the records of the U.S. government, the agency has a process in place to handle incidents in which records could potentially become damaged at its federal records centers. In particular, NARA requires its federal records centers to follow the Emergency First Response for NARA Records checklist to facilitate the protection of federal records from further impact and/or permanent damage when an incident occurs. As part of the agency's 1561 directive, the checklist requires (1) notification and immediate actions, such as notifying management; (2) an initial response, including steps to take if water damage occurs; and (3) damaged records response operations, including the requirement to document NARA's immediate response to incidents in an after-action report and a general requirement to provide a report after completing follow-up activities. Additionally, internal control standards specify, among other things, the need for significant events to be clearly documented. In addition to the checklist requirements, NARA's Chief Operating Officer told us about specific steps NARA is to take when boxes of records get wet. For example, based on the volume of records that are involved and available resources, boxes are to be air dried and stored in an onsite freezer or in freezer trucks to minimize the growth of mold and prevent or reduce potential damage to records. Boxes of records are then to be individually removed, treated, and dried, or sent to a contractor that can freeze dry various types of records. NARA is also to use in-house restoration services, such as industrial fans, for incidents that are considered minor. For major incidents (where affected records are not expected to be available to the agency that owns them for more than 48 hours), NARA's process indicates that it will work with a contractor for drying services. NARA generally followed its process to prevent damage to records when incidents occurred. Documentation that we reviewed for 55 incidents that NARA reported as occurring from January 2009 through March 2013 indicated that the agency had taken steps consistent with its Emergency First Response for NARA Records checklist. For example, NARA provided documentation of steps taken to handle incidents at the Washington National Records Center and at the National Personnel Records Center in Valmeyer, Illinois from March 2011 through August 2012. Specifically, at the Washington National Records Center: A roof leak incident in March 2011 impacted 47 cubic feet of records stored at the center. According to NARA's documentation, 2 cubic feet of records were placed on drying racks and dried, 3 cubic feet of records were reboxed, and the remaining records were air dried in their original boxes. During another roof leak at the center in May 2011, a large number of boxes of records became wet. NARA staff noted the locations of the leaks, notified management, and took steps to address the incident. The staff initiated triage efforts to relocate the records to another area to determine how the incident had affected the records. While some records were air dried, those that were substantially wet were placed in a freezer truck. After the records were held in the freezer truck for several days, NARA reassessed them, and removed and reboxed records that had dried. The remaining 252 cubic feet of wet records were freeze dried at an offsite facility. NARA documented the actions it took to address the wet records and the center director notified the affected agencies. A roof leak that occurred at the center in June 2011 affected 7 cubic feet of records. NARA documented the actions it took, noting that 5 cubic feet of records were reboxed, and the remaining records were air dried. Another roof leak later that month resulted in a large number of boxes of records becoming wet. NARA staff noted the locations in which the leaks occurred, notified management, and took actions to address the records involved in the incident. The staff initiated triage efforts to relocate the records to another area and determine the level of severity for the affected records. Records that could be dried with minimal effort were removed from boxes and placed on pallets to begin the air-drying process onsite. Records that were found to be substantially wet were placed in a freezer truck. After the records were held in the freezer truck for several days, NARA reassessed them and determined that some of the records had dried. While the dry records were removed from the freezer truck and reboxed, 414 cubic feet of records were freeze dried at an offsite facility. NARA documented the actions it took to address the wet records and the center director notified the affected agencies. In addition, at the National Personnel Records Center (Valmeyer): A sprinkler leak in August 2012 affected 27 cubic feet of records. Five of the 27 cubic feet of records were determined to not be wet and 18 cubic feet of records were removed from the location and dried. The remaining 4 cubic feet of records were reboxed. While NARA has taken steps to minimize damage to records, the agency has not tracked the results of its efforts in all cases. For example, of the 55 incidents, NARA provided documentation that verified that the actions it took in responding to 46 incidents resulted in no permanent damage to records. For the remaining 9 incidents, officials stated that NARA's actions prevented permanent damage to records; however, the agency could not provide documentation that would allow us to verify this assertion. For example, NARA could not provide documentation that described the results of its efforts to prevent permanent damage to 6 cubic feet of records that became wet due to faulty floor and roof drains at the Chicago Federal Records Center in June 2011. A contributing factor is that while the NARA 1561 checklist provides generally defined requirements for final reporting, it does not require the federal records centers to document the results of the actions they have taken to prevent permanent damage to records that were at risk. As a result, NARA is not positioned to fully report on the effectiveness and outcome of its actions to minimize damage to records and does not have an institutional record that a third party can use to validate the results of its efforts. The Treasury and General Government Appropriations Act, 2000, established a Records Centers Revolving Fund to pay for expenses and equipment necessary to provide storage and related services for federal records. Accordingly, the Federal Records Centers Program and NARA's Office of the Chief Financial Officer are responsible for annually developing the fees charged to agencies for records storage and related services. These fees are to be developed for the upcoming fiscal year using the current fiscal year fee schedule, expense projections, and workload projections for NARA's records centers. In determining the fees, it is to consider costs associated with full operation of the records storage facilities, taking into consideration expenses, such as reserves for accrued annual leave, worker's compensation, depreciation of capitalized equipment and shelving, and amortization of IT software and systems. Annually, all federal records centers are required to submit expense and workload projections to the Federal Records Centers Program headquarters operation. The expense and workload projections are used to develop budget and revenue projections, which are then used as the basis to develop rates for the upcoming fiscal year. Factors such as inflation, customer impact, the frequency of rate change, and competitiveness with the private sector are then considered when developing new rates. The fees developed for the upcoming fiscal year are approved by the Director of the Federal Records Centers Program, Executive for Agency Services, Chief Financial Officer, and Chief Operating Officer before receiving final approval from the Archivist. According to NARA officials responsible for managing the Federal Records Centers Program, the newly developed fees are then used at all federal records centers for the upcoming fiscal year. Storage fees charged by NARA in fiscal year 2013 were comparable to fees charged by commercial vendors on the GSA schedule in that same time frame. Specifically, of the 12 commercial vendors that provided storage services for 11 federal agencies, 5 had price lists that were posted on GSA's Federal Acquisition Service webpage. Table 6 provides a comparison of storage fees for NARA and these 5 commercial vendors for fiscal year 2013. As shown in the table, NARA's fee of $0.23 per cubic foot was consistent regardless of the storage quantity. Specifically, NARA's fee was higher than fees charged by vendors 1 and 2, although its fees were lower than those of vendors 3 and 5. In addition, NARA's fees were lower than those of vendor 4 if storing less than 100,000 cubic feet and higher if storing 100,000 or more cubic feet. NARA also did not charge additional fees that certain vendors charged. Specifically, vendors 1, 3, and 4 applied a $65, $25, and $100 fee, respectively, to a customer's account when the storage charges did not meet the customer's contractual minimum storage requirement. In addition, vendor 4 charged an administration fee of $25.12 or $62.80 per account, respectively, for summary or detailed billing. Although federal regulations call for records to be stored in one of three types of facilities--NARA-operated federal records centers, agency records centers, or commercial records storage facilities--the extent to which agency and commercial facilities are used to store records is uncertain because NARA does not know where all agencies store their records. NARA's efforts to collect data from agencies about the facilities they use to store records have yielded data that are incomplete, outdated, and of questionable validity. NARA has determined that most of its federal records center facilities are fully compliant with the standards established in regulations, but that four facilities are partially or entirely noncompliant--a situation that increases the risk of damage to the records stored in the facilities. Although it has plans for bringing these four facilities into full compliance with the regulations, NARA has not established dates for completing its plans at two of the facilities. As a result, NARA does not have a basis for determining progress toward correcting deficiencies in those facilities that do not fully meet the standards Additionally, although NARA has taken steps to prevent permanent damage to records in their facilities on a total of 55 occasions over a recent 4-year time period, the federal records centers did not always keep track of the results of their efforts and were unable to provide documentation confirming they were successful in 9 cases. Therefore, NARA is not positioned to fully report on the effectiveness of its actions to minimize permanent damage to federal records. To assist NARA in its responsibility to ensure that federal records are stored in compliant facilities, we recommend that the Archivist of the United States direct the Chief Operating Officer to take the following three actions: Place increased priority on the collection of complete, current, and valid information from agencies about their use of agency and commercial records storage facilities. Develop a schedule for executing plans to resolve issues at each of the federal records centers that is not fully compliant with 36 C.F.R Part 1234. Clarify NARA's checklist for handling incidents that may involve permanent damage to records by including a requirement to document the results of the steps taken to minimize permanent damage to records. NARA provided written comments on a draft of this report, which are reprinted in app. II. In its comments, the agency concurred with all three of our recommendations for executive action regarding facility inspections and other areas related to safe storage of federal records. In addition, we received technical comments via email from NARA, which we have incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees; the Archivist of the United States; and other interested parties. This report also is available at no charge on the GAO website at http://www.gao.gov. Should you or your staffs have any questions on information discussed in this report, please contact me at (202) 512-6304 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Our objectives were to (1) determine the types of facilities agencies use to store federal records and the extent to which NARA's data on agencies' use of storage facilities are complete, (2) evaluate the extent to which NARA has determined these facilities to be compliant with standards in 36 C.F.R. Part 1234, (3) determine what actions NARA has taken to minimize damage to records in federal records centers and the extent to which it documents such efforts, and (4) determine how NARA determines storage fees and whether fees differ among facilities. To accomplish the first objective, we reviewed 36 C.F.R. Part 1234 and developed a thorough understanding of the regulation through discussions with NARA officials who are responsible for administering it. We then obtained lists of NARA, agency, and commercial records storage facilities from NARA. These lists included NARA's central registry of approved facilities. We corroborated the lists by comparing them with other documentation such as facility approval memoranda and inspection schedules, as well as through interviews with agency officials. Additionally, we obtained NARA's database of agencies' records storage facilities and discussed NARA's methods for populating the database with responsible NARA officials. We determined the database to be unreliable because it was incomplete, outdated, and largely reliant on self-reported data from agencies. For the second objective, we obtained and reviewed memoranda from NARA that indicated approval of NARA, agency, and commercial records storage facilities and the facilities' compliance with 36 C.F.R. Part 1234. We then used additional documentation, including detailed facility inspection checklists, fire inspection reports, and structural engineering reports to determine the existence of support for NARA's approval determinations. We also discussed NARA's method for approving and inspecting facilities, in addition to plans for conducting future facility inspections with the officials who are responsible for performing the inspections. To accomplish the third objective, we reviewed NARA policies and procedures for the storage and management of federal records and compared them with applicable internal control standards. We also reviewed procedures for handling records damage in NARA records centers and documentation relative to records emergency planning and training. We collected and analyzed documentation on 55 incidents that occurred at NARA records centers from January 2009 through March 2013, including reports that described NARA's actions to mitigate or reduce records damage. We also compared requirements in NARA's 1561 checklist to the documentation described above. Further, we interviewed NARA officials to determine the actions taken to minimize records damage in federal records centers and corroborated the officials' statements with aforementioned documentation. To accomplish the fourth objective, we obtained and analyzed documentation from the NARA Federal Records Centers Program and General Services Administration (GSA) schedules that identified and discussed records storage fees and then compared fees among records storage facilities. To determine the reliability of the data provided from NARA, we performed basic steps to ensure the data provided were valid, and reviewed relevant information describing the data. We reviewed documentation related to the data sources, including NARA's fiscal year 2013 fee schedule, fee determination process description documents, and workload and expense projections. Although we could not independently verify the reliability of all this information, we compared the data with other available supporting documents to determine data consistency and reasonableness. We also obtained price lists from GSA's website for commercial vendors that listed facilities that are compliant with 36 C.F.R. Part 1234. We did not determine whether individual agencies had negotiated lower prices than those listed in the price lists. We compared storage fees for NARA and commercial vendors by extracting fee data from NARA's fee schedule and commercial vendor price lists. For our comparison, we reviewed the publicly available price lists for five commercial vendors (referred to as vendors 1-5 in our analysis). Four of the five vendors' price lists charged storage fees based on cubic feet of storage per month and the fifth vendor charged based on the number of boxes stored. In order to directly compare fees established by NARA and the five vendors, we converted boxes to cubic feet for vendor 5. Storage fees were then arranged in order from lowest to highest. We supplemented our analyses with interviews of NARA officials who are knowledgeable about the Federal Records Centers Program, including NARA's Chief Operating Officer, the program director, and assistant director. We also interviewed representatives of private sector record storage companies that were relevant to our study. We conducted this performance audit from November 2012 to September 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact name above, the following staff also made key contributions to this report: Mark Bird, Assistant Director; Sharhonda Deloach; Elena Epps; Rebecca Eyler; Jacqueline Mai; and Constantine Papanastasiou.
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NARA manages the Federal Records Centers Program, which is to ensure the storage and preservation of federal records, including paper, photographic, audio, video, and film. Records storage facilities are required to meet certain minimum structural, environmental, property, and life safety standards set forth in federal regulations. GAO was requested to conduct a study of key aspects of the program. GAO's objectives were to (1) determine the types of facilities agencies use to store federal records and the extent to which NARA's data on agencies' use of storage facilities are complete, (2) evaluate the extent to which NARA has determined these facilities to be compliant with standards in 36 C.F.R. Part 1234, (3) determine what actions NARA has taken to minimize damage to records in federal records centers and the extent to which it documents such efforts, and (4) determine how NARA determines storage fees and whether fees differ among facilities. To do so, GAO obtained, analyzed, and corroborated documentation on records storage facilities, identified and compared records storage fees, and interviewed NARA officials. Agencies are to store federal records in three types of facilities: Federal records centers : The National Archives and Records Administration (NARA) operates 18 federal records centers that are comprised of 24 facilities (buildings) located across the United States. Each facility includes storage areas, referred to as bays. Agency records centers : Agencies also establish and operate records centers for storing their own records. As of May 2013, NARA had identified 18 agency records centers that were operated by 6 agencies or offices. Commercial records storage facilities : Agencies also use private sector commercial facilities. As of May 2013, agencies reported that 12 vendors provided 22 facilities, which were used by 11 agencies. These facilities notwithstanding, NARA does not know where all agencies are storing records. NARA has solicited data from agencies about their use of agency records centers and commercial records storage facilities, but not all agencies have submitted data. Further, the data agencies submitted--mostly from 2008 and 2009--are now outdated. As a result, NARA cannot be assured that all agencies are using one of the three types of authorized facilities. NARA determined that 20 of its 24 federal records center facilities were fully compliant with 36 C.F.R. Part 1234 because all of their bays satisfied the regulation; of the remaining 4, 2 facilities with inadequate shelving were partially compliant, 1 facility with insufficient protections against pipe leaks was not compliant, and the remaining facility was to be replaced. As of July 2013, NARA had plans to bring these 4 facilities into full compliance, but did not have a schedule for completing the plans at 2 of the facilities. As a result, NARA does not have a basis for determining progress toward correcting deficiencies in those facilities that do not yet fully meet the standards. Also, while NARA had approved 10 agency records centers and 22 commercial records storage facilities, it has inspected 1 of 18 agency records centers and 13 commercial records storage facilities. Until NARA completes planned inspections of all remaining facilities, it cannot be reasonably assured that agencies are storing records in facilities that meet standards. To facilitate the protection of federal records from permanent damage, NARA had generally taken steps consistent with a checklist it requires federal records centers to follow when incidents (e.g., roof or sprinkler leaks) occur. However, it did not always document the results of its efforts to minimize damage because the checklist does not include a step for doing so. Specifically, of the 55 incidents that occurred from January 2009 through March 2013, NARA provided documentation about the final outcome for 46 incidents. For the remaining 9 incidents, it could not provide documentation that included the final results of its efforts. Without a process that includes documenting the results of its efforts, NARA is not positioned to fully report on the effectiveness of its actions to minimize damage to federal records and to provide a third party with information to validate the results of its efforts. Storage fees are determined by NARA's Federal Records Centers Program and the Office of the Chief Financial Officer using the existing fee schedule, expense projections, and workload projections. The storage fees charged by NARA in fiscal year 2013 were comparable to fees charged by commercial vendors in that same time frame. For example, NARA's fee of $0.23 per cubic foot was higher than fees charged by two vendors and lower than fees charged by two other vendors. GAO recommends that NARA (1) obtain complete data on where agencies are storing records, (2) develop a schedule to bring noncompliant storage areas into compliance with 36 C.F.R. Part 1234, and (3) establish a requirement to document the results of efforts to minimize damage to federal records. NARA concurred with the recommendations.
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The National Park System is one of the most visible symbols of who we are as a land and a people. As the manager of this system, the National Park Service is caretaker of many of the nation's most precious natural and cultural resources, ranging from the fragile ecosystems of Arches National Park in Utah to the historic structures of Philadelphia's Independence Hall and the granite faces of Mount Rushmore in South Dakota. Over the past 30 years, more than a dozen major studies of the National Park System by independent experts as well as the Park Service itself have pointed out the importance of guiding resource management through the systematic collection of data--sound scientific knowledge. The recurring theme in these studies has been that to manage parks effectively, managers need information that allows for the detection and mitigation of threats and damaging changes to resources. Scientific data can inform managers, in objective and measurable terms, of the current condition and trends of park resources. Furthermore, the data allow managers to make resource management decisions based on measurable indicators rather than relying on judgment or general impressions. Managing with scientific data involves both collecting baseline data about resources and monitoring their condition over time. Park Service policy calls for managing parks on this basis, and park officials have told us that without such information, damage to key resources may go undetected until it is so obvious that correcting the problem is extremely expensive--or worse yet, impossible. Without sufficient information depicting the condition and trends of park resources, the Park Service cannot adequately perform its mission of preserving and protecting these resources. While acknowledging the importance of obtaining information on the condition of park resources, the Park Service has made only limited progress in developing it. Our reviews have found that information about many cultural and natural resources is insufficient or absent altogether. This was particularly true for park units that feature natural resources, such as Yosemite and Glacier National Parks. I would like to talk about a few examples of the actual impact of not having information on the condition of park resources, as presented in our 1995 report. Generally, managers at culturally oriented parks, such as Antietam National Battlefield in Maryland or Hopewell Furnace National Historic Site in Pennsylvania, have a greater knowledge of their resources than managers of parks that feature natural resources. Nonetheless, the location and status of many cultural resources--especially archaeological resources--were largely unknown. For example, at Hopewell Furnace National Historic Site, an 850-acre park that depicts a portion of the nation's early industrial development, the Park Service has never conducted a complete archaeological survey, though the site has been in the park system since 1938. A park official said that without comprehensive inventory and monitoring information, it is difficult to determine whether the best management decisions about resources are being made. The situation was the same at large parks established primarily for their scenic beauty, which often have cultural resources as well. For example, at Shenandoah National Park in Virginia, managers reported that the condition of more than 90 percent of the identified sites with cultural resources was unknown. Cultural resources in this park include buildings and industrial artifacts that existed prior to the formation of the park. In our work, we found that many of these sites and structures have already been damaged, and many of the remaining structures have deteriorated into the surrounding landscape. The tragedy of not having sufficient information about the condition and trends of park resources is that when cultural resources, like those at Hopewell Furnace and Shenandoah National Park, are permanently damaged, they are lost to the nation forever. Under these circumstances, the Park Service's mission of preserving these resources for the enjoyment of future generations is seriously impaired. Compared with the situation for cultural resources, at the parks we visited that showcase natural resources, even less was known about the condition and trends that are occurring to natural resources over time. For example: -- At California's Yosemite National Park, officials told us that virtually nothing was known about the types or numbers of species inhabiting the park, including fish, birds, and such mammals as badgers, river otters, wolverines, and red foxes. -- At Montana's Glacier National Park, officials said most wildlife-monitoring efforts were limited to four species protected under the Endangered Species Act. -- At Padre Island National Seashore in Texas, officials said they lacked detailed data about such categories of wildlife as reptiles and amphibians as well as mammals such as deer and bobcats. Park managers told us that--except for certain endangered species, such as sea turtles--they had inadequate knowledge about whether the condition of wildlife was improving, declining, or staying the same. This lack of inventory and monitoring information affects not only what is known about park resources, but also the ability to assess the effect of management decisions. After 70 years of stocking nonnative fish in various lakes and waterways in Yosemite, for example, park officials realized that more harm than good had resulted. Nonnative fish outnumber native rainbow trout by a 4-to-1 margin, and the stocking reduced the numbers of at least one federally protected species (the mountain yellow-legged frog). The Park Service's lack of information on the condition of the vast array of resources it must manage becomes even more significant when one considers the fact that many known threats exist that can adversely affect these resources. Since at least 1980, the Park Service has begun to identify threats to its resources, such as air and water pollution or vandalism, and to develop approaches for dealing with them. However, our recent reviews have found that sound scientific information on the extent and severity of these threats is limited. Yet preventing or mitigating these threats and their impact is at the core of the agency's mission to preserve and protect the parks' resources. We have conducted two recent reviews of threats to the parks, examining external threats in 1994 and internal threats in 1996. Threats that originate outside of a park are termed external and include such things as off-site pollution, the sound of airplanes flying overhead, and the sight of urban encroachment. Protecting park resources from the damage resulting from external threats is difficult because these threats are, by their nature, beyond the direct control of the Park Service. Threats that originate within a park are termed internal and include such activities as heavy visitation, the impact of private inholdings within park grounds, and vandalism. In our nationwide survey of park managers, they identified more than 600 external threats, and in a narrower review at just eight park units, managers identified more than 100 internal threats. A dominant theme in both reports was that managers did not have adequate information to determine the impact of these threats and correctly identify their source. For the most part, park managers said they relied on judgment, coupled with limited scientific data, to make these determinations. For some types of damage, such as the defacement of archaeological sites, observation and judgment may provide ample information to substantiate the extent of the damage. But for many other types of damage, Park Service officials agree that observation and judgment are not enough. Scientific research will generally provide better evidence about the types and severity of damage occurring and any trends in the severity of the threats. Scientific research also generally provides a more reliable guide for mitigating threats. Two examples will help illustrate this point. In California's Redwood National Park, scientific information about resource damage is helping mitigation efforts. Scientists used research data that had been collected over a period of time to determine the extent to which damage occurring to trees, fish, and other resources could be attributed to erosion from logging and related road-building activities. On the basis of this research, the park's management is now in a position to begin reducing the threat by advising adjacent landowners on better logging and road-building techniques that will reduce erosion. The second example, from Crater Lake National Park in Oregon, shows the disadvantage of not having such information. The park did not have access to wildlife biologists or forest ecologists to conduct scientific research identifying the extent of damage occurring from logging and its related activities. For example, damage from logging, as recorded by park staff using observation and a comparison of conditions in logged and unlogged areas, has included the loss of habitat and migration corridors for wildlife. However, without scientific research, park managers are not in a sound position to negotiate with the Forest Service and the logging community to reduce the threat. The information that I have presented to you today is not new to the National Park Service. Park Service managers have long acknowledged that to improve management of the National Park System, more sound scientific information on the condition of resources and threats to those resources is needed. The Park Service has taken steps to correct the situation. For example, automated systems are in place to track illegal activities such as looting, poaching, and vandalism, and an automated system is being developed to collect data on deficiencies in preserving, collecting, and documenting cultural and natural resource museum collections. For the most part, however, relatively limited progress has been made in gathering information on the condition of resources. When asked why more progress is not being made, Park Service officials generally told us that funds are limited and competing needs must be addressed. Our 1995 study found that funding increases for the Park Service have mainly been used to accommodate upgraded compensation for park rangers and deal with additional park operating requirements, such as safety and environmental regulations. In many cases, adequate funds are not made available to the parks to cover the cost of complying with additional operating requirements, so park managers have to divert personnel and/or dollars from other activities such as resource management to meet these needs. In addition, we found that, to some extent, these funds were used to cope with a higher number of park visitors. Making more substantial progress in improving the scientific knowledge base about resources in the park system will cost money. At a time when federal agencies face tight budgets, the park system continues to grow as new units are added--37 since 1985, and the Park Service faces such pressures as higher visitation rates and an estimated $4 billion backlog of costs related to just maintaining existing park infrastructures such as roads, trails, and visitor facilities. Dealing with these challenges calls for the Park Service, the administration, and the Congress to make difficult choices involving how national parks are funded and managed. Given today's tight fiscal climate and the unlikelihood of substantially increased federal appropriations, our work has shown that the choices for addressing these conditions involve (1) increasing the amount of financial resources made available to the parks by increasing opportunities for parks to generate more revenue, (2) limiting or reducing the number of units in the park system, and (3) reducing the level of visitor services. Regardless of which, if any, of these choices is made, without an improvement in the Park Service's ability to collect the scientific data needed to properly inventory park resources and monitor their condition over time, the agency cannot adequately perform its mission of preserving and protecting the resources entrusted to it. This concludes my statement, Mr. Chairman. I would be happy to respond to any questions you or other Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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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GAO discussed its views on the National Park Service's (NPS) knowledge of the condition of the resources that the agency is entrusted to protect within the National Park System. GAO noted that: (1) GAO's work has shown that although NPS acknowledges, and its policies emphasize, the importance of managing parks on the basis of sound scientific information about resources, today such information is seriously deficient; (2) frequently, baseline information about natural and cultural resources is incomplete or nonexistent, making it difficult for park managers to have a clear knowledge about what condition the resources are in and whether the condition of those resources is deteriorating, improving, or staying the same; (3) at the same time, many of these park resources face significant threats, ranging from air pollution, to vandalism, to the development of nearby land; (4) however, even when these threats are known, NPS has limited scientific knowledge about the severity of them and their impact on affected resources; (5) these concerns are not new to NPS, and in fact, the agency has taken steps to improve the situation; (6) however, because of limited funds and other competing needs that must be completed, NPS has made relatively limited progress to correct this deficiency of information; (7) there is no doubt that it will cost money to make more substantial progress in improving the scientific knowledge base about park resources; (8) dealing with this challenge will require NPS, the administration, and the Congress to make difficult choices involving how parks are funded and managed; and (9) however, without such an improvement, NPS will be hindered in its ability to make good management decisions aimed at preserving and protecting the resources entrusted to it.
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Overall federal support for education includes not only federal funds, but also nonfederal funds associated with federal legislation. More than 30 departments or agencies administer federal education dollars, although the Department of Education administers the most, accounting for about 43 percent. Of the about $73 billion appropriated to support education, half supports elementary and secondary education. Overall, six program areas account for almost two-thirds of all budgeted education funding. Many departments and programs may target funds to the same target groups, such as poor children. Although some coordination takes place and some programs have been consolidated, much more needs to be done to coordinate the multiple education programs scattered throughout the federal government. NCES estimates federal support for education, excluding tax expenditures, as approximately $100.5 billion in fiscal year 1997. This figure is an estimate of the value of the assistance to the recipients--not the cost to the government. NCES describes this support as falling into two main categories: funds appropriated by the Congress (on-budget) and a combination of what NCES calls "off-budget" funds and nonfederal funds generated by federal legislation. Appropriated funds include items such as grants, federal matching funds, and the administration and subsidy costs for direct and guaranteed student loans. Off-budget funds are the portion of direct federal loans anticipated to be repaid. Nonfederal funds generated by federal legislation include nonfederal (generally state or local) funds provided to obtain federal matching funds and capital provided by private lenders for education loans. According to NCES, in fiscal year 1997, appropriated funds constituted approximately three- quarters of the total: $73.1 billion. To ensure that all Americans have equal access to educational opportunities, the federal government often targets its education funds to groups, such as poor children, that for various reasons have not had equal access to educational opportunities. The government may also target funds to ensure that all children have access to vital resources--such as well-trained teachers and technology. These concerns have helped disperse federal education programs to over 30 departments or agencies. The Department of Education spends the most, accounting for about 43 percent of appropriations or an estimated $31 billion in fiscal year 1997. (See fig. 2.) The Department of Health and Human Services (HHS) spends the next largest amount, with about 18 percent or an estimated $13 billion. Over half of this amount ($7.1 billion) funded research; another $4 billion funded the Head Start program. Other Departments with federal education dollars include the Departments of Agriculture, Labor, and Defense, with 13, 6, and 5 percent, respectively. The remaining 15 percent is spent by more than 30 additional departments or agencies. (A) T I (Educaon) Pll G (Educaon) (Lbo) HS) (Educaon) Elementary and secondary education programs account for half of all budgeted federal education dollars. (See fig. 5.) In addition, the federal government provides funds for postsecondary education (generally as grants and loan guarantees), research (through such Departments as HHS, Energy, and Defense, along with the National Science Foundation), and other activities such as rehabilitative services. Federal funds are generally targeted to specific groups. However, many education programs administered by separate agencies may target any single group. Although we have no comprehensive figures on the number of programs targeted to different groups, figure 6 shows the number of programs in various agencies targeted to three specific groups--young children, at-risk and delinquent youth, and teachers. Teachers (FY1993) (FY1992 & 1993) (FY1996) services. For example, in 1996, 47 federal programs provided substance abuse prevention, 20 provided substance abuse treatment, and 57 provided violence prevention. Thirteen federal departments and agencies administered these programs and received about $2.3 billion. In addition, the same department or agency administered many programs providing similar services. Justice, for example, had nine programs providing substance abuse prevention services to youth in 1996. Furthermore, many individual programs funded multiple services: about 63 percent of the programs funded four or more services each in 1996, according to our review. We also examined programs that provide teacher training. For this target group, multiple federal programs exist in a number of federal agencies. For example, the federal government funded at least 86 teacher training programs in fiscal year 1993 in nine federal agencies and offices. For the 42 programs for which data were available, Department officials reported that over $280 million was obligated in fiscal year 1993. Similarly, in fiscal years 1992 and 1993, the government funded over 90 early childhood programs in 11 federal agencies and 20 offices, according to our review. Our analysis showed that one disadvantaged child could have possibly been eligible for as many as 13 programs. Many programs, however, reported serving only a portion of their target population and maintained long waiting lists. Secretary of Education Riley testified recently before this Task Force that the Department of Education has made progress in both eliminating low-priority programs and consolidating similar programs. He noted, for example, that the reauthorization of the Individuals With Disabilities Education Act reduced the number of programs from 14 to 6. In addition, the Department has proposed eliminating or consolidating over 40 programs as part of the reauthorization of the Higher Education Act. difficulty for those trying to access the most appropriate services and funding sources. Federal programs that contribute to similar results should be closely coordinated to ensure that goals are consistent and, as appropriate, program efforts are mutually reinforcing. Uncoordinated program efforts can waste scarce funds, confuse and frustrate program customers, and limit the overall effectiveness of the federal effort. The large numbers of programs and agencies supporting education activities and target groups make management and evaluation information critical to the Congress and agency officials. Information about the federal education effort is needed by many different decisionmakers, for different reasons, at different times, and at different levels of detail. Much of that information, however, is not currently available. To efficiently and effectively operate, manage, and oversee programs and activities, agencies need reliable, timely program performance and cost information and the analytic capacity to use that information. For example, agencies need to have reliable data during their planning efforts to set realistic goals and later, as programs are being implemented, to gauge their progress toward reaching those goals. In addition, in combination with an agency's performance measurement system, a strong program evaluation capacity is needed to provide feedback on how well an agency's activities and programs contributed to reaching agency goals. Systematically evaluating a program's implementation can also provide important information about the program's success or lack thereof and suggest ways to improve it. nationwide. Finally, the Congress needs the ability to look across all programs designed to help a given target group to assess how the programs are working together and whether the overall federal effort is accomplishing a mission such as preventing substance abuse among youths. In addition, for specific oversight purposes, congressional decisionmakers sometimes want specific kinds of information. For example, this Task Force has indicated that two types of information would be particularly useful to its mission: knowing which federal education programs target which groups and knowing what characterizes successful programs. Some information is available about preK-12 programs that do not appear to be achieving the desired results and others that appear to be successful. Secretary Riley, for example, has testified that the Department will be doing more to disseminate the latest information on what works in education. Our clearest evidence about a lack of positive effect from federal expenditures comes from one of the largest programs: title I. Title I of the Elementary and Secondary Education Act is the largest federal elementary and secondary education grant program. It has received much attention recently because of an Education Department report showing that, overall, title I programs do not ultimately reduce the effect of poverty on a student's achievement. For example, children in high-poverty schools began school academically behind their peers in low-poverty schools and could not close this gap as they progressed through school. In addition, when assessed according to high academic standards, most title I students failed to exhibit the reading and mathematics skills expected for their respective grade levels. The study concluded that students in high-poverty schools were the least able to demonstrate the expected levels of academic proficiency. strategies in several areas: school violence, substance abuse prevention,and school-to-work transition. In 1995, we also prepared an overview of successful and unsuccessful practices in schools and workplaces. Our reviews identified several important program characteristics: strong program leadership, linkages between the program and the community, and a clear and comprehensive approach. The Department of Education also has contracts for evaluating what works. For example, the Prospects study--in addition to providing the data on the overall limited effect of title I--analyzed the five high- performing, high-poverty schools in its sample of 400 schools. Although the number of schools is too small for conclusive generalizations, the study described the characteristics of these schools as "food for thought" for future research on successful programs. These schools had an experienced principal; low teacher and pupil turnover; an emphasis on schoolwide efforts that seek to raise the achievement of every student; a greater use of tracking by student ability; a balanced emphasis on remedial and higher order thinking in classroom involvement; and higher parent support and expectations than low-performing, high-poverty schools. Significant information gaps exist, however, about both programs and their outcomes. Currently, no central source of information exists about all the programs providing services to the same target groups among different agencies or about those providing a similar service to several target groups. Instead, we have had to conduct the specific analyses previously described for at-risk and delinquent youth, young children, and teachers--as well as others--to obtain this information. Moreover, in our evaluations of specific programs--some of which get billions of federal dollars each year--the most basic information is lacking. For example, our study of the Safe and Drug-Free Schools Program revealed that the program has no centralized information about what specific services the funds pay for--much less whether the money is being spent effectively. In our ongoing work on Head Start, we found that no list of Head Start classrooms and their locations existed. Urban and Suburban/Rural Special Strategies for Educating Disadvantaged Children: Findings and Policy Implications of a Longitudinal Study, Department of Education (Washington, D.C.: Apr. 1997). changes and changes in the population served. We have recommended that HHS include in its research plan an assessment of the impact of regular Head Start programs. Although the Department believes that clear evidence exists of the positive impacts of Head Start services, it does have plans to evaluate the feasibility of conducting such studies. More promising, but still incomplete, is the information available for Safe and Drug-Free Schools programs. Information on effectiveness and impact has not been collected, although overall evaluations of the Safe and Drug-Free Schools program have not been completed. However, Education's evaluative activities focus on broader aspects of program implementation and not the effectiveness of all Safe and Drug-Free Schools programs nationwide. Moreover, the lack of uniform information requirements on program activities and effectiveness may create a problem for federal oversight. If (1) process information is critical for program, agency, and interagency management of federal elementary and secondary programs, and (2) outcome and impact information is needed to assess results and focus efforts on what works, why is information not readily available? The challenges to collecting that information include competing priorities--such as reducing paperwork and regulatory burden and promoting flexibility in program implementation--that restrict data collection and evaluation activities; the cost of data collection; the secondary role of education in many programs; the difficulty of obtaining impact evaluation information (under any circumstances); the special challenge to assessing overall effects on federal efforts involving multiple federal programs in multiple agencies; and until recently, a lack of focus on results and accountability. approving collections of information done by the federal government, whether through questions, surveys, or studies. This can limit the burden on state and local governments and others; however, it can also limit the amount of information collected by the Department of Education. Similarly, the challenge of balancing flexibility and accountability is apparent in efforts to provide certain federal education funds as block grants. Agencies face the challenge of balancing the flexibility block grants afford states to set priorities on the basis of local need with their own need to hold states accountable for achieving federal goals. For example, the Safe and Drug-Free Schools program allows a wide range of activities and permits states to define the information they collect on program activities and effectiveness. With no requirement that states use consistent measures, the Department faces a difficult challenge in assembling the triennial state reports to develop a nationwide picture of the program's effectiveness. One promising strategy as an alternative to traditional block grants is the use of Performance Partnership Grants (PPG). Under PPGs, the states and the federal government negotiate an arrangement that identifies specific objectives and performance measures regarding outcomes and processes. This approach gives the states more control over their funding decisions, while encouraging them to accept greater accountability for results. Obtaining and analyzing information to manage and evaluate programs requires significant resources. For example, the Department of Education's strategic plan cites the need to improve the quality of performance data on programs and operations and to promote the integration of federal programs with one another as well as with state and local programs. Towards this end, in fiscal year 1997, the Department of Education was appropriated about $400 million for educational research and improvement. Education estimates an additional $367 million was obligated by the Department for information technology for Department operations. In addition, evaluation research is costly. For example, in fiscal year 1993, the Department awarded 38 contracts totaling more than $20 million for evaluating elementary and secondary education programs. Contract amounts ranged from $38,000 to fund a program improvement conference to $6.8 million for implementing the chapter 1 longitudinal study (Prospects). But this accounted for only 1 year of this multiyear study: this longitudinal study to assess the impact of significant participation in title I programs on student and young adult outcomes cost about $25 million over a 4-year period. The median cost for an evaluation contract was about $180,000 in fiscal year 1993. In our testimony last spring on challenges facing the Department of Education, we noted that the Department needed more information to determine how its programs are working and that additional departmental resources may be needed to manage funds and provide information and technical assistance. For example, title I is intended to promote access to and equity in education for low-income students. The Congress modified the program in 1994, strengthening its accountability provisions and encouraging the concentration of funds to serve more disadvantaged children. At this time, however, the Department does not have the information it needs to determine whether the funding is being targeted as intended. Although the Department has asked for $10 million in its fiscal year 1998 budget request to evaluate the impact of title I, it has only just begun a small study of selected school districts to examine targeting to identify any necessary mid-course modifications. The ultimate impact of the 1994 program modifications could be diminished if the funding changes are not implemented as intended. Many federal programs involving education have other primary purposes. For example, the Department of Agriculture's child nutrition program provides school breakfast and school lunch programs. The Head Start program also emphasizes health and nutrition as well as parenting skills; cognitive development is only one of six program goals. In addition, Safe and Drug-Free Schools Act money can be used to provide comprehensive health education, whose major goals and objectives are broader than just drug and violence prevention. Good evaluative information about program effects is difficult to obtain. Each of the tasks involved--measuring outcomes, ensuring the consistency and quality of data collected at various sites, establishing the causal connection between outcomes and program activities, and distinguishing the influence of extraneous factors--raises formidable technical or logistical problems. Thus, evaluating program impact generally requires a planned study and, often, considerable time and expense. Program features affect the relative difficulty of getting reliable impact information. The more varied the program activities and the less direct the connection between the provider and the federal agency, the greater the difficulty of getting comparable, reliable data on clients and services. For example, a federal agency whose own employees deliver a specified service can probably obtain impact data more easily than one that administers grants that states then pass on to several local entities to be used different ways. Also, due to the absence of contrasting comparison groups, it is extremely difficult to estimate the impact of a long-standing program that covers all eligible participants. The sheer number of departments and agencies that spend federal education dollars makes it hard to aggregate existing information among federal programs for certain issues or target groups. Each program may have its own measures on the federal, state, and local levels. Even for a single program, each state may use different measures (as mentioned earlier regarding the Safe and Drug-Free Schools and Communities Act programs), creating difficult challenges to developing a nationwide picture of the program's effectiveness. Yet this is just 1 of the 127 programs administered by 15 agencies that target at-risk and delinquent youth. If the Congress wanted to know the overall effectiveness of the federal effort in helping at-risk and delinquent youth, the task would be even more daunting than that the Department of Education faces in developing a nationwide picture of one flexibly administered program. Federally funded programs have historically placed a low priority on results and accountability. Therefore, until recently, the statutory framework has not been in place to bring a more disciplined approach to federal management and to provide the Congress and agency decisionmakers with vital information for assessing the performance and costs of federal programs. In recent years, however, governments around the world, including ours, have faced a citizenry that is demanding that governments become more effective and less costly. These two demands are driving the move to a performance-based approach to managing public-sector organizations. GPRA is the centerpiece of a statutory framework provided by recent legislation to bring needed discipline to federal agencies' management activities. Other elements are the expanded Chief Financial Officers Act, the Paperwork Reduction Act of 1995, and the Clinger-Cohen Act of 1996. These laws each responded to a need for accurate, reliable information for executive branch and congressional decision-making. In combination, they provide a framework for developing (1) fully integrated information about an agency's mission and strategic priorities, (2) performance data for evaluating the achievement of these goals, (3) the relationship of information technology investments to meeting performance goals, and (4) accurate and audited financial information about the costs of meeting the goals. GPRA requires that agencies clearly define their missions, establish long-term strategic goals as well as annual goals linked to them, measure their performance according to the goals they have set, and report on their progress. In addition to ongoing performance monitoring, agencies are also expected to perform discrete evaluations of their programs and to use information obtained from these evaluations to improve their programs. Agencies are also expected to closely coordinate with other federal agencies whose programs contribute to similar results to ensure that goals are consistent and, as appropriate, that program efforts are mutually reinforcing. Each agency was required to submit to OMB and the Congress a strategic plan explaining its mission, long-term goals, and strategies for meeting these goals by September 30, 1997, and the Department of Education did so. needed to meet any unmet goals. In addition, by early 1998, OMB must submit to the Congress governmentwide performance plans based on agencies' plans as part of the president's fiscal 1999 budget. For federal education programs, this shift to a focus on results can help inform decisionmakers about effective program models and the actual activities and characteristics of individual federal programs. GPRA provides an incentive for agency and program personnel to systematically assess their programs and identify and adapt successful practices of similar programs. The act also provides an early warning system for identifying goals and objectives that are not being met so that agency and program staff can replace ineffective practices with effective ones. The act's emphasis on coordination among similar programs and linking results to funding also provides a way to better understand the overall effect of federal activities and to identify programs that might be abolished, expanded, or consolidated with others. If agencies and OMB use the annual planning process to highlight crosscutting program issues, the individual agency performance plans and the governmentwide performance plan should provide the Congress with the information needed to identify agencies and programs addressing similar missions. Once these programs are identified, the Congress can consider the associated policy, management, and performance implications of crosscutting program issues. This information should also help identify the performance and cost consequences of program fragmentation and the implications of alternative policy and service delivery options. These options, in turn, can lead to decisions about department and agency missions and allocating resources among those missions. Achieving the full potential of GPRA is a particularly difficult challenge because of the multiple programs and many departments involved in the federal effort to improve public K-12 education. Meanwhile, this challenge--combined with the current limited data available about the programs and their effectiveness--is precisely why GPRA is needed. It is also why we believe it holds promise to help improve the information available to decisionmakers and, thus, the federal effort in this important area. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or members of the Task Force may have. Managing for Results: Building on Agencies' Strategic Plans to Improve Federal Management (GAO/T-GGD/AIMD-98-29, Oct. 30, 1997). Safe and Drug-Free Schools: Balancing Accountability With State and Local Flexibility (GAO/HEHS-98-3, Oct. 10, 1997). Education Programs: Information on Major Preschool, Elementary, and Secondary Education Programs (GAO/HEHS-97-210R, Sept. 15, 1997). Education Programs: Information on Major Postsecondary Education, School-to-Work, and Youth Employment Programs (GAO/HEHS-97-212R, Sept. 15, 1997). At-Risk and Delinquent Youth: Fiscal Year 1996 Programs (GAO/HEHS-97-211R, Sept. 2, 1997). Managing for Results: Using the Results Act to Address Mission Fragmentation and Program Overlap (GAO/AIMD-97-146, Aug. 29, 1997). Substance Abuse and Violence Prevention: Multiple Youth Programs Raise Questions of Efficiency and Effectiveness (GAO/T-HEHS-97-166, June 24, 1997). The Government Performance and Results Act: 1997 Governmentwide Implementation Will Be Uneven (GAO/GGD-97-109, June 2, 1997). Head Start: Research Provides Little Information on Impact of Current Program (GAO/HEHS-97-59, Apr. 15, 1997). Department of Education: Challenges in Promoting Access and Excellence in Education (GAO/T-HEHS-97-99, Mar. 20, 1997). Schools and Workplaces: An Overview of Successful and Unsuccessful Practices (GAO/PEMD-95-28, Aug. 31, 1995). Block Grants: Issues in Designing Accountability Provisions (GAO/AIMD-95-226, Sept. 1, 1995). Multiple Teacher Training Programs: Information on Budgets, Services, and Target Groups (GAO/HEHS-95-71FS, Feb. 22, 1995). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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GAO discussed: (1) the amount and complexity of federal support for education; (2) additional planning, implementation, and evaluative information needed by agencies and the Congress on federal education programs; and (3) some of the challenges of obtaining more and better information. GAO noted that: (1) billions in federal education dollars are distributed through hundreds of programs and more than 30 agencies; (2) agencies and the Congress need information to plan, implement, and evaluate these programs; (3) to gauge and ensure the success of these programs, the Congress and agencies need several kinds of information; (4) they need to know which specific program approaches or models are most effective, the circumstances in which they are effective, and if the individual programs are working nationwide; (5) they also need to be able to look across all programs that are designed to help a given target group to see if individual programs are working efficiently together and whether the federal effort is working effectively overall; (6) GAO believes a close examination of these multiple education programs is needed; (7) the current situation has created the potential for inefficient service and reduced overall effectiveness; (8) basic information about programs and program results is lacking and there are many challenges in obtaining this important information; and (9) the Government Performance and Results Act of 1993 (GPRA) holds promise as a tool to help agencies manage for results, coordinate their efforts with other agencies, and obtain the information they need to plan and implement programs and evaluate program results.
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Among other things, FSA is responsible for implementing USDA's direct and guaranteed loan programs. FSA's county office staff administers the direct loan program and has primary decision-making authority for approving loans. As of September 30, 2001, there were about 95,000 borrowers with direct loans outstanding, with an unpaid principal balance of about $8.5 billion. FSA farm loan managers are responsible for approving and servicing these loans. The factors FSA staff consider in approving or denying a loan include the applicant's eligibility, (i.e., operates a family-size farm in the area), credit rating, cash flow, collateral, and farming experience. Once a farm loan application is complete, FSA officials have 60 days to approve or deny the application and notify the applicant in writing of the decision. Once FSA approves a direct loan, it helps borrowers develop financial plans; collects loan payments; and, when necessary, restructures delinquent debt. Direct loans are considered delinquent when a payment is 30 days past due. When a borrower's account is 90 days past due, FSA county staff formally notify him or her of the delinquency and provide an application for restructuring the loan. To be considered for loan restructuring, borrowers must complete and return an application within 60 days. FSA staff process the completed application and notify the borrowers as to whether they are eligible for loan restructuring. If a borrower does not apply or is not eligible for loan restructuring, and the loan continues to be delinquent, FSA notifies the borrower that it will take legal action to collect all the money owed on the loan (called loan acceleration). If the borrower does not take action to settle their account within a certain period of time, FSA can start foreclosure proceedings. When farmers believe that FSA has discriminated against them, they may file a discrimination complaint with USDA's OCR. For the complaint to be accepted, it must be filed in writing and signed by the complainant; be filed within 180 days of the discriminatory event; and describe the discriminatory conduct of an employee of a USDA agency or discriminatory effect of a policy, procedure, or regulation. Farmers may also seek compensation for violations of their civil rights by filing individual or class action lawsuits. In 1997, African American farmers filed a class action against USDA (Pigford v. Glickman). In 1999, this suit resulted in a multimillion-dollar settlement agreement for the farmers. Since then, women and other minority farmers have also filed class actions against USDA. To elevate the attention of civil rights matters at USDA, in the 2002 Farm Bill the Congress created the position of Assistant Secretary of Agriculture for Civil Rights. Although the average direct loan application processing time was longer for Hispanic farmers than for non-Hispanic farmers during fiscal years 2000 and 2001, over 90 percent of loan applications from Hispanic farmers (and 94 percent from non-Hispanic farmers) were processed within the agency's 60-day requirement. We also found that the direct loan approval rate for Hispanic farmers was slightly lower than for non-Hispanic farmers, 83 and 90 percent, respectively. FSA officials maintain that approval rate differences were not significant and attribute them to differences in the applicants' ability to repay the loans they requested. During fiscal year 2000 and 2001, the national average processing time for direct loans from Hispanic farmers was 20 days--4 days longer than for non-Hispanic farmers--but well within FSA's 60-day requirement. At the state level, loan processing time differences were more distinct. For example, in the four states that account for over half of all Hispanic applications, processing times for Hispanic farmers were faster than for non-Hispanic farmers in three states and slower in the fourth state. However, all times fell well within FSA's 60-day requirement. Table 1 shows the average processing times for non-Hispanic and Hispanic applications nationwide and for the four states, both fiscal years combined. The vast majority--91 percent--of all direct loan applications from Hispanic farmers were processed within FSA's 60-day requirement. However, the loan approval rate for Hispanic farmers was lower than for non-Hispanic farmers during this 2-year period--83 and 90 percent, respectively. Nonetheless, as shown in table 2, in three of the four states that received the largest number of Hispanic applications in fiscal year 2001, direct loan approval rates were similar. As part of FSA's assessment of its civil rights performance, the agency monitors differences between minority and non-minority loan processing times and approval rates at both the national and state levels. In addition, FSA sends teams out to state offices to conduct civil rights reviews. The teams review loan files to verify compliance with FSA policies and procedures and, if warranted, provide written recommendations to remedy problems identified. Up through fiscal year 2001, each state was reviewed once every 3 years; beginning in fiscal year 2002, state offices will be reviewed every other year. As shown in tables 1 and 2, Washington was the only state in our review that had both slower processing times and lower approval rates for Hispanic farmers. This disparity also surfaced during a 2001 FSA field review. Specifically, the final report noted that the time period from the completion of loan applications to the applications' approval was significantly longer for minorities in three of the four FSA service centers it reviewed. Although the review found that the state properly documented its reasons for rejecting loan applications from minority farmers, FSA recommended that the office director emphasize to staff the importance of treating prospective borrowers equally and of the need to properly document reasons for denying loan requests when there may be the appearance of disparate treatment. While FSA monitors variations in loan processing times and approval rates between minorities and non-minorities, it does not have established criteria for determining when observed variations are significant enough to warrant further inquiry. In addition, while FSA conducts periodic field reviews of state offices' performance in civil rights matters and suggests improvements, it does not require the offices to implement the recommendations and does not monitor state follow-up efforts. FSA is currently considering requiring state offices to provide information on how they addressed weaknesses noted during reviews. USDA has a policy for issuing stays of foreclosure in cases where discrimination has been alleged in individual complaints filed with OCR, but not in response to individual or class action lawsuits with similar allegations. In cases where individuals file an administrative discrimination complaint with USDA's OCR, agency policy is to automatically issue a stay of adverse action--including foreclosures--until the complaint has been resolved. During fiscal years 2000 and 2001, this policy was followed in 24 out of the 26 applicable cases involving Hispanic borrowers. The policy was not followed in the remaining two cases because of miscommunication between OCR and FSA in reconciling their respective lists of complainants. When the Farm Service Agency learned that complaints had been filed with the Office of Civil Rights, it stayed its foreclosure actions, and, as of August 2002, no further collection actions were taken against the two farmers. Although future data system improvements should alleviate this problem, OCR and FSA officials acknowledge that improvements could be made in the interim. USDA does not have a similar policy for issuing stays related to discrimination claims raised in an individual or class action lawsuit. Instead, FSA makes decisions on whether to issue stays on a case-by-case basis based on the advice of USDA's General Counsel and the Department of Justice. Since 1997, USDA has issued stays of foreclosures related to African-American and Native American farmers' class action discrimination lawsuits involving FSA loan programs. In contrast, USDA did not issue stays of foreclosure for other class action discrimination lawsuits involving FSA loan programs because the agency believes that they circumstances did not warrant a stay. These class action lawsuits and how USDA handled stays of foreclosure are discussed in greater detail below. In October 1997, African-American farmers filed a class action lawsuit against the Secretary of Agriculture (Pigford v. Glickman) alleging racial discrimination by USDA in its administration of federal farm programs. On October 9, 1998, the court certified the class--issued the criteria for class eligibility. On January 5, 1999, USDA entered into a 5-year consent decree with the claimants of the suit to settle it. The federal district court approved the consent decree and a framework for the settlement of individual claims in April of the same year. As of July 31, 2002, almost 23,000 claims had been filed under the consent decree. Of those, 21,539 were accepted for processing, and 1,146 claims were rejected based on a determination that the claimant was not a member of the class. As part of the consent decree, USDA agreed to refrain from foreclosing on real property owned by a claimant or accelerating their loan account. In November 1999, Native American farmers filed a class action lawsuit against the Secretary of Agriculture (Keepseagle v. Glickman) alleging that USDA willfully discriminated against Native American farmers and ranchers when processing applications for farm credit and farm programs. Further, claimants alleged that class members previously filed discrimination complaints with USDA and that the department failed to thoroughly investigate the complaints. In December 1999, USDA issued a notice to FSA offices informing them that they were not to accelerate or foreclose on any direct loans held by Native American borrowers before the end of 2000, unless the national office, with the concurrence of the Office of General Counsel, specifically authorized such action against an individual. As scheduled, this directive expired at the end of 2000. In October 2000, Hispanic farmers (Garcia v. Glickman) and women farmers (Love v. Glickman) each filed class action lawsuits against USDA alleging similar claims that USDA willfully discriminated against them in processing applications for farm credit and farm programs. Specifically, they alleged that loans were denied, provided late, or provided with less money than needed to adequately farm. In addition, the plaintiffs alleged that when they filed discrimination complaints about the handling of their loan applications, USDA failed to investigate them. The department has not issued stays of foreclosure in either of these lawsuits. In June 2001, USDA's Acting General Counsel wrote a memo that explained the department's reasoning for issuing stays of foreclosure in response to some class action lawsuits, but not others. The memo stated that the stay of foreclosure agreement included in the Pigford consent decree was reached only in the context of litigation and only to settle a lawsuit in which a class action had already been certified by the district court. The memo went on to say that the stay of foreclosure policy issued in response to the Keepseagle lawsuit was implemented during the infancy of the lawsuit while USDA and the Department of Justice evaluated how to proceed in defending it. In addition, the memo stated that USDA did not intend to continue a stay of foreclosure beyond the evaluation. Further, the Acting General Counsel wrote that in all three of the pending lawsuits--Keepseagle, Garcia, and Love--no adequate factual bases have been alleged to support the claim of discrimination made even by most of the named plaintiffs. As a result, the department saw no reason to implement a policy to halt foreclosures and other similar actions affecting borrowers potentially involved in these lawsuits. As of August 2002, a class has been certified for the Keepseagle lawsuit, but not for the Garcia suit. USDA has not issued any further stays of adverse action for participants in any of these lawsuits. Although USDA has not issued a stay of foreclosure for potential class members in Garcia, relatively few Hispanic farmers have been affected by this decision. According to our survey results, FSA accelerated the direct loans for almost 1,500 borrowers during fiscal years 2000 and 2001; only 41 of these borrowers were Hispanic. Six of these 41 farmers also had their loans foreclosed on by FSA during this period. In addition to these 41 borrowers, 10 other Hispanic borrowers who had their loans accelerated in prior years were foreclosed on during fiscal years 2000 and 2001. To put these figures into context, during this period, FSA foreclosed on approximately 600 borrowers, 16 (or 3 percent) of whom were Hispanic. During this period, Hispanic farmers made up about 4 percent of the agency's direct loan portfolio. FSA does not maintain historic information on accelerations or foreclosures in a manner for this information to be retrieved or analyzed readily. FSA officials acknowledged that such information is needed in light of the frequent charges of discrimination it faces. Despite implementing many improvements recommended by USDA's Inspector General and task forces, OCR has only made modest progress in its timely processing of complaints. Additional progress has been hindered because OCR has yet to address underlying, severe human capital problems. In addition, USDA's criterion for timely processing only covers a portion of the three major stages of complaint processing. OCR officials acknowledge that without time requirements that address all phases of processing, it lacks a meaningful way to measure timeliness or to identify and address problem areas and staffing needs. OCR has adopted many recommendations made in the past by USDA's Inspector General and agency task forces. For example, in 2000, a USDA task force identified 54 tasks to help address problems with the OCR's organization and staffing, database management, and complaint processing. As of July 2002, the office has fully implemented 42, or nearly 80 percent, of these recommendations and plans to complete actions on most of the others by October 2002. In addition, OCR has made some organizational modifications--such as creating separate employment and program directorates, which report under separate lines of supervision, and adding three new divisions to the current structure--Program Adjudication, Program Compliance, and Resource Management Staff. Further, from the beginning of fiscal year 2000 to the end of fiscal year 2001, OCR has made significant progress in reducing its inventory of complaints from 1,525 to 594. Despite these actions, however, OCR continues to fail to meet USDA's requirement that program complaints be processed in a timely manner. Specifically, USDA's internal requirements direct OCR to complete its investigative reports within 180 days after accepting a discrimination complaint. However, during fiscal years 2000 and 2001 it took OCR on average 365 days and 315 days, respectively, to complete its investigative reports. Furthermore, as shown in figure 1, the 180-day requirement only covers a portion of the three major stages of the entire processing cycle. Accordingly, even if the 180-day requirement was met, it could still take OCR 2 years or more to complete the processing of a complaint. In fact, when all phases of the complaint resolution are accounted for, it took OCR an average of 772 and 676 days for fiscal years 2000 and 2001, respectively, to completely process complaints through the entire complaint cycle and issue the final agency decision. OCR has made only modest progress in improving its timely processing of complaints because it has yet to address severe, underlying human capital problems. According to USDA officials, the office has had long-standing problems in obtaining and retaining staff with the right mix of skills. The retention problem is evidenced by the fact that only about two-thirds of the staff engaged in complaint processing in fiscal year 2000 was still on board 2 years later. OCR officials also pointed out that this staffing problem has been exacerbated because management and staff have been intermittently diverted from their day-to-day activities by such things as responding to requests for information from the courts. OCR officials stated that this pattern of disruption has been continuous since 1997. Furthermore, severe morale problems have exacerbated staff retention problems and have adversely affected the productivity of the remaining staff. Management officials told us that they spend an inordinate amount of time and resources addressing internal staff complaints. In fact, during fiscal years 2000 and 2001, OCR had one of the highest rates within USDA of administrative complaints filed by employees. This atmosphere has led to frequent reassignments or resignations of OCR managers and staff. According to OCR's Deputy Director of Programs, the problem has reached the point where some staff have even threatened fellow employees or sabotaged their work. Although OCR's Director believes that the situation has improved over the past few years, he acknowledges that some of the more serious morale problems have not been resolved. The purpose of USDA's direct loan program is to provide loans to farmers who are unable to obtain private commercial credit. Over the past decade, USDA has continuously been faced with allegations of discrimination in its making direct loans to farmers. To help guard against such charges, FSA needs to improve its monitoring and accountability mechanisms and make its systems and decision processes more consistent and transparent. Although FSA monitors variations in loan processing times and approval rates, it lacks criteria for determining when discrepancies warrant further inquiry. Similarly, while FSA conducts periodic reviews of its state offices' civil rights conduct and makes suggestions for improvement, it cannot ensure that these suggestions have been effective--or even adopted-- without a requirement that state offices implement its recommendations or if not, explain their reasons for not doing so. In addition, USDA has also been criticized for its handling of the allegations themselves--whether they were handled through litigation or the agency's complaint processes. In the case of class action lawsuits, the agency has been charged with treating different minority groups inequitably because it grants stays of foreclosures to some groups but not to others. Without a standard, transparent policy that lays out the factors USDA considers in deciding whether or not to issue stays, the agency faces the continued problem of having its decisions viewed as unfair. Furthermore, if USDA does not improve its process of reconciling its lists of complainants, it runs the risk of violating its policy of not taking foreclosure actions against farmers with pending discrimination complaints. In addition, without maintaining historical information on foreclosures, USDA lacks an important tool to help it understand its equal opportunity performance. In the case of USDA's processing of complaints, its Office of Civil Rights continues to be untimely. Also, without a time requirement that covers all stages of complaint processing, USDA lacks a meaningful way to measure performance or to identify and remedy problem areas and staffing needs. Furthermore, until USDA addresses long-standing human capital problems within OCR, it is unlikely that the timeliness of complaint processing will significantly improve. To help resolve issues surrounding charges of discrimination in FSA's direct loan program, we recommend that the Secretary of Agriculture establish criteria for determining when discrepancies between minority and non-minority loan processing times and approval rates warrant further inquiry; and require state offices to implement recommendations made as a result of FSA field reviews or explain in writing their rationale for not doing so. To help address problems related to FSA foreclosures, we recommend that the Secretary of Agriculture develop and promulgate a policy statement that lays out the factors USDA considers in issuing stays of foreclosure in class action lawsuits; maintain historic information, by race, on foreclosures completed by direct FSA and OCR to improve communications to ensure that foreclosure actions are not taken against borrowers with pending complaints. To help address long-standing problems related to OCR's untimely processing of complaints, we recommend that the Secretary of Agriculture establish time requirements for all stages of the complaint process and monitor OCR's progress in meeting these requirements; and develop an action plan to address ongoing problems with obtaining and retaining staff with needed skills, establish performance measures to ensure accountability, and monitor OCR's progress in implementing the plan. We provided a copy of a draft of this report to USDA's Farm Service Agency, Office of General Counsel, and Office of Civil Rights for their review and comment. FSA and OGC generally agreed with the information in the report and provided technical and clarifying comments. We have incorporated these comments, as appropriate. OCR commented that they were in general agreement with our recommendations but wanted us to give more prominence to the progress it has made in notifying FSA about filed complaints, improving complaint processing, and addressing morale problems. We have revised the report to more clearly reflect OCR progress in certain areas. These comments and our response are presented in appendix II. To compare the processing times for direct loans for Hispanic farmers with those for non-Hispanic farmers, we analyzed FSA data and obtained FSA officials' explanations for differences we observed. To analyze USDA's policies for staying foreclosures and how they have been implemented, we obtained relevant USDA policies and memoranda, and, through file reviews (in California, Texas, New Mexico, and Washington), determined the extent to which these policies were followed. To assess USDA's progress in addressing previously identified problems associated with slow processing of discrimination complaints and resolution of human capital issues within USDA's Office of Civil Rights, we reviewed USDA status reports and obtained senior managers' views on why previously identified problems persist. (App. I contains a more detailed discussion of our scope and methodology.) We performed our review from October 2001 through August 2002 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to congressional committees with jurisdiction over farm programs, the Secretary of Agriculture, the Director of the Office of Management and Budget, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202)-512-3841. Key contributors to this report are listed in appendix IV. To compare the processing times for direct loans for Hispanic farmers with those for non-Hispanic farmers, we interviewed FSA officials at the national, state, and county level about the types of direct loans that FSA provides as well as the steps that are followed in the loan-making process. We also reviewed FSA regulations and procedures related to direct loan processing. Because of completeness and reliability issues with FSA's direct loan data, we were not able to perform detailed analyses of loan processing times for Hispanic and non-Hispanic farmers using a download of FSA loan data. Instead, we analyzed direct loan processing times using FSA reports based on historical data for fiscal years 2000 and 2001. We calculated loan processing times from the date the farm loan application was complete to the date of the agency decision to approve or reject the loan application. We compared the average processing times for all complete applications from Hispanic farmers to those from non-Hispanic farmers. We also calculated loan approval rates using FSA historical loan data. We were unable to provide information about the loan amount requested and received by borrowers for comparison purposes because this data has not been tested by FSA for completeness and reliability. To identify USDA's policies for staying foreclosures and to determine how they have been implemented, we interviewed officials from USDA's Office of Civil Rights, Office of General Counsel, FSA's Civil Rights staff, and FSA state offices. We reviewed policies and procedures for implementing stays of foreclosure, where available. In those instances where written guidance was not available, we relied on interviews with officials from USDA's Office of General Counsel and written correspondence regarding the department's actions. In reviewing FSA's implementation of its stay of foreclosure policy in response to administrative complaints, we limited our work to the four states that received the largest number of Hispanic loan applications during fiscal year 2001--California, New Mexico, Texas, and Washington. To identify Hispanic farmers who had had filed discrimination complaints against FSA and whose complaints were processed during fiscal years 2000 and 2001, we obtained a list of Hispanic farmers from the OCR and reviewed available FSA state office direct loan and complaint files to determine whether the FSA farm loan chiefs had been notified when a farmer had filed a complaint and whether or not FSA had implemented a stay of adverse action. In addition, we followed up with FSA's Office of Civil Rights, with regard to those complainants who did not have a state loan file or a stay of adverse action notice in the state complaint file, to determine whether the office had sent out notices to stay adverse actions. To obtain previously unavailable national data for fiscal years 2000 and 2001 about the number of FSA accelerations and foreclosures of direct loans made to Hispanic and non-Hispanic farmers, we surveyed FSA Farm Loan Chiefs in all 50 states, as well as Guam, the Virgin Islands, and Puerto Rico. The response rate to our survey was 100 percent. To assess USDA progress in addressing previously identified problems with its civil rights office's organizational structure, staff turnover, and complaint processing times, we reviewed reports from USDA's Office of Inspector General, internal agency task forces, the U.S. Commission on Civil Rights, and the Congress. We discussed problems and recommended remedies with officials from OCR and FSA. We also examined budget justification documents, USDA departmental regulations, and OCR procedures. Due to problems with OCR's program complaint database, we relied on, but were unable to verify, processing information published in USDA's annual program performance reports for fiscal years 2000 and 2001. As noted in the 2001 report, USDA modified the method it used for calculating processing times that year. If its prior method had been used, processing times would have increased by 14 percent. We conducted our review from October 2001 through August 2002 in accordance with generally accepted auditing standards. The following are GAO's comments on the Office of Civil Rights' letter dated September 11, 2002. 1. Since early 2000, OCR has coordinated on a monthly basis with FSA to reconcile their respective lists of complainants. However, OCR's Long Term Improvement Plan (LTIP)--issued in October 2000--noted that current procedures had not ensured that FSA was notified about newly filed complaints in time to prevent foreclosures or other adverse actions against complainants. In addition, one of the cases we noted in our report occurred in 2001--well after the implementation of the monthly meetings. When asked about this and another case, FSA officials told us that the current procedures still needed improvement. (As we noted in the report, foreclosure actions were halted once FSA was informed that OCR had accepted the complaints.) Given the importance of halting foreclosure actions once a complaint has been filed, we believe that OCR and FSA need to improve communications about borrowers with pending complaints. 2. We have added information about OCR's reduction of its inventory of complaints. However, unless OCR reduces the time it takes to process complaints, the inventory will expand once again. While we acknowledged that OCR has made modest progress in reducing its processing time, it still exceeds its own interim goals for timeliness by 75 percent in fiscal year 2001. 3. The seven essential needs cited by OCR, for the most part, involve improving the office's work processes. Although these improvements should indirectly help improve morale, they do not directly address the severe problems cited by the Deputy Director, such as staff threatening fellow employees or sabotaging their work. We revised the report to reflect the director's belief that the situation has improved over the past several years and his acknowledgment that some of the more serious morale problems have yet to be resolved. 4. During the course of our review, several senior OCR managers referred to the increased workloads created by the courts' requests for files and other information needed to resolve pending lawsuits. In addition, OCR's October 2000 LTIP noted that investigative staff had been assigned to a variety of non-investigative projects, which delayed the processing of complaints. We have removed the reference regarding the Equal Employment Opportunity Commission. 5. Our report focused on the timeliness of processing program complaints and not on EEO complaints filed by USDA employees. 6. GAO did not mean to imply that OCR's productivity is declining. Rather, we are making the point that serious morale problems adversely affect productivity and have revised the report accordingly. While the number of EEO complaints filed by OCR employees has declined between fiscal years 2000 and 2001, OCR continues to have one of the highest complaint rates within USDA. In addition to those named above, Natalie H. Herzog, Jacqueline A. Cook, Lynn M. Musser, Robert G. Crystal, and George H. Quinn Jr. made key contributions to this report.
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The Farm Service Agency (FSA) runs a direct loan program that provides loans to farmers who are unable to obtain private commercial credit to buy and operate farms. FSA is required to administer this program in a fair, unbiased manner. GAO found that during fiscal years 2000 and 2001, FSA averaged 4 days longer to process loan applications from Hispanic farmers than it did for non-Hispanic farmers: 20 days versus 16 days. However, the processing times in three of the four states with the highest number of Hispanic borrowers was faster that it was for non-Hispanic borrowers in those states. FSA's direct loan approval rate was somewhat lower for Hispanic farmers than for non-Hispanic farmers nationwide--83 and 90 percent, respectively. The Department of Agriculture's (USDA) policies for staying foreclosures when discrimination has been alleged depend on the method used to lodge complaints. When an individual has a discrimination complaint accepted by USDA's Office of Civil Rights (OCR), FSA's policy is to automatically issue a stay of foreclosure until the complaint has been resolved. A GAO survey revealed that during fiscal years 2000 and 2001, FSA foreclosed on the loans of 600 borrowers nationwide. Although Hispanic farmers make up 4 percent of the agency's direct loan portfolio, 3 percent of these foreclosures involved Hispanic farmers. OCR has made modest progress in the length of time it takes to process discrimination complaints. USDA requirements direct OCR to complete its processing up through the investigative phase of complaints within 180 days of acceptance. It does not, however, have a time requirement for all of the phases of complaint processing.
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In February 2008, we reported that FERC had made few substantive changes to either its merger and acquisition review process or its postmerger oversight as a consequence of its new responsibilities and, as a result, does not have a strong basis for ensuring that harmful cross- subsidization does not occur. Specifically: Reviewing mergers and acquisitions. FERC's merger and acquisition review relies primarily on company disclosures and commitments not to cross-subsidize. FERC-regulated companies that are proposing to merge with or acquire a regulated company must submit a public application for FERC to review and approve. If cross-subsidies already exist or are planned, companies are required to describe how these are in the public interest by, for example identifying how the planned cross-subsidy benefits utility ratepayers and does not harm others. FERC also requires company officials to attest that they will not engage in unapproved cross- subsidies in the future. This information becomes part of a public record that stakeholders or other interested parties, such as state regulators, consumer advocates, or others may review and comment on, and FERC may hold a public hearing on the merger. FERC officials told us that they evaluate the information in the public record for the application and do not collect evidence or conduct separate analyses of a proposed merger. On the basis of this information, FERC officials told us that they determine which, if any, existing or planned cross-subsidies to allow, then include this information in detail in the final merger or acquisition order. Between the time EPAct was enacted in 2005 and July 10, 2007--when FERC provided detailed information to us--FERC had reviewed or was in the process of reviewing 15 mergers, acquisitions, or sales of assets. FERC had approved 12 mergers, although it approved three of these with conditions- -for example, requiring the merging parties to provide further evidence of provisions to protect customers. Of the remaining three applications, one application was withdrawn by the merging parties prior to FERC's decision and the other two were still pending. Postmerger oversight. FERC's postmerger oversight relies on its existing enforcement mechanisms--primarily self-reporting and a limited number of compliance audits. FERC indicates that it places great importance on self-reporting because it believes companies can actively police their own behavior through internal and external audits, and that the companies are in the best position to detect and correct both inadvertent and intentional noncompliance. FERC officials told us that they expect companies to become more vigilant in monitoring their behavior because FERC can now levy much larger fines--up to $1 million per day per violation--and that a violating company's actions in following this self-reporting policy, along with the seriousness of a potential violation, help inform FERC's decision on the appropriate penalty. Key stakeholders have raised concerns that internal company audits tend to focus on areas of highest risk to the company profits and, as a result, may not focus specifically on affiliate transactions. One company official noted that the threat of large fines may "chill" companies' willingness to self-report violations. Between the enactment of EPAct--when Congress formally highlighted its concern about cross-subsidization--and our February 2008 report, no companies had self-reported any of these types of violations. To augment self- reporting, FERC plans to conduct a limited number of compliance audits of holding companies each year, although at the time of our February 2008 report, it had not completed any audits to detect whether cross- subsidization is occurring. In 2008, FERC's plans to audit 3 of the 36 companies it regulates--Exelon Corporation, Allegheny, Inc., and the Southern Company. If this rate continues, it would take FERC 12 years to audit each of these companies once, although FERC officials noted that they plan audits one year at a time and that the number of audits may change in future years. We found that FERC does not use a formal risk-based approach to plan its compliance audits--a factor that financial auditors and other experts told us is an important consideration in allocating audit resources. Instead, FERC officials plan audits based on informal discussions between FERC's Office of Enforcement, including its Division of Audits, and relevant FERC offices with related expertise. To obtain a more complete picture of risk, FERC could more actively monitor company-specific data--something it currently does not do. In addition, we found that FERC's postmerger audit reports on affiliate transactions often lack clear information--that they may not always fully reflect key elements such as objectives, scope, methodology, and the specific audit findings, and sometimes lacked key information, such as the type, number, and value of affiliate transactions at the company involved, the percentage of all affiliate transactions tested, and the test results. Without this information, these audit reports are of limited use in assessing the risk that affiliate transactions pose for utility customers, shareholders, bondholders, and other stakeholders. In our February 2008 report, we recommended that the Chairman of the Federal Energy Regulatory Commission (FERC) develop a comprehensive, risk-based approach to planning audits of affiliate transactions to better target FERC's audit resources to highest priority needs. Specifically, we recommended that FERC monitor the financial condition of utilities, as some state regulators have found useful, by leveraging analyses done by the financial market and developing a standard set of performance indicators. In addition, we recommended that FERC develop a better means of collaborating with state regulators to leverage audit resources states have already applied to enforcement efforts and to capitalize on state regulators' unique knowledge. We also recommended that FERC develop an audit reporting approach to clearly identify the objectives, scope and methodology, and the specific findings of the audit to improve public confidence in FERC's enforcement functions and the usefulness of its audit reports. The Chairman strongly disagreed with our overall findings and the need for our recommendations; nonetheless, we maintain that implementing our recommendations would enhance the effectiveness of FERC's oversight. States utility commissions' views of their oversight capacities vary, but many states foresee a need for additional resources to respond to changes from EPAct. The survey we conducted for our February 2008 report highlighted the following concerns: Almost all states have merger approval authority, but many states expressed concern about their ability to regulate the resulting companies. All but 3 states (out of 50 responses) have authority to review and either approve or disapprove mergers, but their authorities varied. For example, one state could only disapprove a merger and, as such, allows a merger by taking no action to disapprove it. State regulators reported being mostly concerned about the impact of mergers on customer rates, but 25 of 45 reporting states also noted concerns that the resulting, potentially more complex company could be more difficult to regulate. In recent years, the difficulty of regulating merged companies has been cited by two state commissions--one in Montana and one in Oregon--that denied proposed mergers in their states. For example, a state commission official in Montana told us the commission denied a FERC-approved merger in July 2007 that involved a Montana regulated utility, whose headquarters was in South Dakota, which would have been bought by an Australian holding company. Most states have authorities over affiliate transactions, but many states report auditing few transactions. Nationally, 49 states noted they have some type of affiliate transaction authority, and while some states reported that they require periodic, specialized audits of affiliate transactions, 28 of the 49 reporting states reported auditing 1 percent or fewer over the last five years. Audit authorities vary from prohibitions against certain types of transactions to less restrictive requirements such as allowance of a transaction without prior review, but authority to disallow the transaction at a later time if it was deemed inappropriate. Only 3 states reported that affiliate transactions always needed prior commission approval. One attorney in a state utility commission noted that holding company and affiliate transactions can be very complex and time-consuming to review, and had concerns about having enough resources to do this. Some states report not having access to holding company books and records. Although almost all states report they have access to financial books and records from utilities to review affiliate transactions, many states reported they do not have such direct access to the books and records of holding companies or their affiliated companies. While EPAct provides state regulators the ability to obtain such information, some states expressed concern that this access could require them to be extremely specific in identifying needed information, which may be difficult. Lack of direct access, experts noted, may limit the effectiveness of state commission oversight and result in harmful cross-subsidization because the states cannot link financial risks associated with affiliated companies to their regulated utility customers. All of the 49 states that responded to this survey question noted that they require utilities to provide financial reports, and 8 of these states require reports that also include the holding company or both the holding company and the affiliated companies. States foresee needing additional resources to respond to the changes from EPAct. Specifically, 22 of the 50 states that responded to our survey said that they need additional staffing or funding, or both, to respond to the changes that resulted from EPAct. Further, 6 out of 30 states raised staffing as a key challenge in overseeing utilities since the passage of EPAct, and 8 states have proposed or actually increased staffing. In conclusion, the repeal of PUHCA 1935 opened the door for needed investment in the utility industry; however, it comes at the potential cost of complicating regulation of the industry. Further, the introduction of new types of investors and different corporate combinations--including the ownership of utilities by complex international companies, equity firms, or other investors with different incentives than providing traditional utility company services--could change the utility industry into something quite different than the industry that FERC and the states have overseen for decades. In light of these changes, we believe FERC should err on the side of a "vigilance first" approach to preventing potential cross- subsidization. As FERC and states approve mergers, the responsibility for ensuring that cross-subsidization will not occur shifts to FERC's Office of Enforcement and state commission staffs. Without a risk-based approach to guide its audit planning--the active portion of its postmerger oversight- -FERC may be missing opportunities to demonstrate its commitment to ensuring that companies are not engaged in cross-subsidization at the expense of consumers and may not be using its audit resources in the most efficient and effective manner. Without reassessing its merger review and postmerger oversight, FERC may approve the formation of companies that are difficult and costly for it and states to oversee and potentially risky for consumers and the broader market. In addition, the lack of clear information in audit reports not only limits their value to stakeholders, but may undermine regulated companies' efforts to understand the nature of FERC's oversight concerns and to conduct internal audits to identify potential violations that are consistent with those conducted by FERC-- key elements in improving their self-reporting. We continue to encourage the FERC Chairman to consider our recommendations. 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. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information about this testimony, please contact Mark Gaffigan at (202) 512-3841 or at [email protected]. Individuals who contributed to this statement include Dan Haas, Randy Jones, Jon Ludwigson, Alison O'Neill, Anthony Padilla, and Barbara Timmerman. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Under the Public Utility Holding Company Act of 1935 (PUHCA 1935) and other laws, federal agencies and state commissions have traditionally regulated utilities to protect consumers from supply disruptions and unfair pricing. The Energy Policy Act of 2005 (EPAct) repealed PUHCA 1935, removing some limitations on the companies that could merge with or invest in utilities, and leaving the Federal Energy Regulatory Commission (FERC), which already regulated utilities, with primary federal responsibility for regulating them. Because of the potential for new mergers or acquisitions between utilities and companies previously restricted from investing in utilities, there has been considerable interest in whether cross-subsidization--unfairly passing on to consumers the cost of transactions between utility companies and their "affiliates"--could occur. GAO was asked to testify on its February 2008 report, Utility Oversight: Recent Changes in Law Call for Improved Vigilance by FERC (GAO-08-289), which (1) examined the extent to which FERC changed its merger review and post merger oversight since EPAct to protect against cross-subsidization and (2) surveyed state utility commissions about their oversight. In this report, GAO recommended that FERC adopt a risk-based approach to auditing and improve its audit reports, among other things. The FERC Chairman disagreed with the need for our recommendations, but GAO maintains that implementing them would improve oversight. In its February 2008 report, GAO reported that FERC had made few substantive changes to either its merger review process or its post merger oversight since EPAct and, as a result, does not have a strong basis for ensuring that harmful cross-subsidization does not occur. FERC officials told GAO that they plan to require merging companies to disclose any cross-subsidization and to certify in writing that they will not engage in unapproved cross-subsidization. After mergers have taken place, FERC intends to rely on its existing enforcement mechanisms--primarily companies' self-reporting noncompliance and a limited number of compliance audits--to detect potential cross-subsidization. FERC officials told us that they believe the threat of the large fines allowed under EPAct will encourage companies to investigate and self-report noncompliance. To augment self-reporting, FERC officials told us that, in 2008, they are using an informal plan to reallocate their limited audit staff to audit the affiliate transactions of 3 of the 36 holding companies it regulates. In planning these compliance audits, FERC officials told us that they do not formally consider companies' risk for noncompliance --a factor that financial auditors and other experts told us is an important consideration in allocating audit resources. Rather, they rely on informal discussions between senior FERC managers and staff. Moreover, we found that FERC's audit reporting approach results in audit reports that often lack a clear description of the audit objectives, scope, methodology, and findings--inhibiting their use to stakeholders. GAO's survey of state utility commissions found that states' views varied on their current regulatory capacities to review utility mergers and acquisitions and oversee affiliate transactions; however many states reported a need for additional resources, such as staff and funding, to respond to changes in oversight after the repeal of PUHCA 1935. All but a few states have the authority to approve mergers, but many states expressed concern about their ability to regulate the resulting companies. In recent years, two state commissions denied mergers, in part because of these concerns. Most states also have some type of authority to approve, review, and audit affiliate transactions, but many states review or audit only a small percentage of the transactions; 28 of the 49 states that responded to our survey question about auditing said they audited 1 percent or fewer transactions over the last five years. In addition, although almost all states reported that they had access to financial books and records from utilities to review affiliate transactions, many states reported they do not have such direct access to the books and records of holding companies or their affiliated companies. While EPAct provides state regulators the ability to obtain such information, some states expressed concern that this access could require them to be extremely specific in identifying needed information, thus potentially limiting their audit access. Finally, 22 of the 50 states that responded to our survey question about resources said that they need additional staffing or funding, or both, to respond to changes that resulted from EPAct, and 8 states have proposed or actually increased staffing since EPAct was enacted.
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Education disburses grant and loan payments by electronic funds transfer and processes these payments in GAPS. This disbursement process relies extensively on various computer systems application controls, or edit checks, to help ensure the propriety of these payments. Because these edit checks are important to the Department's controls over grant and loan payments, we focused our work on assessing whether existing edit checks were working effectively and whether additional edit checks and controls are needed. Using computerized matching techniques, we tested the $181.4 billion of grant and loan payments processed through GAPS to identify potentially improper payments that could have resulted from either ineffective edit checks or the lack of necessary edit checks. Following are examples of improper and potentially improper payments we identified through our various tests. We found that Education's student aid application processing system lacks an automated edit check that would identify students that were much older than expected. To identify improper payments that may have resulted from the absence of this edit check, we initially identified institutions that disbursed Pell Grants over multiple years to students 70 years of age or older. We chose to test for students of this age because we did not expect large numbers of older students to be enrolled in a degree program and thus eligible for student aid. Based on the initial results of our test of students 70 years of age or older and because of the problems we identified in the past, we decided to expand our review of schools that had disproportionately high numbers of older students to include recipients 50 years of age or older. Our Office of Special Investigations, in coordination with Education's IG, investigated four schools that disbursed as much as $3.4 million in Pell Grants to ineligible students. These students were ineligible because their primary course of study was English as a second language, and they were not seeking a degree or determined to need English language instruction in order to utilize their existing knowledge and skills. The investigation disclosed that at least one of the schools generated fraudulent student admissions documents to create the appearance that students who were not in fact seeking a degree were participating in a degree program. We previously investigated two of these four schools in 1993 and found the similar activities, including the falsification of student records to support the schools' eligibility to participate in the Pell Grant program. We have also identified three other schools that disbursed about $500,000 in Pell Grants that warrant additional review. These schools have unusually high concentrations of older, foreign-born students who are more likely to be studying English as a second language. We will formally refer the information related to these three schools, as well as the results of our investigations of the four schools discussed above, to Education's IG for appropriate follow-up. During our testing, we also identified an additional 708 schools that disbursed Pell Grants to students 70 years or older totaling $4.5 million. We provided lists of these schools to the Department for additional analysis. Based on its analysis, Education has determined that two of these schools also exhibited disbursement patterns similar to the schools above that disbursed Pell Grants to ineligible students for the study of English as a second language. For these two schools, the Department plans to perform full program reviews later this year to assess their eligibility to continue to participate in the Pell Grant program. We are currently expanding our review in this area to determine whether additional schools may be inappropriately disbursing Pell Grants. Education told us that they have performed ad hoc reviews in the past to identify Pell Grants disbursed to ineligible students and have recovered some improper payments as a result of these reviews. Based on the results of our analyses, Education has decided to implement a new edit check for students' 85 years or older beginning with the 2002-2003 academic year. If the birth date on a student's application indicates the student is 85 years of age or older, the application processing system will identify the applicant and Education will forward the information to the school for follow-up. Education also said it conducts other limited procedures - including the use of Single Audit results - to assess schools' determination of student eligibility. However, these procedures are not specifically designed to identify schools that are knowingly disbursing Pell Grants to students who are not eligible to participate in the program. Regarding the edit check that Education plans to implement in the 2002 - 2003, we believe the age limit is too high and will exclude many potential problems. Using Education's criteria, we would have identified less than 1 percent of the students that were ineligible to receive as much as $3.4 million in Pell Grants. Further, given the recurring nature of improper Pell Grant disbursements, we feel it is incumbent upon Education to implement a formal, routine process to identify and investigate questionable disbursement patterns such as those I have discussed. Another key control, which was not in effect during the time of our review, was a match of student social security numbers (SSN) with Social Security Administration (SSA) death files. As a result, we had SSA compare loan and grant recipient data in Education's systems with SSA's death records. SSA identified over 900 instances, totaling $2.7 million, in which the student SSN was listed in SSA's death records. We are currently in the process of reviewing additional data from Education that they believe supports the propriety of many of these payments. Beginning with the 2000-2001 award year (subsequent to our review period), as part of the application process, Education started matching student SSNs with SSA death records to identify potentially improper payments. We also performed several additional tests of Education's existing edit checks to identify potentially improper grant and loan payments that may not have been detected by these checks. These tests included searches for a single SSN associated with two or more dates of birth, grants to recipients in excess of statutory limits, and searches for invalid SSNs. Based on these tests, we initially identified $43.6 million in potentially improper payments, for which Education has to date been able to provide sufficient supporting documentation for $18.7 million or about 42 percent of these payments. Education is in the process of researching the remaining $24.9 million of potentially improper payments. Our conclusion as to the effectiveness of Education's existing edit checks will depend on the resolution of the remaining $24.9 million currently being researched by the Department. Education's third party draft system was originally set up to efficiently process checks to pay non-Education employees who review grant applications, known as field readers. However, in May 1999, Education's policy manual expanded the use of third party drafts to pay for other expenses including employee local travel reimbursements, fuel and maintenance for government vehicles, and other small purchases. Third party drafts could be issued for up to $10,000 - the limitation printed on the face of each draft. Executive Officers determine who has signature authority within their units. From May 1998 through September 2000, Education's payments by third party draft totaled $55 million. During our analysis of the third party draft payment process, we identified several internal control weaknesses, including inadequate computer systems application controls, poor segregation of duties, and inadequate audit trails. Specifically, as we discussed in our April 3, 2001, testimony, Education (1) circumvented a system's application control designed to avoid duplicate payments by adding a suffix to the invoice/voucher number when the system indicates that an invoice/voucher number has already been used; (2) allowed 21 of the 49 Education employees who could issue third party drafts to do so without involving anyone else; and (3) lacked adequate audit trails, such as a trigger log, to identify changes made to the list of approved vendors. Based on these weaknesses and information gathered from Education IG reports, we designed tests to identify potentially improper payments in this area. These tests included various automated searches of Education's disbursement data, as well as manual reviews of about 38,000 third party draft transactions. Based on these analyses thus far, we have identified 268 instances in which multiple third party drafts were issued to the same payee with the same invoice number or on the same day, totaling about $8.9 million. Education officials are in the process of researching and providing supporting documentation for these transactions, which we will then test for overpayments and duplicate payments. In addition to analyzing the support for the potentially improper payments I have described, we plan to perform various computerized sorts and searches to identify additional anomalies, including a thorough review of third party drafts issued by individuals with complete control over the payment process to determine whether questionable transactions occurred that require additional research to assess their propriety. Following the April 3, 2001 hearing, Education took action to eliminate the use of third party drafts. The Department's Third Party Draft Program's Closing Procedures, issued in May, 2001, indicates that Treasury payments will replace third party drafts. In addition, Education officials acknowledged that the Department lacks adequate trigger logs and told us that they are currently developing and implementing more-effective trigger logs. Even though Education is no longer issuing third party drafts, this is an important improvement because the same system that produced those payments also produces Treasury payments, which are replacing third party drafts. Government purchase cards are available to federal agencies under a General Services Administration (GSA) contract and, according to instructions from the Department of Treasury, should generally be used for small purchases up to $25,000. Treasury requires agencies to establish approved uses and limitations on the types of purchases and dollar amounts. According to a departmental directive, Education's policy is to use government purchase cards for authorized purchases of expendable goods and services, such as supplies not available from the GSA Customer Supply Center. From May 1998 through September 2000, the time frame for our review, Education's payments by government purchase card totaled over $22 million. During our analysis of the purchase card payment process, we identified internal control weaknesses, including inadequate computer systems application controls, lack of supervisory review, and improper authorization of transactions. Specifically, we found that Education (1) did not use management reports available from Bank of America, Education's contractor for government purchase cards, to monitor purchases; (2) had serious deficiencies in its process for reviewing and approving purchase card transactions; and (3) allowed employees to execute transactions beyond the scope of their authority. Inadequate control over these expenditures, combined with the inherent risk of fraud and abuse associated with purchase card purchases, provides Education employees the opportunity to make unauthorized purchases without detection. Based on these weaknesses and information gathered from Education IG reports, we designed tests to identify potentially improper payments made with government purchase cards. As with third party drafts, we performed various automated searches of purchase card disbursement data. Specifically, we sorted the data by principal office, cardholder, vendor, and Merchant Category Code (MCC) to identify unusual transactions and patterns. We supplemented these computerized searches with manual reviews of the over 35,000 purchase card transactions. We also selected 5 months of cardholders' statements, a total of 903 statements, to review for certain attributes, including approving official's signature. Out of the 903 purchase cardholders' monthly statements totaling $4 million that we reviewed, 338 statements, totaling about $1.8 million, were not properly approved. Because this key control-supervisory review and approval-was not operating, we requested supporting documentation for these transactions from the Department. Education has provided invoices and other support related to most of the transactions included in these monthly statements. The Department believes this support will validate these transactions. We are currently reviewing the support to confirm this assessment. We provided Education with an additional 833 transactions, totaling about $362,000, in which the payee appeared to be an unusual vendor to be engaging in commerce with the Department. For example, we found one instance, that is now being investigated by our Office of Special Investigations, in which a cardholder made several purchases from two pornographic Internet sites. The names of these sites should have aroused suspicions when they appeared on the employee's monthly credit card bill. We also found another instance in which Education paid for an employee to take a training course completely unrelated to activities of the Department. In addition, we gave Education a list of 124 instances, totaling about $600,000, in which it appears that cardholders may have split their purchases into multiple transactions to bypass pre-established single-purchase spending limits. Education is currently researching these transactions. In our April 2001 testimony, we also reported that individual cardholders' monthly purchase limits were as high as $300,000. Education, in response to a letter from this subcommittee dated April 19, 2001, said the Department has taken action to improve internal controls related to the use of the government purchase card. Education has lowered the maximum monthly spending limit to $30,000, revoked some purchase cards, and lowered other cardholders' single purchase and total monthly purchase limits. While these are important improvements, they will not prevent cardholders from continuing to split large purchases in order to circumvent single purchase limits. In addition, they do not address the issue of lax approval practices. To address these issues, Education needs to reiterate and strengthen its policy of requiring review and approval of cardholders' monthly statements, including a review for potentially split purchases. In addition, Education should institute a mechanism to periodically monitor purchase card activity to ensure that proper review and approval is occurring and that split purchases are not. Further, since MCCs can be effectively used to prevent purchases from certain types of vendors, Education should expand its list of MCCs that are being blocked to further help prevent improper payments. In closing, Mr. Chairman, I want to emphasize the importance of Education management's giving top priority to improving internal control to minimize the agency's vulnerability to improper payments. The Secretary's actions to establish a management improvement team to address the Department's serious management problems, and to respond to issues related to using third party drafts and purchase cards, are important first steps. However, there are other important steps that we recommend be taken to address the Department's control problems. The Department needs to (1) establish appropriate edit checks to identify unusual grant and loan disbursement patterns, (2) implement a formal routine process to investigate unusual disbursement patterns identified by the edit checks, (3) reiterate to all employees established policies regarding the appropriate use of purchase cards, (4) strengthen the process of reviewing and approving purchase card transactions, focusing on identifying split purchases and other inappropriate transactions, and (5) expand the use of MCCs to block transactions with certain vendors. Further, the Department needs to continue to focus on researching and resolving the potential improper payments that we have identified thus far. This will help provide a clear picture of any fraud or abuse that has occurred. Once the improper activities are identified, immediate action can be taken to terminate them. We discussed our recommendations with Department officials and they generally concurred. We may have additional recommendations after we complete our work later this fall. Mr. Chairman, this concludes my statement. I would be happy to answer any questions you or other Members of the Subcommittee may have. For information about this statement, please contact Linda Calbom, Director, Financial Management and Assurance, at (202) 512-9508 or at [email protected]. Individuals making key contributions to this statement include Dan Blair, Don Campbell, Anh Dang, Bonnie Derby, David Engstrom, Bill Hamel, Kelly Lehr, Sharon Loftin, Bridgette Lennon, Diane Morris, Andy O' Connell, Russell Rowe, Peggy Smith, Brooke Whittaker, and Doris Yanger. (190024)
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GAO and the Department of Education's Office of Inspector General have issued many reports in recent years on the Department's financial management problems, including internal control weaknesses that put the Department at risk for waste, fraud, abuse, and mismanagement. In an April 2001 assessment of the internal control over Education's payment processes and the associated risks for improper payments, GAO identified four broad categories of internal control weaknesses: poor segregation of duties, lack of supervisory review, inadequate audit trails, and inadequate computer systems' applications controls. This testimony discusses how these weaknesses make Education vulnerable to improper payments in grant and loan payments, third party drafts, and government purchase card purchases. GAO found that Education's student aid application processing system for grants and loans lacks an automated edit check that would identify potentially improper payments from students who were much older than expected, a single social security number associated with two or more dates of birth, grants to recipients in excess of statutory limits, and searches for invalid social security numbers. GAO also found problems with Education's third party draft system. Specifically, Education (1) circumvented a system's application control designed to avoid duplicate payments by adding a suffix to the invoice/voucher number when the system indicates that an invoice/voucher number has already been used; (2) allowed 21 of the 49 Education employees who could issue third party drafts to do so without involving anyone else; and (3) lacked adequate audit trails, such as a trigger log, to identify changes made to the list of approved vendors. GAO also found shortcomings with Education's internal controls over government purchase cards.
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In pursuing its mission of assisting small businesses, SBA facilitates access to capital and federal contracting opportunities, offers entrepreneurial counseling, and provides disaster assistance. Program offices are located at SBA's headquarters and include the offices responsible for oversight of the agency's key program areas (see fig. 1). For example, the Office of Capital Access delivers services and programs to expand access to capital for small businesses. The Office of Entrepreneurial Development oversees a network of resource partners that offer small business counseling and technical assistance. The Office of Government Contracting and Business Development works to increase participation by small, disadvantaged, and woman-owned businesses in federal government contract awards. The programs it manages include the 8(a) business development program, which is designed to assist small disadvantaged businesses in obtaining federal contracts, and the Historically Underutilized Business Zone (HUBZone) program, which aims to stimulate economic development by providing federal contracting assistance to small firms in economically distressed areas. Finally, the Office of Disaster Assistance makes loans to businesses and families trying to rebuild and recover in the aftermath of a disaster. SBA delivers its services through a network of field offices that includes 10 regional offices and 68 district offices led by the Office of Field Operations (see fig. 2). SBA's regional offices were established shortly after the agency was created in 1953. These offices, which are managed by politically appointed administrators, play a part in supervising the district offices and promoting the President's and SBA Administrator's messages throughout the region. District offices conduct marketing, outreach, and compliance reviews. Considered by officials as SBA's "boots on the ground," district offices serve as the point of delivery for most SBA programs and services and work with resource partners to accomplish the agency's mission. SBA's field structure has been revised over the years. In response to budget reductions, SBA streamlined its field structure during the 1990s by downsizing regional and district offices and shifting supervisory responsibilities to headquarters. The 10 regional offices originally acted as intermediaries between headquarters and the field and served as communication channels for critical information, policy guidance, and instructions. SBA downsized these offices and reallocated some of the regional offices' workload to district and headquarters offices and created the Office of Field Operations to act as the field's representative in headquarters and help facilitate the flow of information between headquarters and district offices. The Office of Field Operations also provides policy guidance and supervision to regional administrators and district directors in implementing SBA's goals and objectives. Regional offices continue to play a supervisory role by monitoring performance against district goals and coordinating administrative priorities with the districts. Since the early 2000s, SBA has further restructured and centralized some key agency functions. For example, from 2003 through 2006, SBA completed the centralization of its 7(a) loan processing, servicing, and liquidation functions from 68 district offices to 1 loan processing center, 2 commercial loan servicing centers, and 1 loan liquidation and guaranty purchase center. From fiscal years 2003 to 2006, headquarters full-time equivalents (FTE) decreased from 1,154 to 1,089 (see fig. 3). District office FTEs decreased from 1,285 in fiscal year 2003 to 997 in fiscal year 2006, and regional office FTEs remained about the same. In fiscal year 2014, headquarters FTEs were 1,429, district office FTEs were 771, and regional office FTEs were 31. Despite long-standing organizational challenges affecting program oversight and human capital management that we and others have identified, SBA has not documented an assessment of its overall organizational structure, which could provide information on how best to address these challenges. Since its last major reorganization in 2004, the agency has continued to face long-standing organizational and workforce challenges, including complex overlapping responsibilities among offices, poor communication between headquarters and district offices in the administration of programs, and persistent skill gaps, especially in field offices. These challenges can affect SBA's ability to deliver its programs consistently and effectively, especially in a climate of resource constraints. But its response has been limited to making incremental (piecemeal) changes to some of its divisions to, among other things, consolidate functions or change reporting relationships and offering employees early retirement in an attempt to address skill gaps. SBA told us that it has assessed its organizational structure but did not provide documentation of the results of the assessment. SBA continues to face program oversight and human capital challenges related to its organizational structure. In a January 2003 report on SBA's management challenges, we found that SBA's organizational structure created complex overlapping relationships among offices that contributed to challenges in delivering services to small businesses. In 2004, SBA centralized its loan functions by moving responsibilities from district offices to loan processing centers. However, some of the complex overlapping relationships we identified in 2003 still exist (see fig. 4). Specifically, SBA's organizational structure often results in working relationships between headquarters and field offices that differ from reporting relationships, potentially posing programmatic challenges. District officials work with program offices at SBA headquarters to implement the agency's programs but report to regional administrators, who themselves report to the Office of Field Operations. For example, the lender relations specialists in the district offices work with the Office of Capital Access at SBA headquarters to deliver programs but report to district office management. Similarly, the business opportunity specialists in the district offices work with the Office of Government Contracting and Business Development at SBA headquarters to assist small businesses with securing government contracts but report to district office management. Further, some officials have the same duties. The public affairs specialists at the district offices and the regional communications directors both handle media relations. In addition, district directors and regional administrators both are to conduct outreach to maintain partnerships with small business stakeholders such as chambers of commerce; lending institutions; economic development organizations; and federal, state, regional, and local governments. They also participate in media activities and speak at public events. In later reports, we and others--including SBA itself--identified organizational challenges that affected SBA's program oversight and human capital management. In a March 2010 report on the 8(a) business development program, we identified a breakdown in communication between SBA district offices and headquarters (due in part to the agency's organizational structure) that resulted in inconsistencies in the way district offices delivered the program. For example, in about half of the 8(a) files we reviewed we found that district staff did not follow the required annual review procedures for determining continued eligibility for the program. We found that the headquarters office responsible for 8(a) did not provide clear guidance to district staff. In addition, we found that confusion over roles and responsibilities led to district staff being unaware of the types and frequency of complaints across the agency on the eligibility of firms participating in the 8(a) program. As a result, district staff lacked information that could be used to help identify issues relating to program integrity. We made six recommendations that individually and collectively could improve procedures used in assessing and monitoring the continued eligibility of firms to participate and benefit from the 8(a) program. SBA agreed with the six recommendations when the report was issued. As of July 2015, SBA had taken actions responsive to four of the recommendations. Specifically, it had assessed the workload of business development specialists, updated its 8(a) regulations to include more specificity on the criteria for the continuing eligibility reviews, developed a centralized process to collect and maintain data on 8(a) firms participating in the Mentor-Protege Program, and implemented a standard process for documenting and analyzing complaint data. Under the Mentor-Protege Program, experienced firms mentor 8(a) firms to enhance the capabilities of the protege, provide various forms of business developmental assistance, and improve the protege's ability to successfully compete for contracts. The two remaining recommendations yet to be fully implemented as of July 2015 focus on (1) procedures to ensure that appropriate actions are taken for firms subject to early graduation from the program and (2) taking actions against firms that fail to submit required documentation. We maintain that these recommendations continue to have merit and should be fully implemented. noted that this lack of communication could have not only inhibited the sharing of crucial information but also caused inconsistencies in the examinations across field offices. It concluded that these weaknesses in the examination process had diminished the agency's ability to identify regulator violations and other noncompliance issues in the operation of the program. The OIG recommended that SBA create and execute a plan to improve the internal operations of the examination function, including a plan for better communication. Although SBA disagreed with the recommendation, the agency issued examination guidelines that in 2015 the OIG deemed satisfactory to close the recommendation. In documentation requesting fiscal years 2012 and 2014 Voluntary Early Retirement Authority and Voluntary Separation Incentive Payments (VERA/VSIP) programs, SBA said that long-standing skill gaps (primarily in field offices) that had resulted from the 2004 centralization of the loan processing function still existed. SBA determined that its organizational changes had resulted in a programmatic challenge because employees hired for a former mission did not have the skills to meet the new mission. Specifically, before the centralization field offices had primarily needed staff with a financial background to process individual loans. But the new mission required staff who could conduct small business counseling, develop socially and economically disadvantaged businesses and perform annual financial reviews of them, engage with lenders, and conduct outreach to small businesses. While it has made incremental (piecemeal) changes, SBA has not documented an organizational assessment that it first planned to undertake in 2012. According to federal internal control standards, organizational structure affects the agency's control environment by providing management's framework for planning, directing, and controlling operations to achieve agency objectives.A good internal control environment requires that the agency's organizational structure clearly define key areas of authority and responsibility and establish appropriate lines of reporting. Further, internal control guidance suggests that management periodically evaluate the organizational structure and make changes as necessary in response to changing conditions. Since its last major reorganization in 2004, SBA has seen significant changes, including decreases in budget and an increase in the number of employees eligible to retire. Despite the organizational and managerial challenges it has faced, SBA's changes to its organizational structure since fiscal year 2005 have been incremental and largely involved program offices at headquarters rather than field offices where we and others have identified many of the organizational challenges. For example, SBA reestablished its Office of the Chief Operating Officer to improve efficiency and restructured the Office of Human Capital Management in response to significant turnover. In addition, following a review of all position descriptions, the Office of Field Operations revamped district office positions to ensure that the positions aligned with SBA's and its district offices' strategic plans. No changes to the regional offices were made during the last 10 years. For more information on changes that SBA has made to its organizational structure since fiscal year 2005, see appendix II. In 2012, the agency committed to assessing and revising its organizational structure to meet current and future SBA mission objectives. However, the contractor that SBA hired to assess its organizational structure did not begin its assessment until November 2014. SBA officials told us that the effort was delayed because in February 2013 SBA's Administrator announced she was leaving the agency and the position was vacant from August 2013 until April 2014. In August 2015, SBA officials told us that after the new administrator reviewed business delivery models and became acclimated to the agency, the agency procured a contractor and work began on the organizational assessment in November 2014. According to the statement of work, the contractor was to assist the chief human capital officer by making recommendations on an agency-wide realignment to improve service delivery models, modernize systems and processes, and realign personnel, among other things. SBA officials told us the contractor completed its assessment in March 2015 and that SBA had completed its assessment of the contractor's work. However, SBA has not provided documentation that shows when the assessment was completed or that describes the results. Instead of conducting its planned assessment and subsequent reorganization when initially scheduled, SBA used two VERA/VSIP programs to attempt to address workforce challenges, including those related to field offices, resulting from the 2004 reorganization. As noted previously, SBA had identified ongoing skill gaps resulting from the 2004 centralization of the loan processing function. These gaps were primarily in district offices, which are supervised by regional offices. SBA determined that this organizational change had resulted in a gap between the competency mix of the employees who had been hired for one mission (loan processing) and the competency mix needed to accomplish a new mission (business development, lender relations, and outreach). SBA noted that the skill gap was particularly pronounced among 480 employees in two job series--GS-1101 and GS-1102--that included business opportunity specialists, economic development specialists, and procurement staff. In addition, SBA stated that the skill gap had been compounded by recent changes in job requirements and new initiatives that required new skill sets for its employees. SBA's plans in the aftermath of the fiscal year 2014 VERA/VSIP program include restructuring that would address the skill gaps. Specifically, an October 2014 guidance memorandum on staffing the agency-wide vacancies after the fiscal year 2014 VERA/VSIP stated that an Administrator's Executive Steering Committee for SBA's Restructuring would make decisions about restructuring. The memorandum also stated that the chief human capital officer had been tasked with identifying vacant FTEs for new positions that would support any new functions or initiatives envisioned by the administrator's restructuring efforts. For example, the memorandum noted that 82 of the 147 vacancies would be used to support the restructuring, but did not include details of how these positions would be allocated among program offices. The memorandum added that the remaining 65 vacancies would remain in their respective program offices and that the position descriptions would be modified or positions relocated to meet internal needs. According to SBA, options for restructuring and related hiring were still being considered as of May 2015. We also report on these issues in a related, soon-to-be-released report on SBA's management and make recommendations as appropriate. Regional administrators supervise and evaluate the district offices within their regions. For example, they help to ensure that the district offices within their boundaries are consistently meeting agency goals and objectives. Field office performance is tracked and assessed by goals, measures, and metrics reports and is largely driven by district office performance. SBA headquarters officials, in consultation with regional and district officials, set the goals and measures for the district offices in part on the basis of a "capacity planner" that considers the number of staff and their positions. Regional office goals are generally the combined goals for the district offices within the region. The six goals are: protecting public funds and ensuring regulatory compliance; supporting lending to small businesses; expanding contracting to small businesses; supporting small business training and counseling; providing outreach to high-growth and underserved communities; and serving as a voice for the small business community. Under these goals are a total of 54 measures that cover specific areas. For example, "maintain and increase active lending" and "expand lender participation through direct outreach" are measures under the goal "supporting lending to small businesses." According to SBA, 6 of the 10 regions met or exceeded all of their goals in fiscal year 2014. Further, regional administrators are the interface between the district offices and SBA headquarters, overseeing staff across their regions. In particular, they supervise and provide direction to the district directors in their region, who report directly to them. The regional administrators are to meet with district directors quarterly to evaluate progress on meeting critical elements tied to their job descriptions. In addition, according to officials regional administrators may assign district directors tasks to help create a team effort within the region--for example, to explain new legislation that affects small businesses or to focus on alternative financing. Officials we interviewed cited a number of internal communication channels that involved the regional offices. In general, regional administrators help to facilitate communication between headquarters and district offices, specifically concerning program implementation, and serve as the regional points of contact for the Office of Field Operations. As SBA develops proposals for new initiatives, the agency convenes panels that include field officials and are often led by regional administrators. SBA officials cited a panel that was looking at upgrading technology in district offices as an example of a panel that was co-chaired by a regional administrator. In addition, program changes are typically communicated to the Office of Field Operations, which then talks to the regional administrators to get input on how the changes could affect the field offices. Office of Field Operations officials said that they hold a weekly conference call with all 10 regional administrators. If a program is being changed or a new initiative introduced, a manager from the relevant program office would participate in this meeting to provide the information to the regional administrators. The regional administrators share best practices for carrying out their role during these meetings. The regional administrators also told us that they had weekly calls with district office management for their region to discuss agency initiatives and obtain input. Finally, during an annual management conference regional administrators meet with each SBA division to discuss how to implement the programs in the field. Most of the 60 officials we interviewed from the Office of Field Operations and regional and district offices thought that internal communication was effective and sufficient. Senior officials from the Office of Field Operations said that the presence of regional offices enhanced agency communication. All 10 regional administrators pointed to regular communication that occurs between headquarters and the field. For example, one regional administrator noted that having a field office structure fostered effective communication. Fourteen of 19 district managers emphasized that communication within the agency was seamless and that, in addition to scheduled calls and meetings, they communicated with program offices during the course of their work. Twelve of the 28 nonmanagement staff noted that communication was effective and sufficient. However, 5 of the 28 district office nonmanagement staff and 3 of the 19 managers who we interviewed expressed concerns about communication between headquarters and field offices. For example, one district official said that communication was inconsistent and that at times industry officials might know about a program change before district staff had been informed. Another district official said that communications came from too many different sources. For example, program changes were not always consistently communicated to the field offices, and such information could come from the Office of General Counsel instead of a program office. We and the SBA OIG have identified communication challenges that affected program oversight and made recommendations to address these challenges (as discussed earlier in this report). Externally, regional officials are responsible for interpreting, supporting, and communicating the President's and SBA Administrator's policies as well as for setting regional priorities. Each regional office has a regional communications director tasked with coordinating SBA's marketing, communications, and public affairs functions throughout the assigned area. According to SBA, this responsibility includes authorizing all outgoing communication within the region to avoid duplication in communication duties conducted by district offices. Regional administrators attend public speaking engagements, are involved in press activities, and conduct outreach and coordination with small business partners and government officials. Regional administrators also regularly work with representatives from local and state governments and collaborate with economic development departments to help promote SBA's products and services. In addition, they help manage interagency relations and maintain relationships with industry representatives and suppliers, including in geographic areas that may have unique small business needs. Because regional office costs represent a relatively small part of SBA's overall costs, closing them would have a limited budgetary effect. However, according to SBA officials closing these offices could cause nonbudgetary challenges such as difficulties in providing supervision to 68 district offices and broadcasting the President's and SBA administrator's message. If such closures were to occur, other options exist that could help ensure that these functions are performed effectively. However, it would be important to assess the feasibility of these options and weigh the related costs and benefits before deciding on a course of action. In fiscal year 2013, SBA's costs for the regional offices totaled slightly more than $4.7 million. Given that these costs constituted less than 1 percent of SBA's approximately $1 billion appropriation for that year, closing the regional offices would have a limited budgetary effect. The bulk of regional office costs went to compensation and benefits, which totaled $4.5 million in fiscal year 2013. Other administrative costs for the 10 regional offices totaled just $234,539, with individual office budgets ranging from $11,771 to $36,692. According to officials, these funds were spent on travel, equipment, and office supplies. All 10 regional offices are co-located with district offices, so they are not incurring separate rental costs. Further, because (as noted previously) each regional office generally has five employees or fewer, they are not materially affecting district office rental costs. Over half of the headquarters (Office of Field Operations), regional, and district office managers (18 of 32) we interviewed cited challenges that could result if regional offices were to close and their functions were transferred to headquarters and district offices, but a few nonmanagement staff (6 of the 28) offered different views. The challenges managers cited were related to oversight, workload, advocacy, and outreach. First, as mentioned earlier, regional administrators supervise and evaluate the performance of the district offices, responsibilities that would likely have to be transferred to headquarters. The 10 regional administrators oversee between 4 and 10 district offices each. Fifteen headquarters, regional, and district managers we interviewed said that without regional supervision, all 68 district directors would likely report to two senior officials in the Office of Field Operations. Eight of these officials said that it would be difficult for these two individuals to manage all 68 districts and to understand the economic, political, and other nuances of each district. Second, four regional and district managers we interviewed noted that one of the regional administrators' responsibilities was to help "even out" the workload among district offices to ensure that the offices could continue to carry out their responsibilities even with critical vacancies. For example, regional administrators can request that a lender relations specialist in one district office take on additional duties to help another district office that has lost staff. Thus, the managers were concerned that without regional offices, district offices would be challenged to address such workload issues. Third, according to six district managers, the district offices would lose their advocates for resources if the regional offices closed. For instance, regional administrators identify training and staffing needs across the region and emphasize these issues during their interactions with the Office of Field Operations. Officials we interviewed also noted that without regional offices, SBA would lose its knowledge of regional needs, which headquarters and district offices might not have. These officials stated that regional administrators had a broad view of the district offices in their regions and could see differences and similarities among offices. For example, a district official noted that a regional administrator might be aware of a specific issue within a particular district office, see the similarities with the challenges of another district office, and develop a solution. Fourth, six headquarters, regional, and district managers we interviewed said that SBA would experience challenges in promoting SBA's message without the regional offices. Thirteen headquarters, regional, and district officials emphasized that as political appointees, regional administrators played a greater role than district directors, who are career officials, in explaining and amplifying the President's and SBA Administrator's message and priorities. For example, officials cited the role of regional administrators in informing small businesses, during the time when the Patient Protection and Affordable Care Act was pending, of how the bill might affect them. Conversely, six nonmanagement district staff we interviewed and union officials told us that they did not see a particular need for the regional offices. Three district officials said that they could coordinate directly with headquarters instead of coordinating with the regional offices. One of these district officials noted that SBA would be more efficient if the functions of the regional and district offices were consolidated. Another of these district officials could not identify the impact of the regional offices, despite the regional administrators' stated roles in providing guidance and supervision. In addition, union officials stated that the outreach responsibilities of the district directors and regional administrators were duplicative, pointing out that both regional and district officials did outreach to small businesses in their communities. However, as noted previously regional communications directors are expected to authorize all outgoing communication within the region to avoid duplication. We recognize that the regional administrators and other staff in the regional offices provide a number of services for SBA. However, if closures were to occur, there are options available to address these challenges. For example, one option could involve adding career senior officials to the Office of Field Operations to address the challenge of overseeing the 68 district offices. In addition, to address the challenge of the potential loss of flexibility in managing district office workloads, district directors could coordinate with each other to help distribute the workload among their offices. Alternatively, this responsibility could be assigned to the Office of Field Operations. An option to address the challenge associated with the loss of regional administrators as advocates would be having district directors collaborate to identify the needs of the various offices and advocate directly to the Office of Field Operations. However, before deciding on whether regional offices should be closed or selecting an alternative option, it is important to carefully assess the feasibility of these options as well as any others and to weigh the costs and benefits associated with available options and closure of the regional offices. We sent a draft of this report to SBA for review and comment. SBA provided technical comments that we incorporated into the report as appropriate. As part of these comments and in response to a GAO point that certain types of statement constitute prohibited "grassroots" lobbying, SBA clarified that "o SBA employee, whether career or political, is authorized or encouraged to 'grassroot' lobby ... to support or oppose pending legislation." We modified our draft report to take into account SBA's clarification. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to SBA and appropriate congressional committees. This report also will be available at no charge on our website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. This report (1) examines any challenges associated with the Small Business Administration's (SBA) organizational structure; (2) describes the specific responsibilities of the regional offices; and (3) discusses the budgetary effects of closing the regional offices and SBA managers' and staff's views on other possible effects of closures. For the background, we analyzed data on staffing levels at headquarters, regional, and district offices from fiscal years 2003 through 2014 (to include staffing levels prior to and after SBA's last major reorganization in 2004). To assess the reliability of these data, we interviewed SBA officials from the Office of Human Resource Solutions to gather information on the completeness and accuracy of the full-time equivalent database and examined the data for logical inconsistencies and completeness. We determined that the data were sufficiently reliable for the purposes of reporting on staffing levels. For all objectives, we interviewed SBA headquarters officials in the Office of Field Operations, the 10 regional administrators, management and nonmanagement staff at 10 district offices, and union representatives. Specifically, to obtain perspectives from SBA district office officials, we selected a nonrandom, purposive sample of 10 of the 68 district offices, 1 from each SBA region to provide national coverage. We randomly selected 7 of the 10 district offices from those offices located within the continental United States. We selected the Washington, D.C., and Georgia district offices to pre-test our interview questions because of proximity to GAO offices. We selected the New York district office to include an additional large office to better ensure a variety of offices with both a larger and smaller number of employees. During our visit to 9 of the 10 district offices, we interviewed the office managers (district directors and deputy district directors). At the remaining district office, the deputy district director could not attend the meeting. For our interviews with nonmanagement staff at the 10 district offices, district office management invited any interested nonmanagement staff to meet with us. However, as a condition of meeting with nonmanagement staff, SBA's general counsel required inclusion of district counsel in these interviews. Of the approximately 120 nonmanagement district staff members invited to speak with us, 28 participated in the interviews. We generally met with the participating staff as a group. Because participation by nonmanagement staff members was limited, we provided them an additional opportunity to share their perspectives via e-mail. Specifically, we sent an e-mail to all nonmanagement staff at those 10 district offices, inviting them to share their thoughts on specific topics by sending an e- mail to a specified GAO e-mail address. Nine staff members from 6 of these offices responded to our e-mail, three of whom also attended our interviews. The e-mails were used as additional information sources and to corroborate what we heard in the interviews. The results of our interactions with the 10 district offices cannot be generalized to other SBA district offices. The group of union representatives we interviewed was from headquarters and the field. In conducting this review, we focused on the role of regional offices. A related, soon-to-be-released GAO report addresses a range of SBA management issues. To review SBA's organizational structure, we reviewed prior GAO and SBA Inspector General reports that discussed, among other things, the effect of the agency's structure on its human capital management and program oversight. We also examined documentation on changes to SBA's organizational structure from fiscal year 2005 to 2014 (the period after SBA's last major reorganization in 2004). Specifically, we requested and reviewed all of the forms that SBA used to document organizational changes that were approved during this period. We also reviewed documentation on SBA's planned efforts to assess its organizational structure--including its Strategic Human Capital Plan Fiscal Years 2013- 2016, guidance implementing its fiscal year 2014 Voluntary Early Retirement Authority (VERA) and Voluntary Separation Incentive Payments (VSIP) programs, and the statement of work for a contractor's assessment of organizational structure--and compared these plans to federal internal control standards. To determine the specific responsibilities of the regional offices, we reviewed position descriptions for the regional administrator and regional communications director, and compared them to the position descriptions for the district director and public affairs specialist. In addition, we interviewed officials at headquarters, regional, and district offices. We also analyzed data on the 10 regional offices from the field office goals, measures, and metrics reports from fiscal year 2014 (the most currently available data). To assess the reliability of these data, we reviewed the goals, measures, and metric reports for outliers and interviewed officials from the Office of Field Operations to obtain information on the completeness and accuracy of the database. We determined that the data were sufficiently reliable for the purpose of reporting on field performance. To determine how closing SBA's regional offices could affect SBA, we analyzed fiscal year 2013 operating budgets and compensation and benefits data for the regional offices. SBA had to create a report that separated regional costs from other field office costs, and fiscal year 2013 data were the most recent data available at the time they generated the report. To assess the reliability of these data, we examined the data for logical inconsistencies and completeness and reviewed documentation on the agency's financial system. We also interviewed officials from the Office of the Chief Financial Officer to gather information on the completeness and accuracy of the budget database. We determined that the data were sufficiently reliable for the purpose of reporting on SBA's regional office costs. Additionally, we reviewed documentation on the tenure of regional administrators and acting regional administrators from fiscal years 2005 through 2014 to determine turnover. We also interviewed SBA officials about the costs of operating the regional offices and the potential effects of transferring the responsibilities of the regional offices to the district offices. We conducted our work from June 2014 through September 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The Small Business Administration (SBA) made a number of incremental (piecemeal) changes to its organizational structure in fiscal years 2005- 2014, as illustrated by the following examples. In 2007, SBA reorganized five program offices and four administrative support functions in order to clearly delineate reporting levels, among other things. The agency also eliminated the Chief Operating Officer as a separate office and integrated its functions into the Office of the Administrator. In 2008, the Office of Equal Employment Opportunity and Civil Rights Compliance began reporting directly to the Associate Administrator for Management and Administration to facilitate better oversight, planning, coordination, and budgeting for all of the agency's administrative management operations. In 2010, SBA consolidated financial management by moving its procurement function to the Office of the Chief Financial Officer and transferring day-to-day procurement operations from headquarters to the agency's Denver Finance Center. This change was intended to improve the efficiency and effectiveness of SBA's acquisition programs. In 2011, SBA restructured the Office of Human Capital Management in response to significant turnover that had a serious effect on the level and scope of services. The reorganization streamlined the office, which was renamed the Office of Human Resources Solutions, by reducing the number of branches and divisions. In 2012, new offices were created in the Office of Capital Access to respond to, among other things, growth in small business lending programs and increased servicing and oversight responsibilities following the 2007-2009 financial crisis. The changes sought to help the agency become a better partner with lending institutions and nonprofit financial organizations to increase access to capital for small businesses. In 2012, SBA established a new headquarters unit within the Office of Government Contracting and Business Development and made it responsible for processing the continued eligibility portion of the annual review required for participants in the 8(a) program. Prior to this change, district officials, who are also responsible for providing business development assistance to 8(a) firms, were tasked with conducting exams of continued eligibility. While district officials have continued to perform other components of the annual review, shifting the responsibility for processing continued eligibility to headquarters was designed to eliminate the conflict of interest for district officials associated with performing both assistance and oversight roles. In 2012, the Office of Field Operations revamped field office operations following a 2010 review of all position descriptions to ensure that they aligned with SBA's strategic plan and its district office strategic plans. Many position descriptions were rewritten, although there were no changes in grade or series. Before the review, district offices had two principal program delivery positions--lender relations specialist and business development specialist. As a result of the review, descriptions for both positions were rewritten, and the business development specialist position became two--economic development specialist and business opportunity specialist. The skills and competencies for the new position descriptions focused on the change in the district offices' function from loan processing to compliance and community outreach in an effort to address skill gaps. As a result, staff were retrained for the rewritten positions. In 2013, SBA reestablished the Office of the Chief Operating Officer (formerly the Office of Management and Administration) to improve operating efficiency. Among other things, this change transferred Office of Management and Administration staff to the reestablished office, along with the Office of the Chief Information Officer and the Office of Disaster Planning, which saw its mission expanded to include enterprise risk management. In addition to the contact named above, A. Paige Smith (Assistant Director), Meredith P. Graves (Analyst-in-Charge), Jerry Ambroise, Emily Chalmers, Pamela Davidson, Carol Henn, John McGrail, Marc Molino, Erika Navarro, William Reinsberg, Deena Richart, Gloria Ross, and Jena Sinkfield made key contributions to this report.
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SBA was created in 1953, and its regional offices were established shortly thereafter. In the late 1990s and early 2000s, the agency downsized the staff and responsibilities of the regional offices. These offices, which are managed by politically appointed administrators, are currently responsible for supervising SBA's district offices and promoting the President's messages throughout the region. GAO was asked to review SBA's current organizational structure, with a focus on the regional offices. Among other objectives, this report (1) examines challenges related to SBA's organizational structure and (2) discusses the budgetary effects of closing the regional offices and SBA managers' and staff's views on other possible effects of closures. GAO reviewed documentation on changes to SBA's organizational structure from fiscal years 2005-2014 (following SBA's last major reorganization in 2004); analyzed data on fiscal year 2013 regional budgets (the most recent data SBA provided); and interviewed a total of 60 SBA officials at headquarters, all 10 regional offices, and a nongeneralizable sample of 10 of the 68 district offices (one from each region reflecting a variety of sizes). While long-standing organizational challenges affected program oversight and human capital management, the Small Business Administration (SBA) has not documented an assessment of its overall organizational structure that could help determine how to address these challenges. SBA currently has a three-tiered organizational structure--headquarters offices, 10 regional offices, and 68 district offices. SBA's last major reorganization was in 2004, when it moved loan processing from district offices to specialized centers and assigned district offices new duties, such as small business counseling. But the agency has continued to face long-standing organizational and workforce challenges, including complex overlapping responsibilities among headquarters and regional offices and skill gaps in district offices (which are supervised by regional offices). These challenges can affect SBA's ability to deliver its programs consistently and effectively, especially in a climate of resource constraints. SBA's response has been limited to (1) making incremental changes to some of its divisions such as consolidating functions or changing reporting relationships and (2) offering employees early retirement. SBA committed to assessing and revising its organizational structure in 2012 but has not yet documented this effort. Although a contractor studied SBA's organizational structure in March 2015 and SBA stated it had completed its assessment of the contractor's work as of August 2015, it has not provided documentation of this assessment. In a related, soon-to-be-released report on SBA's management, GAO assesses the agency's organizational structure and makes recommendations as appropriate. Closing SBA's 10 regional offices, as some have suggested, would have a limited effect on SBA's budget, but the impact on operations is less clear. Compensation and benefits--totaling $4.5 million in fiscal 2013--were the largest costs of regional offices, which together had other administrative costs totaling about $235,000 and were co-located with district offices. Because these costs constituted less than 1 percent of SBA's approximately $1 billion appropriation in 2013, closing the regional offices would have a limited budgetary effect. But over half of the SBA managers GAO interviewed (18 of 32) said that closing regional offices could pose operational challenges. First, headquarters, regional, and district managers said that eliminating the 10 regional administrators would require one headquarters office to supervise 68 district directors. Second, regional and district officials were concerned that SBA would lose the overall regional perspective and ability to balance workloads within regions. Third, headquarters, regional, and district managers explained that the agency would be challenged to promote SBA's message without regional offices. They emphasized the role that regional administrators play in explaining and amplifying the President's and SBA Administrator's messages and priorities. However, a few (6 of 28) nonmanagement staff GAO interviewed disputed the importance of regional administrators, some stating that district offices could coordinate directly with headquarters offices. GAO recognizes that regional administrators and offices provide a number of services for SBA. If closures were to occur, there are options available to address these challenges. However, it would be important to carefully assess the feasibility of these options and weigh the related costs and benefits before deciding on a course of action. GAO is not making recommendations in this report. However, in a related, soon-to-be-released report examining SBA management issues, GAO assesses organizational structure and makes recommendations as appropriate.
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Community policing is generally defined as a shift in police efforts from a solely reactive response to crime to also proactively working with residents to prevent crime. Citizens, police departments, and other agencies are to work together to identify problems and apply appropriate problem-solving strategies. The practice of community policing began to emerge in the late 1970s. The Department of Justice (DOJ) has supported community policing efforts through various implementation and research grants for about the last 15 years. The Public Safety Partnership and Community Policing Act of 1994 (Community Policing Act)--Title I of the Violent Crime Control and Law Enforcement Act of 1994--authorizes DOJ to make grants for the hiring or rehiring of law enforcement officers to participate in community policing. In addition, the Community Policing Act authorizes DOJ to award grants for the purchase of equipment, technology, and support systems if the expenditures would result in an increase in the number of officers deployed in community-oriented policing. It also authorizes grants for other programs such as providing specialized training to enhance skills needed to work in partnership with members of the community. The purposes of the grants are to increase police presence, expand and improve cooperative efforts between law enforcement agencies and members of the community to address crime and disorder problems, and otherwise enhance public safety. The Community Policing Act authorizes $8.8 billion in grants over a 6-year period to states, local governments, Indian tribal governments, other public and private entities, and multijurisdictional or regional consortia. Fiscal year 1995 appropriated funds for the Community Policing Act totaled $1.3 billion. The President's fiscal year 1996 budget requests about $1.9 billion for public safety and community policing grants. DOJ has used three programs to date--COPS: Phase I, COPS FAST, and COPS AHEAD--as part of its efforts to increase by 100,000 the number of sworn law enforcement officers over current levels by providing community policing grants. COPS: Phase I was open only to jurisdictions not funded due to a scarcity of funds under DOJ's 1993-1994 Police Hiring Supplement Program (PHSP). COPS FAST is open to state, local, and other public enforcement agencies, Indian tribal governments, other public and private entities, and multijurisdictional or regional consortia that employ sworn law enforcement officers and that serve populations under 50,000. COPS AHEAD is open to those agencies serving populations of 50,000 or more. DOJ community policing guidelines provide that jurisdictions that had received COPS: Phase I funding were also eligible to receive additional funding under COPS AHEAD if the combined hiring under both programs did not exceed 3 percent of the actual October 1, 1994, total police force level.In addition, an agency that received funding under COPS: Phase I is eligible to receive additional funding under COPS FAST. DOJ has also announced additional programs. The guidelines also stipulate that federal grant funds awarded under the COPS FAST and COPS AHEAD programs cannot exceed 75 percent of the total salary and benefits of each officer up to a maximum of $75,000 per officer for a 3-year period. Grantees are required to provide at least 25 percent of officer costs and commit to retaining new officers after the grant expires. The application and selection processes varied somewhat between the COPS: Phase I program and the COPS FAST and COPS AHEAD programs because they were administered differently by separate offices within DOJ. BJA administered the application and selection of COPS: Phase I awards. The Attorney General created a separate office, the COPS Office, to administer the Community Policing Act grants. This office designed the application and selection processes for the COPS FAST and COPS AHEAD grants. The COPS Office is to monitor the grants awarded under all three programs. The Community Policing Act requires that each application (1) include, among other things, a long-term community policing strategy and a detailed implementation plan; (2) demonstrate a specific public safety need; and (3) explain the applicant's inability to meet its public safety needs without federal assistance. The act makes special provisions for applications of local government or law enforcement agencies in jurisdictions with populations of less than 50,000 and for nonpolice hiring grants of less than $1 million by allowing the Attorney General to waive one or more of the grant application requirements and to facilitate the submission, processing, and approval of these applications. The difference in the application process between COPS: Phase I and COPS FAST and COPS AHEAD grants is the stage at which jurisdictions could begin recruiting and hiring additional officers. In the traditional grant process used for COPS: Phase I, jurisdictions submitted a detailed application to BJA for review and waited for final grant approval and award before beginning officer recruitment, hiring, and training. For the COPS FAST and COPS AHEAD grant programs, the COPS Office implemented a two-step application process that allowed jurisdictions to recruit, hire, and train officers while final grant applications were being reviewed. In response to a suggestion from the U.S. Conference of Mayors to expedite the grant application process for the COPS FAST and COPS AHEAD programs, the COPS Office designed a two-step application process to try to get new officers on the street months earlier than they would be under traditional grant award processes. First, for COPS AHEAD, the COPS Office used a one-page initial application to determine the number of officers jurisdictions could recruit and train. Approved jurisdictions were notified of proposed funding levels, cautioned that the funding was tentative, and warned that if the subsequent application was not approved, the COPS Office would not be held liable for officers hired. In COPS FAST, grant decisions were made based upon one-page applications. Second, the selected jurisdictions in both programs were to submit additional information to the COPS Office prior to issuance of formal awards. COPS AHEAD agencies were asked to submit detailed applications, while COPS FAST supplied brief budget and community policing information. The type of information and amount of detail required in this second application differed between COPS FAST and COPS AHEAD programs. COPS FAST applicants were allowed to provide less detailed information because the Attorney General waived certain requirements for communities serving under 50,000 residents. BJA awarded the COPS: Phase I grants based primarily on public safety need, while the COPS Office used commitment to community policing as the primary eligibility criterion for the COPS FAST and COPS AHEAD grants. COPS: Phase I grantees were competitively selected on the basis of the following five criteria used for PHSP applicants: (1) public safety need (40 percent), (2) community policing strategy (30 percent), (3) implementation plan (10 percent), (4) continuation and retention plan (10 percent), and (5) additional resource commitments (10 percent). The eligible jurisdictions for COPS: Phase I were those 2,507 jurisdictions that applied for the 1993-1994 PHSP but did not receive funding. BJA considered applications from both traditional law enforcement jurisdictions--such as municipal, county, and state police--and special law enforcement jurisdictions--such as airports, parks, and transit authorities. A BJA official said that most of the COPS: Phase I applicants demonstrating a high or moderate need based on the above five factors received funding. In addition, 16 jurisdictions received waivers of the local match requirement after demonstrating extraordinary economic hardships. The Assistant Director for Grants Administration said the intent of the COPS Office was to award COPS FAST and COPS AHEAD grants to as many applicant jurisdictions as funds allowed. However, after receiving more applications than it had expected--about 8,000 of the approximately 15,000 law enforcement jurisdictions applied--the COPS Office decided to consider in COPS FAST and COPS AHEAD only applications from traditional law enforcement jurisdictions. Jurisdictions with satisfactory COPS FAST and COPS AHEAD applications were approved for funds based on the number of officers on board on October 1, 1994. About 92 percent of jurisdictions that applied for a COPS grant received initial award approval. COPS Office staff said that if an application was incomplete, a COPS Office grant adviser contacted a local official for further information. In some cases, jurisdictions were referred for technical assistance to help them plan and implement a community policing strategy. On July 1, 1995, the COPS Office and the Community Policing Consortium entered into a cooperative agreement for the provision of certain training and technical assistance services. Table 1 shows the authorized hiring scale for approved jurisdictions. Table 2 summarizes information about the grant application and selection process for the three COPS programs. The Attorney General established the COPS Office to administer all Community Policing Act grants, including monitoring and evaluation to assess the financial and programmatic impact of the grants. Grantees are required to submit progress and accounting reports and are to be contacted periodically by telephone. Some of the financial monitoring is to be done by DOJ's Office of Justice Programs (OJP). An intra-agency agreement between the COPS Office and OJP allows OJP to provide certain accounting and financial monitoring to track grantee compliance with audit requirements, as well as prepare financial status reports. According to the Assistant Director for Grants Administration, the frequency and extent of evaluation to assess a jurisdiction's grant implementation process will depend on the amount of the grant award, with the level of scrutiny increasing for larger awards. A COPS FAST jurisdiction, for example, which received a grant award for only one law enforcement officer--about 6,200 jurisdictions--is to receive a minimum of telephone contacts and have its periodic progress reports reviewed. A COPS AHEAD jurisdiction, however, which may have received funding for a large number of officers, should expect site visits, frequent telephone contacts, and close review of its community policing efforts through its periodic progress reports. COPS Office staff said that each jurisdiction is to complete periodic progress reports that will outline information on each officer hired and the specific activities and achievements of its community policing program. The COPS Office is to conduct evaluations to review how the jurisdiction interacts with the community, what kind of training is provided to officers and residents, and what specific strategies are used to prevent crime. The COPS Office is to select a sample of jurisdictions for continuous impact evaluations. The Policy Support and Evaluation Unit within the COPS Office is to conduct these evaluations. DOJ's National Institute of Justice is also expected to conduct impact evaluations. Impact evaluations are to be conducted on fewer sites than the process evaluations and are to assess how the quality of life in the community has been affected by community policing efforts. The COPS Office is to examine, for example, crime and arrest data, victimization surveys, and citizen surveys to evaluate the impact of the grants. The periodic progress reports are also to be used to evaluate the impact of the grants. We estimated that about 42 percent of all law enforcement jurisdictions applied for a COPS FAST or COPS AHEAD grant. Jurisdictions eligible for a COPS AHEAD grant were much more likely to apply than were jurisdictions eligible for a COPS FAST grant. About 81 percent of the jurisdictions eligible for the COPS AHEAD program applied; about 49 percent of those eligible for a COPS FAST grant applied. However, regardless of the program, generally, the higher the crime rate, the more likely a jurisdiction was to apply for a grant. Table 3 shows the application rates for law enforcement jurisdictions by program eligibility and number of crimes reported per 1,000 population served. Crimes reported in the 1993 UCR included violent crimes of murder and nonnegligent manslaughter, forcible rape, robbery, and aggravated assault and the property crimes of burglary, larceny-theft, and motor vehicle theft. As previously mentioned, an estimated 92 percent of all jurisdictions that applied for a COPS FAST or COPS AHEAD grant received one. The eligibility criteria for these grant programs included the jurisdiction's commitment to community policing, the type of law enforcement jurisdiction, population, and number of sworn officers on the force. Overall, jurisdictions with populations of less than 50,000 were more likely to receive a COPS grant than were larger jurisdictions. Approximately 93 percent of COPS FAST applicants were accepted, while about 74 percent of the jurisdictions applying for a COPS AHEAD grant were accepted (see table 4). We found no relation between crime rates and whether an applicant jurisdiction was awarded the grant. Table 4 shows the disposition of applications for jurisdictions by program and crime rate. At the Committee's request, we conducted telephone interviews with a random sample of 289 nonapplicant jurisdictions to find out why they did not apply for a grant. From our telephone survey, we estimated that 62 percent (plus or minus 11 percent) of the nonapplicant jurisdictions did not apply for a COPS FAST or COPS AHEAD grant due to cost-related factors. For the following question: "How important was each of the following reasons in your agency's decision to not apply for a COPS program grant?", we asked respondents to assign one of five levels of importance to each of five reasons. Next, we asked respondents to indicate the most important reason for not applying. We also allowed respondents to identify any other reasons that affected their jurisdiction's decision. The estimated 62 percent included about 40 percent (plus or minus 12 percent) of nonapplicants who said uncertainty about the jurisdiction's ability to meet the requirement for continued officer funding after the 3-year grant period was the most important reason for not applying. An additional 18 percent cited the 25-percent local match requirement as the most important reason in their decision; 4 percent cited other financial reasons. An additional 8 percent said the jurisdiction did not apply either because of a lack of information on the grants or because of problems meeting the application deadlines, 3 percent mentioned local political or management decisions, and 4 percent cited various other reasons. In addition, some respondents cited the inadequacy of the $25,000 per year per officer grant to cover the full cost of new officers. According to DOJ's Bureau of Justice Statistics, average starting salaries for entry level officers range from $18,710 to $26,560, with average operating expenditures per officer ranging from $31,500 to $63,400. Table 5 summarizes the results of the importance ratings. We reviewed a random sample of 207 COPS FAST approved applications and found that approximately 84 percent (plus or minus 5 percent) of these jurisdictions--serving populations of less than 50,000--cited property crimes most frequently among their top five ranked public safety issues (from the categories listed on the application form), with almost half of the jurisdictions ranking it as their first or second most important concern. In addition, we estimated that at least half the jurisdictions ranked the following public safety issues among their top five: domestic violence, alcohol-related crimes, drug crimes, vandalism, and violent crimes against persons. Table 6 shows the rank order of the public safety issues. On September 13, 1995, we received written comments from the Director of DOJ's Office of Community Oriented Policing Services on a draft of this report. He said that the popularity of the COPS grant programs continues to expand and provided technical clarifications, which we incorporated where appropriate. He also provided some updated information on the progress of the programs since our audit work was completed. The Director's written comments are reproduced in full in appendix II. We are sending copies of this report to other interested congressional committees and Members and to the Attorney General. Copies will also be made available to others upon request. The major contributors to this report are listed in appendix III. Please call me on (202) 512-8777 if you have any questions concerning this report. As agreed with the Committee and Subcommittee, our objectives were to review various aspects of the COPS programs and describe the grant application, selection, and monitoring processes for COPS: Phase I, COPS FAST, and COPS AHEAD. In addition, for COPS FAST and COPS AHEAD we were to compare the crime rates for applicant and nonapplicant jurisdictions, determine why some jurisdictions chose not to apply for the grants, and determine the public safety issues of applicant jurisdictions. To describe the application, selection, and monitoring processes for the COPS programs, we interviewed officials from BJA and the COPS Office, including the Assistant Director for Grants Administration and the co-chiefs of the Grant Monitoring sections. In addition, we reviewed documents used in the grants process, including application forms, selection review forms, and draft monitoring guidelines. To determine and compare crime rates for COPS FAST and COPS AHEAD applicant and nonapplicant jurisdictions, we used application data provided by the COPS Office and UCR data for 1993, which lists all law enforcement jurisdictions that report crimes to the Federal Bureau of Investigation. UCR data contained information on population and numbers of reported crimes for jurisdictions. We merged the COPS Office's listing of applicant jurisdictions with UCR data to identify nonapplicant jurisdictions. Next, we used UCR data to assign jurisdictions to population categories (less than 50,000 and 50,000 and over) and calculated the number of crimes reported per 1,000 population served. We grouped jurisdictions into COPS FAST and COPS AHEAD grant applicants and nonapplicants, and applicants into those approved and those not approved. To determine why jurisdictions chose not to apply for COPS grants, we surveyed a stratified, random sample of nonapplicants by telephone. We limited our survey population to city, local, county, and tribal police. These types of law enforcement agencies account for 91 percent of all jurisdictions. Using UCR population data, we stratified the population into three size groups and selected random samples from each: 0 - <10,000 population (71 from 6,094 jurisdictions); 10,000 - <50,000 (143 from 1,375 jurisdictions); and 50,000 and over (all 170 jurisdictions). We completed 334, or 87 percent, of our planned contacts with the sample of 384 jurisdictions. Fifty contacts were not completed for various reasons, including difficulty in reaching the appropriate respondent and unwillingness of some jurisdictions to respond. Of the 334 contacts made, we completed interviews with respondents in 289 jurisdictions. We found that 45 did not belong in our study population because they had applied for a COPS grant. Mostly, these jurisdictions were either covered under another jurisdiction's application (and the application was identified by the other jurisdiction) or not listed on the COPS program's applicant file as an individual applicant. All survey results have been weighted to represent the total population. To determine the public safety issues of applicant jurisdictions, we reviewed a random sample of 207 of the 3,258 COPS FAST applications that had been received and graded or approved for funding as of April 25, 1995. According to the Assistant Director for Grants Administration, this represents about half of the 6,656 jurisdictions that were given preliminary funding approval. Applications were stored at various locations in the COPS Office. To obtain our sample, we used a random starting point and then took every 16th application from the files. Jurisdictions applying for the COPS FAST program were required to rank order their public safety issues from a list of 16 issues. We did not review COPS AHEAD applications because their statements of public safety needs were included as part of a narrative description of their community policing program, which could be up to 18 pages. It would have been difficult, if not impossible, to identify or infer the relative importance of the public safety concerns from such narrative sources. Our work was done primarily in Washington, D.C., from April to August 1995 in accordance with generally accepted government auditing standards. The Office of Community Oriented Policing Services provided written comments on a draft of this report. The written comments are reproduced in appendix II. Ann H. Finley, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO reviewed various aspects of the Community Oriented Policing Services (COPS) Program, focusing on the reasons some jurisdictions did not apply for federal community policing grants. GAO found that: (1) jurisdictions with higher crime rates were more likely to apply for COPS grants; (2) nearly 92 percent of the jurisdictions applying for grants received initial approval; (3) some jurisdictions were uncertain about being able to continue officer funding after their grant expired and about their ability to provide the required 25 percent match; (4) the jurisdictions that did not apply for COPS grants cited cost-related factors as their major concern; and (5) the most frequent crimes reported by COPS Funding Accelerated for Smaller Towns (FAST) applicants were property crime and domestic violence.
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DeCA, headquartered at Fort Lee, Virginia, is the Department of Defense's designated agency for managing commissaries on a worldwide basis. A Commissary Operating Board, which is comprised of representatives from each of the military services, has day-to-day operational oversight responsibilities for DeCA. The Under Secretary of Defense (Personnel and Readiness) exercises overall supervision of the commissary system. DeCA operates four regional offices that oversee the management of its commissaries. Commissaries are located in 46 states and 14 foreign countries. As of November 7, 2002, the agency had 276 stores and more than 16,000 employees under its purview. Its annual sales in fiscal year 2002 amounted to about $5 billion. In meeting its mission of providing groceries at a savings to the customer, in the most efficient and effective manner possible, DeCA strives to provide the lowest cost possible, charging patrons only for the cost of goods plus a 5-percent surcharge. DeCA receives about $1 billion in direct appropriations from Congress for its annual operating costs. These funds pay for employees' salaries, transportation, some above-store-level information technology, and other expenses. DeCA also operates a resale stock fund for the purchase and sale of products. To the extent that savings in operating costs occur, they reduce the need for appropriated funds. The savings in store operating costs do not have an effect on the cost of merchandise sold to customers. In January 2001, DeCA issued its current strategic plan. This plan included objectives to reduce unit operating costs and reshape the workforce while maintaining or improving customer service and satisfaction. A major focus of the unit cost reduction objective was to reduce positions as well as streamline operations and develop a more efficient organization. To reshape the workforce, DeCA planned to determine the appropriate mix of skills and expertise and the appropriate level of part-time employees to carry out the reductions to reach a more efficient organization. DeCA conducts a biannual Commissary Customer Service Survey to assess customer views of products and services. A team appointed by each store director administers the survey. Customers are systematically selected while waiting in checkout lines. A predetermined number of questionnaires are collected during three periods (morning, midday, and evening) each day for 10 consecutive days during May and November each year. The survey questions are multiple choice with space available for written comments. See appendix I for a copy of the questionnaire. The completed forms are mailed to DeCA headquarters for analysis, and customer service scores are calculated for DeCA overall and for each region and store. Despite the workforce reductions, store operations and customer service have been maintained at the same level, and in some cases improved. DeCA has used various measures to eliminate 2,602 full-time positions, or 85 percent of the planned reductions as of December 31, 2002; very few employees have been separated from the agency. While downsizing and reshaping were occurring, regional officials stated that they encouraged store directors to use part-time positions to maintain store operations. DeCA officials stated the use of part-time employees has enabled store directors to better manage workload fluctuations, expand hours of operation, and thereby improve customer service. However, because DeCA's strategic plan does not include specific goals for achieving a certain full-time/part-time workforce mix in stores, the planned percentage of part-time positions varies widely by individual store and region. Despite personnel reductions, scores for the customer satisfaction surveys completed since DeCA began the personnel reductions show the same or slightly increasing levels of customer satisfaction with the stores. Notwithstanding the improvements, managers of small stores report having difficulty balancing store operations and duties, as a result of the reductions in the number of management positions. DeCA is using workforce reductions as the primary means to achieve its goal of reducing operating costs by fiscal year 2004. As table 1 shows, DeCA plans to reduce its workforce by 3,047 full-time positions, a decrease of 17 percent from its fiscal year 2000 staff. Of these positions, the largest number (2,690) will come from reductions at the store level while 187 will come from headquarters and 170 from regional offices. As of December 31, 2002, DeCA had completed all of its workforce reductions at the regional offices and 62 percent of its planned headquarters' reductions. It accomplished this by eliminating 137 vacant positions (114 in headquarters and 23 in the regional offices). It reduced its regional staff by another 147 positions through organizational changes and other efficiencies, including closing two area offices in one region. By the same date, DeCA had completed most of its planned workforce reductions at the store level, eliminating 2,316, or 86 percent of the 2,690 positions that it had targeted. As table 2 indicates, most of the planned store-level reductions (51 percent) are being achieved by implementing efficiency measures within stores. Efficiencies are being derived by implementing new staffing standards for each department within a store based on sales volume and other measures. The remaining reductions are accomplished by other methods, including eliminating vacant positions, closing stores, and contracting out some functions. A breakdown of completed and planned workforce reductions at the store level are as follows: 1,113 positions were eliminated by implementing the new store staffing standards based on sales volume. The remaining 261 efficiency reductions are planned in fiscal year 2003. 812 vacant positions were eliminated. A DeCA official stated that vacant positions existed because stores had historically been funded at only 90 percent of their required staffing. The elimination of these positions resulted in no personnel losses and produced no savings. 304 positions were eliminated as a result of 15 store closings. Closings can stem from Base Realignment and Closure recommendations or Under Secretary of Defense (Personnel and Readiness) approval of DeCA's recommendations from internal assessments. An additional 49 positions will be eliminated at two stores scheduled to close in fiscal year 2003. 87 positions were eliminated by contracting out such store functions as receiving, handling, and stocking. An additional 30 positions at various stores will be eliminated in this way in fiscal year 2003. The remaining 26 planned reductions were canceled to provide positions for a new computer-aided ordering function. Although DeCA had eliminated most of the planned 2,690 positions from its stores by the end of 2002, only 122 store employees were separated from the agency by a reduction in force and an additional 341 employees retired. Other employees were reassigned or moved to lower graded positions through the reduction process. As part of the effort to reshape the workforce, all stores have begun to, or plan to, increase the use of part-time positions to manage workloads and meet the needs of customers. However, since DeCA's strategic plan does not include specific goals for achieving a certain full-time/part-time workforce mix in stores, the planned percentage of part-time positions varies widely by individual store and region. The available data shows that the number of part-time positions in stores has increased since the personnel reduction plan went into effect. For example, the number of part-time employees rose by 8 percent in stores in the Midwest region between April 2001 and October 2002. Store directors told us that using part-time employees improved their ability to manage fluctuations in store workloads more effectively. For example, a store director said that part-time employees were used during weekends and holidays to save money. Another store director pointed out that part-time employees are available to work if there is work to do in a department or cover a peak shopping period, but they can be sent home if the work is completed. In addition, some store directors told us that a greater use of part-time workers has allowed them to increase their store operating hours. We found that 30 stores have increased their hours of operation by relying more heavily on part-time employees. For example, one store with a part-time workforce of nearly 60 percent increased its operating hours by 6 hours a week. In addition, current individual store plans call for a growth in the number of part-time positions in stores as of the end of fiscal year 2003. The Eastern and Midwest regions estimate that about 56 percent of their store positions will be part-time, and the Western Pacific region estimates 46 percent of its store positions will be part-time. Table 3 shows the range in the percentage of part-time positions that stores within each sales band plan to employ. As table 3 shows, the planned percentage of part-time positions varies widely by individual store and region. For example, one Eastern region store expects to convert all of its store positions to part time while another store in the Western Pacific region plans to have only 7 percent of its workforce as part time. While some stores are close to the 75 to 80 percent industry average for part-time positions in commercial grocery stores, the overall regional average of part-time positions indicates that there are opportunities to achieve more efficiencies through greater use of part-time positions. Store directors have the flexibility of changing the mix of full-time and part-time positions in their stores. Some store directors told us they used part-time positions primarily to meet their budget goals. One store director said that part-time positions were created to meet the store's budget and that there were no plans to increase part-time positions in the store once the needed reductions were made. However, nearly all of the store directors we interviewed said that they could operate their stores with more part-time positions rather than full-time positions. As indicated earlier, they recognized that part-time positions provide flexibility to manage workload fluctuations more effectively. A regional director said that agencywide goals for part-time workers need to be incorporated into the strategic plan to optimize agency efforts to reshape the workforce. According to recent surveys, customer satisfaction with commissary stores has shown a modest, but steady, improvement between October 2001 and November 2002, the period when personnel reductions were being made. These improvements were registered in the overall score, ranging from 4.33 to 4.39, as well as in specific products and service categories. Table 4 includes results for 6 of the 14 questions, as well as the overall score. These scores reflect continuing satisfaction including those likely to be most immediately affected by changes in personnel levels such as checkout waiting time. As part of the effort to reshape the workforce, many directors of small stores (bands 1 and 2) told us they had to eliminate one managerial position. Small stores that have less than $60,000 in average monthly sales were required to reduce the number of managers to one manager. Small stores with $60,000 to $500,000 in average monthly sales had to reduce their number to two managers. The managers of 15 of the 28 band 1 stores told us that they are having difficulties balancing store operations with their own managerial and administrative duties along with doing the work of absent employees. Some store directors said they typically have to work more than 40 hours a week to perform all these duties. Eighty-seven percent of these 15 band 1 stores are open more than 40 hours a week. Because DeCA policy requires that a manager be present in the store when it is open for customers, when the second manager or an employee is absent, the on-duty manager has to carry his/her own workload and administrative functions, as well as the load of the absent manager or employee, typically working over the usual 40-hour work week. DeCA headquarters officials have recognized the concerns raised by managers in small stores and the need to balance their overall workload but have not yet developed a plan for doing so. Overall, DeCA's customer satisfaction survey methodology is a reasonable approach to obtain customer feedback. It adheres to standard questionnaire design principles, and attempts to select shoppers in an unbiased fashion. However, some improvements in the analysis of survey data could be made to provide more precise and complete customer information. For example, it could adjust survey results for actual sales volumes, or report and possibly adjust for shoppers who refuse to complete the survey questionnaire. Because these factors are not considered, overall survey results could be distorted to some degree. Furthermore, the current survey does not collect information on the number of service members who do not shop at a commissary and reasons why they do not. DeCA's current methodology appropriately attempts to obtain more survey responses from stores with higher sales volumes than stores with smaller sales volumes. DeCA places commissaries into three groups according to sales volume. They do this so that survey responses of customers in greater sales volume stores receive more emphasis than those in lower volume stores. For example, stores in the largest sales volume group are required to collect 150 responses, stores in the next largest sales group collect 100 responses, and those in the lowest sales volume group collect 50 responses. However, sales volume can vary significantly among the stores in the same group as well as between groups. A more precise methodology would entail weighting survey responses by the relative sales volume of individual stores. This approach could help DeCA avoid potential over- or underreporting of survey results, and evaluate changes in survey results that may be impacted by changes in sales volume. DeCA does not document the number of customers who refuse to participate in the customer satisfaction survey. DeCA officials told us that most customers selected to participate in the survey willingly respond, but they acknowledge that documenting the number of non-respondents would enhance survey reporting. Survey literature indicates that even nominally low levels of non-responses can influence the interpretation of survey results. There may be a particular sub-group of customers that does not respond to the questionnaire and that would not be reflected in DeCA results. By not adjusting for non-response, DeCA is assuming that respondents have similar satisfaction scores as non-respondents. Also, by collecting data on non-respondents, the agency may be able to determine if the results omit customer subgroups whose opinions may be important. For example, some dependents of service personnel may not feel comfortable participating in the survey because of language barriers. DeCA does not conduct systematic assessments of the number and types of personnel who do not shop at commissaries. The customer satisfaction survey is conducted in the stores, and thus reflects the views of those who shop at the commissaries. They do not capture the views of those who do not shop there. Although DeCA's strategic plan addresses the need to attract more military personnel to use the commissary, DeCA officials do not know to what extent eligible customers are not shopping at a commissary and the reasons why not. Realignment of the workforce, through greater use of part-time employees, has enabled many stores to increase their operating hours and maintain or improve customer service. However, DeCA's strategic plan does not include specific goals for the full-time/part-time workforce mix. As a result, the extent of part-time employees varied among the stores and is significantly less than current industry practice. Opportunities to achieve even more efficiencies may exist through greater use of part-time positions. In addition, small store directors have concerns about balancing their workload and maintaining store operations. Although DeCA's customer satisfaction survey questionnaire is reasonable, survey results could be subject to some under- or over- stated because the current methodology does not explicitly weight stores' results by sales volume and does not collect data on non-responding customers. Finally, DeCA does not know how many eligible service members do not shop at a commissary and the reasons they do not. We recommend that the Under Secretary of Defense (Personnel and Readiness), in consultation with the Chairman, Commissary Operating Board, require the Director, Defense Commissary Agency, to update the strategic plan to include goals that identify the percent of the store workforce that is expected to be full- and part-time to achieve further efficiencies from reshaping the workforce; reassess the management reductions at small stores to ensure managers can balance their workload and maintain store operations; adjust the customer survey results on the basis of sales volume and document the number of survey non-respondents and their reasons for not completing the questionnaire; and examine potential methods and analyses to periodically determine how many and why eligible personnel do not shop at commissaries, to identify ways to improve service and increase the number of potential customers using the commissary benefit. In commenting on a draft of this report, the Under Secretary of Defense (Personnel and Readiness) concurred with four of our five recommendations and outlined actions to be taken to address the four recommendations the department concurred with. He disagreed with our recommendation that the Defense Commissary Agency update its strategic plan to include goals that identify the percent of the store workforce that is expected to be full- and part-time, expressing the view that staff in Washington should not prescribe the full-part-time mix for stores. The intent of our recommendation was not for the Under Secretary to prescribe the workforce mix for stores but rather have the Defense Commissary Agency include agencywide goals on the projected workforce mix in its strategic plan to help achieve the goal of reshaping the workforce. Rather than being arbitrary or prescriptive, such goals, if based on considered research or best practices, could provide an important term of reference to guide staffing decisions at the local level to optimize organizational performance and cost effectiveness. We continue to believe the recommendation is an appropriate one for the Defense Commissary Agency to implement. The department's comments are reprinted in appendix II. We performed our work at DeCA headquarters located at Fort Lee, Virginia, and DeCA's three regional offices in the continental United States (the Eastern Regional Office in Virginia Beach, Virginia; the Midwest Regional Office in San Antonio, Texas; and the Western Pacific Regional Office in Sacramento, California). Due to travel costs and time constraints, we did not do any work at the European Regional Office in Germany; however, the total number of reductions shown for DeCA does include positions in the European Region. To determine the status of DeCA's personnel reduction plan, we obtained data from DeCA headquarters and each regional office on the number of reductions planned by region by store as well as made as of December 31, 2002. We also analyzed reduction-in-force data to determine the actual or estimated impact on store employees. We also reviewed DeCA's strategic plan to document DeCA's plans for reducing unit operating costs and reshaping the workforce. We did not validate the cost savings reported by DeCA. To determine how store operations and customer service have been affected by the personnel reductions, we interviewed officials at DeCA headquarters and the three regional offices in the United States. We also interviewed store directors at eight stores that were near the Eastern and Midwest regional offices. In addition, we also conducted telephone interviews with either the store directors or managers for 38 band 1 and 2 stores in the continental United States (defined as having average monthly sales volume of less than $1 million), resulting in interviews of all 41 band 1 and 2 stores in the continental United States. We also determined the planned use of part-time positions by each store in the three regional offices visited. Finally, we also reviewed and discussed the Commissary Customer Service Survey results for the surveys conducted in October 2001 and May and November 2002, to identify changes in the satisfaction scores as the personnel reductions were being implemented. To determine if the DeCA customer satisfaction survey methodology is reasonable, we reviewed DeCA's questionnaire and methodology and contrasted these to standard questionnaire design and statistical sampling procedures used in industry and government research. We also interviewed DeCA officials responsible for administering the survey regarding their analysis of survey results. We also observed the survey being conducted at the Fort Myer store in Virginia in November 2003. We conducted our review from July 2002 through January 2003 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of Defense; the Under Secretary of Defense (Personnel and Readiness); the Chairman, Commissary Operating Board; Director, Defense Commissary Agency; and the Director, Office of Management and Budget. In addition, the report will be available at no charge on GAO's Web site at www.gao.gov and to others upon request. Please contact me at (202) 512-8412 if you or your staff have any questions concerning this report. Major contributors to this report were Michael Kennedy, Leslie Gregor, Betsy Morris, Curtis Groves, and Nancy Benco.
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In response to concerns about the impact of proposed cuts in the Defense Commissary Agency's workforce, the House Armed Services Committee placed in its report on the Bob Stump National Defense Authorization Act for Fiscal Year 2003 a requirement that we evaluate the effect of the personnel reductions. Specifically, we assessed (1) the status of personnel reductions and how they have affected store operations and customer service, and (2) whether the agency uses a reliable methodology to measure customer satisfaction with its commissaries. The Defense Commissary Agency's commissary operations and customer services have been maintained at the same level, and in some cases improved, despite the recent reductions in workforce. As of December 31, 2002, the agency had completed most of its 3,047 planned personnel reductions in full-time positions. It accomplished this primarily by achieving efficiencies or eliminating vacant positions in the stores. Only 122 employees have been separated and 341 retired as a result of the personnel cutbacks. A major focus of DeCA's personnel reductions, as outlined in its strategic plan, was to reshape the workforce and develop a more efficient organization. We found that commissaries are making greater use of part-time employees because of the reductions. This has allowed some stores to increase their operating hours to better meet customer needs. It has also given store managers more flexibility in meeting workload fluctuations. However, DeCA's strategic plan does not include specific goals for achieving a certain full-time/part-time workforce mix in stores. As a result, the planned percentage of part-time positions varies widely by store. A recent customer satisfaction survey showed that commissary patrons expressed high satisfaction with their overall shopping experience, as well as with such key indicators as time waiting in line and convenient hours. However, the managers of the smaller commissaries reported concerns over balancing workload and maintaining store operations. We found that the Commissary Customer Satisfaction Survey methodology is reasonable. However, some improvements in the analysis of survey data could ensure that the findings are more complete and consistent. Such changes could include adjusting survey results for the volume of sales at individual stores or for the number of shoppers who refuse to fill out the questionnaire. Furthermore, the current survey does not collect information on the number of, and reasons why, potential customers do not shop at their local commissaries.
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Within the Department of Health and Human Services (HHS), CMS is responsible for overseeing Medicaid at the federal level, while states are responsible for the day-to-day operations of their Medicaid programs. Under section 1115 of the Social Security Act, the Secretary of HHS may waive certain Medicaid requirements to allow states to implement demonstrations through which states can test and evaluate new approaches for delivering Medicaid services that, in the Secretary's judgment, are likely to assist in promoting Medicaid objectives. Prior to the enactment of PPACA, states that wanted to expand Medicaid coverage to childless adults could do so only under a demonstration. While states may now expand their programs to cover these individuals through a state plan amendment, some states have expanded coverage under demonstrations in order to tailor coverage for this group in a manner that differs from what federal law requires. For example, states are not permitted to exclude coverage of mandatory benefits, such as NEMT, under their state plans, but they may do so by obtaining a waiver of the requirement under a demonstration. Recently, the Secretary of HHS approved various states' demonstrations to test alternative approaches, such as allowing states to use Medicaid funds to provide newly eligible enrollees with premium assistance to purchase private health plans in their respective state marketplace, or to exclude from coverage certain mandatory Medicaid benefits, such as NEMT, for newly eligible enrollees. CMS has required those states that have obtained approval to exclude the NEMT benefit for one year under a demonstration to submit annual evaluations on the effect of this change on access to care, which will inform the agency's decision to approve any extension requests. Evaluations by research organizations identified the lack of transportation as a barrier to care that can affect costs and health outcomes. For example, a survey of adults in the National Health Interview Survey found that limited transportation disproportionally affected Medicaid enrollees' access to primary care. A study by the Transportation Research Board found that individuals who miss medical appointments due to transportation issues could potentially exacerbate diseases, thus leading to costly subsequent care, such as emergency room visits and hospitalizations. We also previously reported that there are many federal programs, including Medicaid, that provide the NEMT benefit to the transportation-disadvantaged population. However, in this work we found that coordination of NEMT programs at the federal level is limited, and there is fragmentation, overlap, and the potential for duplication across NEMT programs. As a result, individuals who rely on these programs may encounter fragmented services that are narrowly focused and difficult to navigate, possibly resulting in NEMT service gaps. Among the 30 states that expanded Medicaid as of September 30, 2015, 25 reported that they did not undertake efforts to exclude the NEMT benefit for newly eligible Medicaid enrollees and were not considering doing so. Three states reported pursuing such efforts, and two states did not respond to our inquiry, although CMS indicated that neither of these states undertook efforts to exclude the NEMT benefit. (See fig. 1.) Three states (Indiana, Iowa, and Arizona) reported undertaking efforts to exclude the NEMT benefit under a demonstration as part of a broader health care initiative to expand Medicaid in their respective states. However, only Indiana and Iowa had received approval from HHS for these waivers as of September 30, 2015, while Arizona was still seeking approval. Indiana: Indiana's effort to exclude the NEMT benefit from coverage pre-dates PPACA and is not specific to newly eligible enrollees under the state's expansion. Beginning in February 2015, Indiana expanded Medicaid under a demonstration that provides two levels of coverage for newly eligible enrollees, depending on their income level and payment of premiums. As part of this demonstration, the state received approval to exclude the NEMT benefit for newly eligible enrollees. Indiana's efforts to implement its Medicaid expansion are based, in part, on another demonstration that the state has had in place since 2008. Under this older demonstration, which provided authority for the state to offer Medicaid coverage to certain uninsured adults, NEMT was not a covered benefit for this population. Iowa: Iowa expanded Medicaid in response to PPACA through two demonstrations beginning in January 2014. Under these demonstrations, the state offers two separate programs for newly eligible enrollees: one that offers Medicaid coverage administered by the state to enrollees with incomes up to 100 percent of the FPL, and a second that offers premium assistance to purchase private coverage through the state's health insurance marketplace for those enrollees with incomes from 100 to 133 percent of the FPL. For both of these demonstrations, the state received approval to exclude the NEMT benefit. Similar to Indiana, Iowa's effort to exclude the NEMT benefit for a portion of its Medicaid population pre-dates PPACA. In July 2005, Iowa expanded Medicaid to certain populations under a demonstration with limited benefits that did not include NEMT. Arizona: When Arizona expanded Medicaid in January 2014, it had not sought to exclude the NEMT benefit for newly eligible enrollees. However, when the state submitted a request on September 30, 2015, to extend its longstanding demonstration, it sought approval to exclude the NEMT benefit. Arizona's proposed extension would require newly eligible adults, including those with incomes from 100 to 133 percent of the FPL, to enroll in a new Medicaid program that includes enrollee contributions into an account that can be used for non-covered services and an employment incentive program. The proposed extension, including the request to exclude the NEMT benefit, was under review, as of November 2015. Officials from these three states cited several reasons for their efforts to exclude the NEMT benefit, including a desire to align Medicaid benefits with private insurance plans, which typically do not cover this benefit. Indiana officials indicated that when the state initially developed its demonstration in 2008, they designed benefits for a low-income population that tended to be employed. Thus, under that demonstration they offered benefits that resembled private insurance in an effort to familiarize enrollees with private coverage. This experience largely influenced the state's decision under its current demonstration to exclude the NEMT benefit for newly eligible enrollees. Iowa officials reported that when the state expanded Medicaid, they wanted Medicaid benefits to look like a private insurance plan--with the hope of limiting disruptions in service as fluctuations in income could result in changes to enrollees' coverage. While Arizona officials also cited the state's intent to align Medicaid benefits with private health insurance, they also noted that excluding the NEMT benefit would be one way to contain costs. Of the remaining 25 Medicaid expansion states, 14 offered reasons for why they did not exclude the NEMT benefit for newly eligible enrollees. Officials from 8 states reported they did not pursue such efforts because they considered the NEMT benefit critical to ensuring enrollees' access to care. Officials from an additional 4 states reported that they wanted to align benefits for the newly eligible enrollees with those offered to enrollees covered under the traditional Medicaid state plan. Officials from 2 other states reported that the newly eligible Medicaid enrollees did not significantly increase their program enrollment, and therefore, there was no need to alter this benefit. The two states that excluded the NEMT benefit are in different stages of completing required evaluations of the effect of this exclusion on access to care. Research and advocacy groups indicated that excluding the NEMT benefit could affect enrollees' access to services and costs of coverage, and could set a precedent for the Medicaid program moving forward. The two states that obtained approval to exclude the NEMT benefit for newly eligible Medicaid enrollees--Indiana and Iowa--are at different stages of evaluating the effect this will have on enrollees and have different time frames for reporting their results. Indiana officials indicated that the state is currently working with CMS on the design of its evaluation and must submit results to CMS by February 29, 2016. According to a draft of the evaluation design, the state plans to survey enrollees and providers to compare the experiences of Medicaid enrollees with and without the NEMT benefit with respect to missed appointments, preventative care, and overall health outcomes; the state also seeks to determine whether enrollees residing in certain parts of the state are more affected by a lack of this benefit. Similarly, Iowa, which excluded the NEMT benefit for all newly eligible enrollees beginning in January 2014, was required to submit a series of independent analyses to CMS and recently received approval to continue its exclusion of this benefit until March 2016. The state conducted an analysis to determine whether newly eligible enrollees' access to services was affected and reported its results in April 2015. Developed in close consultation with CMS, the analysis focused on the comparability of experiences of enrollees covered under the Medicaid state plan (who have the NEMT benefit) with newly eligible Medicaid expansion enrollees (who do not have the NEMT benefit). With such a focus, the analysis sought to determine whether excluding the NEMT benefit presented more of a barrier to obtaining services than an enrollee would have otherwise experienced under the state's Medicaid state plan. Using enrollee surveys, the analysis found little difference in the barriers to care experienced by the two groups of enrollees as a result of transportation- related issues. For example, the analysis noted that about 20 percent of enrollees in both groups reported usually or always needing help from others to get to a health care appointment. Additionally, the analysis identified comparability between both groups of enrollees in terms of their reported unmet need for transportation to medical appointments (about 12 percent of both groups) and reported worry about the ability to pay for the associated costs (13 percent of both groups). However, looking within the group of newly eligible enrollees without the NEMT benefit, the Iowa evaluation found that those with lower incomes-- under 100 percent of the FPL--tended to need more transportation assistance and have more unmet needs than those with higher incomes. For example, 25 percent of newly eligible enrollees with incomes under 100 percent of the FPL reported needing help with transportation, compared with 11 percent of higher income newly eligible enrollees; 15 percent of newly eligible enrollees with incomes under 100 percent of the FPL reported an unmet need for transportation, compared with 5 percent of higher income newly eligible enrollees; and 14 percent of newly eligible enrollees with incomes under 100 percent of the FPL reported that they worried a lot about paying for transportation, compared with 6 percent of higher income newly eligible enrollees that reported that they worried a lot about paying for transportation. HHS recently approved Iowa's amendment to continue its waiver of the NEMT benefit, although it noted concern about the lower income enrollees' experience. In approving the state's request, HHS cited the need for Iowa to continue evaluating the effects of the waiver in light of survey results on the type of transportation that newly eligible enrollees reported using to get to health care appointments. These results showed that newly eligible enrollees tended to rely on others, such as family and friends, to reach health care appointments more so than Medicaid state plan enrollees. Researchers who conducted the evaluation of Iowa's program indicated that they plan to conduct additional analyses, which include some--but not all--of the suggestions we have offered. For example, our review of Iowa's evaluation methodology suggests that linking survey responses from both groups of enrollees directly to their claims could improve the state's understanding of enrollees' patterns of utilization and the implications of transportation difficulties. The researchers indicated that they will link claims data with survey responses in the next evaluation and use regression modeling to determine which group of enrollees was more likely to have an unmet need due to transportation issues. Additionally, we noted that the small sample size could limit their ability to detect differences between the enrollees. The researchers indicated that their next evaluation will survey a larger sample of Medicaid enrollees covered under the state plan who have the NEMT benefit and newly eligible enrollees who do not in an effort to increase their ability to detect these differences. We agree that increasing the sample size could strengthen confidence in the results. We also noted that the researchers did not consider whether survey respondents lived in a rural or urban area, which can be important because research shows that the need to travel longer distances and the lack of public transportation in rural areas can pose challenges for individuals seeking services. The researchers indicated that they did not stratify the groups by rural or urban areas because of a concern about inadequate sample sizes in certain counties and because the need for transportation in Iowa is not unique to the pursuit of health care services, but also poses a challenge in other aspects of residents' lives. While stratifying survey results by rural and urban areas could be relevant in evaluating enrollees' access to care or unmet need, the researchers do not plan to include a rural and urban stratification in the next evaluation. CMS officials recognized the value of a rural and urban distinction, but indicated that there is a need to balance further analysis with the ability to generate results expeditiously and facilitate decision making on the waiver. Officials from the 10 research and advocacy groups we interviewed-- which represent Medicaid enrollees, underserved populations, and health care providers--noted potential concerns of excluding the NEMT benefit as it relates to enrollee access to services and costs of coverage. Access to Services: Officials from 9 of the 10 groups we interviewed indicated that excluding the NEMT benefit would impede newly eligible enrollees' ability to access health care services, particularly individuals living in rural or underserved areas, as well as those with chronic health conditions. For example, officials from one national group that represents underserved populations indicated that the enrollees affected by the lack of the NEMT benefit will be those living in rural areas that must travel long distances for medical services. Another group that represents providers in Iowa also cited the difficulty faced by enrollees that live in rural areas by noting that some of the patients they served have had to cancel their medical appointments because the patients do not have a car, money to pay for gas, or access to public transportation. With respect to enrollees with chronic health conditions, one group that represents transportation providers (and others who support mobility efforts) noted that transportation can be a major barrier for individuals who are chronically ill and need recurring access to life-saving health services. Similarly, another group that represents community health centers specified that those with mental health conditions are particularly vulnerable due to a lack of transportation. Costs of Coverage: Officials from 5 of the 10 groups we interviewed also noted that efforts to exclude the NEMT benefit can have implications on the costs of care because patients without access to transportation may forgo preventive care or health services and end up needing more expensive care, such as ambulance services or emergency room visits. For example, a national group that represents providers of services for low-income populations noted that for people who are receiving regular substance abuse treatments, missing appointments can make them vulnerable to relapsing, which ultimately drives up the cost of their care. Another national group that represents underserved populations indicated that they have seen low-income individuals who do not have a car and cannot afford public transportation use higher-cost care from emergency rooms for their medical problems because they cannot otherwise access care. One other group that represents providers noted that by driving up the cost of care, a lack of transportation will ultimately trickle down to lower reimbursement rates for providers. Despite these potential implications, officials from 9 of the 10 groups we interviewed acknowledged various advantages of a state expanding Medicaid even with a more limited benefit. For example, officials from 4 groups remarked that some coverage is better than no coverage in light of the significant health care needs among low-income populations. These groups recognized the political challenges that have driven state decisions whether to expand Medicaid and the concessions that are needed for an expansion to occur. For example, officials from a group that represents providers in Iowa indicated that although introducing variations in Medicaid programs adds complexity for providers, patients, and the state, flexibility is important in helping a state find a coverage solution that works in its political climate. Similarly, an advocacy group from one state acknowledged that an expansion with full traditional Medicaid benefits was never going to be achieved in that state, given the political environment. As such, groups within that state's provider community broadly supported the state's effort to expand Medicaid--even without the NEMT benefit--because so much of the population was uninsured and needed this coverage. However, while acknowledging their preference for states to expand Medicaid, three groups we spoke with maintained their concerns about the effects of such efforts on enrollees' access to care. Officials from two of these groups said that improvements in the number of people covered should not be achieved by eroding essential services, while an official from the other group questioned the value of having health coverage if an enrollee is unable to get to the location where services are provided. Further, officials from six of the groups we interviewed were concerned that HHS's approvals of state efforts to exclude the NEMT benefit potentially provide other states with an incentive to pursue similar efforts. These six groups raised concerns that every time HHS approves such an effort, a new baseline is created for what states may request in an effort to exclude core Medicaid services. We provided a draft of this report to HHS for comment. The department provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact Carolyn L. Yocom at (202) 512-7114 or [email protected], or Mark L. Goldstein at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix I. In addition to the individuals named above, other key contributors to this report were Susan Anthony, Assistant Director; Julie Flowers; Sandra George; Drew Long; Peter Mann-King; JoAnn Martinez-Shriver; Bonnie Pignatiello Leer; Laurie F. Thurber; and Eric Wedum.
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Medicaid, a federal-state health financing program for certain low-income individuals, offers NEMT benefits to individuals who are unable to provide their own transportation to medical appointments. This benefit can be an important safety net for program enrollees as research has identified the lack of transportation as affecting Medicaid enrollees' access to services. Under PPACA, states can opt to expand eligibility for Medicaid to certain adults. However, some states have excluded the NEMT benefit for these newly eligible enrollees by obtaining a waiver of the requirement under the authority of a Medicaid demonstration project. GAO was asked to explore state efforts to exclude the NEMT benefit for newly eligible Medicaid enrollees, and the potential implications of such efforts. This report examines (1) the extent to which states have excluded this benefit for newly eligible enrollees, and (2) the potential implications of such efforts on enrollees' access to services. GAO contacted the 30 states that expanded Medicaid under PPACA as of September 30, 2015; reviewed relevant documents and interviewed officials in the 3 states that have taken efforts to exclude the NEMT benefit; reviewed prior research on transportation for disadvantaged populations; and interviewed officials from CMS, the federal agency that oversees Medicaid, and 10 research and advocacy groups based on referrals from subject-matter experts and knowledge of the NEMT benefit. HHS provided technical comments on a draft of this report, which GAO incorporated as appropriate. States' efforts to exclude nonemergency medical transportation (NEMT) benefits from enrollees who are newly eligible for Medicaid under the Patient Protection and Affordable Care Act (PPACA) are not widespread. Of the 30 states that expanded Medicaid as of September 30, 2015, 25 reported that they did not undertake efforts to exclude the NEMT benefit for newly eligible enrollees, 3 states reported pursuing such efforts, and 2 states--New Jersey and Ohio--did not respond to GAO's inquiry. However, the Centers for Medicare & Medicaid Services (CMS), within the Department of Health and Human Services (HHS), indicated that neither New Jersey nor Ohio undertook efforts to exclude the NEMT benefit. Two of the three states pursuing efforts to exclude the NEMT benefit--Indiana and Iowa--have received waivers from CMS to exclude the benefit, and are in different stages of evaluating the effect these waivers have on enrollees' access to care. Indiana's draft evaluation design describes plans to survey enrollee and provider experiences to assess any effect from excluding the NEMT benefit. Iowa's evaluation largely found comparable access between enrollees with and without the NEMT benefit; however, it also found that newly eligible enrollees beneath the federal poverty level tended to need more transportation assistance or have more unmet needs than those with higher incomes. Officials from the groups that GAO interviewed identified potential implications of excluding the NEMT benefit, such as a decrease in enrollee access to services and an increase in the costs of coverage. For example, nearly all of the groups indicated that excluding the NEMT benefit would impede access to services, particularly for those living in rural areas, as well as those with chronic health conditions.
| 4,072 | 698 |
The Trust Fund's uncommitted balance depends on the revenues flowing into the fund and the appropriations made available from the fund for various spending accounts. The amount of revenue flowing into the Trust Fund has fluctuated from year to year but has generally trended upward, as shown in figure 2. Some of the fluctuation has resulted from changes in economic conditions, but some has been due to other factors. For example, during 1981 and 1982, revenues (including interest) flowing into the fund averaged about $629 million--the lowest amount in the fund's history--because of a lapse in the collection of aviation taxes. In 1999, revenue flowing into the fund totaled about $11.1 billion, the largest amount in the fund's history. However, after revenues peaked in 1999, the amount of revenue flowing into the Trust Fund decreased in each of the next 4 years, reaching a level of about $9.3 billion in 2003. A number of factors contributed to this decrease. For example, within the airline industry, the growth of the Internet as a means to sell and distribute tickets, the growth of low-cost airlines, and fare reductions by legacy carriers all transformed the industry and led to lower average fares. These lower fares have resulted in lower ticket taxes and less revenue going into the Trust Fund. In addition, in the same time period, a series of largely unforeseen events, including the September 11, 2001, terrorist attacks, war in Iraq and associated security concerns, the Severe Acute Respiratory Syndrome (SARS), and global recessions seriously affected demand for air travel, resulting in a decrease in airline industry and Trust Fund revenue. Since the beginning of 2004, however, Trust Fund revenues have been increasing. In fact, revenues from tax sources in 2005 were nearly as high as in 1999, although total revenues were still below peak level because less interest was earned due to a lower Trust Fund balance. Similar to the revenue picture, the annual amount of expenditures from the Trust Fund also has generally increased since the fund's inception, but with some fluctuation. One source of fluctuation has been that the share of FAA operations paid by the Trust Fund has varied over time. Figure 3 shows how expenditures from the fund have changed over time and how they have compared with revenues. In some years, they have exceeded revenues, but in other years they have been less than revenues. In the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR-21), the Congress created a link between Trust Fund revenues and appropriations from the fund to try to ensure that all fund receipts, including interest, were committed to spending for aviation purposes on an annual basis. According to a provision of AIR-21, which was continued in the Century of Aviation Reauthorization Act (Vision 100)--FAA's current authorizing legislation--total appropriations made available from the fund in each fiscal year shall equal the level of receipts plus interest in that year, and these appropriations can be used only for aviation investment programs, which are defined as FAA's capital accounts plus the Trust Fund's share of FAA operations. Further, the level of receipts was specified to be the level of excise taxes plus interest credited to the fund for a fiscal year as set forth in the President's budget baseline projection for that year. As shown in figure 4, with the exception of its first four years, the Trust Fund has ended each year with an uncommitted balance; however, the amount of the uncommitted balance has fluctuated substantially over time, generally increasing when Trust Fund revenues exceed appropriations from the fund and decreasing when they are less than appropriations. As noted in the figure, the uncommitted balance has decreased substantially in recent years. The Trust Fund's uncommitted balance peaked at over $7 billion in 1991, 1999, and 2001. In contrast, because of lapses in the taxes that accrue to the fund, at the end of 1982, the uncommitted balance was about $2.1 billion, and at the end of 1997, it was about $1.4 billion. Specifically, the Trust Fund's uncommitted balance decreased from $7.3 billion at the end of 2001 to $4.8 billion at the end of 2002 and has continued to decrease since then, reaching about $1.9 billion at the end of 2005. However, the rate of decrease has slowed; in 2005, the uncommitted balance decreased by about $500 million, after falling by at least $900 million in each of the previous 3 years. The uncommitted balance has fallen in recent years because Trust Fund revenues have fallen short of forecasted levels by over $1 billion in 3 out of the last 4 fiscal years. For example, in 2001, the difference between forecasted revenue and actual revenue coming in to the Trust Fund was $383 million less than expected. In 2002, the difference jumped to $2.3 billion due to the impact that unanticipated external events such as the September 11, 2001, terrorist attacks had on the aviation industry. Residual effects and other factors such as the war in Iraq and the SARS outbreak lasted through 2003 and 2004, with each year's actual revenues coming in at least $1 billion below forecasted revenues. As mentioned above, under Vision 100 and its predecessor, AIR-21, appropriations made available from the Trust Fund are based on forecasted revenues. Thus, if actual revenues approximate forecasted revenues, there should be no substantial change in the uncommitted balance. However, as shown in figure 5, for each year beginning with 2001, actual revenues, including interest, have been less than forecasted, so that in each year since then, the uncommitted balance has fallen. Based on its revenue forecast and appropriations for 2006, FAA forecasts that the Trust Fund's uncommitted balance will decrease by the end of 2006 to about $1.7 billion. FAA forecasts that if, for 2007, the Congress continues to follow the Vision 100 formula for linking budget resources made available from the fund to expected revenues, then there will be little change in the uncommitted balance--$1.7 billion--during that year. If, instead, the Congress adopts the President's budget request for FAA for 2007, FAA forecasts that the fund's uncommitted balance by the end of 2007 will rise to about $2.7 billion. This higher forecasted uncommitted balance occurs because the President's budget calls for an appropriation from the Trust Fund that is about $1 billion lower than the Vision 100 formula. In addition, compared with Vision 100, the President's budget calls for a reduction in the appropriation to FAA from the general fund of about $500 million. Thus, in total, compared with Vision 100, the President's budget calls for a reduction of about $1.5 billion in FAA's appropriation. Figure 6 shows the forecasted year-end uncommitted balance under both scenarios through 2007. While the President's budget calls for making a smaller appropriation available from the Trust Fund than under Vision 100, largely due to reductions in the AIP, it calls for greater reliance on the Trust Fund to fund FAA's operations. Vision 100 uses the formula created in AIR-21 to determine how much funding for FAA operations should come from the Trust Fund, but the President's budget proposal does not use this formula. Under Vision 100, the formula makes the amount of Trust Fund revenue that will be authorized for FAA operations and RE&D in a given year equal to projected Trust Fund revenues (as specified in the President's budget) minus the authorizations for the capital accounts (AIP and F&E) in that year. Thus, under Vision 100, the Trust Fund is projected to support $4.6 billion of FAA's operations, or 57 percent. In contrast, the President's budget specifies a set amount of Trust Fund revenue to be used for FAA operations. Therefore, if Congress enacts the President's budget request for FAA, the Trust Fund would provide $5.4 billion for FAA's operations in 2007, or 65 percent of its total estimated cost for operations. Although the Trust Fund is projected to have a surplus at the end of 2007 under each of the expenditure proposals, this projection depends to a significant extent on achieving forecasted commercial passenger traffic levels and airfares, as they have the largest impact on the amount of revenues flowing into the Trust Fund. We recognize that it is difficult to anticipate future events that may significantly affect the demand for air travel, particularly since FAA makes a forecast that is contained in the President's budget based on information available in the first quarter of the preceding fiscal year. However, our analysis shows that for each of the last 5 years, FAA's projected revenue forecast for the President's budget was higher than the actual amount of revenue received, as shown in figure 5. Given the differences in recent years between the forecasted revenue and actual amount of revenue received, we conducted sensitivity analyses to estimate what would happen to the Trust Fund's uncommitted balance if Trust Fund revenues in 2006 and 2007 fall below the levels that FAA projected in March 2006. For example, table 2 shows the projected Trust Fund balances under Vision 100 and the President's proposal and the impact if revenues, for whatever reason, are 5 percent or 10 percent less than currently projected. If revenues are 5 percent lower than projected, which they were in 2001, the Trust Fund would have a small but positive uncommitted balance under both expenditure proposals--Vision 100 and the President's budget proposal. However, if the revenues were 10 percent lower than projected, as they were in 2004, the uncommitted balance would drop below half a billion dollars under the President's proposal and would fall to zero by the end of 2007 under Vision 100. We believe these scenarios raise concerns because, in the past, the Trust Fund's uncommitted balance was used to offset lower-than-expected Trust Fund revenues and decreased general fund contributions. FAA could help address these concerns by continuing to look for ways to improve efficiency and reduce costs. However, the zero-balance scenario would most likely have implications for Congress in funding FAA programs. To keep the Trust Fund from declining, the Congress could use an alternate basis for authorizing and appropriating money out of the Trust Fund that does not rely on the revenue forecast in the President's budget. One alternative that would still maintain the link between revenues and spending would be for appropriations from the Trust Fund to be based on the actual Trust Fund revenues from the most recent year for which data are available. That would mean, for example, that the Congress would appropriate for 2007 the Trust Fund revenues received in 2005. Although that would make it less likely that the Trust Fund balance would decline further, it could also mean that a smaller appropriation would be made available for aviation. Whereas Trust Fund revenues in 2005 were about $10.8 billion, the President's budget for 2007 forecasts Trust Fund revenues of about $11.8 billion. Future policy decisions concerning spending for aviation will affect the Trust Fund balances beyond 2007. If general fund appropriations for FAA's operations are maintained at recent levels, future projected Trust Fund revenues under the current tax structure may be insufficient to pay for the expenditures that FAA says are needed to maintain and modernize the current system. According to FAA, its aviation infrastructure is aging, and replacing it will cost $32 billion. Even more, Trust Fund revenues would be needed to pay for those expenses if general fund appropriations for operations are reduced. Insufficient Trust Fund revenues could result in critically needed capacity-enhancing air traffic control modernization investments being deferred or canceled at a time when commercial activity is returning to or exceeding pre-September 11 levels. In addition to costs projected just to maintain FAA's current system, additional capital expenses are on the horizon to modernize the system. Vision 100 directed the administration to develop a comprehensive plan for a Next Generation Air Transportation System (NGATS) that can accommodate the changing needs of the aviation industry and meet air traffic demands by 2025. The act chartered the Joint Planning and Development Office (JPDO) within FAA to coordinate federal and private- sector research related to air transportation. FAA leads the interagency effort that leverages expertise and resources within the Departments of Transportation, Defense, Homeland Security, and Commerce as well as at the National Aeronautics and Space Administration and the White House Office of Science and Technology Policy. The Congress appropriated $5 million to FAA in seed money in 2005, and appropriated $18 million to FAA for JPDO in 2006, while additional funding and in-kind support comes from the participating agencies. For 2007, the President's budget requests $18 million for JPDO critical system engineering and planning efforts for NGATS, as well as funding for two NGATS systems at a combined cost of $104 million. JPDO published the Integrated Plan for the Next Generation Air Transportation System in December 2004, but the plan did not specify what new capabilities would be pursued or how much they would cost to implement and maintain. Vision 100 also directed that an annual progress report, including any changes to the Integrated Plan, be submitted at the time of the President's budget request. In March 2006, JPDO published its 2005 Progress Report to the Next Generation Air Transportation System Integrated Plan and reported it is working to identify the longer-term costs. JPDO conducted a financial analysis of the air traffic management portions of NGATS, including examining the existing 2025 operational vision, to understand the hardware and software components that may be required to implement NGATS. However, because of the high level of uncertainty in some areas and a significant number of assumptions in others, JPDO reported more work is required before this analysis can be useful and credible. A clear understanding of proposed future capabilities for NGATS (and how they will be paid for) will be important as the Congress prepares to reauthorize FAA programs and explores financing mechanisms. While FAA has made great efforts in its cost-control program, cutting costs will remain a challenge for FAA well into the future. In 2005, FAA outsourced its flight service stations to a private contractor, resulting in total savings estimated at $2.2 billion. Also in 2005, FAA put in place a number of cost-control initiatives that affected smaller programs and that, if successful, will generate smaller levels of savings. We are reviewing options to fund FAA, at the request of this subcommittee, and we will address this issue in detail later this year. Although FAA has initiated several of these cost-control measures, these initiatives alone cannot reduce expenses enough to free up sufficient Trust Fund revenues to pay for the expenditures that FAA says are necessary to maintain and modernize the current airspace system, let alone finance future NGATS initiatives. Through the reauthorization process, the Congress will determine both the level of appropriations for aviation and the way in which that commitment will be funded. Congressional decisions pertaining to the link between annual Trust Fund revenues and appropriations made available for aviation programs, as well as the method for funding the Trust Fund, will continue to influence future Trust Fund balances. To assess the current financial status and projected financial viability of the Airport and Airway Trust Fund, we obtained financial data from FAA and interviewed FAA officials familiar with the information. To assess the comparisons of Vision 100 with the President's budget, we analyzed the legislation and the administration's 2007 budget proposal. We used a sensitivity analysis to project what would happen if Trust Fund revenues in fiscal years 2006 and 2007 were 5 percent and 10 percent lower than the levels projected by FAA in March 2006 under each of these proposals. Accordingly, our findings on the financial outlook of the Trust Fund are based on GAO projections, not FAA's. We performed our work in February and March 2006 in accordance with generally accepted government auditing standards. Mr. Chairman, this concludes my prepared statement. At this time, I would be pleased to answer any questions that you or other Members of the Subcommittee may have. For further information on this testimony, please contact Dr. Gerald Dillingham at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony include Chris Bonham, Jay Cherlow, Tammy Conquest, Colin Fallon, David Hooper, Maureen Luna-Long, Maren McAvoy, Rich Swayze, and Matt Zisman. 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 Airport and Airway Trust Fund was established by the Airport and Airway Revenue Act of 1970 (P.L. 91-258) to help fund the development of a nationwide airport and airway system and to fund investments in air traffic control facilities. It provides all of the funding for the Federal Aviation Administration's (FAA) capital accounts, including: (1) the Airport Improvement Program, which provides grants for construction and safety projects at airports; (2) the Facilities and Equipment account, which funds technological improvements to the air traffic control system; and (3) the Research, Engineering, and Development account, which funds continued research on aviation safety, mobility, and environment issues. In addition, at various times during its history, the Trust Fund has funded all or some portion of FAA's operations. To fund these accounts, the Trust Fund is credited with revenues from a variety of excise taxes related to passenger tickets, passenger flight segments, international arrivals/departures, cargo waybills, and aviation fuels. Including interest earned on its balances, the Trust Fund received $10.8 billion in fiscal year 2005. The various taxes that accrue to the Trust Fund are scheduled to expire at the end of fiscal year 2007. GAO was asked to provide information and analysis about the financial condition and future viability of the Trust Fund. The Trust Fund's uncommitted balance decreased from $7.3 billion at the end of fiscal year 2001 to about $1.9 billion at the end of fiscal year 2005. In 3 of the last 4 fiscal years, the Trust Fund's uncommitted balance has fallen by over $1 billion because revenues were lower than FAA forecasted due to the impact of unanticipated events such as the September 11, 2001, terrorist attacks. However, the rate of decrease has slowed; during fiscal year 2005, the uncommitted balance decreased by about $500 million. Under FAA's current authorization, appropriations from the Trust Fund are based on forecasted revenues. Thus, if actual revenues approximate forecasted revenues, there should be no substantial change in the uncommitted balance. However, for each fiscal year since 2001, because actual revenues have been less than forecasted, the uncommitted balance has fallen. Based on its revenue forecast and appropriation for fiscal year 2006, FAA forecasts that the Trust Fund's uncommitted balance will fall by the end of 2006 to about $1.7 billion. If the Congress continues to follow the formula from Vision 100--FAA's current authorizing legislation that links appropriations made available from the fund to revenue forecasts--then FAA expects there will be little change in the uncommitted balance for fiscal year 2007. If, instead, the Congress adopts the President's budget for FAA for fiscal year 2007, FAA forecasts that the fund's uncommitted balance by the end of 2007 will rise to about $2.7 billion. This higher forecasted uncommitted balance occurs because the President's budget calls for an appropriation to FAA from the Trust Fund that is about $1 billion lower than the Vision 100 formula. If revenues in fiscal years 2006 and 2007 are below forecasted levels, the Trust Fund's uncommitted balance will be less than forecasted and, in one scenario we analyzed, will reach zero by the end of 2007. This scenario raises concerns because, in the past, the Trust Fund's uncommitted balance was used to offset lower-than-expected Trust Fund revenues and decreased general fund contributions. FAA could help address these concerns by continuing to look for ways to improve efficiency and reduce costs. However, the zero-balance scenario would most likely have implications for the Congress in funding FAA programs.
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With almost 700,000 civilian employees on its payroll, DOD is the second largest federal employer of civilians in the nation, after the Postal Service. Defense civilian personnel, among other things, develop policy, provide intelligence, manage finances, and acquire and maintain weapon systems. Given the current global war on terrorism, the role of DOD's civilian workforce is expanding, such as participation in combat support functions that free military personnel to focus on warfighting duties for which they are uniquely qualified. Civilian personnel are also key to maintaining DOD's institutional knowledge because of frequent rotations of military personnel. However, since the end of the Cold War, the civilian workforce has undergone substantial change, due primarily to downsizing, base realignments and closures, competitive sourcing initiatives, and DOD's changing missions. For example, between fiscal years 1989 and 2002, DOD reduced its civilian workforce by about 38 percent, with an additional reduction of about 55,000 personnel proposed through fiscal year 2007. Some DOD officials have expressed concern about a possible shortfall of critical skills because downsizing has resulted in a significant imbalance in the shape, skills, and experience of its civilian workforce while more than 50 percent of the civilian workforce will become eligible to retire in the next 5 years. As a result, the orderly transfer of DOD's institutional knowledge is at risk. These factors, coupled with the Secretary of Defense's significant transformation initiatives, make it imperative for DOD to strategically manage its civilian workforce based on a total force perspective which includes civilian personnel as well as active duty and reserve military personnel and contractor personnel. This strategic management approach will enable DOD to accomplish its mission by putting the right people in the right place at the right time and at a reasonable cost. NSPS is intended to be a major component of DOD's efforts to more strategically manage its workforce and respond to current and emerging challenges. This morning I will highlight several of the key provisions of NSPS that in our view are most in need of close scrutiny as Congress considers the DOD proposal. The DOD proposal would allow the Secretary of Defense to jointly prescribe regulations with the Director of the Office of Personnel Management (OPM) to establish a flexible and contemporary human resources management system for DOD--NSPS. The joint issuance of regulations is similar to that set forth in the Homeland Security Act of 2002 between the Secretary of Homeland Security and the Director of OPM for the development of the Department of Homeland Security (DHS) human resources management system. However, unlike the legislation creating DHS, the Defense Transformation for the 21st Century Act would allow the Secretary of Defense to waive the requirement for joint issuance of regulations if, in his or her judgment, it is "essential to the national security"--which is not defined in the act. While the act specifies a number of key provisions of Title 5 that shall not be altered or waived, including those concerning veterans' preference, merit protections, and safeguards against discrimination and prohibited personnel practices, the act nonetheless would, in substance, provide the Secretary of Defense with significant independent authority to develop a separate and largely autonomous human capital system for DOD. The DOD proposal also has significant potential implications for governmentwide human capital policies and procedures and for OPM as the President's agent and advisor for human capital matters and overseer of federal human capital management activities. In essence, the act would allow for the development of a personnel system for the second largest segment of the federal workforce that is not necessarily within the control or even direct influence of OPM. To strike a better balance between reasonable management flexibility and the need for a reasonable degree of consistency and adequate safeguards to prevent abuse throughout the government, Congress should consider making these provisions of the Defense Transformation for the 21st Century Act consistent with the Homeland Security Act of 2002, or at a minimum, providing some statutory guidance on what would constitute a situation "essential to the national security" that would warrant the Secretary of Defense to act independently of the Director of OPM. DOD states that it needs a human capital management system that provides new and increased flexibility in the way it assesses and compensates its employees, and toward that end, we understand that in implementing NSPS DOD plans to strengthen its performance appraisal systems and implement pay banding approaches as core components of any new DOD human capital system. We have a long and successful experience in using pay banding with our analyst staff as a result of the GAO Personnel Act of 1980. Certain DOD components have had a number of years of experience with pay banding through OPM's personnel demonstration projects, authorized by the Civil Service Reform Act of 1978, to test and introduce beneficial change in governmentwide human resources management systems. For example, in 1980, the Navy personnel demonstration project, commonly referred to as the China Lake demonstration project, implemented a number of reforms including pay banding and a pay for performance system. More recently, the Civilian Acquisition Workforce personnel demonstration project (AcqDemo) was implemented in 1999 and created a pay banding system that covers part of its civilian acquisition, technology, and logistics workforce. The expected results of AcqDemo's pay banding system include increased flexibility to assign employees as well as increased pay potential and satisfaction with advancement for employees. According to agency officials, an evaluation to OPM on AcqDemo's progress is scheduled to be available this June. Lastly, DOD's science and technology reinvention laboratory demonstration projects all implemented some form of pay banding and pay for performance. OPM reports that these reinvention laboratory demonstration projects have been able to offer more competitive starting salaries. Additionally some labs' turnover experience was significantly lower among highly-rated employees and higher among employees with lower ratings. DOD's demonstration projects clearly provide helpful insights and valuable lessons learned in connection with broad banding and pay for performance efforts. At the same time these projects and related DOD efforts involve less than 10 percent of DOD's civilian workforce and expanding these concepts to the entire department will require significant effort and likely need to be implemented in phases over several years. As you know, there is growing agreement on the need to better link individual pay to performance. Establishing such linkages is essential if we expect to maximize the performance and assure the accountability of the federal government for the benefit of the American people. As a result, from a conceptual standpoint, we strongly support the need to expand broad banding approaches and pay for performance-based systems in the federal government. However, moving too quickly or prematurely at DOD or elsewhere can significantly raise the risk of doing it wrong. This could also serve to severely set back the legitimate need to move to a more performance and results-based system for the federal government as a whole. Thus, while it is imperative that we take steps to better link employee pay to performance across the federal government, how it is done, when it is done, and the basis on which it is done can make all the difference in whether or not such efforts are successful. In our view, one key need is to modernize performance management systems in executive agencies so that they are capable of adequately supporting more performance-based pay and other personnel decisions. Unfortunately, based on GAO's past work, most existing federal performance appraisal systems, including a vast majority of DOD's systems, are not designed to support a meaningful performance-based pay system. The bottom line is that in order to receive any additional performance- based pay flexibility for broad based employee groups, agencies should have to demonstrate that they have modern, effective, credible, and, as appropriate, validated performance management systems in place with adequate safeguards, including reasonable transparency and appropriate accountability mechanisms, to ensure fairness and prevent politicalization and abuse. At your request Madam Chairwoman, and that of Senator Voinovich, we identified key practices leading public sector organizations both here in the United States and abroad have used in their performance management systems to link organizational goals to individual performance and create a "line of sight" between an individual's activities and organizational results. These practices can help agencies develop and implement performance management systems with the attributes necessary to effectively support pay for performance. More specifically, Congress should consider establishing statutory standards that an agency must have in place before it can implement broad banding or a more performanced-based pay program. As the request of Congressman Danny Davis, we developed an initial list of possible safeguards to help ensure that any additional flexibility Congress may grant for expanding pay for performance management systems in the government are fair, effective, and credible. We provided an initial list to Congressman Davis late last week. This initial list of safeguards was developed based on our extensive body of work looking at the performance management practices used by leading public sector organizations both in the United States and in other countries as well as our own experiences at GAO in implementing a modern performance management system for our own staff. We believe that the following could provide a starting point for developing a set of statutory safeguards in connection with any additional efforts to expand pay for performance systems. Assure that the agency's performance management systems (1) link to the agency's strategic plan, related goals, and desired outcomes, and (2) result in meaningful distinctions in individual employee performance. This should include consideration of critical competencies and achievement of concrete results. Involve employees, their representatives, and other stakeholders in the design of the system, including having employees directly involved in validating any related competencies, as appropriate. Assure that certain predecisional internal safeguards exist to help achieve the consistency, equity, nondiscrimination, and nonpoliticization of the performance management process (e.g., independent reasonableness reviews by Human Capital Offices and/or Offices of Opportunity and Inclusiveness or their equivalent in connection with the establishment and implementation of a performance appraisal system, as well as reviews of performance rating decisions, pay determinations, and promotion actions before they are finalized to ensure that they are merit-based; internal grievance processes to address employee complaints; and pay panels whose membership is predominately made up of career officials who would consider the results of the performance appraisal process and other information in connection with final pay decisions). Assure reasonable transparency and appropriate accountability mechanisms in connection with the results of the performance management process (e.g., publish overall results of performance management and pay decisions while protecting individual confidentiality, and report periodically on internal assessments and employee survey results). The above items should help serve as a starting point for Congress to consider in crafting possible statutory safeguards for executive agencies' performance management systems. OPM would then issue guidance implementing the legislatively defined safeguards. The effort to develop such safeguards could be part of a broad-based expanded pay for performance authority under which whole agencies and/or employee groups could adopt broad-banding and move to more pay for performance oriented systems if certain conditions are met. Specifically, the agency would have to demonstrate, and OPM would have to certify, that a modern, effective, credible, and, as appropriate, validated performance management system with adequate safeguards, including reasonable transparency and appropriate accountability mechanisms, is in place to support more performance-based pay and related personnel decisions before the agency could implement a new system. In this regard OPM should consider adopting class exemption approaches and OPM should be required to act on any individual certifications within prescribed time frames (e.g., 30-60 days). This approach would allow for a broader-based yet more conceptually consistent approach in this critical area. It would also facilitate a phased-implementation approach throughout government. The list is not intended to cover all the attributes of a modern, results- oriented performance management system. Rather, the items on the list cover possible safeguards for performance management systems to help ensure those systems are fair, effective, and credible. Congress should also consider establishing a governmentwide fund whereby agencies, based on a sound business case, could apply for funds to modernize their performance management systems and ensure those systems have adequate safeguards to prevent abuse. This approach would serve as a positive step to promote high-performing organizations throughout the federal government while avoiding fragmentation within the executive branch in the critical human capital area. The Senior Executive Service (SES) needs to lead the way in the federal government's effort to better link pay to performance. We have reported that there are significant opportunities to strengthen efforts to hold senior executives accountable for results. In particular, more progress is needed in explicitly linking senior executive expectations for performance to results-oriented organizational goals and desired outcomes, fostering the necessary collaboration both within and across organizational boundaries to achieve results, and demonstrating a commitment to lead and facilitate change. These expectations for senior executives will be critical to keep agencies focused on transforming their cultures to be more results- oriented, less hierarchical, more integrated, and externally focused and thereby be better positioned to respond to emerging internal and external challenges, improve their performance, and assure their accountability. Given the state of agencies' performance management systems, Congress should consider starting federal results-oriented pay reform with the SES. In that regard and similar to the Homeland Security Act, the proposed NSPS would increase the current total allowable annual compensation limit for senior executives up to the Vice President's total annual compensation. However, the Homeland Security Act provides that OPM, with the concurrence of the Office of Management and Budget, certify that agencies have performance appraisal systems that, as designed and applied, make meaningful distinctions based on relative performance. NSPS does not include such a certification provision. Congress should consider requiring OPM to certify that the DOD SES performance management system makes meaningful distinctions in performance and employs the other practices used by leading organizations to develop effective performance management systems that I mentioned earlier, before DOD could increase the annual compensation limit for senior executives. The proposed Defense Transformation for the 21st Century Act includes provisions intended to ensure collaboration with employee representatives in the planning, development, and implementation of a human resources management system. For example, employee representatives are to be given the opportunity to review and make recommendations on the proposed NSPS. The Secretary of Defense and the Director of OPM are to provide employee representatives with a written description of the proposed system, give these representatives at least 30 calendar days to review and make recommendations on the proposal, and fully and fairly consider each recommendation. DOD may immediately implement the parts of the proposed system that did not receive recommendations or those recommendations they chose to accept from the employee representatives. While these provisions are designed to help assure that employees and their authorized representatives play a meaningful role on the design and implementation of any new human capital system, DOD does not have a good track record in reaching out to key stakeholders. In fact, it is my understanding that neither DOD employees nor their authorized representatives played a meaningful role in connection with the design of the legislative proposal that is the subject of this hearing. For the recommendations from the employee representatives that the Secretary and the Director do not accept, the Secretary and the Director are to notify Congress and meet and confer with employee representatives in an attempt to reach agreement on how to proceed with these recommendations. If an agreement has not been reached after 30 days, and the Secretary determines that further consultation with employee representatives will not produce agreement, the Secretary may implement any or all parts of the proposal, including any modifications made in response to the recommendations. The Secretary is to notify Congress of the implementation of any part of the proposal, any changes made to the proposal as a result of recommendations from the employee representatives, and the reasons why implementation is appropriate. Although the procedures called for in the DOD proposal are similar to those enacted in the Homeland Security Act, the latter states explicitly the intent of Congress on the importance for employees to be allowed to participate in a meaningful way in the creation of any human resources management system affecting them. To underscore the importance that Congress places on employee involvement in the development and implementation of NSPS, Congress should consider including similar language as that found in the Homeland Security Act. More generally, and aside from the specific statutory provisions on consultation, the active involvement of employees will be critical to the success of NSPS. We have reported that the involvement of employees both directly and indirectly is crucial to the success of new initiatives, including implementing a pay for performance system. High-performing organizations have found that actively involving employees and stakeholders, such as unions or other employee associations when developing results-oriented performance management systems helps improve employees' confidence and belief in the fairness of the system and increases their understanding and ownership of organizational goals and objectives. This involvement must be early, active, and continuing if employees are to gain a sense of understanding and ownership for the changes that are being made. The legislation has a number of provisions designed to give DOD flexibility to help obtain key critical talent. Specifically, it allows DOD greater flexibility to (1) augment the use of temporary appointment authorities, (2) hire experts and consultants and pay them special rates, (3) define benefits for overseas employees, and (4) enter into personal services contracts for experts and consultants for national security missions, including for service outside of the United States. Specifically, the Secretary would have the authority to establish a program to attract highly qualified experts in needed occupations with the flexibility to establish the rate of pay, eligibility for additional payments, and terms of the appointment. These authorities give DOD considerable flexibility to obtain and compensate individuals and exempt them from several provisions of current law. While we have strongly endorsed providing agencies with additional tools and flexibilities to attract and retain needed talent, the broad exemption from some existing ethics and other personnel authorities without prescribed limits on their use raises some concern. Accordingly, Congress should consider placing numerical or percentage limitations on the use of these provisions or otherwise specifically outline basic safeguards to ensure such provisions are used appropriately. The proposed Defense Transformation for the 21st Century Act would provide the Secretary with a number of broad authorities related to rightsizing and organizational alignment. These include authorizing the Secretary to restructure or reduce the workforce by establishing programs using voluntary early retirement eligibility and separation payments, or both. In addition, the Secretary would be allowed to appoint U.S. citizens who are at least 55 years of age to the excepted service for a period of 2 years, with a possible 2-year extension, subject only to certain provisions preventing displacement of current employees. The proposal also provides that annuitants who receive an annuity from the Civil Service Retirement and Disability Fund and become employed in a position within the Department of Defense shall continue to receive their unreduced annuity. This and selected other NSPS provisions will clearly have incremental budget implications for which we have not seen any related cost estimate. Furthermore, this and other selected NSPS provisions would create an unlevel playing field for experienced talent within the civilian workforce. Authorities such as voluntary early retirements have proven to be effective tools in strategically managing the shape of the workforce. I have exercised the authority that Congress granted me to offer voluntary early retirements in GAO in both fiscal years 2002 and 2003 as one element of our strategy to shape the GAO workforce. However, given DOD's past efforts in using existing rightsizing tools, there is reason to be concerned that DOD may struggle to effectively manage additional authorities that may be provided. While DOD has used existing authorities in the past to mitigate the adverse effects of force reductions, the approach to reductions was not oriented toward strategically shaping the makeup of the workforce. We have previously reported that the net effect of lack of attention to workforce shaping is a civilian workforce that is not balanced by age or experience, which risks the orderly transfer of institutional knowledge. DOD thus may be challenged in using new authorities in a cohesive, integrated way that supports achieving mission results, absent a comprehensive and integrated human capital strategy and workforce plan. In the past, OPM has managed its authority to reemploy an annuitant with no reduction in annuity on a case-by-case basis. The NSPS proposal, which broadly grants such treatment, raises basic questions about the intent and design of the federal benefits or total compensation of federal employees and obviates the importance of establishing an effective DOD partnership with OPM in prescribing the use of this authority. As noted previously, providing such authority only to DOD would provide DOD a competitive advantage in the market place that would place other agencies at a disadvantage. It would also involve incremental costs that have yet to be estimated. Flexible approaches to shaping the workforce, such as 2-year excepted service appointments, may be helpful in avoiding long-term commitments for short-term requirements, addressing transition gaps, and smoothing outsourcing strategies. At the same time, these authorities represent tools that are not effective on their own, rather they are elements that need to be developed into an effective strategy and aligned with program goals and missions. The legislation could also allow DOD to revise Reduction-in-Force (RIF) rules to place greater emphasis on an employee's performance. DOD has indicated that it will be considering for application DOD-wide, personnel practices that were identified in the April 2, 2003, Federal Register notice. This notice describes revised RIF procedures that change the order in which employees would be retained under a RIF order. Specifically, employees could be placed on a retention list in the following order: type of employment (i.e., permanent, temporary), level of performance, and veterans' preference eligibility (disabled veterans will be given additional priority), which we note would reduce the order in which veterans' preference is currently provided. While we conceptually support revised RIF procedures that involve much greater consideration of an employee's performance, as I pointed out above, agencies must have modern, effective and credible performance management systems in place to properly implement such authorities. The proposed NSPS would allow the Secretary, after consultation with the Merit Systems Protection Board (MSPB), to prescribe regulations providing fair treatment in any appeals brought by DOD employees relating to their employment. The proposal states that the appeals procedures shall ensure due process protections and expeditious handling, to the maximum extent possible. In this regard, the proposal provides that presently applicable appeals procedures should only be modified insofar as such modifications are designed to further the fair, efficient, and expeditious resolution of matters involving DOD employees. This provision is substantially the same as a similar provision in the Homeland Security Act of 2002 allowing DHS to prescribe regulations for employee appeals related to their employment. As required of the Secretary of DHS, the Secretary of Defense would be required to consult with MSPB prior to issuing regulations. However, neither the Homeland Security Act nor the proposed legislation expressly requires that employee appeals be heard and decided by the MSPB. There is also no express provision for judicial review of decisions regarding employee appeals decisions. Given the transparency of the federal system dispute resolution and its attendant case law, the rights and obligations of the various parties involved is well developed. It is critical that any due process changes that are implemented after consultation with MSPB result in dispute resolution processes that are not only fair and efficient but, as importantly, minimize any possible perception of unfairness. The critical need for an institutional infrastructure to develop and support change has been a consistent theme raised throughout the observations I have been providing on some of the specific aspects of the proposed NSPS. This institutional infrastructure includes, at a minimum, a human capital planning process that integrates the department's human capital policies, strategies, and programs with DOD's mission, goals, and desired outcomes; the capabilities to effectively develop and implement a new human capital system; and a set of adequate safeguards, including reasonable transparency and appropriate accountability mechanisms to ensure the fair and merit-based implementation and application of a new system. Quite simply, in the absence of the right institutional infrastructure, granting additional human capital authorities will provide little advantage and could actually end up doing damage if the new flexibilities are not implemented properly. Our work looking at DOD's strategic human capital planning efforts and our work looking across the federal government at the use of human capital flexibilities and related human capital efforts underscores the critical steps that DOD needs to take to properly develop and effectively implement any new personnel authorities. Our work here and abroad has consistently demonstrated that leading organizations align their human capital approaches, policies, strategies, and programs with their mission and programmatic goals. Human capital plans that are aligned with mission and program goals integrate the achievement of human capital objectives with the agency's strategic and program goals. Careful and thoughtful human capital planning efforts are critical to making intelligent competitive sourcing decisions. The Commercial Activities Panel, which I was privileged to chair, called for federal sourcing policy to be "consistent with human capital practices designed to attract, motivate, retain, and reward a high performing workforce" and highlighted a number of human capital approaches to help achieve that objective. In April 2002, DOD published a strategic plan for civilian personnel. However, as we reported in March 2003, top-level leadership at the department and the component levels has not until recently been extensively involved in strategic planning for civilian personnel; however, civilian personnel issues appear to be a higher priority for top-level leaders today than in the past. Although DOD began downsizing its civilian workforce more than a decade ago, top-level leadership has not, until recently, developed and directed reforms to improve planning for civilian personnel. With the exception of the Army and the Air Force, neither the department nor the components in our March review had developed strategic plans to address challenges affecting the civilian workforce until 2001 or 2002, which is indicative of civilian personnel issues being an emerging priority. In addition, we reported that top-level leaders in the Air Force, the Marine Corps, the Defense Contract Management Agency, and the Defense Finance and Accounting Service have been or are working in partnership with their civilian human capital professionals to develop and implement civilian strategic plans; such partnership is increasing in the Army and not as evident in the Navy. Moreover, DOD's issuance of its departmentwide civilian human capital plan begins to lay a foundation for strategically addressing civilian human capital issues; however, DOD has not provided guidance on aligning the component-level plans with the department-level plan to obtain a coordinated focus to carry out the Secretary of Defense's transformation initiatives in an effective manner. High-level leadership attention is critical to developing and directing reforms because, without the overarching perspective of such leaders as Chief Operating Officers and the Chief Human Capital Officers, reforms may not be sufficiently focused on mission accomplishment, and without their support, reforms may not receive the resources needed for successful implementation. We have previously reported that the concept of a Chief Operating Officer (COO) could offer the leadership to help elevate attention on key management issues and transformational change, integrate these various efforts, and institutionalize accountability for addressing management issues and leading transformational change both within and between administrations. In our view, DOD is a prime candidate to adopt this COO concept. In addition, if Congress provides DOD with many of the flexibilities it is seeking under the NSPS, the basis for adding a COO position at DOD would be even stronger. Despite the progress that has been made recently, the DOD human capital strategic plans we reviewed, for the most part, were not fully aligned with the overall mission of the department or respective components, results oriented, or based on data about the future civilian workforce. For example, the goals and objectives contained in strategic plans for civilian personnel were not explicitly aligned with the overarching missions of the respective organizations. Consequently, it is difficult to determine whether DOD's and the components' strategic goals are properly focused on mission achievement. In addition, none of the plans contained results- oriented performance measures that could provide meaningful data critical to measuring the results of their civilian human capital initiatives (i.e., programs, policies, and processes). Thus, DOD and the components cannot gauge the extent to which their human capital initiatives contribute to achieving their organizations' mission. Also, for the most part, the civilian human capital plans in our review did not contain detailed information on the skills and competencies needed to successfully accomplish future missions. Without information about what is needed in the future workforce, it is unclear if DOD and its components are designing and funding initiatives that are efficient and effective in accomplishing the mission, and ultimately contributing to force readiness. Lastly, the DOD civilian strategic plans we reviewed did not address how the civilian workforce will be integrated with their military counterparts or with sourcing initiatives. At the department level, the strategic plan for civilian personnel was prepared separately from corresponding plans for military personnel and not integrated to form a seamless and comprehensive strategy and did not address how DOD plans to link its human capital initiatives with its sourcing plans, such as efforts to outsource non-core responsibilities. For the most part, at the component level, the plans set goals to integrate planning for the total workforce, to include civilian, military, and contractor personnel. The Air Force and the Army, in particular, have begun to integrate their strategic planning efforts for civilian and military personnel, also taking contractor responsibilities into consideration. Without integrated planning, goals for shaping and deploying civilian, military, and contractor personnel may not be consistent with and support each other. Consequently, DOD and its components may not have the workforce with the skills and competencies needed to accomplish tasks critical to assuring readiness and achieving mission success. In our March report we recommended, among other things, that DOD improve future revisions and updates to the departmentwide strategic human capital plan by more explicitly aligning its elements with DOD's overarching mission, including performance measures, and focusing on future workforce needs. DOD only partially concurred with our recommendation, and, as explanation, stated that the recommendation did not recognize the involvement in and impact of DOD's Quadrennial Defense Review on the development of the departmentwide plan. We also recommended that DOD develop a departmentwide human capital strategic plan that integrates both military and civilian workforces and takes into account contractor roles and sourcing initiatives. DOD did not concur with this recommendation stating that it has both a military and civilian plan, and the use of contractors is just another tool to accomplish the mission, not a separate workforce with separate needs to manage. The intent of our recommendation is not to say that DOD has a direct responsibility to manage contractor employees, but rather to recognize that strategic planning for the civilian workforce should be undertaken in the context of the total force--civilian, military, and contractors--since the three workforces need to perform their responsibilities in a seamless manner to accomplish DOD's mission. In commenting on our recommendations, the Under Secretary of Defense for Personnel and Readiness stated that DOD is in the early stages of its strategic planning efforts. We recognize this and believe that our recommendations represent opportunities that exist to strengthen its developing planning efforts. Our work has identified a set of key practices that appear to be central to the effective use of human capital authorities. These practices, which are shown in figure 1, center on effective planning and targeted investments, involvement and training, and accountability and cultural change. Congress should consider the extent to which an agency is capable of employing these practices before additional human capital flexibilities are implemented. In the context of NSPS, Congress should consider whether and to what extent DOD is using those practices. I have discussed throughout my statement today the importance of moving to a new human capital system which provides reasonable management flexibility along with adequate safeguards, reasonable transparency, and appropriate accountability mechanisms to prevent abuse of employees. In addition to the suggestions made above, Congress should consider requiring DOD to fully track and periodically report on its performance. This requirement would be fully consistent with those contained in our calendar year 2000 human capital legislation, which required us to comprehensively assess our use of the authorities granted to us under the act. More generally, Congress should consider requiring DOD to undertake evaluations that are broadly modeled on the evaluation requirements of OPM's personnel demonstration program. Under the demonstration project authority, agencies must evaluate and periodically report on results, implementation of the demonstration project, cost and benefits, impacts on veterans and other EEO groups, adherence to merit principles, and extent to which the lessons from the project can be applied elsewhere, including governmentwide. This evaluation and reporting requirement would facilitate congressional oversight of NSPS, allow for any mid-course corrections in its implementation, and serve as a tool for documenting best practices and sharing lessons learned with employees, stakeholders, other federal agencies, and the public. DOD has stated that it would continue its evaluation of the science and technology reinvention laboratory demonstration projects when they are integrated under a single human capital framework. In summary, DOD's civilian human capital proposals raise several critical questions. Should DOD and/or other federal agencies be granted broad- based exemptions from existing law, and if so, on what basis? Does DOD have the institutional infrastructure in place to make effective use of the new authorities? This institutional infrastructure includes, at a minimum, a human capital planning process that integrates the agency's human capital policies, strategies, and programs with its program goals and mission, and desired outcomes; the capabilities to effectively develop and implement a new human capital system; and a set of adequate safeguards, including reasonable transparency and appropriate accountability mechanisms to ensure the fair, effective, and credible implementation and application of a new system. Many of the basic principles underlying DOD's civilian human capital proposals have merit and deserve the serious consideration they are receiving here today and will no doubt be received by others in the coming weeks and months. However, the same critical questions should be posed to the DOD proposal. Should DOD and/or other federal agencies be granted broad-based exemptions from existing law, and if so, on what basis? In addition, Congress and DOD should carefully assess the degree to which DOD has the institutional infrastructure in place to make effective use the new authorities it is seeking. Our work has shown that while progress has been and is being made, additional efforts are needed by DOD to integrate its human capital planning process with the department's program goals and mission. The practices that have been shown to be critical to the effective use of flexibilities provide a validated roadmap for DOD and Congress to consider. Finally, as I have pointed out in several key areas, Congress should consider, if the authorities are granted, establishing additional safeguards to ensure the fair, merit-based, transparent, and accountable implementation and application of NSPS. In our view, Congress should consider providing governmentwide broad banding and pay for performance authorities that DOD and other federal agencies can use provided they can demonstrate that they have a performance management system in place that meets certain statutory standards, which can be certified to by a qualified and independent party, such as OPM. Congress should also consider establishing a governmentwide fund whereby agencies, based on a sound business case, could apply for funds to modernize their performance management systems and ensure that those systems have adequate safeguards to prevent abuse. This would serve as a positive step to promote high- performing organizations throughout the federal government while avoiding further fragmentation within the executive branch in the critical human capital area. This morning, I have offered some preliminary observations on some aspects of the proposal. However, these preliminary observations have not included some serious concerns I have with other sections of the proposed legislation that go beyond the civilian personnel proposal. My observations have included suggestions for how Congress can help DOD effectively address its human capital challenges and ensure that NSPS is designed and implemented in an effective, efficient, and fair manner that meets the current and future needs of DOD, its employees, and the American people. Human capital reforms at DOD obviously have important implications for national security and precedent-setting implications for governmentwide human capital management. Given the massive size of DOD and the magnitude of the nature and scope of the changes that are being considered, such reform at DOD also has important precedent-setting implications for federal human capital management generally and should be considered in that context. We look forward to continuing to support Congress and work with DOD in addressing the vital transformation challenges it faces. Madam Chairwoman and Mr. Davis, this concludes my prepared statement. I would be pleased to respond to any questions that you may have. For further information on human capital issues at DOD, please contact Derek Stewart, Director, Defense Capabilities and Management on (202) 512-5559 or at [email protected]. For further information on governmentwide human capital issues, please contact J. Christopher Mihm, Director, Strategic Issues, on (202) 512-6806 or at [email protected]. Individuals making key contributions to this testimony included William Doherty, Clifton G. Douglas, Jr., Christine Fossett, Bruce Goddard, Judith Kordahl, Janice Lichty, Bob Lilly, Lisa Shames, Ellen Rubin, Edward H. Stephenson, Jr., Tiffany Tanner, Marti Tracy, and Michael Volpe.
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DOD is in the midst of a major transformation effort including a number of initiatives to transform its forces and improve its business operations. DOD's legislative initiative would provide for major changes in the civiliean and military human capital management, make major adjustments in the DOD acquisition process, affect DOD's organization structure, and change DOD's reporting requirements to Congress, among other things. DOD's proposed National Security Personnel System (NSPS) would provide for wide-ranging changes in DOD's civilian personnel pay and performance management, collective bargaining, rightsizing, and a variety of other human capital areas. The NSPS would enable DOD to develop and implement a consistent DOD-wide civilian personnel system. This testimony provides GAO's preliminary observations on aspects of DOD's legislative proposal to make changes to its civilian personnel system and poses critical questions that need to be considered. Many of the basic principles underlying DOD's civilian human capital proposals have merit and deserve serious consideration. The federal personnel system is clearly broken in critical respects--designed for a time and workforce of an earlier era and not able to meet the needs and challenges of our current rapidly changing and knowledge-based environment. DOD's proposal recognizes that as GAO has stated and the experiences of leading public sector organizations here and abroad have found strategic human capital management must be the centerpiece of any serious government transformation effort. More generally, from a conceptual standpoint, GAO strongly supports the need to expand broad banding and pay for performance-based systems in the federal government. However, moving to quickly or prematurely at DOD or elsewhere, can significantly raise the risk of doing it wrong. This could also serve to severely set back the legitimate need to move to a more performance and results-based system for the federal government as a whole. Thus, while it is imperative that we take steps to better link employee pay and other personnel decisions to performance across the the federal government, how it is done, when it is done, and the basis on which it is done, can make all the difference in whether or not we are successful. In our view, one key need is to modernize performance management systems in executive agencies so that they are capable of supporting more performance-based pay and other personnel decisions. Unfortunately, based on GAO's past work, most existing federal performance appraisal systems, including a vast majority of DOD's systems, are not currently designed to support a meaningful performance-based pay system. The critical questions to consider are: should DOD and/or other agencies be granted broad-based exemptions from existing law, and if so, on what bas; and whether they have the institutional infrastructure in place to make effective use of the new authorities. This institutional infrastructure includes, at a minimum, a human capital planning process that integrates the agency's human capital policies, strategies, and programs with its program goals and mission, and desired outcomes; the capabilities to effectively develop and implement a new human capital system; and, importantly, a set of adequate safeguards, including reasonable transparency and appropriate accountability mechanisms to ensure the fair, effective, and credible implementation of a new system. In our view, Congress should consider providing governmentwide broad banding and pay for performance authorities that DOD and other federal agencies can use provided they can demonstrate that they have a performance management system in place that meets certain statutory standards, which can be certified to by a qualified and independent party, such as OPM, within prescribed timeframes. Congress should also consider establishing a governmentwide fund whereby agencies, based on a sound business case, could apply for funding to modernize their performance management systems and ensure that those systems have adequate safeguards to prevent abuse. This approach would serve as a positive step to promote high-performing organizations throughout the federal government while avoiding fragmentation within the executive branch in the critical human capital area.
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VA's mission is to promote the health, welfare, and dignity of all veterans in recognition of their service to the nation by ensuring that they receive medical care, benefits, social support, and lasting memorials. VA is the second largest federal department and, in addition to its central office located in Washington, D.C., has field offices throughout the United States, as well as the U.S. territories and the Philippines. The department's three major components--the Veterans Health Administration (VHA), the Veterans Benefits Administration (VBA), and the National Cemetery Administration (NCA)--are primarily responsible for carrying out its mission. More specifically, VHA provides health care services, including primary care and specialized care, and it performs research and development to improve veterans' needs. VBA provides a variety of benefits to veterans and their families, including disability compensation, educational opportunities, assistance with home ownership, and life insurance. Further, NCA provides burial and memorial benefits to veterans and their families. Collectively, the three components rely on approximately 340,000 employees to provide services and benefits. These employees work in VA's Washington, D.C. headquarters, as well as 167 medical centers, approximately 800 community-based outpatient clinics, 300 veterans centers, 56 regional offices, and 131 national and 90 state or tribal cemeteries situated throughout the nation. The use of IT is critically important to VA's efforts to provide benefits and services to veterans. As such, the department operates and maintains an IT infrastructure that is intended to provide the backbone necessary to meet the day-to-day operational needs of its medical centers, veteran- facing systems, benefits delivery systems, memorial services, and all other systems supporting the department's mission. The infrastructure is to provide for data storage, transmission, and communications requirements necessary to ensure the delivery of reliable, available, and responsive support to all VA staff offices and administration customers, as well as veterans. Toward this end, the department operates approximately 240 information systems, manages approximately 314,000 desktop computers and 30,000 laptops, and administers nearly 460,000 network user accounts for employees and contractors to facilitate providing benefits and health care to veterans. These systems are used for the determination of benefits, benefits claims processing, patient admission to hospitals and clinics, and access to health records, among other services. VHA's systems provide capabilities to establish and maintain electronic health records that health care providers and other clinical staff use to view patient information in inpatient, outpatient, and long-term care settings. The department's health information system-- the Veterans Health Information Systems and Technology Architecture (VistA)--serves an essential role in helping the department to fulfill its health care delivery mission. Specifically, VistA is an integrated medical information system that was developed in-house by the department's clinicians and IT personnel, and has been in operation since the early 1980s. The system consists of 104 separate computer applications, including 56 health provider applications; 19 management and financial applications; 8 registration, enrollment, and eligibility applications; 5 health data applications; and 3 information and education applications. Within VistA, an application called the Computerized Patient Record System enables the department to create and manage an individual electronic health record for each VA patient. VBA relies on VBMS to collect and store information such as military service records, medical examinations, and treatment records from VA, DOD, and private medical service providers. In 2014, VA issued its 6-year strategic plan, which emphasizes the department's goal of increasing veterans' access to benefits and services, eliminating the disability claims backlog, and ending veteran homelessness. According to the plan, the department intends to improve access to benefits and services through the use of enhanced technology to provide veterans with access to more effective care management. The plan also calls for VA to eliminate the disability claims backlog by fully implementing an electronic claims process that is intended to reduce processing time and increase accuracy. Further, the department has an initiative under way that provides services, such as health care, housing assistance, and job training, to end veteran homelessness. Toward this end, VA is working with other agencies, such as the Department of Health and Human Services, to implement more coordinated data entry systems to streamline and facilitate access to appropriate housing and services. VA reported spending about $3.9 billion to improve and maintain its IT resources in fiscal year 2015. Specifically, the department reported spending approximately $548 million on new systems development efforts, approximately $2.3 billion on maintaining existing systems, and approximately $1 billion on payroll and administration. For fiscal year 2016, the department received appropriations of about $4.1 billion for IT--about $505 million on new systems development, about $2.5 billion on maintaining existing systems, and about $1.1 billion on payroll and administration. For fiscal year 2017, the department's budget request included nearly $4.3 billion for IT. The department requested approximately $471 million for new systems development efforts, approximately $2.5 billion for maintaining existing systems, and approximately $1.3 billion for payroll and administration. In addition, in its 2017 budget submission, the department requested appropriations to make improvements in a number of areas, including: veterans' access to health care, to include enhancing health care- related systems, standardizing immunization data, and expanding telehealth services ($186.7 million); veterans' access to benefits by modernizing systems supporting benefits delivery, such as VBMS and the Veterans Services Network ($236.3 million); veterans' experiences with VA by focusing on integrated service delivery and streamlined identification processes ($171.3 million); VA employees' experiences by enhancing internal IT systems ($13 information security, including implementing strong authentication, ensuring repeatable processes and procedures, adopting modern technology, and enhancing the detection of cyber vulnerabilities and protection from cyber threats ($370.1 million). Electronic health records are particularly crucial for optimizing the health care provided to veterans, many of whom may have health records residing at multiple medical facilities within and outside the United States. Taking steps toward interoperability--that is, collecting, storing, retrieving, and transferring veterans' health records electronically--is significant to improving the quality and efficiency of care. One of the goals of interoperability is to ensure that patients' electronic health information is available from provider to provider, regardless of where it originated or resides. Since 1998, VA has undertaken a patchwork of initiatives with DOD to allow the departments' health information systems to exchange information and increase interoperability. Among others, these have included initiatives to share viewable data in the two departments' existing (legacy) systems, link and share computable data between the departments' updated heath data repositories, and jointly develop a single integrated system that would be used by both departments. Table 1 summarizes a number of these key initiatives. In addition to the initiatives mentioned in table 1, VA has worked in conjunction with DOD to respond to provisions in the National Defense Authorization Act for Fiscal Year 2008. This act required the departments to jointly develop and implement fully interoperable electronic health record systems or capabilities in 2009. Yet, even as the departments undertook numerous interoperability and modernization initiatives, they faced significant challenges and slow progress. We have reported, for example, that the two departments' success in identifying and implementing joint IT solutions has been hindered by an inability to articulate explicit plans, goals, and time frames for meeting their common health IT needs. In March 2011, the secretaries of VA and DOD announced that they would develop a new, joint integrated electronic health record system (referred to as iEHR). This was intended to replace the departments' separate systems with a single common system, thus, sidestepping many of the challenges they had previously encountered in trying to achieve interoperability. However, in February 2013, about 2 years after initiating iEHR, the secretaries announced that the departments were abandoning plans to develop a joint system, due to concerns about the program's cost, schedule, and ability to meet deadlines. The Interagency Program Office (IPO), put in place to be accountable for VA's and DOD's efforts to achieve interoperability, reported spending about $564 million on iEHR between October 2011 and June 2013. Following the termination of the iEHR initiative, VA and DOD moved forward with plans to separately modernize their respective electronic health record systems. In light of VA and DOD not implementing a solution that allowed for the seamless electronic sharing of health care data, the National Defense Authorization Act for Fiscal Year 2014 included requirements pertaining to the implementation, design, and planning for interoperability between the departments' electronic health record systems. Among other actions, provisions in the act directed each department to (1) ensure that all health care data contained in their systems (VA's VistA and DOD's Armed Forces Health Longitudinal Technology Application, referred to as AHLTA) complied with national standards and were computable in real time by October 1, 2014; and (2) deploy modernized electronic health record software to support clinicians while ensuring full standards-based interoperability by December 31, 2016. In August 2015, we reported that VA, in conjunction with DOD, had engaged in several near-term efforts focused on expanding interoperability between their existing electronic health record systems. For example, the departments had analyzed data related to 25 "domains" identified by the Interagency Clinical Informatics Board and mapped health data in their existing systems to standards identified by the IPO. The departments also had expanded the functionality of their Joint Legacy Viewer--a tool that allows clinicians to view certain health care data from both departments. More recently, in April 2016, VA and DOD certified that all health care data in their systems complied with national standards and were computable in real time. However, VA acknowledged that it did not expect to complete a number of key activities related to its electronic health record system until sometime after the December 31, 2016, statutory deadline for deploying modernized electronic health record software with interoperability. Specifically, the department stated that deployment of a modernized VistA system at all locations and for all users is not planned until 2018. VA's recently departed Chief Information Officer (CIO) initiated an effort to transform the focus and functions of the Office of Information and Technology (OI&T), which is responsible for providing IT services across VA and managing the department's IT assets and resources. The CIO's transformation strategy, initiated in January 2016, called for OI&T to focus on stabilizing and streamlining processes, mitigating weaknesses highlighted in GAO assessments, and improving outcomes by institutionalizing a new set of IT management capabilities. As part of this transformation, the CIO began transitioning the oversight of and accountability for IT projects to a new project management process called the Veteran-focused Integration Process in January 2016, in an effort to streamline systems development and the delivery of new IT capabilities. The CIO established five new functions within OI&T: The enterprise program management office is to serve as OI&T's portfolio management and project tracking organization. The account management function is to be responsible for managing the IT needs of VA's major components. The quality and compliance function is to be responsible for establishing policy governance and standards and ensuring adherence to them. The data management organization is expected to improve both service delivery and the veteran experience by engaging with data stewards to ensure the accuracy and security of the information collected by VA. The strategic sourcing function is to be responsible for establishing an approach to fulfilling the department's requirements with vendors that provide solutions for those requirements, managing vendor selection, tracking vendor performance and contract deliverables, and sharing insights on new technologies and capabilities to improve the workforce knowledge base. According to the former CIO, the transformation strategy was completed in the first quarter of fiscal year 2017. Recognizing the importance of reforming the government-wide management of IT, Federal Information Technology Acquisition Reform provisions (commonly referred to as FITARA) were enacted in December 2014 as part of the Carl Levin and Howard P. "Buck" McKeon National Defense Authorization Act for Fiscal Year 2015. The law was intended to improve covered agencies' acquisitions of IT and further enable Congress to monitor agencies' progress and hold them accountable for reducing duplication and achieving cost savings. FITARA includes specific requirements related to seven areas, including data center consolidation. Under FITARA, VA and other covered agencies are required to provide OMB with a data center inventory, a strategy for consolidating and optimizing the data centers (to include planned cost savings), and quarterly updates on progress made. FITARA also requires OMB to develop a goal for how much is to be saved through this initiative, and provide annual reports on cost savings achieved. In addition, in August 2016, OMB released guidance intended to, among other things, define a framework for achieving the data center consolidation and optimization requirements of FITARA. The guidance includes requirements for covered agencies such as VA to: maintain complete inventories of all data center facilities owned, operated, or maintained by or on behalf of the agency; develop cost savings targets due to consolidation and optimization for fiscal years 2016 through 2018 and report any actual realized cost savings; and measure progress toward meeting optimization metrics on a quarterly basis. The guidance also directs each covered agency to develop a data center consolidation and optimization strategic plan that defines the agency's data center strategy for fiscal years 2016, 2017, and 2018. This strategy is to include, among other things, a statement from the agency CIO stating whether the agency has complied with all data center reporting requirements in FITARA. Further, the guidance indicates that OMB is to maintain a public dashboard that will display consolidation-related costs savings and optimization performance information for the agencies. Although VA has proceeded with its program to modernize VistA (known as VistA Evolution), the department's long-term plan for meeting its electronic health record system needs beyond fiscal year 2018 is uncertain. The department's current VistA modernization approach is reflected in an interoperability plan and a roadmap describing functional capabilities to be deployed through fiscal year 2018. Specifically, these documents describe the department's approach for modernizing its existing electronic health record system through the VistA Evolution program, while helping to facilitate interoperability with DOD's system and the private sector. For example, the VA Interoperability Plan, issued in June 2014, describes activities intended to improve VistA's technical interoperability, such as standardizing the VistA software across the department to simplify sharing data. In addition, the VistA 4 Roadmap, which further describes VA's plan for modernizing the system, identifies four sets of functional capabilities that are expected to be incrementally deployed during fiscal years 2014 through 2018 to modernize the VistA system and enhance interoperability. According to the roadmap, the first set of capabilities was delivered by the end of September 2014 and included access to the Joint Legacy Viewer and a foundation for future functionality, such as an enhanced graphical user interface. Another interoperable capability that is expected to be incrementally delivered over the course of the VistA modernization program is the enterprise health management platform. The department has stated that this platform is expected to provide clinicians with a customizable view of a health record that can integrate data from VA, DOD, and third-party providers. Also, when fully deployed, VA expects the enterprise health management platform to replace the Joint Legacy Viewer. However, an independent assessment of health IT at VA questioned whether the VistA Evolution program to modernize the electronic health record system can overcome a variety of risks and technical issues that have plagued prior VA initiatives of similar size and complexity. For example, the study raised questions regarding the lack of any clear advances made during the past decade and the increasing amount of time needed for VA to release new health IT capabilities. Given the concerns identified, the study recommended that VA assess the cost versus benefits of various alternatives for delivering the modernized capabilities, such as commercially available off-the-shelf electronic health record systems, open source systems, and the continued development of VistA. In speaking about this matter, VA's former Under Secretary for Health asserted that the department will follow through on its plans to complete the VistA Evolution program in fiscal year 2018. However, the former CIO also indicated that the department would reconsider how best to meet its electronic health record system needs beyond fiscal year 2018. As such, VA's approach to addressing its electronic health record system needs remains uncertain. Beyond modernizing VistA, VA has undertaken numerous initiatives with DOD that were intended to advance electronic health record interoperability between the two departments. Yet, a significant concern is that these departments have not identified outcome-oriented goals and metrics to clearly define what they aim to achieve from their interoperability efforts, and the value and benefits these efforts are expected to yield. As we have stressed in our prior work and guidance, assessing the performance of a program should include measuring its outcomes in terms of the results of products or services. In this case, such outcomes could include improvements in the quality of health care or clinician satisfaction. Establishing outcome-oriented goals and metrics is essential to determining whether a program is delivering value. The IPO is responsible for monitoring and reporting on VA's and DOD's progress in achieving interoperability and coordinating with the departments to ensure that these efforts enhance health care services. Toward this end, the office issued guidance that identified a variety of process-oriented metrics to be tracked, such as the percentage of health data domains that have been mapped to national standards. The guidance also identified metrics to be reported that relate to tracking the amounts of certain types of data being exchanged between the departments, using existing capabilities. This would include, for example, laboratory reports transferred from DOD to VA via the Federal Health Information Exchange and patient queries submitted by providers through the Bidirectional Health Information Exchange. Nevertheless, in our August 2015 report, we noted that the IPO had not specified outcome-oriented metrics and goals that could be used to gauge the impact of the interoperable health record capabilities on the departments' health care services. At that time, the acting director of the IPO stated that the office was working to identify metrics that would be more meaningful, such as metrics on the quality of a user's experience or on improvements in health outcomes. However, the office had not established a time frame for completing the outcome-oriented metrics and incorporating them into the office's guidance. In the report, we stressed that using an effective outcome-based approach could provide the two departments with a more accurate picture of their progress toward achieving interoperability, and the value and benefits generated. Accordingly, we recommended that the departments, working with the IPO, establish a time frame for identifying outcome- oriented metrics; define related goals as a basis for determining the extent to which the departments' modernized electronic health record systems are achieving interoperability; and update IPO guidance accordingly. Both departments concurred with our recommendations. Further, since that time, VA has established a performance architecture program that has begun to define an approach for identifying outcome-oriented metrics focused on health outcomes in selected clinical areas, and it also has begun to establish baseline measurements. We intend to continue monitoring the departments' efforts to determine how these metrics define and measure the results achieved by interoperability between the departments. VA has moved forward with modernizing VistA despite concerns that doing so is potentially duplicative with DOD's acquisition of a commercially available electronic health record system. Specifically, VA took this course of action even though it has many health care business needs in common with DOD. For example, in May 2010, both departments issued a report on medical IT to congressional committees that identified 10 areas--inpatient documentation, outpatient documentation, pharmacy, laboratory, order entry and management, scheduling, imaging and radiology, third-party billing, registration, and data sharing--in which the departments have common business needs. Further, the results of a 2008 consultant's study pointed out that over 97 percent of inpatient requirements for electronic health record systems are common to both departments. We also issued several prior reports regarding the plans for separate systems, in which we noted that the two departments did not substantiate their claims that VA's VistA modernization, together with DOD's acquisition of a new system, would be achieved faster and at less cost than developing a single, joint electronic health record system. Moreover, we noted that the departments' plans to modernize their two separate systems were duplicative and stressed that their decisions to do so should be justified by comparing the costs and schedules of alternate approaches. We recommended that VA and DOD develop cost and schedule estimates that would include all elements of their approach (i.e., to modernize both departments' health information systems and establish interoperability between them) and compare them with estimates of the cost and schedule for developing a single, integrated system. If the planned approach for separate systems was projected to cost more or take longer, we recommended that the departments provide a rationale for pursuing such an approach. VA, as well as DOD, agreed with our recommendations and stated that an initial comparison had indicated that the approach involving separate systems would be more cost effective. However, as of January 2017, the departments had not provided us with a comparison of the estimated costs of their current and previous approaches. Further, with respect to their assertions that separate systems could be achieved faster, both departments had developed schedules which indicated that their separate modernization efforts are not expected to be completed until after the 2017 planned completion date for the previous single-system approach. In February 2015, we designated VA health care as a high-risk area. Among the five broad areas contributing to our determination was the department's IT challenges. Of particular concern was the failed modernization of a system to support the department's outpatient appointment scheduling. We have previously reported on the department's outpatient appointment scheduling system, which is about 30 years old. Among the problems that VA employees responsible for scheduling appointments have cited, are that the system's commands require the use of many keystrokes, and that it does not allow them to view multiple screens at once. Thus, schedulers must open and close multiple screens to check a provider's or a clinic's full availability when setting up a medical appointment, which is time- consuming and can lead to errors. In May 2010, we reported that, after spending an estimated $127 million over 9 years on its outpatient scheduling system modernization project, VA had not implemented any of the planned system's capabilities and was essentially starting over by beginning a new initiative to build or purchase another scheduling system. We also noted that VA had not developed a project plan or schedule for the new initiative, stating that it intended to do so after determining whether to build or purchase the new system. We recommended that the department take six actions to improve key systems development and acquisition processes essential to the second outpatient scheduling system effort. The department generally concurred with our recommendations, but as of May 2016, had not addressed four of the six recommendations. Addressing our recommendations should better position VA to effectively modernize its outpatient scheduling system, and ultimately, improve the quality of care that veterans receive. In September 2015, we reported that VBA had made progress in developing and implementing VBMS, its system that is to be used for processing disability benefit claims. Specifically, it had deployed the initial version of the system to all of its regional offices as of June 2013. Further, after initial deployment, VBA continued developing and implementing additional system functionality and enhancements to support the electronic processing of disability compensation claims. As a result, 95 percent of records related to veterans' disability claims were electronic and resided in the system. Nevertheless, we found that VBMS was not able to fully support disability and pension claims, as well as appeals processing. While the Under Secretary for Benefits stated in March 2013 that the development of the system was expected to be completed in 2015, implementation of functionality to fully support electronic claims processing was delayed beyond 2015. In addition, VBA had not produced a plan that identified when the system would be completed. Accordingly, holding VBA management accountable for meeting a time frame and demonstrating progress was difficult. Our report further noted that, even as VBA continued its efforts to complete the development and implementation of VBMS, three areas were in need of increased management attention. Cost estimating: The program office did not have a reliable estimate of the cost for completing the system. Without such an estimate, VBA management and the department's stakeholders had a limited view of the system's future resource needs, and the program risked not having sufficient funding to complete development and implementation of the system. System availability: Although VBA had improved its performance regarding system availability to users, it had not established system response time goals. Without such goals, users did not have an expectation of the system response times they could anticipate and management did not have an indication of how well the system performed relative to performance goals. System defects: While the program had actively managed system defects, a recent system release had included unresolved defects that impacted system performance and users' experiences. Continuing to deploy releases with large numbers of defects that reduced system functionality could have adversely affected users' ability to process disability claims in an efficient manner. We also noted in the report that VBA had not conducted a customer satisfaction survey that would allow the department to compile data on how users viewed the system's performance, and ultimately, to develop goals for improving the system. Our survey of VBMS users in 2014 found that a majority of them were satisfied with the system, but that decision review officers were considerably less satisfied. However, while the results of our survey provided VBA with data about users' satisfaction with the system, the absence of user satisfaction goals limited the utility of the survey results. Specifically, without having established goals to define user satisfaction, VBA did not have a basis for gauging the success of its efforts to promote satisfaction with the system, or for identifying areas where its efforts to complete development and implementation of the system might need attention. We recommended, among other actions, that the department develop a plan with a time frame and a reliable cost estimate for completing VBMS, establish goals for system response time, assess user satisfaction, and establish satisfaction goals to promote improvement. While all of our recommendations currently remain open, the department indicated that it has begun taking steps to address them. For example, the department informed us of its plans to distribute its own survey to measure users' satisfaction with VBMS and to have the results of this survey analyzed by May 2017. In addition, the department has developed draft metrics for measuring the performance of the most commonly executed transactions within VBMS. Continued attention to these important areas can improve VA's efforts to effectively complete the development and implementation of VBMS and, in turn, more effectively support the department's processing of disability benefit claims. We previously reported that VA was among the agencies that had collectively made progress on their data center closure efforts; nevertheless, it had fallen short of OMB's goal for agencies to close 40 percent of all non-core centers by the end of fiscal year 2015. VA's progress toward closing data centers, and realizing the associated cost savings, lagged behind that of most other covered agencies. Specifically, we reported that VA's closure of 20 out of its total of 356 data centers gave the department a 6 percent closure rate through fiscal year 2015--ranking its closure rate 19th lowest out of the 24 agencies we studied. Further, when we took into account the data centers that the department planned to close through fiscal year 2019, VA's 8 percent closure rate ranked 21st lowest out of 24. With regard to cost savings and avoidance resulting from data center consolidation, our analysis of the department's data identified a total of $19.1 million in reported cost savings or avoidances from fiscal year 2011 though fiscal year 2015. This equated to only about 0.7 percent of the total of approximately $2.8 billion that all 24 agencies reported saving or avoiding during the same time period. Also, when we reported on this matter in March 2016, the department had not yet estimated any planned cost savings or avoidances from further data center consolidation during fiscal years 2017 through 2019. VA also lagged behind other agencies in making progress toward addressing data center optimization metrics established by OMB in 2014. These metrics, which applied only to core data centers, addressed several data center optimization areas, including cost per operating system, energy, facility, labor, storage, and virtualization. Further, OMB established a target value for nine metrics that agencies were expected to achieve by the end of fiscal year 2015. As we previously reported, 20 of 22 agencies with core data centers met at least one of OMB's optimization targets. VA was the only agency that reported meeting none of the nine targets. Accordingly, we recommended that VA take action to improve its progress in the data center optimization areas that we reported as not meeting OMB's established targets. The department agreed with our recommendation and has since stated that approximately 70 data centers have been tentatively identified for potential consolidation by the end of fiscal year 2019. VA is anticipating that, upon completion, these consolidations will improve its performance on OMB's optimization metrics. The federal government spent more than 75 percent of the total amount budgeted for IT for fiscal year 2015 on operations and maintenance, including for the use of legacy IT systems that are becoming increasingly obsolete. VA is among a handful of departments with one or more archaic legacy systems. Specifically, our recent report on legacy systems used by federal agencies identified 2 of the department's systems as being over 50 years old, and among the 10 oldest investments and/or systems that were reported by 12 selected agencies. Personnel and Accounting Integrated Data (PAID)--This 53-year old system automates time and attendance for employees, timekeepers, payroll, and supervisors. It is written in Common Business Oriented Language (COBOL), a programming language developed in the late 1950s and early 1960s, and runs on IBM mainframes. VA plans to replace this system with the Human Resources Information System Shared Service Center in 2017. Benefits Delivery Network (BDN)--This 51-year old system tracks claims filed by veterans for benefits, eligibility, and dates of death. It is a suite of COBOL mainframe applications. VA has general plans to roll the capabilities of BDN into another system, but has not established a firm date doing so. Ongoing use of antiquated systems such as PAID and BDN contributes to agencies spending a large, and increasing, proportion of their IT budgets on operations and maintenance of systems that have outlived their effectiveness and are consuming resources that outweigh their benefits. Accordingly, we recommended that VA identify and plan to modernize or replace its legacy systems. VA concurred with our recommendation and stated that it plans to retire PAID in 2017 and to retire BDN in 2018. In conclusion, effective IT management is critical to the performance of VA's mission. However, the department faces challenges in several key areas, including its approach to pursuing electronic health record interoperability with DOD. Specifically, VA's reconsideration of its approach to modernizing VistA raises uncertainty about how it intends to accomplish this important endeavor. VA has not yet defined the extent of interoperability it needs to provide the highest possible quality of care to its patients, as well as how and when the department intends to achieve this extent of interoperability with DOD. Further, VA has not justified the development and operation of an electronic health record system that is separate from DOD's system, even though the departments have common system needs. The department also faces challenges in modernizing its approximately 30-year old outpatient appointment scheduling system and improving its development and implementation of VBMS. Further, the department has not yet demonstrated expected progress toward consolidating and optimizing the performance of its data centers. In addition, VA's continued operation of two of the oldest legacy IT systems in the federal government raises concern about the extent to which the department continues to spend funds on IT systems that are no longer effective or cost beneficial. While we recognize that VA has initiated steps to mitigate the IT management weaknesses we have identified, sustained management attention and organizational commitment will be essential to ensuring that the transformation is successful and that the weaknesses are fully addressed. Chairman Roe, Ranking Member Walz, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have. If you or your staffs have any questions about this testimony, please 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 testimony statement. GAO staff who made key contributions to this statement are Mark Bird (Assistant Director), Eric Trout (Analyst in Charge), Rebecca Eyler, Scott Pettis, Priscilla Smith, and Christy Tyson. 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The use of IT is crucial to helping VA effectively serve the nation's veterans, and each year, the department spends over $4 billion on IT. However, over many years, VA has had difficulty managing its information systems, raising questions about the effectiveness of its operations and its ability to deliver intended outcomes needed to help advance the department's mission. GAO has previously reported on a number of the department's IT initiatives. This statement summarizes results from key GAO reports related to increasing electronic health record interoperability between VA and DOD; system challenges that have contributed to GAO's designation of VA health care as a high-risk area; and VA's development of its system for processing disability benefits, data center consolidation, and legacy systems. GAO noted in July 2016 that the Department of Veterans Affairs (VA) had moved forward with an effort to modernize its health information system--the Veterans Health Information Systems and Technology Architecture (VistA)--but that the department is uncertain of its long-term plan for addressing its electronic health record system needs beyond fiscal year 2018. Beyond modernizing VistA, GAO reported in August 2015 that VA and the Department of Defense (DOD) had not identified outcome-oriented goals and metrics to clearly define what they aim to achieve from their efforts to increase electronic health record interoperability (i.e., the electronic exchange and use of health records) between the two departments. Moreover, VA has begun to modernize VistA separate from DOD's planned acquisition of a commercially available electronic health record system, even though both departments have many health care business needs in common. In 2014, GAO noted that the departments' decision to abandon the development of a single system in favor of modernizing their two separate systems was not justified and was identified as an example of duplication among government activities. The departments have not yet provided a comparison of the estimated costs and schedules of their current and previous approaches as GAO recommended. In February 2015, GAO designated VA health care as a high-risk area, with IT challenges being one contributing factor. Specifically, GAO noted that the outpatient appointment scheduling system, which is currently about 30 years old, is time-consuming to use and error prone. However, the project to modernize that system failed after VA spent an estimated $127 million over 9 years. VA has begun a new initiative to build or purchase another scheduling system. GAO reported in September 2015, that VA had made progress implementing the Veterans Benefits Management System (VBMS) for processing disability benefits. However, the department had not developed a time frame and a reliable cost estimate for completing VBMS. VA also had not established goals for system response time, and had not minimized incidences of high and medium severity system defects for future VBMS releases. Further, the department had not assessed user satisfaction, or established user satisfaction goals. In addition, VA's consolidation and closure of data centers has lagged behind other agencies, as GAO reported in March 2016. For example, VA's closure of 20 out of a total of 356 data centers gave the department a 6 percent closure rate through fiscal year 2015 that ranked 19th of the 24 agencies in GAO's study. Also, VA's reported $19.1 million in cost savings or avoidances from fiscal year 2011 through fiscal year 2015 was only about 0.7 percent of the total of about $2.8 billion that all 24 agencies reported saving. In addition, the department had not met any of the data center optimization areas established by the Office of Management and Budget. VA was identified in a May 2016 GAO report as using antiquated and expensive to maintain, legacy IT systems. At that time, the 53-year-old Personnel and Accounting Integrated Data (PAID) system was slated to be replaced in 2017. Further, VA has plans to retire the 51-year-old Benefits Delivery Network, which tracks veterans' claims for benefits, eligibility, and death dates in 2018. GAO has made numerous recommendations to VA to improve the modernization of its IT systems. For example, GAO has recommended that VA develop goals and metrics for determining the extent to which its modernized electronic health record system is achieving interoperability with DOD's; address challenges associated with modernizing its scheduling system; address shortcomings with VBMS planning and implementation; take actions to improve progress in data center optimization; and modernize or replace obsolete legacy IT systems. VA agreed with these recommendations and said it has begun taking actions to implement them.
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Beginning on April 27, 2005, DOD made TRICARE coverage available for purchase through TRS for certain reservists when they were not on active duty or eligible for pre- or postactivation TRICARE coverage. Enrollees in TRS can obtain care from MTFs or from TRICARE-authorized civilian providers or hospitals. TRS enrollees can obtain prescription drugs through TRICARE's pharmacy system, which includes MTF pharmacies, network retail pharmacies, nonnetwork retail pharmacies, and the TRICARE Mail Order Pharmacy. Since 2005, Congress has made this benefit available to a growing number of members of the Selected Reserves. The NDAA for Fiscal Year 2005 authorized the TRS program. As originally authorized, TRS made TRICARE coverage available to certain members of the Selected Reserves--that is, reservists mobilized since September 11, 2001, who had continuous qualifying service on active duty for 90 days or more in support of a contingency operation. To qualify for TRS, reservists had to enter into an agreement with their respective reserve components to continue to serve in the Selected Reserves in exchange for TRS coverage. For each 90-day period of qualifying service in a contingency operation, reservists could purchase 1 year of TRS coverage. Electing to enroll in this TRS program was a onetime opportunity, and as originally authorized, the program required reservists to sign the new service agreement and register for TRS before leaving active duty service. Reservists who qualified could also obtain coverage for their dependents by paying the appropriate premium. The NDAA for Fiscal Year 2006 expanded the number of reservists and dependents who qualify to participate in the TRS program. Under the expanded program, which became effective on October 1, 2006, almost all reservists and dependents--regardless of the reservists' prior active duty service--had the option of purchasing TRICARE coverage. Similar to the TRS program as it was originally authorized, members of the Selected Reserves and their dependents choosing to enroll in the expanded TRS program had to pay a monthly premium to receive TRICARE coverage. The portion of the premium paid by reservists in the Selected Reserves and their dependents for TRS coverage varied based on certain qualifying conditions that had to be met, such as whether the reservist also had access to an employer-sponsored health plan. The NDAA for Fiscal Year 2006 established three levels--which DOD calls tiers--of qualification for TRS, with enrollees paying different portions of the premium based on the tier for which they qualified. Those who would have qualified under the original TRS program, because they had qualifying service in support of a contingency operation, paid the lowest premium. In another change to the program, those reservists with qualifying service in support of a contingency operation now had up to 90 days after leaving active duty to sign the new service agreement required to qualify for this lowest premium tier. The NDAA for Fiscal Year 2007 significantly restructured the TRS program by eliminating the three-tiered premium structure. The act also changed TRS qualification criteria for members of the Selected Reserves, generally allowing these reservists to purchase TRICARE coverage for themselves and their dependents at the lowest premium--formerly paid by enrollees in tier 1--regardless of whether they have served on active duty in support of a contingency operation. In addition, the act removed the requirement that reservists sign service agreements to be qualified for TRS. Instead, the act established that reservists in the Selected Reserves qualify for TRS for the duration of their service in the Selected Reserves. DOD implemented these changes on October 1, 2007. See table 1 for an overview of TRS qualification criteria and the monthly portion of the TRS premiums paid by reservists. Currently, reservists who qualify for TRS may purchase TRS individual or family coverage at any time. Once enrolled in TRS, reservists and their dependents are able to obtain health care through MTFs, if appointments are available, or through TRICARE-authorized civilian providers or hospitals. Enrollees who choose to use civilian providers are subject to an annual deductible, co-payments, and coinsurance. When these enrollees use providers outside TRICARE's civilian network, they pay higher cost shares and are considered to be using TRICARE Standard, the TRICARE option that is similar to a fee-for-service plan. When they use providers who are part of the TRICARE network, they pay discounted cost shares and are considered to be using TRICARE Extra, the TRICARE option that is similar to a preferred provider plan. DOD is required by law to set premiums for TRS at a level that it determines to be reasonable using an appropriate actuarial basis. DOD officials told us that the department interpreted this to mean that TRS premiums should be set equal to the expected average costs per plan of providing the benefit. Beginning in 2005, DOD based TRS premiums on the premiums for the BCBS Standard plan offered through FEHBP because, at the time DOD was developing TRS, actual data on the costs of delivering TRS benefits for the TRS population did not exist. To set the premiums, DOD compared characteristics of the beneficiary populations in each group and subsequently adjusted the BCBS premiums for differences in age, gender, and family size between the TRS and BCBS populations. The population that qualifies for TRS is younger, has a higher percentage of males, and has a larger number of dependents per sponsor than the BCBS population. Taken together, DOD concluded that these factors caused expected health care costs for the TRS population to be lower than expected health care costs for the BCBS population. To account for these differences, DOD set the TRS premium for individual coverage 32 percent lower than the corresponding BCBS premium and set the TRS premium for family coverage 8 percent lower than the corresponding BCBS premium. According to DOD officials, the department based TRS premiums on BCBS premiums, rather than another health insurance plan's premiums, because BCBS offers coverage that is similar to the coverage offered under TRICARE Standard. (For a comparison of cost-sharing provisions under TRS and BCBS Standard, see table 2.) In addition, like TRS, BCBS charges a separate premium for individual coverage and for family coverage, and each of these premiums is uniform nationally and updated annually. Furthermore, according to DOD officials, basing TRS premiums on BCBS premiums allowed the department to account for the effect of adverse selection on the department's costs, because adverse selection is already accounted for in BCBS premiums. In order to compensate for rising health care costs, DOD originally designed TRS premiums so that they would be adjusted each year based on annual adjustments in the total BCBS Standard premiums. DOD planned to continue using this method to adjust premiums in the immediate future but allowed for the possibility that it might change the methodology at some point in the future. Thus, if BCBS premiums increased by 8.5 percent from 2005 to 2006, TRS premiums would be increased by the same percentage. New premiums are effective at the start of each calendar year. TRS premiums were increased by 8.5 percent for 2006 and scheduled to be increased by 1 percent for 2007, but a provision in the NDAA for Fiscal Year 2007 prevented this increase from being implemented for 2007. According to DOD officials, another reason DOD decided to use BCBS as the basis for annual TRS premium adjustments was because BCBS premiums are updated annually, and the new premiums are made public each October. DOD officials told us they did not want to use DOD data to adjust premiums because they believe that doing so would be less transparent; that is, they wanted to avoid any appearance that the data might have been manipulated to DOD's own financial advantage. In 2006, the premiums for both individual and family coverage under TRS exceeded the reported costs of providing TRICARE benefits through the program. The total premium for individual coverage under tier 1 was 72 percent higher than the average cost per plan of providing benefits through the program. Similarly, the total premium for family coverage under tier 1 was 45 percent higher than the average cost per plan of providing benefits. There are several reasons that basing TRS premiums on BCBS premiums did not successfully align TRS premiums with benefit costs. These include certain differences between the TRS and BCBS populations and certain differences between the two programs that DOD did not take into account. Experts indicated that data on the costs of delivering TRS benefits would provide DOD with an improved basis for adjusting premiums in future years. In 2006, the premium for both individual and family coverage under TRS exceeded the reported costs per plan of providing TRICARE benefits through the program. For tier 1, the annual premium for individual plans of $3,471--including the share paid by enrollees and the share covered by DOD--was 72 percent higher than the average cost of providing benefits through TRS of $2,020 per plan. Similarly, the annual premium for family plans of $10,843 was 45 percent higher than the average cost of providing benefits through TRS of $7,496 per plan. (See fig. 1.) The average costs per TRS plan do not include certain administrative costs that DOD was not able to allocate specifically to TRS, such as advertising costs and program education. However, DOD officials told us that including these costs would not be sufficient to close the gap between TRS premiums and the average costs per plan. DOD also incurred start-up costs associated with establishing the TRS program, which are not included in the average costs per TRS plan because DOD did not intend for them to be covered by TRS premiums. The discrepancy between TRS premiums and reported TRS costs has implications for DOD's cost sharing with TRS enrollees. By statute, the portion of the TRS premium paid by enrollees in tier 1--and all enrollees as of October 1, 2007--is to cover 28 percent of the full premium. In 2006, TRS enrollees in tier 1 paid $972 for individual coverage and $3,036 for family coverage. This covered 48 percent of the average cost per individual plan and 41 percent of the average cost per family plan. Had DOD been successful in establishing TRS premiums that were equal to the average reported cost per TRS plan in 2006, enrollees' share of the premium would have been $566 for single coverage and $2,099 for family coverage in that year. Basing TRS premiums on BCBS premiums is unlikely to align TRS premiums with benefit costs because of several differences between the TRS and BCBS populations and programs that DOD did not take into account. DOD based TRS premiums on BCBS premiums because at the time DOD was developing TRS, actual data on the costs of delivering TRS benefits to the TRS population did not exist. However, experts we interviewed suggested that because of demographic differences between the TRS and BCBS populations, BCBS-based premiums are unlikely to reflect TRS costs. In setting TRS premiums, DOD adjusted BCBS premiums to account for differences in age, gender, and family size between the TRS and BCBS populations. However, DOD did not take other demographic differences into account that could have potentially affected its likely success--such as enrollees' geographic distribution and health status--because accounting for these differences is very difficult. The geographic distribution of a population is an important factor in predicting health care costs and corresponding health insurance premiums, in large part because physician payment rates vary across geographic locations. Furthermore, according to experts we interviewed, the most important predictors of health care costs are measures related to enrollees' health status, which were not fully available to DOD when it first established TRS premiums. Another factor that may have contributed to the disparity between TRS premiums and the program's costs is the dissimilarity in the structures of the TRS and BCBS programs. While TRS premiums are designed to cover enrollees' health care costs and certain administrative costs, BCBS premiums are designed to cover these costs and also may include contributions to or withdrawals from plan reserves and profits. As a result, changes in BCBS premiums are generally not equal to changes in BCBS program costs. Experts indicated that data on the costs of delivering TRS benefits will provide DOD with an improved basis for adjusting premiums in future years. They informed us that there are several methods of setting health insurance premiums. The methods that are most successful in aligning premiums with the actual costs of providing benefits involve using program cost data when setting premiums. Although TRS cost data did not exist when the program was implemented, leading DOD to base TRS premiums on BCBS premiums, TRS cost data from 2005 and 2006 are now available. In DOD's description of its methodology for establishing and adjusting TRS premiums in the Federal Register on March 16, 2005, DOD allowed for the possibility of using other means to adjust premiums in the future. It stated that it could base future changes in TRS premiums on actual cost data. However, DOD officials told us that the department has not used these data to adjust TRS premiums due to the limitations associated with using prior year costs to predict future costs. According to DOD officials, prior year claims data may not be indicative of future year claims costs due to the newness of the TRS program, recent changes to TRS, and the low number of enrollees. However, TRS cost data reflect actual experience with the program and any limitations associated with TRS cost data should decrease over time as DOD gains more experience with the program and more reservists enroll in it. Nonetheless, due to the uncertainty associated with predicting future health care costs, premiums are unlikely to exactly match program costs, even when they are based on cost data from prior years. To help adjust for discrepancies between premiums and program costs, some health insurance programs have established reserve accounts, which may be used to defray future premium increases or cover unexpected shortfalls from higher-than-anticipated costs. For example, as noted earlier, the Office of Personnel Management administers a reserve account for each FEHBP plan, including BCBS. These reserve accounts are funded by a surcharge of up to 3 percent of a plan's premium. Once funds in the reserve accounts exceed certain minimum balances, they can be used to offset future year premium increases. Similarly, some health insurance programs make adjustments to premiums for subsequent years that account for any significant discrepancy between prior year premiums and program costs. The law governing TRS contains no provision for the establishment of a reserve account or for methods of increasing or decreasing premiums, after they are set, to address differences between premiums and costs in prior years. DOD's estimated costs of providing TRS benefits were about 11 times higher than its reported costs. DOD's cost projections were too high largely because it overestimated the number of reservists who would enroll in TRS as well as the associated cost per plan of providing benefits through the program. DOD officials told us that they considered TRS cost and enrollment data when developing future year projections of program costs and enrollment levels, but they chose not to use these data as part of their projections because they are uncertain that prior year enrollment and cost data are indicative of future year costs and enrollment levels. DOD significantly overestimated the costs of providing benefits through TRS. Prior to TRS's implementation, DOD estimated that total costs of providing benefits through the program would amount to about $70 million in fiscal year 2005 and about $442 million in fiscal year 2006. In contrast, reported costs in those years only amounted to about $5 million and about $40 million, respectively. DOD estimated the program's likely costs by multiplying the number of TRS plans that it projected would be purchased by DOD's estimated cost per plan for individual and family plans. DOD estimated that its cost per plan would be equal to the total TRS premium minus the portion of the premium paid by enrollees. The number of reservists who purchased TRS coverage has been significantly lower than DOD projected, and as a result TRS program costs have also been lower than expected. DOD projected that about 114,000 reservists would purchase individual or family plans by 2007; however, as of June 2007 only about 11,500--or about 10 percent--of that number had purchased TRS plans. Over 90 percent of TRS enrollment had been for coverage under tier 1, which offered the lowest enrollee premium contributions of the three tiers in existence at the time covered by our analysis. Very few reservists signed up for coverage under tier 3, which had the highest enrollee premium contributions of the three tiers. (See table 3.) DOD estimated the number of reservists who would purchase TRS coverage by dividing the population of reservists who qualify for each of the three tiers into several categories for which it estimated distinct participation rates, based on the premiums these reservists would likely pay for non-DOD health insurance. DOD projected lower enrollment for groups that had access to less expensive health insurance options, such as those who are offered insurance through their employers. DOD officials believe that enrollment in TRS will increase the longer the program is in place. However, while enrollment in TRS increased moderately through October 2006, it has remained relatively stable from October 2006 through June 2007. (See fig. 2.) In addition to the estimated number of plans purchased, the other major factor that affected DOD's projection of overall TRS program costs was its estimate of the cost of providing benefits for each TRS plan. As previously stated, DOD based its estimated cost per plan on the total TRS premium minus the portion of the premium paid by enrollees. Because the premiums have been higher than DOD's reported costs, DOD's cost projections have also been too high. DOD developed a new model to project enrollment levels and program costs under TRS's single-tiered premium structure that went into effect on October 1, 2007; however, DOD's projection of future TRS enrollment levels is likely too high. DOD projected that the total number of TRS plans for individual and family coverage would be approximately 64,000 in fiscal year 2008 at a cost to the department of about $381 million for that year. However, actual TRS enrollment data to date suggest that total TRS enrollment--and therefore program costs--are unlikely to be as high as DOD projected. As of June 2007, there were about 11,500 TRS plans--well below DOD's projection of about 114,000. Enrollment will almost certainly increase to some extent because reservists who previously only qualified for tier 2 or tier 3 of the program--which required enrollees to pay a larger portion of the premium--have qualified for the significantly lower tier 1 enrollee premiums since October 1, 2007. However, the degree to which it will increase is not clear. DOD officials told us that they considered TRS cost and enrollment data when developing future year projections of program costs and enrollment levels, but they chose not to use these data as part of their projections because of uncertainty about whether they would provide an accurate indication of likely future experience. DOD's past enrollment projections, made without the benefit of prior year enrollment data, were significantly higher than actual enrollment levels. Although DOD intended that TRS premiums would be equal to the expected costs per plan of providing the benefit, DOD set premiums for the program based on BCBS premiums that proved to be significantly higher than the program's average reported costs per plan in 2006. Reservists' portion of TRS premiums would have been lower in 2006 if DOD had aligned premiums with the cost of providing TRS benefits. DOD officials told us that the department planned to continue basing TRS premium adjustments on BCBS premium adjustments in the immediate future, but the regulation governing TRS premium adjustments allows for the possibility that the department might change its methodology at some point in the future. However, because TRS premiums were higher than the average costs per plan in 2006, continuing to adjust TRS premiums based on BCBS premium adjustments could widen the gap between TRS premiums and the average costs per plan. The discrepancy between TRS premiums and the reported program costs per plan results from the approach DOD used in setting TRS premiums. Basing TRS premiums on BCBS premiums is problematic because of several dissimilarities between the two programs. Most important, the average cost data now available suggest that TRS enrollees have incurred significantly lower health care costs than BCBS enrollees, even after adjusting for certain demographic characteristics. In addition, BCBS premiums may be based on more than program costs, whereas TRS premiums are intended to cover only costs. Basing TRS premiums on BCBS premiums may have been reasonable at the time that TRS was first implemented in 2005 due to the lack of available data on the cost of providing benefits through TRS. However, cost data that reflect actual experience under the program are now becoming available, and limitations associated with them should decrease over time as DOD gains more experience with the program and more reservists enroll in it. These data will provide DOD with an improved basis for setting premiums in future years, and allow the department to eventually eliminate its reliance on BCBS premiums. Nonetheless, due to the uncertainty associated with predicting future health care costs, premiums are unlikely to exactly match program costs, even when they are based on cost data from prior years. Other insurance programs have methods to address discrepancies between premiums and program costs, which are not provided to DOD in the law governing TRS. DOD has also had difficulty accurately estimating the likely cost of providing TRS benefits in large part because it overestimated the number of reservists who would likely purchase TRS coverage. Over time, the availability of actual cost and enrollment data should help DOD improve its projections for future years. With the goal of eventually eliminating reliance on BCBS premiums and to better align premiums with the costs of providing TRS health care benefits, we recommend that the Secretary of Defense direct the Assistant Secretary for Health Affairs to stop basing TRS premium adjustments only on BCBS premium adjustments and use the reported costs of providing benefits through the TRS program when adjusting TRS premiums in future years as limitations associated with the reported cost data decrease. We also recommend that DOD explore options for addressing instances in which premiums have been either significantly higher or lower than program costs in prior years, including seeking legislative authority as necessary. We received written comments on a draft of this report from DOD. DOD stated that it concurs with our conclusions and recommendations and that it is committed to improving the accuracy of TRS premium projections. It further stated that our recommendations are consistent with DOD's strategy to evolve the process, procedures, and analytical framework used to adjust TRS premiums as the quality and quantity of reported cost data improve. DOD's written comments are reprinted in appendix III. We are sending copies of this report to the Secretary of Defense 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 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) 512-7114 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. The John Warner National Defense Authorization Act (NDAA) for Fiscal Year 2007 required that we describe how increases in TRICARE Reserve Select (TRS) premiums compare with the Department of Defense's (DOD) annual rate of medical care price inflation. As discussed with the committees of jurisdiction, this appendix compares DOD's January 2006 TRS premium increase and DOD's proposed January 2007 TRS premium increase with DOD's estimated annual rate of medical care price inflation in fiscal years 2005 and 2006 as well as the medical component of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Premiums for TRS were first established when the program was implemented in April 2005. To keep pace with rising health care costs, DOD originally designed TRS premiums so that they are adjusted each year based on annual adjustments in the Federal Employees Health Benefits Program's Blue Cross and Blue Shield (BCBS) Standard plan premiums. DOD planned to continue using this method to adjust premiums in the immediate future, although program regulations allow some flexibility in setting the premiums. Accordingly, in line with BCBS, TRS premiums increased by 8.5 percent in January 2006. Based on increases in BCBS, TRS premiums would have increased by 1 percent in January 2007. However, the NDAA for Fiscal Year 2007 froze 2007 premiums through September 30, 2007, at the rates for calendar year 2006. DOD calculated its average annual rate of medical care inflation to be about 4.9 percent in fiscal year 2005 and about 4.7 percent in fiscal year 2006. DOD did not develop these estimates of inflation based on its own spending. Instead, DOD based the estimates on inflation rates provided annually by the Office of Management and Budget for the various components of the TRICARE operating budget, such as military personnel, private sector health care, and pharmacy. In contrast, the medical component of the CPI-W increased at lower rates than DOD's rate of medical care price inflation. The medical care component of the CPI-W increased by about 4.1 percent in 2005 and about 4.2 percent in 2006. The medical care component of the CPI-W is based on medical expenses, but it is problematic to compare to DOD's estimated rate of medical care inflation because it is based only on out-of-pocket medical expenditures paid by consumers, including health insurance premiums, and excludes the medical expenditures paid by public and private insurance programs. Comparing premium growth trends with DOD's annual rate of medical care price inflation and the medical care component of the CPI-W is problematic because of differences in each measurement. Unlike medical care price inflation, premium growth may reflect factors such as changes in the comprehensiveness of the policy, changes in the ratio of premiums collected to benefits paid, changes in costs because of increased utilization of health care services, contributions to or withdrawals from plan reserves, and profits. To compare the annual TRS premiums established by DOD to the reported average costs per plan of providing benefits under TRS in 2006, we reviewed DOD's reported TRS enrollment data and data on the cost of providing TRS benefits through TRICARE-authorized civilian providers or hospitals, data on the administrative costs associated with providing TRS benefits, and data on the costs of providing TRS benefits through military treatment facilities (MTF). Using DOD's data, we calculated the average cost per TRS plan of providing individual and family coverage as the sum of the reported costs divided by the average number of TRS plans. We also reviewed legislation relevant to the TRS program and literature on setting health insurance premiums and interviewed several experts from the fields of health economics and finance and DOD officials in the TRICARE Management Activity and the Office of the Assistant Secretary for Health Affairs. We limited our analysis to calendar year 2006 because some 2007 data are still incomplete and because 2005 average cost data in some months are based on a very small number of enrollees. At the time covered by our analysis, TRS included three tiers of eligibility with enrollees paying different portions of the premium based on the tier for which they qualified. We limited our analysis to tier 1 because it included over 90 percent of TRS plans and because tier 1 enrollee premium levels have applied to the entire TRS program since October 2007. We are unable to report the average cost per plan for tiers 2 and 3 separately, due to the low number of enrollees in these tiers. To compare DOD's projected costs for the TRS program before implementation to DOD's reported costs for the program in 2005 and 2006, we reviewed the analyses prepared by DOD before TRS's implementation that projected (1) the number of individual and family plans in each tier of the TRS program and (2) the costs per plan of providing the TRS benefit. These projections were the two major factors used by DOD to estimate TRS costs. We compared these data with reported TRS enrollment and cost data from April 2005 through June 2007. In reporting the results of our comparison we use cost data through 2006 only, because some cost data for 2007 were incomplete. We also reviewed DOD internal documents and interviewed DOD officials. To determine the average cost of providing benefits under TRS for 2006-- for individual and family plans--we reviewed TRS enrollment data and TRS purchased care cost data, administrative cost data, and data on the costs of providing TRS benefits through MTFs, each of which were provided to us by DOD. DOD officials provided TRS enrollment data to us in the form of multiple reports from the Defense Enrollment Eligibility Reporting System for each month from May 2005 through June 2007. Each report lists the number of TRS plans and enrollees in individual and family plans broken down by tier. Using these reports, we calculated the average number of TRS plans and enrollees in each month. For each month, from May 2005 through June 2007, we calculated the total costs of providing benefits under TRS by adding the cost components reported by DOD, which consist of purchased care costs, MTF costs, and administrative costs. Administrative costs were further divided among costs associated with claims processing and separate administrative fees levied by certain TRICARE managed care support contractors for each enrollee in each month. For each month, we calculated the average cost per TRS plan for individual and family coverage by dividing the total costs of providing benefits under TRS by the average number of TRS plans. We determined the average cost of providing benefits under TRS in 2006--for single and family plans--by summing the monthly averages and weighting them by enrollment in each month. To ensure that the DOD data were sufficiently reliable for our analyses, we conducted detailed data reliability assessments of the data sets that we used. We restricted these assessments, however, to the specific variables that were pertinent to our analyses. We reviewed DOD data that we determined to be relevant to our findings to assess their quality and methodological soundness. Our review consisted of (1) examining documents that describe the respective data, (2) manually and electronically checking the data for obvious errors and missing values, (3) interviewing DOD officials to inquire about concerns we uncovered, and (4) interviewing DOD officials about internal controls in place to ensure that data are complete and accurate. Our review revealed minor inconsistencies in DOD's data that we reported to DOD officials. Overall, however, we found that all of the data sets used in this report were sufficiently reliable for use in our analyses. However, we did not independently verify DOD's figures. We conducted our work from May 2007 through October 2007 in accordance with generally accepted government auditing standards. In addition to the contact named above, Thomas Conahan, Assistant Director; Krister Friday; Adrienne Griffin; William Simerl; and Michael Zose made key contributions to this report.
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(DOD) TRICARE Reserve Select (TRS) program allows most reservists to purchase coverage under TRICARE, the military health insurance program, when not on active duty. DOD intends to set premiums at a level equal to the expected costs of providing TRS benefits. The National Defense Authorization Act for 2007 required GAO to review TRS costs. As discussed with the committees of jurisdiction, GAO compared (1) the TRS premiums established by DOD to the reported costs of providing benefits under TRS in 2006 and (2) DOD's projected costs for TRS before implementation to DOD's reported costs for the program in 2005 and 2006. To do this work, GAO examined DOD analyses and interviewed DOD officials and external experts. In 2006, the premium for both individual and family coverage under TRS--which DOD based on Blue Cross and Blue Shield (BCBS) premiums--exceeded the reported average cost per plan of providing TRICARE benefits through the program. TRS currently serves less than 1percent of the overall TRICARE population, and unlike most other TRICARE beneficiaries, TRS enrollees pay a premium to receive health care coverage. At the time of GAO's analysis, TRS consisted of three tiers, established by law, with reservists in each tier paying different portions of the total premium, based on the tier for which they qualified. Over 90 percent of reservists who purchased TRS coverage enrolled in tier 1. The premium for individual coverage under tier 1 was 72 percent higher than the average cost per plan of providing benefits through the program. Similarly, the premium for family coverage under tier 1 was 45 percent higher than the average cost per plan of providing benefits. DOD based TRS premiums on BCBS premiums because, at the time DOD was developing TRS, actual data on the costs of TRS did not exist; however, these data are now available. Had DOD been successful in establishing premiums that were equal to the cost of providing benefits in 2006, the portion of the premium paid by enrollees in tier 1--which is set by law to cover 28 percent of the full premium--would have been lower that year. Reasons that TRS premiums did not align with benefit costs included differences between the TRS and BCBS populations and differences in the way the two programs are designed, which DOD did not consider in its methodology. According to experts, the most successful methods for aligning premiums with actual program costs involve using program cost data when setting premiums. The regulation governing TRS premium adjustments allows DOD to use either BCBS premiums or other means as the basis for TRS premiums. However, DOD officials told GAO that they plan to continue, at least for the near future, to base TRS premiums on BCBS premiums because of limitations associated with using currently available data to predict future TRS costs. However, these limitations should decrease over time as DOD gains more experience with the program and enrollment increases. Nonetheless, due to the uncertainty associated with predicting future health care costs, premiums are unlikely to exactly match program costs, even when they are based on cost data from prior years. Other insurance programs have methods to address differences between premiums and program costs, which are not provided to DOD in the law governing TRS. DOD overestimated the total cost of providing benefits through TRS. While the department projected that its total costs would amount to about $70 million in fiscal year 2005 and about $442 million in fiscal year 2006, DOD's reported costs in those years were about $5 million and about $40 million, respectively. DOD's cost projections were too high largely because it overestimated the number of reservists who would purchase TRS and the associated cost per plan of providing TRS benefits. DOD officials told GAO that they chose not to use TRS cost and enrollment data when projecting future year program costs and enrollment levels because of uncertainty about whether they would provide an accurate indication of future experience.
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DOD is a massive and complex organization entrusted with more taxpayer dollars than any other federal department or agency. Organizationally, the department includes the Office of the Secretary of Defense, the Joint Chiefs of Staff, the military departments, numerous defense agencies and field activities, and various unified combatant commands that are responsible for either specific geographic regions or specific functions. (See fig. 1 for a simplified depiction of DOD's organizational structure.) In support of its military operations, the department performs an assortment of interrelated and interdependent business functions, including logistics management, procurement, health care management, and financial management. As we have previously reported, the DOD systems environment that supports these business functions is overly complex and error prone, and is characterized by (1) little standardization across the department, (2) multiple systems performing the same tasks, (3) the same data stored in multiple systems, and (4) the need for data to be entered manually into multiple systems. Moreover, the department's nonintegrated and duplicative systems impair its ability to combat fraud, waste, and abuse. The department recently reported that this systems environment is composed of approximately 2,480 separate business systems. For fiscal year 2010, DOD requested about $15.5 billion in funds to operate, maintain, and modernize its business systems and associated information technology (IT) infrastructure. DOD currently bears responsibility, in whole or in part, for 15 of the 31 programs across the federal government that we have designated as high risk because they are highly susceptible to fraud, waste, abuse, and mismanagement. Eight of these areas are specific to the department, and 7 other high-risk areas are shared with other federal agencies. Collectively, these high-risk areas relate to DOD's major business operations that are inextricably linked to the department's ability to perform its overall mission, directly affect the readiness and capabilities of U.S. military forces, and can affect the success of a mission. DOD's business systems modernization is one of the high-risk areas, and it is an essential enabler to addressing many of the department's other high-risk areas. For example, modernized business systems are integral to the department's efforts to address its financial, supply chain, and information security management high-risk areas. The National Defense Authorization Act (NDAA) for Fiscal Year 2008 designates the Deputy Secretary of Defense as the Chief Management Officer (CMO) for DOD and created a Deputy CMO position. The CMO's responsibilities include developing and maintaining a departmentwide strategic plan for business reform and establishing performance goals and measures for improving and evaluating overall economy, efficiency, and effectiveness and monitoring and measuring the progress of the department. The Deputy CMO's responsibilities include recommending to the CMO methodologies and measurement criteria to better synchronize, integrate, and coordinate the business operations to ensure alignment in support of the warfighting mission. The Business Transformation Agency (BTA) supports the Deputy CMO in leading and coordinating business transformation efforts across the department. This includes maintaining and updating the department's enterprise architecture for its business mission area. The CMO and Deputy CMO are to interact with several entities to guide the direction, oversight, and execution of DOD's business transformation efforts, which include business systems modernization. These entities include the Defense Business Systems Management Committee (DBSMC), which serves as the highest-ranking investment review and decision- making body for business systems modernization activities and is chaired by the Deputy Secretary of Defense; the principal staff assistants, who serve as the certification authorities for business system modernizations in their respective core business missions; the investment review boards (IRB), which are chaired by the certifying authorities and form the review and decision-making bodies for business system investments in their respective areas of responsibility; and the BTA, which supports IRBs and leads and coordinates business transformation efforts across the department. (Table 1 lists these entities and provides greater detail on their roles, responsibilities, and composition.) Since 2005, DOD has employed a "tiered accountability" approach to business systems modernization. Under this approach, responsibility and accountability for business architectures and systems investment management are assigned to different levels in the organization. For example, the BTA is responsible for developing the corporate BEA (i.e., the thin layer of DOD-wide policies, capabilities, standards, and rules) and the associated enterprise transition plan (ETP). Each component is responsible for defining a component-level architecture and transition plan associated with its own tiers of responsibility and for doing so in a manner that is aligned with (i.e., does not violate) the corporate BEA. Similarly, program managers are responsible for developing program-level architectures and plans and for ensuring alignment with the architectures and transition plans above them. This concept is to allow for autonomy while also ensuring linkages and alignment from the program level through the component level to the corporate level. (Table 2 describes the four investment tiers and identifies the associated reviewing and approving entities.) Consistent with the tiered accountability approach, the NDAA for Fiscal Year 2008 required the secretaries of the military departments to designate the department under secretaries as CMOs with primary responsibility for business operations. Moreover, the Duncan Hunter NDAA for Fiscal Year 2009 required the military departments to establish business transformation offices to assist their CMOs. Congress included provisions in the NDAA for Fiscal Year 2005 that are aimed at ensuring DOD's establishment and implementation of effective investment management structures and processes. According to the act, DOD is required to develop a BEA; develop an ETP for implementing the architecture; identify each business system proposed for funding in DOD's fiscal year budget submissions; delegate the responsibility for business systems to designated approval authorities within the Office of the Secretary of Defense; require each approval authority to establish investment review structures and processes; and, effective October 1, 2005, not obligate appropriated funds for a defense business system modernization with a total cost of more than $1 million unless the approval authority certifies that the business system modernization meets several conditions. The NDAA for Fiscal Year 2005 also requires that the Secretary of Defense submit to congressional defense committees an annual report on the department's compliance with the act's provisions. This report is to 1. describe actions taken and planned for meeting the act's requirements, a) specific milestones and actual performance against specified performance measures and any revision of such milestones and performance measures and b) specific actions on the defense business system modernizations submitted for certification under such subsection; 2. discuss specific improvements in business operations and cost savings resulting from successful defense business systems modernization efforts; 3. identify the number of defense business system modernizations certified; and 4. identify any defense business system modernization with an obligation in excess of $1 million during the preceding fiscal year that was not certified as required, and the reasons for the waiver. Between 2005 and 2008, we reported that DOD had taken increasing steps to comply with key requirements of the NDAA for Fiscal Year 2005 relative to architecture development, transition plan development, budgetary disclosure, and investment review and to satisfy relevant systems modernization management guidance, but that much remained to be accomplished relative to the act's requirements and relevant guidance. Nevertheless, we concluded that the department had made important progress in defining and beginning to implement institutional management controls (i.e., processes, structures, and tools). Notwithstanding this progress, in May 2009, we reported that the pace of DOD's efforts in defining and implementing key institutional modernization management controls had slowed compared with progress made in each of the last 4 years, leaving much to be accomplished to fully implement the act's requirements and related guidance. For example: The corporate BEA had yet to be extended (i.e., federated) to the entire family of business mission area architectures, including using an independent verification and validation agent to assess the components' subsidiary architectures and federation efforts. The fiscal year 2009 budget submission included some, but omitted other key information about business system investments, in part because of the lack of a reliable, comprehensive inventory of all defense business systems. IT investment management policies and procedures at the corporate and component levels were not fully defined. The business system information used to support the development of the transition plan and DOD's budget requests, as well as certification and annual reviews, was of questionable reliability. Business system investments costing more than $1 million continue to be certified and approved, but these decisions were not always based on complete information. Accordingly, we reiterated existing recommendations to address each of these areas and further recommended that DOD, among other things, improve the quality of investment-related information. DOD partially agreed with our recommendations and described actions being planned or under way to address them. DOD is currently in the process of addressing these recommendations. The act requires that DOD's report describe milestones for business system modernization programs and actual performance against performance measures. In addition, the act requires that the report specify any revisions to milestones and performance measures. To its credit, DOD's annual report includes milestones, performance against milestones, and milestone revisions for 76 programs. However, other important performances measures, which typically include measures associated with determining progress against program cost, capability, and benefit commitments, are not included in the report. BTA officials cited various reasons for the scope and content of the information provided and not provided, but these reasons are at odds with other aspects of its report. Without including information on program performance against, and revisions to, such key measures as cost, capability, and benefit commitments, DOD is not providing Congress with the information needed to inform its oversight of business system modernization programs. Consistent with the act's requirement that DOD report on specific milestones and revisions to the milestones, DOD's March 2010 report includes a summary of the status of milestones that were to be completed during fiscal 2009, the revisions associated with these milestones (e.g. delayed or deleted), and the reason for the revision. Specifically, the report lists three categories of milestones: Standard acquisition milestones: key events and dates that are provided for under DOD's system acquisition process. BEA compliance milestones: time frames for addressing specific IRB certification conditions related to ensuring BEA compliance. Interim milestones: key events and dates to supplement DOD's system acquisition process milestones (e.g., implementing specific system capabilities or upgrading infrastructure by a given date). DOD's report includes a total of 224 milestones that collectively span 76 programs. Of these 224 milestones, 35 are standard acquisition milestones, 22 are BEA compliance milestones, and 167 are interim milestones. The report also discusses performance against these milestones. Specifically, of the 224 milestones, 56 percent are reported to have been met, while 21 and 23 percent are reported to have been deleted (i.e., determined to be unnecessary) or not met, respectively. (See fig 2.) With respect to acquisition and compliance milestones, the percentage of milestones that were reported as not being met was 66 and 50 percent, respectively. Beyond milestones, the act requires DOD's annual report to address actual performance against performance measures and any revision of these performance measures. As we have previously reported, meaningful information about program performance is typically measured in terms of program cost, capability, and benefit commitments, in addition to schedule commitments. Through such a range of performance measures, valuable insight into the health and success of a business system investment can be gained. As we previously discussed in this report, DOD's annual report does report schedule commitments (i.e., milestones) for its modernizing programs. While DOD's annual report also includes examples of business improvements and costs savings, this program performance information is not reported against performance measure baselines. Further, the report remains silent with respect to other important performance measures such as progress made against cost and capability commitments, which would allow congressional decision makers to understand the extent to which programs are meeting cost, capability, and benefit commitments. BTA officials stated they focused the annual report on programs that had planned milestones during fiscal year 2009. Further, they said they focused on program milestones because most of the investments covered by the report have not progressed far enough in their life cycles to measure cost, capability, and benefit performance. In addition, the annual report states that DOD does not include performance measures in its annual report for any system that has reached initial or full operational capability and is no longer modernizing. Nevertheless, the report includes descriptions of a number of programs that have progressed to the point where DOD reports on actual operational efficiencies and dollar savings that have accrued, which, in turn, means that these programs have progressed to the point that DOD can report on progress against defined performance commitments, such as the costs that have been incurred, the capabilities that have been delivered, and benefits that have been realized. Moreover, the programs that have not yet delivered capabilities or realized benefits have incurred costs, which DOD can report relative to expected costs. Establishing performance measures and monitoring actual-versus- expected performance using the full range of measures are essential to understanding the health of any IT investment. By not including information on each program's performance against defined cost, capability, and benefit commitments, DOD is not providing Congress with important information for informing its oversight of business system modernization investments. The act requires that DOD's annual report discuss specific improvements in business operations and cost savings resulting from successful business system modernization programs. DOD met this requirement by including 18 "case in point" examples in the report. Among other things, each narrative generally describes the program and provides high-level information on system capabilities delivered and benefits achieved to date. Specific examples include: The Air Force Recruiting Information Support System is to be the primary Web-based recruiting system for the Air Force. According to the annual report, the Air Force's legacy recruiting information system has been slow and, at times, unavailable to users. Modernization of the system (e.g., new hardware and software upgrades) is reported to have improved recruiters' productivity by reducing the wait time for processing recruiter requests. Other reported improvements include allowing recruiters to build applicant files off line and upload them at a later time and reducing the recruiter's dependence on Internet connectivity. Future plans include merging the Air Force Recruiting Information Support System with the Air Force Reserve Recruiting System to increase functionality and decrease system response time. The Army Learning Management System is a Web-based system for training, scheduling, and career planning for soldiers. According to the annual report, in 2009 the system contributed to an 88 percent increase in the number of student accounts, 111 percent increase in the number of courses offered, and 157 percent increase in the number of course completions. Wide Area Work Flow is a Web-based system to centralize and automate DOD's largely manual business payment process. The annual report states that the system has thus far allowed the cost of processing a payment to decrease from between $22 and $30 to between $6 and $12. Other cited benefits include allowing suppliers to have a single point of interface with DOD for payment invoicing, receipt, and acceptance. The Defense Agencies Initiative is an enterprise resource planning (ERP) system to standardize and integrate enterprise data to support financial decisions in real time. According to the annual report, the system resulted in a reduction in the time it takes to post financial obligations from 60 days to less than 2 days, and a reduction in the time to close out monthly financial reports from 4 days to less than 1 day. Further, the report states that financial information is now available to BTA on a real- time basis and thereby enables proactive management of agency finances. Among other things, the act requires DOD's annual report to describe specific actions the department has taken on each business system modernization investment submitted for certification. More specifically, the act states that such investments involving more than $1 million in obligations must be certified by a designated approval authority as meeting specific criteria, such as demonstrating compliance with DOD's BEA. Further, the act requires the DBSMC to approve each of these certifications. To its credit, DOD's annual report identifies IRB certification actions associated with 116 business system investments. However, certification actions associated with 40 other investments are not included. Further, the bases for several of the fiscal year 2009 system certification actions and subsequent approvals are limited because program weaknesses and issues that our prior work has raised about, for example, the systems' economic analyses and BEA compliance determinations, are not reflected in the reported certification actions. According to BTA officials, only new certifications are included in the report, even though DOD guidance states that recertifications are also certification actions. Moreover, this guidance does not require programs to disclose program weaknesses and issues raised by us or others. By not fully identifying in its annual report the certification actions taken on all business system modernization investments, DOD is not fully informing congressional oversight. Further, by not ensuring that all certifications reflect known program weaknesses, business system modernization program certification and approval decisions are not being fully informed and thus may not be adequately justified. DOD has established what it describes as a "tiered accountability" approach to meeting the act's requirements for certifying business system investments. Under this approach, investment review begins within the military departments and defense agencies and advances through a hierarchy of review and decision-making authorities, depending on the size, nature, and significance of the investment. For those investments that meet the act's dollar threshold, namely those with planned modernizations in excess of $1 million, this sequence of review and decision making includes component precertification, IRB certification, and DBMSC approval. For those investments that do not meet the dollar threshold, investment decision-making authority remains with the responsible component. According to the department's approach, reviews for modernization investments of more than $1 million focus on program alignment with the BEA; alignment with the department's strategic mission, goals, and objectives; and oversight commensurate with the program's cost, scope, and complexity. The approach further requires that these reviews be completed before a component can obligate modernization funds. At the component level, program managers are responsible for the information about their respective programs in a central repository known as the Defense IT Portfolio Repository system (DITPR). The component precertification authority is responsible for precertifying that a given system investment is compliant with the BEA, reviewing the system funding requests, and ensuring that the IRB responsible for the investment receives complete, current, accurate, and timely information. The precertification authority is also responsible for "asserting" the status and validity of the investment information by submitting a component precertification letter to the responsible IRB. At the corporate level, an IRB reviews the precertification letter and related material and makes a recommendation for a specific certification action for each of its investments. After the IRB makes its recommendation, it prepares a certification memorandum that documents the IRB's decisions and any related conditions. The memorandum is forwarded to the DBSMC, which either approves or disapproves the IRB's decision and issues a memorandum containing its decision. If the DBSMC disapproves a system investment's certification, it is up to the component's precertification authority to decide whether or not to resubmit the investment after it has resolved the reasons for the disapproval. Under DOD's approach, there are four types of certification actions: Certify: An IRB certifies the modernization as fully meeting criteria defined in the act and IRB investment review guidance, such as compliance with the BEA and the extent to which the investment is consistent with component and department IT investment portfolios, which are asserted by the component precertification authority. Certify with conditions: An IRB certifies the modernization with the understanding that it will address specific IRB-imposed conditions. For example, the Army's Real Estate Management Information System was certified with a condition to provide a plan for how data elements would comply with certain business rules in DOD's BEA. Recertify: An IRB certifies the obligation of additional modernization funds for a previously certified modernization investment. For example, the Air Force's Cargo Movement Operations System was recertified in April 2009 for $6.3 million to be spent in fiscal years 2009 through 2012. This recertification was in addition to the $21.1 million previously certified in fiscal year 2007. In addition, a program must request IRB recertification if the program plans to redistribute previously approved modernization funds among multiple fiscal years and this redistribution will result in the funding for any given fiscal year exceeding the previously approved amount by 10 percent or more. Decertify: An IRB reduces the amount of modernization funds available to an investment when the entire amount of funding is not to be obligated as previously certified. For example, the Defense Financial Accounting Service's Standard Disbursing Initiative had about $5.5 million decertified because the funds were no longer needed. An IRB may also decertify a modernization after it has been completed. For example, DOD reported that $213,000 for the Air National Guard's Reserve Order Writing System was decertified at the time the system was completed because the funds were no longer needed. The act requires that DOD's annual report describe specific actions taken for each business system investment submitted for certification. However, the department's annual report discusses fiscal year 2009 certification actions on only 116 of the 156 systems on which certification actions were taken. More specifically, the report states that during fiscal year 2009, 92 business system modernizations were certified--32 with and 60 without conditions. For the 32 systems, 58 conditions were collectively reported. Examples of conditions cited in the report are the need for a system to comply with the Standard Financial Information Structure and the need to develop a plan for complying with the data standards of DOD's Item Unique Identifier Registry. The report also identifies 24 decertifications. For example, the Air Force's Enhanced Technical Information Management System had about $13.9 million in funding decertified (i.e., reduced), and the Defense Financial Accounting Service's Standard Disbursing Initiative had about $5.5 million decertified. However, fiscal year 2009 IRB and DBSMC decision memoranda and meeting minutes show that 40 systems had additional certification actions that were not included in DOD's annual report. Of these 40 systems, 2 were certified without conditions, 2 were certified with conditions, and 36 were recertified. Collectively, DOD's annual report omits about 26 percent of its certification actions. (See table 3 for a summary of actual, reported, and unreported certification actions.) According to BTA officials, the excluded certification actions are all recertifications, which they said are intentionally not reported because they are not new certifications. They also told us that the four new certifications were, in fact, recertifications. However, DBSMC and IRB memoranda and meeting minutes identify these four certification actions as new certifications. Moreover, DOD guidance defines a recertification as a type of certification action, thus making it subject to the act's reporting requirements. Without complete reporting of its certification actions, DOD is not in full compliance with its guidance, and DOD is limiting congressional visibility into the full scope of its business systems modernization efforts. According to DOD guidance, IRB certification addresses, among other things, a program's alignment with the BEA and its management relative to factors such as system cost, scope, and complexity. To make a certification decision, IRBs rely on documentation submitted by the component precertification authority, including a certification dashboard, which includes cost and schedule status information; an economic viability analysis, which addresses the investment's cost and benefits or cost effectiveness; and regulatory and standards compliance determinations. DOD guidance also gives IRBs broad authority in their certification reviews and actions, thus allowing each board to review and consider whatever investment-related information that it deems appropriate. Moreover, BTA and IRB officials told us that an IRB is not limited in the conditions it can place on a program. The IRB certification actions described in DOD's latest annual report are limited because they do not reflect significant limitations in the department's basis for determining an investment's alignment to the BEA. Specifically, we recently reported that key DOD BEA compliance assessments did not include all relevant architecture products, such as products that specify the technical standards needed to promote interoperability among related systems or examine overlaps with other business systems. In addition, we reported that these compliance assessments were not validated by DOD certification and approval entities. Despite these limitations, business systems modernization programs were certified as compliant with the BEA even though they did not adequately demonstrate such compliance. Accordingly, we recommended that DOD revise its BEA compliance guidance, tool, and IRB verification requirements to address these shortfalls. To date, DOD has yet to implement these recommendations, and thus the compliance determination weaknesses remain. Despite this, DOD's latest annual report does not disclose these limitations on any of the 116 investment certification actions that it describes. In addition, the fiscal year 2009 IRB certification actions described in the latest annual report are further limited in that they do not reflect weaknesses we have recently reported with the economic justification for and management of certain programs. For example, We reported in September 2009 that the Defense Readiness Reporting System (DRRS) program was not being effectively managed and made recommendations to address a number of acquisition management weaknesses including the absence of a reliable integrated master schedule and well defined and managed requirements, and adequate testing. As stated in our report, we briefed the DRRS program office on the results of our work prior to its DOD Human Resources Management IRB certification review. However, these results were not disclosed to the IRB. Rather, the certification package that the precertification authority submitted to the IRB stated that DRRS was on track for meeting its cost, schedule, and performance measures and highlighted no program risks. Based on this submission, DRRS was certified by the IRB and approved by the DBSMC to obligate $24.625 million in fiscal years 2009 and 2010. According to the chair of the IRB, the board did not validate the information in the submissions it received, and the results of our review were not disclosed to the IRB. We reported in July 2008 that the Global Combat Support System-Marine Corps (GCSS-MC) program had not been economically justified on the basis of reliable estimates of both benefits and costs and that key program management controls, such as the use of earned value management and risk management had not been properly implemented. Accordingly, we made recommendations to address these weaknesses. GCSS-MC was certified with conditions and recertified during fiscal year 2009. Neither the weaknesses that we previously reported nor the status of our recommendations to address them were evident in the conditions accompanying the certification, even though our recommendations had yet to be implemented at the time of these certification actions. We reported in September 2008 that the Navy ERP program did not use important cost estimating practices when economically justifying the program, did not implement key aspects of earned value management, and did not have risk mitigation strategies in place to address the risks described in our report, including risks associated with these issues. Accordingly, we made recommendations to address these weaknesses. However, when Navy ERP was recertified during fiscal year 2009, conditions relative to any of these weaknesses did not accompany the recertification, although our recommendations had yet to be implemented at the time of recertification. Officials representing each of the IRBs stated that the boards depend on the component precertification authorities to provide them with complete and reliable information about each system investment. Among other things, IRB officials stated that such information should include the results of reviews by us and others. However, DOD guidance does not state that GAO-related information, such as open recommendations or the focus and results of our ongoing reviews, is to be included in the certification packages provided to the IRBs. Further, the Special Assistant to the Deputy Chief Management Officer told us it is each program's milestone decision authority that is ultimately responsible for addressing known program management issues, including those raised by GAO. By not having and considering relevant information about the state of each system modernization investment certified and approved, such as the results of our reviews and the status of actions to implement our recommendations that pertain to the investment, DOD's certification and approval decisions are based on limited information, and thus may not be justified. The act requires DOD to identify in its annual report any defense business system modernization with an obligation in excess of $1 million during the preceding fiscal year that was not certified and approved according to the act's provisions, along with any reasons for these requirements being waived. According to DOD's latest annual report, system investments were certified according to the act's requirements during fiscal year 2009, and no systems were granted a certification waiver. Similarly, each of DOD's annual reports since March of 2006 has stated that no systems were approved on the basis of a certification waiver. According to officials representing each of the IRBs, while program officials sometimes seek to be certified on the basis of a waiver, their practice is to ensure that the program office addresses any issues underlying a waiver request before the investment is placed on an IRB's certification review agenda. As a result, they stated that a system is unlikely to go before an IRB for certification until it can be certified with conditions. DOD's latest annual report on its business systems modernization program complies with statutory requirements pertaining to the report's content, but the scope and completeness of key information that is provided in the report is otherwise limited. In particular, the report omits information on numerous business system investment certification actions taken during fiscal year 2009. In addition, while it includes schedule-focused performance measures and performance against these measures for the modernization investments discussed, as required by statute, it does not include similar information for other performance measures, such as cost, capability, and benefit commitments and performance against these commitments. Collectively, this means that DOD's annual report does not provide congressional committees with the full range of information necessary to permit meaningful and informed oversight of DOD's business systems modernization program. Beyond the scope and content of DOD's annual report, the basis for the IRB certifications have been limited because DOD guidance does not provide for disclosure of our findings concerning investments being considered. In particular, investments have been certified and approved without conditions even though our prior reports have identified program weaknesses that were unresolved at the time of certification and approval. As a result, these certification and approval decisions may not be sufficiently justified. To facilitate congressional oversight and promote departmental accountability, we recommend that the Secretary of Defense direct the Deputy Secretary of Defense, as the chair of the DBSMC, to ensure that the scope and content of future DOD annual reports to Congress on compliance with section 332 of the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005, as amended, be expanded to include: Cost, capability, and benefit performance measures for each business system modernization investment and actual performance against these measures. All certification actions, as defined in DOD guidance, which were taken in the previous year by the department on its business system modernization investments. To ensure that IRB certification actions are better informed and justified, we further recommend that the Secretary direct the Deputy Secretary to ensure that DOD guidance be revised to include provisions that require IRB certification submissions disclose program weaknesses raised by GAO and the status of actions to address our recommendations to correct the weaknesses. In written comments on a draft of this report, signed by the Assistant Deputy Chief Management Officer and reprinted in appendix II, the department agreed with our recommendations. We are sending copies of this report to interested congressional committees; the Director, Office of Management and Budget; and the Secretary of Defense. 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 on matters discussed in 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. As agreed with congressional defense committees, our objective was to assess the actions by the Department of Defense (DOD) to comply with the requirements of key aspects of section 332 of the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 (the act). To address this, we focused on the extent to which DOD's annual report to Congress addressed the following provisions of the act: (1) describe milestones and actual performance against specified measures and any revisions, (2) discuss specific improvements in business operations and cost savings resulting from successful business system modernization efforts, (3) describe specific actions on each business system investment submitted for certification, and (4) identify any business system investment with an obligation in excess of $1 million that was not certified during the preceding fiscal year and reasons for the waiver. Our methodology relative to each of the four requirements is as follows: To determine whether the DOD annual report described milestones and actual performance against specified measures and any revisions, we compared information contained in the annual report to what the act required. Further, we compared the types of measures included in the annual report to those commonly associated with program performance, such as those described in prior GAO work related to performance measures. In addition, we interviewed officials from the Business Transformation Agency (BTA) and each of DOD's investment review boards (IRB) to understand the process used to identify and track milestones and other performance measures. We did not independently validate the accuracy of the milestone dates included in the report. To determine the extent to which DOD's annual report discussed specific improvements in business operations and cost savings, we reviewed each of the 18 case-in-point narratives included in the annual report that described examples of business improvements and other benefits. We compared this information with the act's reporting requirements to identify any variances. We did not validate the accuracy of the improvements or benefits discussed in the case-in-point narratives. To determine the extent to which DOD's annual report identified specific actions on each business systems investment submitted for certification, we reviewed and analyzed all Defense Business Systems Management Committee (DBSMC) certification approval memoranda as well as IRB certification memoranda and IRB meeting minutes issued prior to the DBSMC's final approval decisions for fiscal year 2009 and compared the results to those certification actions described in the annual report to identify differences. We also reviewed DOD IRB guidance to understand the types of actions related to certification of business system modernizations. For certification actions included in the DBSMC and IRB memoranda but not described in the annual report, we interviewed officials from the BTA, IRBs, the Office of the Assistant Secretary of Defense (Networks and Information Integration)/DOD Chief Information Officer (ASD(NII)/DOD CIO), and the Office of the DOD Deputy Chief Management Officer (DCMO) as to the reason for the differences. For certification actions included in the report and described in fiscal year 2009 DBSMC and IRB memoranda, we compared information about specific DOD programs from recent GAO reports to the conditions associated with certification actions described in the annual report and the DBSMC and IRB memoranda to determine whether IRBs placed certification conditions related to program weaknesses identified by GAO and whether those conditions addressed those weaknesses. In addition, we interviewed DCMO, BTA, and IRB staff to discuss conditions that were reported as part of certification actions and what is submitted to the IRBs when individual systems request certification. To determine if DOD's annual report identified any business system investment with an obligation in excess of $1 million that was not certified during the preceding fiscal year and the reasons for any waivers granted, we reviewed DBSMC and IRB certification memoranda and compared actions taken during fiscal year 2009 to the actions described in DOD's annual report. We also interviewed DCMO and BTA officials, as well as IRB support staff, to determine if any waivers were issued during fiscal year 2009. Finally, we reviewed DOD's annual reports from 2005 to present to determine the extent to which these reports identify any waivers issued prior to fiscal year 2009. We conducted this performance audit at DOD offices in Arlington, Virginia, from January 2010 to May 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. In addition to the contact person named above, key contributors to this report were Carl Barden, Justin Booth, Nancy Glover, Michael Holland, Neelaxi Lakhmani (Assistant Director), Kate Nielsen, Constantine Papanastasiou, Christine San, Sylvia Shanks, Jennifer Stavros-Turner, and Adam Vodraska.
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Since 1995, GAO has designated the Department of Defense's (DOD) multibillion dollar business systems modernization program as high risk, and it continues to do so today. To assist in addressing DOD's modernization challenges, the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 (the act) requires the department to, among other things, report specific information about business system investments, including (1) milestones and actual performance against specified measures and any revisions and (2) actions taken to certify that a modernization investment involving more than $1 million meets defined conditions before obligating funds. The act also directs GAO to review each report. As agreed, GAO focused on the fiscal year 2010 report's compliance with, among other things, these provisions of the act. To do so, GAO compared DOD's report to the act's reporting requirements, interviewed DOD officials, analyzed relevant documentation, and leveraged prior GAO reports. DOD's fiscal year 2010 report to Congress on its business systems modernization program complies with key provisions in the act, but its scope and content are nevertheless limited. Specifically, (1) The report includes milestones, performance against milestones, and milestone revisions for specific investments. However, other important performance measures, such as measures of progress against program cost, capability, and benefit commitments are not included in the report. DOD officials attributed the missing performance-related information to various factors, including that most of the investments addressed in the report have not progressed far enough in their life cycles to measure cost, capability, and benefit performance. However, the report also cites a number of investments that have produced business improvements and cost savings, and thus it follows that performance-related information about investment costs incurred, capabilities delivered, and benefits realized is available and can be reported relative to program expectations. Moreover, programs that have not yet delivered capabilities or realized benefits have nevertheless incurred costs, which DOD can report relative to expected costs. (2) The report identifies certification actions associated with 116 business system modernization investments. However, the report omits certification actions for 40 other investments. According to DOD officials, the omitted actions are not new certifications, but rather are recertifications that were intentionally excluded from the report. However, certification memoranda show this is not the case for four of the actions and DOD guidance defines a recertification as a type of certification action. Further, the underlying bases for a number of reported actions are limited because program weaknesses that GAO's prior work has raised, such as the reliability of the systems' economic analyses and the sufficiency of business enterprise architecture compliance determinations, are not reflected in the reported certification actions. DOD's guidance does not require that certification submissions disclose program weaknesses that GAO has raised, and DOD officials stated that reviews are limited to the information that is submitted. As a result, DOD's annual report does not provide the full range of information that is needed to permit meaningful and informed congressional oversight of the department's business systems modernization efforts. Moreover, the bases for some certification actions exclude relevant information about known investment weaknesses, and thus these actions may not be sufficiently justified.
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The problems in the D.C. public school system have persisted for years despite numerous efforts at reform. In 1989, a report by the D.C. Committee on Public Education noted declining achievement levels as students move through grades, the poor condition of the school system's physical facilities, and the lack of accountability among D.C. agencies for the schools. Recent reports have continued to cite these problems. In 2004, the Council of the Great City Schools reviewed the D.C. school system and cited the continued failure to improve students' academic performance. In 2006, an analysis of DCPS reform efforts by a consulting firm found no progress and recommended a change in governance to improve student achievement and systemwide accountability. In response to these problems, the D.C. Council (the legislative branch of the D.C. government) approved the 2007 Reform Act, which significantly altered the governance of the D.C. public schools. The Reform Act transferred the day-to-day management of the public schools from the Board of Education to the Mayor and placed DCPS under the Mayor's office as a cabinet-level agency. Prior to the Reform Act, the head of DCPS reported to the Board of Education. The Reform Act also moved the state functions into a new state superintendent's office, moved the facilities office out of DCPS, and created a D.C. Department of Education headed by the Deputy Mayor for Education. (See fig. 1.) DCPS: DCPS functions as a traditional local educational agency, or school district. The head of DCPS, the Chancellor, is appointed by the Mayor, confirmed by the D.C. Council, and serves at the Mayor's discretion. The Chancellor sets the academic priorities and the curriculum for public schools, and works with schools in need of improvement under the No Child Left Behind Act (NCLBA). School districts have the primary responsibility for ensuring that underperforming schools receive technical assistance, as required by NCLBA. Department of Education: The new D.C. Department of Education is headed by the Deputy Major for Education and oversees the state superintendent's office, facilities office, and the ombudsman's office. The department is responsible for planning, coordinating, and supervising all public education and education-related activities that are under the purview of these three offices. It also acts as chief advisor to the Mayor for broad, high-level education strategies that involve more than one District education office and has responsibility for bringing together key players to determine who should take the lead on specific initiatives. In addition, the Deputy Mayor coordinates the work, direction, and agenda of the Interagency Collaboration and Services Integration Commission (Interagency Commission), which serves as a high-level policy making body that coordinates meetings with directors from children and youth- serving agencies. According to the Deputy Mayor, the purpose of the Interagency Commission is to build consensus and set priorities for how to best address the needs of District children and youth. Office of the State Superintendent of Education: The state superintendent's office is responsible for functions traditionally handled by a state educational agency. It develops academic standards, helps develop teacher licensing requirements, and administers funds for federal and District education programs. The State Superintendent is also responsible for developing comprehensive assessments, or tests, and ensuring that DCPS meets federal requirements for elementary and secondary education under NCLBA. The office also oversees, among other functions, those related to early childhood education programs and adult education and literacy. State Board of Education: While the Board of Education--renamed the State Board of Education--no longer has responsibility for day-to-day operations of the public schools, it is responsible for approving the District's academic standards, high-school graduation requirements, and other educational standards. It is required to advise the State Superintendent on policies related to the governing of vocational and charter schools and proposed education regulations. Five of the nine State Board of Education members are elected and four are appointed by the Mayor and confirmed by the D.C. Council. Office of Public Education Facilities Modernization (facilities office): The Reform Act not only moved the facilities office out of DCPS but gave the new office independent procurement and personnel authority. These functions were formerly performed by separate divisions within DCPS not directly accountable to or managed by the DCPS facilities office. The new facilities office is responsible for modernization and maintenance of D.C. public schools. DCPS retains oversight of the janitorial services of individual schools. The Reform Act also gave the D.C. Council an expanded role in overseeing some aspects of D.C. public school management. For example, the Mayor is required to submit proposed DCPS rules and regulations to the Council for review. In addition, the Council has gained new powers over the DCPS budget. The Mayor submits the budget for Council review and the Council may modify the funding allocated to individual schools. Previously, the Council only had authority to approve or disapprove the budget. The early efforts to improve D.C. public schools have focused largely on broad management reforms and other activities that lay the foundation for long-term improvements, such as developing new data systems, a school consolidation plan, academic priorities, and improving school facilities. Management reforms included the transfer of many functions from DCPS to the new offices of state superintendent and facilities. According to District officials, moving state-level education and facility functions out of DCPS should give the Chancellor more time to focus on issues that directly affect student achievement. Furthermore, moving state functions out of DCPS is intended to allow more effective oversight of the District's education programs. The management reforms also included specific human capital initiatives, such as new central office personnel rules and new systems for evaluating central office and state employee performance that are designed to improve office efficiency. District education offices also have begun to lay a foundation for long-term improvements to student and personnel data systems and management of building maintenance. As required by the Reform Act, state-level education functions previously performed by DCPS were transferred to the new office of the state superintendent. This office developed a transition plan, as required by the Reform Act, which detailed the transfer of authority and restructuring of key staff functions and budgets. On October 1, 2007, over 100 staff, functions, and associated funds were transferred to the office of the state superintendent. Staff who spent at least half their time working on state- level functions, such as administering funds for federal and state education programs, became employees of the state superintendent's office. The Reform Act moved state functions out of DCPS, in large part, to provide for independent oversight. Prior to the Reform Act, there was no clear separation of funding, reporting, and staffing between local and state functions within DCPS. For example, staff who monitored federal grant programs reported to the same person as staff who implemented those programs. As a result of the Reform Act, staff who perform state-related functions, such as monitoring federal programs, report to the State Superintendent whereas staff who implement the programs report to the DCPS Chancellor. The transition plan also laid out immediate and long-term priorities, such as federal grants management reform and improved teacher quality. To improve federal grants management, the State Superintendent has established priorities and begun to address long-term deficiencies identified by the U.S. Department of Education (Education) related to federal program administration, including compliance with NCLBA. Specifically, the State Superintendent has established a direct line of accountability by having the director of federal grants report directly to her and serve on her leadership team. In addition, to meet NCLBA requirements, the State Superintendent is in the process of establishing a statewide system of support that will provide technical assistance to underperforming schools. The State Superintendent has stated that establishing this process is challenging, given that 75 percent of D. C. schools have been identified as needing improvement under NCLBA. The district also ranks as one of the lowest school districts for having qualified teachers, with only 55 percent of core classes taught by teachers that meet NCLBA requirements for highly qualified. The transition plan identified teacher quality as a priority area, but does not outline measurable goals for increasing the number of highly qualified teachers. According to the State Superintendent, the office has started to develop a strategic plan that will provide more specifics on its goals and objectives. Specifically, this plan would include measurable goals such as increasing the number of highly qualified teachers. According to the state superintendent's office, this strategic planning effort will be completed in mid-summer 2008.The state superintendent's office also plans to revise the District's "highly qualified teacher" definition under NCLBA and is also considering revisions to how the District certifies teachers to align to the revised definition. The Reform Act also created a new facilities office to improve the conditions of DCPS school facilities. Unlike state-level functions, DCPS facilities staff and functions have not yet formally transferred to the new facilities office. Although the new office took over responsibility for modernization of school facilities (i.e., major renovations or new construction) and facility maintenance in the summer of 2007, functions and staff will not be formally transferred until the facility budget is "reprogrammed" and moved. In addition, the office will oversee general contractors who are hired for major construction projects such as the building of new schools. The director of the facilities office told us about 400 staff (building engineers, painters, and general maintenance workers) will transfer to his office. The District's broad management reforms also included an emphasis on human capital initiatives, particularly efforts to hold employees accountable for their work. Both the State Superintendent and the DCPS Chancellor include new individual performance evaluations as part of their efforts to develop high-performing organizations. Previously, performance evaluations were not conducted for most DCPS staff, including those who moved to the state superintendent's office. DCPS officials told us that all staff had received performance evaluations as of January 2008. These evaluation forms were based on District government-wide competencies, such as maintaining and demonstrating high-quality and timely customer service and using resources effectively. DCPS officials told us that these evaluations do not yet link to their offices' performance goals because they had limited time to implement the new performance system. However, they stated that they plan to develop the linkages over the next year. Officials at the state superintendent's office told us that performance measurement plans have been developed for all staff and performance evaluations based on those plans will begin in late March 2008. The State Superintendent has required each staff member to develop an individual plan that includes specific goals that are linked to the office's overall goals as outlined in the office performance plan. The facilities office intends to create and sustain a culture of high performance and accountability by implementing a performance management system that will hold employees accountable for their work and establish a performance feedback process that ensures "a dialogue between supervisors, managers, and employees throughout the year." Linking individual performance evaluations to organizational goals is an important step in building a high-performing organization. As we noted in a previous report, organizations use their performance management systems to support their strategic goals by helping individuals see the connection between their daily activities and organizational goals. Other human capital initiatives included the Chancellor's effort to improve the capacity of the central office by terminating central office employees who were assessed as not meeting expectations on their performance evaluations and replacing them with staff who have the requisite skills. Specifically, the Chancellor told us she needs staff who are capable of providing critical central office services, so that, for example, teachers are paid and textbooks delivered on time. Several principals we spoke with told us that school staff have spent considerable time on repeatedly calling the central office for support or supplies, time that could otherwise be spent on instruction. In January 2008, the D.C. Council passed the Public Education Personnel Reform Amendment Act of 2008, submitted by the Chancellor and the Mayor, which gave the Mayor greater authority to terminate certain staff within DCPS' central office, including non-union staff and staff hired after 1980. According to the Chancellor, this legislation ultimately will allow her to begin building a workforce that has the qualifications needed for a high-functioning central office. Both the state superintendent's office and DCPS are working to improve their data systems to better track and monitor the performance of students, teachers, and schools. The superintendent's office is in the process of selecting a contractor to build a longitudinal database that will store current and historical data on students, teachers, and schools. Currently, there is no one system that tracks the movement of students among District schools. The new database is being designed to standardize how data are collected from DCPS and charter schools and to track student data, such as attendance and test scores across multiple years. According to the state superintendent's office, this database will help stakeholders identify which schools and teachers are improving student achievement and determine what instructional approaches work best for which types of students. Education awarded the state superintendent's office a 3-year grant totaling nearly $6 million to help fund this effort. The database is expected to be fully operational by 2012. DCPS is also focused on improving the quality of student data, some of which will be inputted into the state longitudinal database. Currently, DCPS student data are not consistently reported throughout the numerous data systems. In addition, the multiple systems often have contradictory information. For example, the Chancellor told us that one system showed there were 5,000 special education students in the District while another showed 10,000. To address these problems, DCPS told us that they are consolidating its data systems, eliminating duplicate information, and verifying data accuracy. DCPS officials told us they expect the new student data management system to be operational by February 2009. In addition to student data systems, DCPS has also taken steps to change and improve its personnel data systems by moving from a paper-based to an electronic system. DCPS scanned millions of personnel files into an electronic data system. According to agency officials, this was necessary because the files that existed were in unorganized stacks in office closets and not securely maintained. DCPS officials told us that they had scanned nearly 5 million documents. The scanning revealed missing personnel records for some staff members and, in other cases, job descriptions that did not match the jobs staff were actually performing. In addition, the D.C. Office of the Inspector General is currently conducting an audit of the DCPS payroll system, to be released in the summer of 2008, to verify that every individual who receives a paycheck from DCPS is currently employed with the school system. In February 2008, DCPS completed its preliminary school consolidation (closing) plan that identified over 20 schools for closure over the next several years in an effort to provide more resources to the remaining schools. Plans to consolidate D.C. public schools have been underway in recent years and Congress has raised concerns about the inefficiency of maintaining millions of square feet of underutilized or unused space in DCPS facilities. (DCPS is currently operating at approximately 330 square feet per student, while the national average is 150 square feet.) According to DCPS officials, the cost of administration, staff, and facilities in underutilized schools diverts resources from academic programs for all students. However, it is unclear how much long-term savings, if any, will result from these closings. DCPS officials told us that they are currently working with the facilities office and the District Office of the Chief Financial Officer (OCFO) to develop long-term cost estimates. In addition, some parents, community groups, and the D.C. Council disagreed with the process the Chancellor and Mayor used to develop the plan. The D.C. Council expressed concern that the Mayor and Chancellor did not present the proposal to the Council before it was made public, and some community members met to express their opposition to the closings. The Chancellor provided a detailed report of the criteria used to select schools for closure and held community meetings. Based on input from parents and the community, the Chancellor revised the list of schools to be closed. The consolidation plan was finalized in March 2008. In the area of academic achievement, DCPS has set academic priorities for the 2007-2008 school year and is in the process of establishing longer-term priorities. The Chancellor told us that the academic priorities will build on DCPS' 2006 Master Education Plan, which established key strategies and goals to direct instruction within DCPS. The Chancellor noted, however, that the 2006 plan cited copious goals and objectives without prioritizing and establishing explicit time frames or clear strategies for how DCPS would meet the goals. In November 2007, DCPS laid out its 2007-2008 academic priorities, which included key objectives and strategies that focus on improving student achievement, school facilities, parental and community involvement, and central office operations. For example, under its objective to improve student achievement, DCPS identified, as a major initiative, efforts to recruit and hire high-quality principals for roughly one-third of its schools. According to the Chancellor, getting high- quality principals to serve as instructional leaders is a key step to improving the quality of teachers and classroom instruction. DCPS has launched a national recruitment strategy and plans to select candidates by the end of the 2007-2008 school year. The Chancellor is also focusing on longer-term priorities, such as developing a districtwide curriculum aligned to academic standards and assessments, and providing teachers with professional development on instructional strategies for the curriculum. DCPS is currently working on a five year academic plan that is to be completed by March 2008. (See table 1 for key initiative and completion dates.) The facilities office has worked since the summer of 2007 to address the backlog of repairs the office inherited from DCPS. The director of the office told us that he found that school heating and plumbing systems were inoperable, roofs leaked, and floors needed replacing. In addition, he told us that many schools were in violation of District fire codes with exit doors locked from the inside for security. The director of the facilities office also told us that when his office took responsibility for school maintenance, he found thousands of work orders that had been submitted to address these building deficiencies that had not been closed. In some cases the repairs were completed but the work order was not closed; however, in many cases, the work orders were several years old and the repairs had not been completed. In addition, the facilities director found that most of the work orders did not adequately reflect the scope of the work needed, and the cost of the repairs was underestimated. For example, he told us that a work order may request repairs related to the symptom rather than the cause of the problem, such as painting over a water stain in the ceiling rather than fixing the more expensive plumbing problem. To address the backlog and ongoing facilities needs, the new office undertook several programs this summer and early fall. Repairs were made to over 70 schools that were not slated to undergo modernization for years. According to facilities officials, needed painting, plumbing, electrical, and other work were done at each of the schools. In addition, systems were assessed at all District schools for heat and air conditioning repairs. According to the facilities director, all schools with central air conditioning received upgrades and about 670 new air conditioning units were installed. The office found, however, that about 1,000 to 1,500 classrooms did not have air conditioning. To ensure classrooms have air conditioning by spring 2008, the facilities office is planning to upgrade electrical systems to allow installation of new cooling units. According to the director, the office has also made repairs to school heating systems and all schools had heat by October 15, 2007. He noted that many of the heating repairs could have been avoided if the heating systems had received adequate maintenance. The office found many schools where boilers installed only three to four years ago were inoperable due to poor maintenance. The office also started a "stabilization" program in the fall of 2007, to make improvements to the remaining 70 or so schools. About $120 million is budgeted to correct possible fire code violations and make plumbing, roofing, and other repairs. According to the facilities director, the work order backlog should be largely eliminated by these maintenance and modernization efforts. Furthermore, a facility official told us that they are prioritizing work order requests by the urgency of the request, that is, whether it is a hazard to students or a routine repair. According to this official, emergency repairs are addressed the day, or the day after, the work order is submitted. Routine repairs and maintenance, such as plumbing and painting, are addressed by the in-house trades (painters, plumbers) while more complicated repairs are addressed by contractors that have been "pre- qualified" by the facility office. Contracts for major repairs, such as replacing an entire roof, are put out for competitive bid. Finally, District officials told us that the facilities office is in the process of revising the DCPS 2006 Master Facilities Plan, which outlined how DCPS planned to use and improve school buildings, offices and other facilities over a 15 year period. According to District officials, the revised plan will align with the Chancellor's academic priorities and school consolidation efforts. The Master Facilities Plan was due on October 1, 2007, but the facilities director was granted an extension until May 31, 2008. The Mayor and education officials have introduced a performance-based process designed to establish accountability for their school reform efforts. This process includes weekly meetings to track progress and accomplishments across education offices and annual performance plans for these offices, including the D.C. Department of Education's plan. According to recent studies of the D.C. school system, little was done in the past to hold offices and education leaders accountable for progress. Weekly meetings are a key component of the District's performance-based process and, according to the Deputy Mayor for Education, integral to how the Mayor and D.C. education offices monitor the progress of reform efforts. The Mayor's meetings, known as CapStat meetings, are used to track progress and accomplishments across all D.C. government offices. Every 3 months, the City Administrator's office develops a list of topics for possible discussion at CapStat meetings based, in part, on a review of each office's performance plan. According to city officials, issues for CapStat meetings typically concern agencies having difficulty meeting their specific performance targets. These issues are given to the Mayor who then selects which ones will be discussed. The Mayor may also identify other issues that have emerged as immediate concerns, for example, those related to the safety and health of D.C. residents. At the CapStat meeting, cognizant managers provide status updates using performance data. The Mayor then assigns follow-up tasks to particular managers with agreed-upon timeframes. The Mayor reviews whether follow-up tasks have been completed. This tracking provides the basis for the Mayor's office to monitor progress, and, if inadequate, determine what further action is needed. For example, during the summer of 2007, a CapStat meeting focused on school facilities. The data indicated that many of the schools' heating systems were not functioning. The Mayor's office asked the director of the facilities office to develop a plan within 2 weeks to ensure that all schools had functional heating systems by mid-October. Officials told us the Mayor's office tracked the submission of the plan and the heating system work. As previously mentioned, District officials reported that all schools had heat by October 15. The Chancellor and the State Superintendent adopted processes similar to CapStat--SchoolStat and EdStat, respectively--to hold managers accountable for their offices' performance (see table 2 for information on the three "Stat" meetings). The Chancellor uses weekly SchoolStat meetings to discuss high-priority issues and what actions DCPS department managers need to take to improve performance. Similarly, the state superintendent's office uses weekly EdStat meetings to monitor progress in administration of federal grants and special education services. At EdStat meetings, managers analyze performance data, collaborate with program managers on remediation strategies, and monitor subsequent performance data to validate the effectiveness of actions taken. The State Superintendent plans to use EdStat meetings to monitor whether the office is meeting time frames for providing assistance to schools identified as in need of improvement under NCLBA. In addition to weekly meetings, the Mayor's office requires education offices to develop and follow annual performance plans as another component of the accountability process. These performance plans include broad objectives, such as increasing student achievement, assessing the effectiveness of educational programs, and coordinating services with city agencies. In addition, the plans detail specific actions to achieve these objectives, and key performance indicators designed to measure progress. For example, regarding DCPS' 2007-2008 performance plan objective to increase student achievement, DCPS plans to provide training for teachers to help them make better use of student performance data. Similarly, regarding the State Superintendent's objective to provide educators with information needed to improve schools and to assess the effectiveness of educational programs, the office plans to provide data from its longitudinal database to educators to help them determine where specialized programs are needed. The first performance plan for the facilities office is scheduled to be in place in November 2008. The D.C. Department of Education has taken some steps to coordinate and integrate the various efforts of the District's education offices. The Deputy Mayor for Education told us that the department reviews the individual annual performance plans of education offices to ensure they are aligned and not working at cross-purposes. The department also uses CapStat meetings to monitor the progress of the education offices. In addition, according to the Deputy Mayor for Education, the department tracks the goals and activities of city youth agencies, such as the Child and Family Services Agency, to ensure they are consistent with the goals of the education offices. D.C. Department of Education officials also told us they will take additional steps in the future. The Deputy Mayor will review each education office's long-term plan, such as the Chancellor's five year academic plan and the revised Master Facilities Plan, to ensure they are coordinated and implemented. The Deputy Mayor also told us that the department will rely on findings from annual evaluations of DCPS to assess the progress of the reform efforts. Officials with the D.C. Department of Education told us they have not yet developed a documented districtwide education strategic plan. According to department officials, they do not intend to develop a written plan at this time, in part, because they are addressing immediate and urgent issues. They questioned the need for a written document as opposed to a formalized process that would help ensure that the individual District education offices' long-term plans are coordinated and executed. While developing a long-term strategic plan takes time, it is useful for entities undergoing a major transformation, such as the D.C. public school system. The District has a new public school governance structure and newly created education offices. A strategic plan, and the process of developing one, helps organizations look across the goals of multiple offices and determine whether they are aligned and connected or working at cross-purposes. By articulating an overall mission or vision, a strategic plan helps organizations set priorities, implementation strategies, and timelines to measure progress of multiple offices. A long-term strategic plan is also an important communication tool, articulating a consistent set of goals and marking progress for employees and key stakeholders, from legislative bodies to community organizations. The problems in the D.C. public school system are long-standing. Past efforts to reform the system and ultimately raise student achievement have been unsuccessful. The Reform Act made many changes: new divisions of responsibility, improved oversight, and greater opportunity for the Chancellor to focus on academic progress. The Mayor and his education team recognized that before they could take full advantage of these changes, they would have to revamp the school system's basic infrastructure. Their initial efforts, including those to create a highly functional central office and repair school buildings to make them safe for students, provide some of the basics for successful learning environments. However, the Mayor and his team will need to sustain the momentum created over the last 6 months and focus as quickly as possible on the challenges that lie ahead--improving the reading and math skills of students and the instructional skills of teachers. In addition, the Mayor and his team have taken steps to hold managers and staff accountable for improving the school system, such as holding weekly performance meetings, developing annual performance plans, and coordinating education activities. These changes form the cornerstone of the Mayor's effort to transform the organizational culture of the District's public education system. However, the Mayor's team has not yet developed a long-term districtwide strategic education plan. Given the significant transformation underway, a strategic plan could provide a framework for coordinating the work of the education offices and assessing short-term and long-term progress. Without a plan that sets priorities, implementation goals, and timelines, it may be difficult to measure progress over time and determine if the District is truly achieving success. Additionally, a districtwide strategic education plan would increase the likelihood that the District's education offices work in unison toward common goals and that resources are focused on key priorities, not non-critical activities. A strategic plan could also help determine when mid-course corrections are needed. Given that leadership changes, a strategic education plan would provide a road map for future district leaders by explaining the steps taken, or not taken, and why. To help ensure the long-term success of the District's transformation of its public school system, we recommend that the Mayor direct the D.C. Department of Education to develop a long-term districtwide education strategic plan. The strategic plan should include certain key elements including a mission or vision statement, long-term goals and priorities, and approaches and time frames for assessing progress and achieving goals. It may also include a description of the relationship between the long-term strategic and annual performance goals. In addition, the strategic plan should describe how coordination is to occur among the District's education offices. As you know Mr. Chairman, you have requested that we conduct a second, longer-term study of changes in D.C. schools' management and operations, and results of these changes. We will begin that study this month. We provided a draft of this report to the offices of the Mayor and District education officials for review and comment, and on March 11, 2008, officials from the Mayor's office discussed their comments with us. They told us they support the need for an overarching strategy that integrates the efforts and plans of DCPS, the state superintendent's office, and the facilities office. They said that these offices are in the process of developing long-term strategic plans to serve as the foundation for an overall education strategy, and that the Deputy Mayor for Education is committed to coordinating and sustaining these efforts. Further, they noted that a districtwide strategy can take many forms, and that the Deputy Mayor's preferred approach is to develop a formal process, rather than a written document, to ensure efforts are coordinated and executed as efficiently as possible. They noted that in the past, plans were written, "put on a shelf," and never used. We agree that the Deputy Mayor is taking steps to coordinate the individual plans of these offices, and that the Mayor's education team recognizes the importance of taking a strategic approach to address the educational needs of District students. However, as we have said in this statement, we see value in developing a documented strategy that could help the District's education leaders coordinate their efforts and goals, and provide future leaders the benefit of understanding what worked, what didn't, and why. While past administrations may have developed strategic plans and not used them, what is unknown is whether these plans could have been of value if they had been used. The current administration's development and implementation of an articulated documented strategy could provide a foundation that would help coordinate future efforts. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have. For further information regarding this testimony, please contact me at (202) 512-7215. Individuals making key contributions to this testimony include Harriet Ganson, Elizabeth Morrison, Sheranda Campbell, Jeff Miller, Bryon Gordon, Susan Aschoff, Sheila McCoy, Sandy Silzer, Sarah Veale, Janice Latimer, and Terry Dorn. 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 response to long-standing problems with student academic performance, the condition of school facilities, and the overall management of the D.C. public school system, the D.C. Council approved the Public Education Reform Amendment Act of 2007 (Reform Act). The Reform Act made major changes to the operations and governance of the D.C. public school system, including giving the Mayor authority over public schools, including curricula, personnel, and school facilities. While other large urban school districts have transferred governance of schools to their mayors, D.C. is unique because it functions as both local and state offices for many education responsibilities. GAO's testimony focuses on (1) the status of the District's efforts to reform its public school system, and (2) what the District has done to establish accountability for these efforts. To address these issues GAO reviewed documents, interviewed District education officials and interviewed principals from nine D.C. public schools. The early efforts to improve D.C. public schools have focused largely on broad management reforms and other activities that lay the foundation for long-term improvements to the D.C. public school system. The broad management reforms included the transfer of many functions from D.C. public schools (DCPS) into the new office of the state superintendent, which could allow for more effective oversight of the District's education programs. Prior to the Reform Act, there was no clear separation of funding, reporting, and staffing between local and state functions. A new facilities office was also created to improve the conditions of DCPS school facilities. Moving state-level education and facilities functions out of DCPS is intended to give the head of DCPS, called the Chancellor, more time to focus on issues that directly affect student achievement. The management reforms also included specific human capital initiatives such as new DCPS central office personnel rules and new systems for evaluating central office and state-level employee performance. In addition, both the State Superintendent and the Chancellor are working to improve their data systems to better track and monitor the performance of students, teachers, and schools. DCPS also completed its school consolidation plan that identified over 20 schools for closure over the next several years. In addition, the school facilities office is working to address the backlog of repairs. The director of the facilities office told us that he found that school heating and plumbing systems were inoperable, roofs leaked, and floors needed replacing. In addition, he said many schools were in violation of District fire codes. To address the backlog and ongoing facilities needs, the new office undertook several repair programs this summer and early fall. The D.C. Mayor and education officials have introduced a performance-based process designed to establish accountability for their school reform efforts. This process includes weekly meetings to track progress and accomplishments across education offices. In addition, the Mayor's office required agencies to develop and follow annual performance plans. D.C. Department of Education officials told us that they review the individual performance plans of District education offices, such as DCPS and the state superintendent's office, to ensure they are aligned and not working at cross-purposes. However, the department has yet to develop a long-term districtwide education strategy that could integrate the work of these offices, even though it included the development of such a strategy in its 2007-2008 performance plan. While developing a strategic plan takes time, it is useful for entities undergoing a major transformation, such as the D.C. public school system. A strategic plan helps organizations look across the goals of multiple offices and identify if they are aligned and connected or working at cross-purposes. Without a plan that sets priorities over time, implementation goals, and timelines, it may be difficult to measure progress over time and determine if the District is truly achieving success. In addition, given that leadership changes, a strategic plan would provide a road map for future District leaders by explaining the steps taken, or not taken, and why.
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Several factors constrain CNMI's economic potential, including the lack of diversification, scarce natural resources, small domestic markets, limited infrastructure, and shortages of skilled labor. The United States exercises sovereignty over CNMI, and, in general, federal laws apply to CNMI. However, federal minimum wage provisions and federal immigration laws do not apply. CNMI immigration policies and the demands for labor by the garment manufacturing industry and tourism sector have resulted in rapid population growth since 1980 such that the majority of the population are non-U.S. citizens. (See fig. 1.) According to U.S. Census Bureau data for 2000, the most recent census data available, about 56 percent of the CNMI population of 69,221 were not U.S. citizens. According to U.S. Census Bureau data for 2000, the median household income in CNMI was $22,898, a little more than half of the U.S. median household income of almost $42,000 for 2000. The percentage of individuals in poverty in 2000 was 46 percent, nearly four times the continental U.S. rate of 12 percent in that same year. CNMI's economy depends on two industries, garment manufacturing and tourism, for its employment, production, and exports. These two industries rely heavily on a noncitizen workforce. This workforce represents more than three quarters of the labor pool that are subject to the CNMI minimum wage, which is lower than the U.S. minimum wage. The garment industry, for example, uses textiles and labor imported mostly from China. A 1999 study found that garment manufacturing and tourism accounted for about 85 percent of CNMI's total economic activity and 96 percent of its exports. A 2005 estimate of CNMI's gross domestic product (GDP) suggest that, in 2002, the garment industry contributed to roughly 40 percent of CNMI's GDP and 47 percent of payroll. However, recent changes in trade laws have increased foreign competition for CNMI's garment industry, while other external events have negatively impacted its tourism sector. Recent developments in international trade laws have reduced CNMI's trade advantages, and the garment industry has declined in recent years. Historically, while garment exporters from other countries faced quotas and duties in shipping to the U.S. market, CNMI's garment industry benefited from quota-free and duty-free access to U.S. markets for shipments of goods in which 50 percent of the value was added in CNMI. In recent years, however, U.S. agreements with other textile-producing countries have liberalized the textile and apparel trade. For example, in January 2005, in accordance with one of the 1994 World Trade Organization (WTO) Uruguay Round agreements, the United States eliminated quotas on textile and apparel imports from other textile- producing countries, leaving CNMI's apparel industry to operate under stiffer competition, especially from low-wage countries such as China. According to a DOI official, more than 3,800 garment jobs were lost between April 2004 and the end of July 2006, with 10 out of 27 garment factories closing. U.S. Department of Commerce data show that the value of CNMI shipments of garments to the United States dropped by more than 16 percent between 2004 and 2005, from about $807 million to $677 million, and down from a peak of $1 billion in 1998--2000. In 2006, reported garment exports to the United States fell further, by an estimated 25 percent compared to 2005, with exports declining to an estimated $497 million. The reported level of shipments to the United States in 2006 was comparable to levels of sales in 1995--1996, prior to the significant build-up of the industry. (See fig. 2.) In December 2006, the largest and oldest garment factory closed. Given that the garment industry is significant to CNMI's economy, these developments will likely have a negative financial effect on government revenue. For example, reported fees collected by the government on garment exports fell 37 percent from $38.6 million in 2000 to $24.4 million in 2005. CNMI's tourism sector experienced a sharp decline in the late 1990s, and a series of external events have further hampered the sector. Tourism became a significant sector of economic activity in CNMI by the mid-1980s and continued to grow into the 1990s. Due to its proximity to Asia, Asian economic trends and other events have a direct effect on CNMI's economy. For example, tourism in CNMI experienced a sharp decline in the late 1990s with the Asian financial crisis and due to the cancellation of Korean Air service to CNMI following an airplane crash on Guam in August 1997. (See fig. 3.) Visitors from Korea, the second largest source of tourists, decreased by 85 percent from 1996 to 1998. After a modest recovery in 2000, tourism faltered again with the September 11, 2001, terrorist attacks on the United States. In 2003, according to CNMI officials, tourism slowed--with a double-digit decline in arrivals for several months--in reaction to the SARS epidemic and to the war in Iraq. Tourism in CNMI is also subject to changes in airline practices. For example, Japan Airlines (JAL) withdrew its direct flights between Tokyo and Saipan in October 2005, raising concerns because roughly 30 percent of all tourists and 40 percent of Japanese tourists arrive in CNMI on JAL flights, according to CNMI and DOI officials. The Marianas Visitors Authority's June 2006 data show that the downward trend in Japanese arrivals is not being offset by the growth in arrivals from other markets such as China and South Korea, with the total number of foreign visitors dropping from 43,115 in June 2005 to 38,510 a year later. At the same time, CNMI has experienced increased Chinese tourists in recent years, which offer the potential to reenergize the industry. The fiscal condition of CNMI's government has steadily weakened from fiscal year 2001 through fiscal year 2005, the most recent year for which audited financial statements for CNMI were available. In addition, several indicators point to a severe financial crisis in fiscal year 2006. As shown in figure 4, CNMI's reported governmental fund balance declined from a positive $3.5 million at the beginning of fiscal year 2001 to a deficit of $84.1 million by the end of fiscal year 2005, as CNMI's expenditures for its governmental activities consistently exceeded revenues in each year since fiscal year 2002. Most of CNMI's governmental activities, which include basic services such as public safety, health care, general administration, streets and parks, and security and safety, are reported in its governmental activities, or government funds. The fund balance (or deficit) for these activities reflects the amount of funds available at the end of the year for spending. A significant contributing factor to the gap between expenditures and revenues is that actual expenditures have exceeded budgeted expenditures each fiscal year during the period 2001 through 2005. Another measure of fiscal health is the measure of net assets for governmental activities, which represents total assets minus total liabilities. As shown in table 1, CNMI has experienced a negative trend in its balance of net assets for governmental activities, going from a reported positive $40.6 million balance at the end of fiscal year 2001 to a negative $38 million balance at the end of fiscal year 2005. The primary difference between the fund balance measure and net assets is that the net assets include capital assets and long-term liabilities, whereas the fund balance figure focuses on assets available for current period expenditures and liabilities that are due and payable in the current period. In order to finance its government activities in an environment where expenditures have exceeded revenues, CNMI has increased its debt and has not made the required contributions to its retirement fund. CNMI's reported balance of notes and bonds payable has increased from $83 million in fiscal year 2002 to $113 million in fiscal year 2005, representing an increase of 36 percent. CNMI's balance owed to its pension fund has increased from $72 million in 2002 to $120 million in 2005, representing an increase of 67 percent. CNMI has also been incurring penalties on the unpaid liabilities to the pension fund. The total amount of assessed penalties was $24 million as of September 30, 2005. As shown in figure 5, CNMI's reported debt to assets ratio has increased significantly, from 89.8 percent in fiscal year 2002 to 113.5 percent in 2005. In other words, at the end of fiscal year 2005, CNMI owed $1.14 for every $1.00 in assets that it held. Although CNMI's audited fiscal year 2006 financial statements are not yet available, indicators point to a severe fiscal crisis during fiscal year 2006. In a May 5, 2006 letter to the CNMI Legislative leaders, Governor Benigno R. Fitial stated that "the Commonwealth is facing an unsustainable economic emergency. . . . I regret to say that the nature and extent of these financial problems are such that there is no simple or painless solution." CNMI has implemented several significant cost-cutting and restructuring measures during fiscal year 2006. For instance, in August 2006, CNMI enacted its Public Law No. 15-24 to implement "austerity holidays" consisting of bi-weekly furloughs, during which government employees are not paid and many government operations are closed. This measure was taken to help alleviate the financial crisis by saving millions of dollars in both personnel and operational costs. The measure declared unpaid holidays once per pay period for the remainder of fiscal years 2006 and 2007, reducing the government's normal pay period to 72 hours every 2 weeks. In June of 2006, CNMI enacted Public Law No. 15-15 to authorize the CNMI government to suspend the government's employer contributions to the retirement fund for the remainder of fiscal years 2006 and 2007. In addition, CNMI has passed laws to restructure loans among its component units, reform the rate of compensation for members of boards and commissions, increase the governor's authority to reprogram funds, extend the date for full funding of the retirement fund's defined benefit plan, and create a defined contribution retirement plan for government employees hired on or after January 1, 2007. These measures are immediate and dramatic, and are indicative of severe financial problems that will likely call for long-term solutions. CNMI has had long-standing financial accountability problems, including the late issuance of its single audit reports, the inability to achieve unqualified ("clean") audit opinions on its financial statements, and numerous material weaknesses in internal controls over financial operations and compliance with laws and regulations governing federal grant awards. CNMI received a reported $65.6 million in federal grants in fiscal year 2005 from a number of federal agencies. The five largest federal grantors in 2005 for CNMI included the Departments of Agriculture, Health and Human Services, Interior, Homeland Security, and Labor. As a nonfederal entity expending more than $500,000 a year in federal awards, CNMI is required to submit a single audit report each year to comply with the Single Audit Act, as amended. Single audits are audits of the recipient organization--the government in the case of CNMI--that focus on the recipient's financial statements, internal controls, and compliance with laws and regulations governing federal grants. One of the objectives of the act is to promote sound financial management, including effective internal controls, with respect to federal expenditures of the recipient organization. Single audits also provide key information about the federal grantee's financial management and reporting and are an important control used by federal agencies for overseeing and monitoring the use of federal grants. For fiscal years 1997 through 2005, CNMI did not submit its single audit reports by the due date, which is generally no later than 9 months after the fiscal year end. CNMI's late submission of single audit reports means that the federal agencies overseeing federal grants to CNMI did not have current audited information about CNMI's use of federal grant funds. As shown in table 2, CNMI's single audit submissions were significantly late for fiscal years 1997 through 2004. However, CNMI has made significant progress in 2005 by submitting its fiscal year 2005 single audit report less than 1 month late. Auditors are required by OMB Circular No. A-133 to provide opinions (or disclaimers of opinion, as appropriate) as to whether the (1) financial statements are presented fairly in all material respects in conformity with generally accepted accounting principles (GAAP) and (2) auditee complied with laws, regulations, and the provisions of contracts or grant agreements that could have a direct and material effect on each major federal program. The CNMI government has been unable to achieve unqualified ("clean") audit opinions on its financial statements, receiving qualified opinions on the financial statements issued for fiscal years 1997 through 2005. Auditors render a qualified opinion when they identify one or more specific matters that affect the fair presentation of the financial statements. The effect of the auditors' qualified opinion can be significant enough to reduce the usefulness and reliability of CNMI's financial statements. CNMI has made some progress in addressing the matters that resulted in the qualified opinions on its financial statements for fiscal years 2001 through 2003. However, some of the issues continued to exist in 2004 and 2005. The auditors identified the following issues in fiscal year 2005 that resulted in the most recent qualified audit opinion: (1) inadequacies in the accounting records regarding taxes receivable, advances, accounts payable, tax rebates payable, other liabilities and accruals, and the reserve for continuing appropriations, (2) inadequacies in accounting records and internal controls regarding the capital assets of the Northern Marianas College, and (3) the lack of audited financial statements for the Commonwealth Utilities Corporation, which represents a significant component unit of CNMI. Auditors for CNMI also rendered qualified opinions on CNMI's compliance with the requirements for major federal award programs from 1997 through 2005. In fiscal year 2005, the auditors cited noncompliance in the areas of allowable costs, cash management, eligibility, property management, procurement, and other requirements. CNMI has long-standing and significant internal control weaknesses over financial reporting and compliance with requirements for federal grants. Table 3 shows the number of material weaknesses and reportable conditions for CNMI for fiscal years 2001 through 2005. The large number and the significance of reported internal control weaknesses raise serious questions about the integrity and reliability of CNMI's financial statements and its compliance with requirements of major federal programs. Furthermore, the lack of reliable financial information hampers CNMI's ability to monitor programs and financial information such as revenues and expenses and to make timely, informed decisions. CNMI's 13 internal control reportable conditions for fiscal year 2005, 9 of which were material weaknesses, indicate a lack of sound internal control over financial reporting needed to provide adequate assurance that transactions are properly recorded, assets are properly safeguarded, and controls are adequate to prevent or detect fraud, waste, abuse, and mismanagement. For example, one of the material internal control weaknesses that the auditors reported for CNMI's government for fiscal year 2005 was the lack of audited fiscal year 2005 financial statements of the Commonwealth Utilities Corporation (Corporation), a significant component unit of CNMI. Because the Corporation's financial statements were unaudited, the auditors could not determine the propriety of account balances presented in the financial statements that would affect CNMI's basic financial statements. CNMI's auditors also reported other significant material internal control weaknesses that have continued from previous years, such as improper tracking and lack of support for advances to vendors, travel advances to employees, liabilities recorded in the General Fund, and tax rebates payable. Due to the lack of detailed subsidiary ledgers and other supporting evidence, the auditors could not determine the propriety of these account balances. According to the auditors, the effect of these weaknesses is a possible misstatement of expenditures and related advances and liabilities, which also resulted in a qualification of the opinion on the fiscal year 2005 CNMI financial statements. Consequently, CNMI's financial statements may not be reliable. As shown in table 3, auditors also reported 38 reportable conditions in CNMI's compliance with requirements for major federal programs and the internal controls intended to ensure compliance with these requirements. Two of these reportable conditions were considered material weaknesses. One of the two material internal control weaknesses affecting compliance with federal programs reported for CNMI's government for fiscal year 2005 included the failure to record expenditures for the Medical Assistance Program when they were incurred. Specifically, the auditors identified expenditures in fiscal year 2005 for billings from service providers for services rendered in previous years. The effect of this weakness is that expenditures reported to the grantor agency, the U.S. Department of Health and Human Services, are based on the paid date and not, as required, the service date. In addition, actual expenditures incurred during the year are not properly recorded and, therefore, current year expenditures and unrecorded liabilities are understated. The other material weakness affecting compliance related to the lack of adherence to established policies and procedures for managing and tracking property and equipment purchased with federal grant funds. As a result, CNMI's government was not in compliance with federal property standards and its own property management policies and procedures. The other 36 reportable conditions concerned compliance with requirements regarding allowable costs; cash management; eligibility; equipment and property management; matching, level of effort, and earmarking; procurement and suspensions and debarment; reporting; subrecipient monitoring; and special tests and provisions that are applicable to CNMI's major federal programs. In CNMI's corrective action plan for fiscal year 2005, CNMI officials agreed with almost all of the auditors' findings. According to its fiscal year 2005 corrective action plan, CNMI is working to get a current audit of its component unit, the Commonwealth Utilities Corporation. Other planned actions include properly reconciling advances to vendors; reviewing travel advance balances and making adjustments as needed, including making payroll deductions if expense vouchers are not filed timely; implementing procurement receiving procedures for prepaid items; making necessary corrections to its automated tax system to enable auditors to better review tax returns; determining the correct balances for construction projects; implementing controls over verifying eligibility for Medicaid and restricting access to the related data; and ensuring proper completion of inventories. The plan provides that most of the findings will be addressed by the end of fiscal year 2007. It is important to note however, that many of the auditors' findings, particularly those categorized as material weaknesses, are longstanding findings going back in some cases to 1987. OIA has ongoing efforts to support economic development in CNMI and assist CNMI in addressing its accountability issues. OIA has in the last 3 years sponsored conferences in the United States and business- opportunity missions in the insular areas to attract American businesses to the insular areas. The main goal of these efforts is to facilitate interaction and the exchange of information between U.S. firms and government and business officials from the insular areas to spur new investment in a variety of industries. Innovative projects such as setting up a production and mass mailing facility in CNMI aimed at the Japanese market are reported to be underway. OIA's efforts in helping to create links between the business communities in the United States and CNMI are key to helping meet some of the economic challenges. In our recent report, we concluded that the insular areas would benefit from formal periodic OIA evaluation of its conferences and business-opportunity missions, including assessments of the cost and benefit of its activities and the extent to which these efforts are creating partnerships with businesses in other nations. In our December 2006 report, we recommended that OIA conduct such formal periodic evaluations to assess the effect of these activities on creating private sector jobs and increasing insular area income. OIA agreed with our recommendation. DOI's OIA and IG, other federal inspectors general, and local auditing authorities assist or oversee CNMI's efforts to improve its financial accountability. OIA monitors the progress of completion and issuance of the single audit reports as well as providing general technical assistance funds to provide training for insular area employees and funds to enhance financial management systems and processes. DOI's IG has audit oversight responsibilities for federal funds in the insular area. To promote sound financial management processes in the insular area government, OIA has increased its focus on bringing the CNMI government into compliance with the Single Audit Act. For example, OIA created an incentive for CNMI to comply with the act by stating that an insular area cannot receive capital funding unless its government is in compliance with the act or has presented a plan, approved by OIA, that is designed to bring the government into compliance by a certain date. In addition, OIA provides general technical assistance funds for training and other direct assistance, such as grants, to help the insular area governments comply with the act and to improve their financial management systems and environments. The Graduate School of the U.S. Department of Agriculture (USDA) has been working with OIA for over a decade through its Pacific Islands and Virgin Islands Training Initiatives (PITI and VITI) to provide training and technical assistance. OIA staff members make site visits to CNMI as part of its oversight activities. In our December 2006 report, we recommended that OIA develop a standardized framework for its site visits to improve the effectiveness of its monitoring. We also recommended that OIA develop and implement procedures for formal evaluation of progress made by the insular areas to resolve accountability findings and set a time frame for achieving clean audit opinions. OIA agreed with our recommendations and noted that it had already made some progress during fiscal year 2006. Establishing a routine procedure of documenting the results of site visits in a standard framework would help ensure that (1) all staff members making site visits are consistent in their focus on overall accountability objectives and (2) OIA staff has a mechanism for recording and following up on the unique situations facing CNMI. CNMI faces daunting economic, fiscal, and financial accountability challenges. CNMI's economic and fiscal conditions are affected by its economy's general dependence on two key industries. In addition, although progress has been made in improving financial accountability, CNMI continues to have serious internal control and accountability problems that increase its risk of fraud, waste, abuse, and mismanagement. Efforts to meet formidable fiscal challenges in CNMI are exacerbated by delayed and incomplete financial reporting that does not provide officials with the timely and complete information they need for effective decision making. Timely and reliable financial information is especially important as CNMI continues to take actions to deal with its fiscal crisis. OIA has ongoing efforts to assist CNMI in addressing its accountability issues and to support economic development in CNMI. OIA officials monitor CNMI's progress in submitting single audit reports, and OIA provides funding to improve financial management. Yet, progress has been slow and inconsistent. The benefit to CNMI of past and current assistance is unclear. Federal agencies and CNMI have sponsored and participated in conferences, training sessions, and other programs to improve accountability, but knowing what has and has not been effective and drawing the right lessons from this experience is hampered by a lack of formal evaluation and data collection. Strong leadership is needed for CNMI to weather its current crisis and establish a sustainable and prosperous path for the future. During 2006, the CNMI government took dramatic steps to reverse prior patterns of deficit spending. The CNMI government will need to continue to work toward long-term sustainable solutions. A focused effort is called for in which direct and targeted attention is concentrated on the challenges facing CNMI, with feedback mechanisms for continuing improvement to help CNMI achieve economic, fiscal, and financial stability. OIA plays a key role in this effort. In its comments on our December 2006 report, OIA pointed out that it provides "a crucial leadership role and can provide important technical assistance" to help CNMI and the other insular areas improve their business climates, identify areas of potential for private sector investment, and market insular areas to potential investors. It also noted that improving accountability for federal financial assistance for CNMI and other insular areas is a major priority. OIA has stated its commitment to continuing its comprehensive approach and to implementing other innovative ideas to assist CNMI and the other insular areas in continuing to improve financial management and accountability. Leadership on the part of the CNMI government and OIA is critical to addressing the challenges CNMI faces and to providing long-term stability and prosperity for this insular area. Mr. Chairman and Members of the Committee, this concludes my statement. I would be pleased to answer any questions that you and other Members of the Committee may have at this time. For further information about this testimony, please contact Jeanette Franzel, Director, Financial Management and Assurance at (202) 512-9471 or [email protected], or David Gootnick, Director, International Affairs and Trade at (202) 512-4128 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. The following individuals made important contributions to this report: Norma Samuel, Cheryl Clark, Anh Dang, Meg Mills, Maxine Hattery, and Emil Friberg, Jr. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The U.S. insular area of the Commonwealth of the Northern Mariana Islands (CNMI) is a self-governing commonwealth of the United States that comprises 14 islands in the North Pacific. In a December 2006 report--U.S. Insular Areas: Economic, Fiscal, and Financial Accountability Challenges (GAO-07-119)--regarding four insular areas including CNMI, GAO identified and reported the following: (1) economic challenges, including the effect of changing tax and trade laws on their economies; (2) fiscal condition; and (3) financial accountability, including compliance with the Single Audit Act. The Chairman of the Senate Committee on Energy and Natural Resources, which requested the December 2006 report, asked GAO to present and discuss the results as they pertain to CNMI. Our summary and conclusions are based on our work performed for our December 2006 report on U.S. insular areas. For this testimony we also had available CNMI's fiscal year 2005 audited financial statements, which we have included in our review, along with some recent developments in fiscal year 2006. The Commonwealth of the Northern Mariana Islands (CNMI) faces serious economic, fiscal, and financial accountability challenges. CNMI's economy depends heavily on two industries, garment manufacturing and tourism. However, recent changes in U.S. trade law have increased foreign competition for CNMI's garment industry, while other external events have negatively affected its tourism sector. CNMI's garment industry has declined in recent years with factory closings and reduced production. The value of garment shipments to the United States dropped by more than 16 percent between 2004 and 2005 and by an estimated 25 percent in 2006. Tourism in CNMI declined sharply in the late 1990s as a result of a series of external events, including the Asian financial crisis; cancellation of Korean Air service; and fears of international crises such as the SARS epidemic, terrorism, and the Iraq war. In 2005, Japan Airlines withdrew direct flights to the capital. The fiscal condition of CNMI's government has steadily weakened from fiscal year 2001 through fiscal year 2005, as government spending has exceeded revenues each year since 2002. CNMI ended fiscal year 2005 with a deficit of $84.1 million in its governmental fund balance. CNMI's liabilities also exceed its assets for its primary government. Indicators point to a severe financial crisis in fiscal year 2006. In response, the CNMI government has implemented cost-cutting and restructuring measures, including "austerity holidays," consisting of biweekly furloughs during which government workers are not paid and many government operations are closed to reduce personnel and operating costs. CNMI's long-standing financial accountability problems include the late submission of financial audit reports, inability to achieve "clean" opinions in its financial statements by the independent financial auditors, and reports showing serious internal control weaknesses over financial reporting. Many of the auditors' findings are longstanding, going back in some cases to 1987. Federal agencies and CNMI have sponsored and participated in conferences, training sessions, technical assistance, and other programs to improve CNMI's economy, fiscal condition, and accountability. During 2006, the CNMI government took steps to reverse its prior patterns of deficit spending. It will need to continue to work toward long-term sustainable solutions, with concentrated attention on the challenges facing the islands and feedback mechanisms for continuing improvement. Leadership on the part of the CNMI government and the Department of the Interior's Office of Insular Affairs is critical to providing long-term stability and prosperity for this U.S. insular area.
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Because of the abundance of coal and its historically low cost, coal-fueled electricity generating units provide a large share of the electricity produced in the United States. In 2012, according to Energy Information Administration (EIA) data, there were 1,309 coal-fueled generating units in the United States, with a total of 309,680 megawatts (MW) of net summer generating capacity--about 29 percent of the total net summer generating capacity in the United States.produced by using other fossil fuels, particularly natural gas and oil; nuclear power; and renewable sources, including hydropower, wind, geothermal, and solar. Historically, coal-fueled generating units have provided about half of the electricity produced in the United States--an amount that has declined in recent years, falling to 37 percent in 2012. In addition to coal, electricity is To address concerns over air pollution, water resources, and solid waste, several environmental laws, including the Clean Air Act, Clean Water Act, and Resource Conservation and Recovery Act, were enacted. As required or authorized by these laws, EPA recently proposed or finalized four key regulations that will affect coal-fueled units. As outlined in table 1, these regulations are at different stages of development and have different compliance deadlines. These four regulations have potentially significant implications for public health and the environment. In particular, EPA projected that, among other benefits, CSAPR would reduce SO emissions by over half in covered states, reducing asthma and related human health impacts. In addition, EPA projected that MATS would reduce mercury emissions by 75 percent from coal-fueled electricity generating units, reducing the impacts of mercury on adults and children. In addition to these four regulations, on June 2, 2014, EPA proposed new regulations to reduce carbon dioxide emissions from existing fossil-fueled generating units that, if finalized, will impact the electricity industry, including coal-fueled generating units, aiming for overall reductions equivalent to 30 percent from 2005 emissions levels by 2030. The proposed regulations include state-specific goals for carbon dioxide emissions and guidelines for states to follow in developing, submitting, and implementing plans to achieve these goals, which would be due in June 2016, although, under some circumstances, a state may submit an initial plan by June 2016 and a completed plan up to 2 years later. In addition to DOE, FERC, and EPA, other key stakeholders have certain responsibilities for overseeing actions power companies take in response to the regulations and have a role in mitigating some potential adverse implications. These other stakeholders include state environmental and electricity regulators and system planners that coordinate planning decisions regarding transmission and generation infrastructure to maintain the reliable supply of electricity to consumers. System planners and operators attempt to avoid reliability problems through advance planning of transmission and, in some cases, generation resources, and coordinating or determining operational decisions such as which generating resources are operated to meet demand throughout the day. The role of a system planner can be carried out by individual power companies or RTOs. System planners' responsibilities include analyzing expected future changes in generation and transmission assets, such as the retirement of a generating unit; customer demand; and emerging reliability issues. For example, once a power company notifies the system planner that it is considering retiring a generating unit, the system planner generally studies the electricity system to assess whether the retirement would cause reliability challenges and identify long- or short-term solutions to mitigate any impacts. The solutions could include building new generating units, reducing demand in specific areas, building new transmission lines or adding other equipment. DOE, EPA, and FERC have taken initial steps to implement the recommendation we made in our July 2012 report that these agencies develop and document a formal, joint process to monitor industry progress in responding to the four EPA regulations. Since that time, DOE, EPA, and FERC have taken initial steps collectively and individually to monitor industry progress responding to EPA regulations including jointly conducting regular meetings with key industry stakeholders. However, recent and pending actions on the four existing regulations, as well as EPA's recently proposed regulations to reduce carbon dioxide emissions from existing generating units may require additional monitoring efforts, according to DOE, EPA, and FERC officials. DOE, EPA, and FERC have taken initial steps to implement the recommendation we made in our July 2012 report. In that report we found the agencies had undertaken individual monitoring efforts of varied scale and scope and engaged in informal coordination, but lacked a formal documented process for routinely monitoring industry progress toward compliance with the regulations. As such, we recommended that these agencies develop and document a formal, joint process to monitor industry progress in responding to EPA regulations. We concluded that such a process was needed until at least 2017 to monitor the complexity of implementation and extent of potential effects on price and reliability. Since that time, DOE, EPA, and FERC have taken initial steps collectively to monitor industry progress responding to EPA regulations including jointly conducting regular meetings with key industry stakeholders. Currently, these monitoring efforts are primarily focused on industry implementation in regions with a large amount of capacity that must comply with the MATS regulation--the only one of the four regulations that has taken effect. According to EPA officials, DOE, EPA, and FERC officials have met three times since our July 2012 report to coordinate the efforts under way at each agency to monitor industry's progress implementing the MATS regulation and other related issues, including EPA's development of recently proposed regulations to reduce carbon dioxide emissions from existing generating units. In addition, in May 2013, staff from DOE, EPA, and FERC jointly developed a coordination memorandum that was intended to identify how the agencies would work together to address the potential effects of EPA's regulations on reliability. According to one EPA official, the memorandum was intended to be an evolving document that the agencies would revisit as appropriate, for example, as additional EPA regulations are finalized. These four RTOs include PJM Interconnection, which serves all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia; Midcontinent ISO, which serves parts of Arkansas, Illinois, Indiana, Iowa, Kentucky, Louisiana, Michigan, Minnesota, Mississippi, Missouri, Montana, North Dakota, South Dakota, Texas, and Wisconsin, as well as the Canadian province of Manitoba; the Southwest Power Pool, which serves parts of Arkansas, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, Oklahoma, and Texas; and the Electric Reliability Council of Texas, which serves parts of Texas. control equipment in use and retrofit plans, and other information such as reliability assessments under way in the region. As part of these meetings, officials told us that the RTOs provided information of varying levels of detail to the agencies, including information on retirement notifications and associated impacts as determined by the reliability studies completed by the RTOs; the status and findings of reliability assessments they conduct; data on the generating capacity of units with planned, announced, or completed retirements and retrofits; and data on planned outages. RTO officials told us they each gathered information about the plans for generating units in the areas they oversee. Officials from several RTOs told us that they gathered this information by surveying owners of generating units to identify, among other things, information on decisions related to retiring or retrofitting specific generating units. According to EPA officials, the agencies' monitoring and technical assistance efforts are primarily focused on implementation of the MATS requirements because it has taken effect and includes requirements that must be achieved within well-defined time frames. The MATS regulation was finalized in February 2012 and calls for a 3-year compliance period for existing generating units with the deadline of April 16, 2015, but permitting authorities may provide an extra year for certain generating units that request additional time to comply. Agency officials and stakeholders told us that state agencies are generally providing the 1- year extension for generating units--providing these units a total of 4 years to comply. In addition, according to the National Association of Clean Air Agencies (NACAA), as of May 2014, all but 9 of over 100 requests for extensions were granted by the state permitting agencies. In addition to the MATS extension, EPA also provided a mechanism to allow certain units--generating units that are needed to address specific and documented reliability concerns--to request an additional year to come into compliance through the use of Clean Air Act administrative orders--which, if granted, would provide a total of 5 years to comply. According to EPA officials, compliance with the MATS requirements has been less challenging for industry than anticipated, and operators have generally been able to undertake retrofits as part of scheduled maintenance outages; however, certain retrofits, such as the installation of a fabric filter will require additional or longer outages to be completed. According to EPA officials, whether a plant will need to schedule outages for retrofits will depend on a number of factors including the type of controls required for compliance. EPA officials told us they anticipate few administrative orders to be requested. However, if EPA receives a request for an administrative order, EPA has stated in its policy that it will rely on the advice and counsel of reliability experts, including FERC, to identify and analyze reliability risks, but EPA officials will make the final decision on these requests. In May 2012, FERC issued a policy statement detailing how it intends to provide advice to EPA on such requests. In addition to participating in the EPA-facilitated meetings with industry and reviewing information provided from the RTOs through those meetings, DOE, FERC, and EPA have taken other steps to individually monitor or support industry progress implementing EPA regulations. DOE. DOE is offering technical assistance to state public utility commissioners, generating unit owners and operators, and utilities on implementing the new and pending EPA regulations affecting the electric utility industry. Specifically, according to DOE officials and documents, DOE may provide technical information on cost and performance of the various retrofit control technologies; technical information on generation or transmission alternatives for any replacement power needed for retiring generating units; and assistance to public utility commissions regarding any regulatory evaluations or approvals they may have to make on utility compliance strategies. According to agency officials, while DOE offers technical assistance on implementing new and pending EPA rules, DOE has received limited requests for such assistance. EPA. According to EPA officials, EPA has conducted outreach to ensure state agencies understand their ability to provide MATS extensions and EPA officials also review information from NACAA on the status of MATS extension requests. In addition, EPA has updated its power sector modeling tool--a model EPA uses to analyze the impact of policies, regulations, and legislative proposals on the power sector--to reflect MATS requirements along with changes in other market conditions. FERC. FERC officials told us that they monitor information from several sources including the NERC reliability assessments,capacity additions, and information from NACAA on the status of MATS extension requests. In addition, FERC obtained industry information on EIA data on reliability challenges through a technical conference that it convened to obtain information on the effect of recent cold weather events on the RTOs. Recent and pending actions on the four existing regulations, as well as EPA's recently proposed regulations to reduce carbon dioxide emissions from existing generating units, may require additional agency effort to monitor industry's progress in responding to the regulations and any potential impacts on reliability. DOE, EPA, and FERC officials told us that, in light of these changes, their coordination efforts may need to be revisited. Specifically, one EPA official noted that the agencies may need to reexamine their coordination efforts, as appropriate, in light of changing conditions, including newly proposed EPA regulations. In addition, according to FERC officials, since not all the regulations have been finalized, conditions will continue to change, making continued monitoring of potential reliability or resource adequacy challenges important. Furthermore, in April 2014, a FERC Commissioner testified before Congress about concerns and uncertainty related to potential reliability and price impacts associated with environmental regulations.Specifically, the Commissioner expressed concerns about the reliability of data on which generating units are retiring and the resources to replace those retiring generating units and called for a more formal review process including FERC, EPA, and others to analyze the specific details of retiring units, as well as the new units and new transmission that will be needed to manage the transition and ensure reliability of the nation's electricity sector. RTO officials and other industry stakeholders also told us that recent and pending actions on regulations could have impacts on the industry's ability to reliably deliver electricity. Officials from several RTOs told us that, while widespread reliability concerns are not anticipated, some regions may face reliability challenges including challenges associated with increasing reliance on natural gas. Officials from several RTOs said that their efforts to monitor reliability impacts will include evaluating the recently proposed regulations to reduce carbon dioxide emissions, which may present challenges in the future. In addition, officials from one RTO told us that compliance with new and proposed EPA regulations and an evolving generation portfolio will have significant effects on the industry's ability to reliably deliver electricity. Officials from this RTO reported that their region is forecasting shortfalls in its reserve margin--additional capacity that exceeds the maximum expected demand to provide for potential backup--in some areas. In addition, these RTO officials and industry stakeholders noted that retirement of coal-fueled generating units may lead to increasing reliance on natural gas, as these generating units are replaced with natural gas fueled generating units, which will require construction of new pipeline and storage infrastructure. As a result, according to officials from one RTO, their region has increased coordination with the natural gas industry through a stakeholder forum and a series of gas infrastructure studies. These officials said that, while relying on natural gas to generate electricity has not historically negatively affected reliability, greater reliance on natural gas may require more consideration of potential fuel-related future reliability challenges. RTO officials and other industry stakeholders also told us recent and pending actions on regulations could have impacts on electricity prices. For example, industry stakeholders told us that the retirements that are occurring or planned are significant and could lead to increased electricity rates in some regions. In addition, as we reported in July 2012, the studies we reviewed estimated that increases in electricity prices could vary across the country, with one study projecting a range of increases from 0.1 percent in the Northwest to an increase of 13.5 percent in parts of the South more dependent on electricity generated from coal. Officials from several RTOs told us that, while they analyze the potential reliability impacts of specific generating units that power companies are considering retiring, they do not analyze the potential market impacts of these retirements on electricity prices or other market factors. In addition, several RTO officials told us they cannot estimate the impacts of these potential retirements on the markets due to the number of factors involved in determining market prices and affecting markets. Based on our discussions with agency officials, FERC, DOE, and EPA are not evaluating the potential impacts of planned retirements or retrofits on electricity prices as part of their monitoring efforts. However, EPA officials told us it uses its power sector modeling tool to analyze the potential impact of new regulations on economic factors including electricity prices and has used the tool to examine the potential impact of the new carbon rule that reflected publicly announced retirements and retrofits at the time of its analysis. According to EPA's analysis for the recently proposed regulations to reduce carbon dioxide emissions from existing generating units, it projected an increase in the national average retail electricity price between 5.9% and 6.5% in 2020 compared with its base case estimate. According to our analysis, power companies plan to retire a greater percentage of coal-fueled net summer generating capacity and retrofit less capacity with environmental controls than the estimates we reported in July 2012. Specifically, our analysis indicates that power companies retired or plan to retire about 13 percent of coal-fueled net summer generating capacity (42,192 MW) from 2012 through 2025, which exceeds the estimates of 2 to 12 percent of capacity we reported in 2012. In addition, power companies have planned or completed some type of retrofit on about 70,000 MW of net summer generating capacity to reduce SO, NO, or particulate matter from 2012 through 2025, which is less than estimates we reported in 2012. In addition to our analysis of publicly announced retirements and retrofits, RTO officials told us that power companies may take additional steps and provided information on generating units that owners may take steps to retire or retrofit; specifically, about 7,000 MW of additional capacity from 46 generating units may be retired from 2012 through 2025, beyond what we identified in our analysis of SNL data. According to our analysis of SNL data, planned retirements of coal-fueled generating units appear to have increased and are above the high end of the estimates we reported in July 2012. Specifically, power companies retired or plan to retire about 13 percent of coal-fueled net summer generating capacity (42,192 MW from 238 units) from 2012 through 2025. When we reported in July 2012, projections suggested that 2 to 12 percent of coal-fueled capacity may be retired. Based on our analysis of SNL data, power companies retired 100 coal-fueled units from January 2012 to May 2014 with a total of 14,887 MW net summer generating capacity. In addition, based on our analysis of SNL data, power companies have reported plans to retire an additional 138 coal- fueled units with a total of 27,306 MW of net summer generating capacity from June 2014 through 2025. Another recent review also identified higher projected retirements of coal-fueled capacity than estimates we reported in July 2012. Specifically, in April 2014, EIA projected that retirements from 2012 through 2020 could reach approximately 50,000 MW or about 16 percent of net summer generating capacity available at the end of 2012. Consistent with the reasons we had reported for retirements in 2012, some stakeholders we interviewed said that some of these projected retirements may have occurred without the environmental regulations. Specifically, these stakeholders noted that several industry trends may be contributing to the retirement of coal-fueled generating units, including relatively low natural gas prices, increasing prices for coal, and low expected growth in demand for electricity. In addition, in June 2012, we reported that operators of some coal-fueled generating units had entered into agreements with EPA to retire or retrofit units to settle EPA enforcement actions. However, we also reported in July 2012 that, according to some stakeholders, the new environmental regulations may accelerate retirements because power companies may not want to invest in retrofitting units with environmental controls for those units they expect to retire soon for other reasons. About three-quarters of the retirements we identified in our analysis of SNL data are expected to occur by the end of 2015, corresponding to the initial April 2015 MATS compliance deadline (see fig. 1). This level of retirements is significantly more retirements than have occurred in the past; for example, according to our analysis, between 2000 and 2011, 150 coal-fueled units with a total net summer generating capacity of 13,786 MW have been retired. According to our analysis of SNL data, the units that power companies have retired or plan to retire are generally older, smaller, and more polluting, and this is generally consistent with what we reported in October 2012. In addition, we found that many of the units that companies have retired or plan to retire are those that are not used extensively and are geographically concentrated, with some exceptions. Specifically, we found the following: Older. Generating units that power companies have retired or plan to retire are generally older. The fleet of operating coal-fueled units was built over many decades, with most of the capacity currently in service built in the 1970s and 1980s. In particular, from 2012 through 2025, power companies retired or plan to retire about 80 percent of net summer generating capacity from units that were placed in service prior to 1970 (33,419 MW from 213 of the 238 units). However, SNL data indicate that power companies retired or plan to retire some newer generating units, including one generating unit placed into service in 2008. Smaller. Generating units that power companies have retired or plan to retire are generally smaller. Smaller generating units are generally less fuel efficient than larger units and can be more expensive to retrofit, maintain, and operate on a per-MW basis. In particular, smaller units--those less that 300 MW--comprise about 63 percent of the net summer generating capacity that power companies retired or plan to retire from 2012 through 2025 (26,659 MW from 208 of the 238 units). However, some larger generating units are also planned for retirement. In particular, according to our analysis, power companies retired 4 generating units with a net summer generating capacity of over 300 MW from 1990 to 2012, and they retired or plan to retire about 30 such generating units from 2012 through 2025. More polluting. Generating units that power companies retired or plan to retire over the next 3 years emit air pollutants such as SO at generally higher rates than the remaining fleet. According to our analysis, units that were retired or are planned for retirement from 2014 through 2017 emitted on average almost three times as much SO per unit of fuel used at the generating unit in 2013 as units that are not planned for retirement. Similarly, units that were retired or are planned for retirement from 2014 through 2017 emitted on average about 41 percent more NO per unit of fuel used at the generating unit in 2013 than units not planned for retirement. Not used extensively. Most generating units that power companies have retired or plan to retire have not been extensively used in recent years, but other units were used more often. Specifically, according to our analysis, from 2012 through 2025, power companies retired or plan to retire units that comprise about 70 percent of the net summer generating capacity (30,000 MW from 186 of the 238 units) that operated the equivalent of less than half of the hours they were available over the past few years. However, data also indicate that about 13 of the 238 units that companies retired or plan to retire-- which represent about 4,200 MW of net summer generating capacity--operated the equivalent of 70 percent or more of the hours they were available over the past few years. Geographically concentrated. Generating units that power companies have retired or plan to retire are concentrated in certain states (see fig. 2). Specifically, about 38 percent of the net summer generating capacity that power companies retired or plan to retire from 2012 through 2025 is located in four states--Ohio (14 percent), Pennsylvania (11 percent), Kentucky (7 percent), and West Virginia (6 percent). In particular, figure 2 shows how completed or planned retirements from 2012 through 2025 are distributed nationwide and how these are concentrated in certain areas. According to our analysis of SNL data, completed or planned retrofits of coal-fueled generating units include less capacity than estimates we reported in July 2012. These retrofits include the use of a wide range of the technologies we reported at that time. As noted in our July 2012 report, operators of generating units were expected to rely on the combined installation of several technologies to comply with the regulations. These technologies include: (1) fabric filters or electrostatic precipitators to control particulate matter; (2) flue gas desulfurization units--also known as scrubbers--or dry sorbent injection units to control SO and acid gas emissions; (3) selective catalytic reduction or selective noncatalytic reduction units to control NO; and (4) activated carbon injection units to reduce mercury emissions. Appendix I includes a description of these controls, how they operate, and their potential capacity to remove pollutants. that power companies have either installed or expect to install a scrubber--generally intended to reduce SO--on about 34,000 MW of net summer generating capacity from 2012 through 2025, an effort that we reported in July 2012 has typically been costly and can take some time to complete. In addition, about 20,000 MW have completed or planned to complete a retrofit to reduce particulates, including about 17,000 MW with completed or planned installations of fabric filters known as "baghouses." By comparison, in July 2012, we reported that several studies forecasted the steps generating unit owners would take to retrofit units. In particular, EPA estimated that, in response to MATS, companies would retrofit 102,000 MW of generating capacity with fabric filters and 83,000 MW with new scrubbers or scrubber upgrades. In addition, a study by NERC, which collectively examined early versions of all four regulations in 2011, estimated that 576 units that account for about 234,371 MW of capacity would be retrofitted by the end of 2015. We identified two key characteristics of the units that power companies have retrofitted or plan to retrofit as follows: Larger. Most of the net summer generating capacity that have completed or plan to complete a retrofit--about 68 percent--is at larger units with capacity greater than 500 MW. Geographically concentrated. A large share of the net summer generating capacity that has completed or plan to complete a retrofit--about 36 percent--is composed of generating units located in four states: Illinois, Indiana, Kansas, and Texas. In addition, some states have completed or plan to complete more retrofits than others. In particular, seven states (Kansas, Louisiana, New Hampshire, New Mexico, Oregon, South Dakota, and Washington) have completed or plan to retrofit more than half of the net summer generating capacity located in that state. Based on information provided by RTOs, power companies may be considering retiring or retrofitting some additional generating units. In particular, RTO officials provided information on additional generating capacity that power companies have either announced plans to retire or retrofit, or are in the process of considering for a retirement or retrofit. In particular, RTOs identified about 46 coal-fueled generating units that account for about 7,000 MW of additional generating capacity that may be retired from 2012 through 2025, beyond what we identified in our analysis of SNL data. In addition, RTOs identified a total of 260 units that account for about 108,000 MW of generating capacity that have completed or may undertake a retrofit from 2012 through 2025, which may include the capacity identified in our analysis. The electricity sector is in the midst of a significant transition as power companies face decisions on the future of coal-fueled electricity generating units in light of new regulations and changes in the market, such as recent low prices for natural gas, and even though compliance deadlines for three of the regulations remain uncertain, power companies have already identified retirements beyond the range of estimates we reported in 2012. Reliable electricity remains critically important to U.S. homes and businesses and is itself reliant upon the availability of sufficient generating capacity. DOE, EPA, and FERC have taken initial steps to implement our recommendation to establish a joint process to monitor industry's progress in responding to the four EPA regulations and other factors. However, stakeholders, including a FERC Commissioner, continue to express concerns about reliability and electricity prices. Furthermore, proposed regulations focused on reducing emissions of carbon dioxide from the electricity sector, when finalized, may pose additional challenges for coal-fueled generating units. The initial coordination efforts now under way across the three agencies are an important tool for understanding and monitoring the potential effects of EPA regulations and other factors on the electricity sector. However, consistent with our recommendation in 2012, careful monitoring and coordination by the federal agencies incorporating the views of other stakeholders such as RTOs will be even more important over the next several years as key regulations are finalized and implemented. We are not making new recommendations in this report. We provided a draft of this report to DOE, EPA, and FERC, for review and comment. In written comments from DOE, EPA, and FERC, reproduced in appendixes II, III, and IV respectively, the three agencies generally concurred with our analysis. The agencies stated that they will continue to monitor the progress of industry implementation of the regulations and coordinate with one another to address potential reliability challenges. Specifically, DOE stated that these coordination efforts have primarily focused on MATS and may be revisited as they work with industry to monitor compliance with other EPA regulations. EPA stated that it will monitor compliance with all of the rules, as appropriate, to ensure that reliability is not put at risk. FERC stated that it is working with industry to explore reliability issues stemming from new and pending environmental rules for the power sector, and that it will continue to monitor industry's progress implementing these rules and will coordinate with DOE, EPA, and industry. We continue to believe it is important that these agencies jointly monitor industry's progress in responding to the EPA regulations and fully document these steps as we recommended in 2012. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of Energy, the Administrator of the EPA, the Chairman of FERC, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made major contributions to this report are listed in appendix V. How it works An induced electrical charge removes particles from flue gas. Fabric filter (commonly referred to as a "baghouse") Flue gas passes through tightly woven fabric filter "bags" that filter out the particulates. Flue gas desulfurization unit (commonly referred to as a "scrubber") Wet flue gas desulfurization units inject a liquid sorbent slurry, such as a limestone slurry, into the flue gas to form a wet solid that can be disposed of or sold. Dry flue gas desulfurization units inject a dry sorbent, such as lime, into the flue gas to form a solid byproduct that is collected. Coal combustion conditions are adjusted so less NO is formed. For SCR, ammonia is injected into flue gas to react with NO to form nitrogen (N) and water and uses a catalyst to enhance the reaction. For SNCR, ammonia or urea is injected into flue gas to react with NO as well, but does not use a catalyst. Activated carbon injection units Powdered activated carbon sorbent is injected into flue gas, binds with mercury, and is collected in particulate matter control device. In addition to the individual named above, Jon Ludwigson (Assistant Director), Janice Ceperich, Margaret Childs, Philip Farah, Quindi Franco, Cindy Gilbert, Richard Johnson, Armetha Liles, and Alison O'Neill made key contributions to this report.
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EPA recently proposed or finalized four regulations affecting coal-fueled electricity generating units, which provide about 37 percent of the nation's electricity supply. These regulations are the: (1) Cross-State Air Pollution Rule; (2) Mercury and Air Toxics Standards; (3) Cooling Water Intake Structures regulation; and (4) Disposal of Coal Combustion Residuals regulation. In 2012, GAO reported that, in response to these regulations and other factors such as low natural gas prices, companies might retire or retrofit some units. GAO reported that these actions may increase electricity prices and, according to some stakeholders, may affect reliability-the ability to meet consumers' demand--in some regions. In 2012, GAO recommended that DOE, EPA, and FERC develop and document a formal, joint process to monitor industry's progress responding to these regulations. In June 2014, EPA proposed new regulations to reduce carbon dioxide emissions that will also affect these units. GAO was asked to update its 2012 report. This report examines (1) agencies' efforts to respond to GAO's recommendation and (2) what is known about planned retirements and retrofits. GAO reviewed documents, analyzed data, and interviewed agency officials and stakeholders. The Department of Energy (DOE), the Environmental Protection Agency (EPA), and the Federal Energy Regulatory Commission (FERC) have taken initial steps to implement a recommendation GAO made in 2012 that these agencies develop and document a joint process to monitor industry's progress in responding to four proposed or finalized EPA regulations affecting coal-fueled generating units. GAO concluded that such a process was needed until at least 2017 to monitor the complexity of implementation and extent of potential effects on price and reliability. Since that time, DOE, EPA, and FERC have taken initial steps to monitor industry progress responding to EPA regulations including jointly conducting regular meetings with key industry stakeholders. Currently, these monitoring efforts are primarily focused on industry's implementation of one of four EPA regulations--the Mercury and Air Toxics Standards--and the regions with a large amount of capacity that must comply with that regulation. Agency officials told GAO that in light of EPA's recent and pending actions on regulations including those to reduce carbon dioxide emissions from existing generating units, these coordination efforts may need to be revisited. According to GAO's analysis of public data, power companies now plan to retire a greater percentage of coal-fueled generating capacity and retrofit less capacity with environmental controls than the estimates GAO reported in July 2012. About 13 percent of coal-fueled generating capacity--42,192 megawatts (MW)--has either been retired since 2012 or is planned for retirement by 2025, which exceeds the estimates of 2 to 12 percent of capacity that GAO reported in 2012 (see fig.). The units that power companies have retired or plan to retire are generally older, smaller, more polluting and not used extensively, with some exceptions. For example, some larger generating units are also planned for retirement. In addition, the capacity is geographically concentrated in four states: Ohio (14 percent), Pennsylvania (11 percent), Kentucky (7 percent), and West Virginia (6 percent). GAO's analysis identified about 70,000 MW of generating capacity that has either completed some type of retrofit to reduce sulfur dioxide, nitrogen oxides, or particulate matter since 2012 or plan to complete one by 2025, which is less than the estimate of 102,000 MW GAO reported in 2012. GAO is not making new recommendations but believes it is important that these agencies jointly monitor industry progress and fully document these steps as GAO recommended in 2012. The agencies concurred with GAO's findings.
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For the past several decades, computer systems have typically used two digits to represent the year, such as "98" for 1998, in order to conserve electronic data storage and reduce operating costs. In this format, however, 2000 is indistinguishable from 1900 because both are represented as "00." As a result, if not modified, systems or applications that use dates or perform date- or time-sensitive calculations may generate incorrect results beyond 1999. SSA has been anticipating the change of century since 1989, initiating an early response to the potential crisis. It made significant early progress in assessing and renovating mission-critical mainframe systems--those necessary to prevent the disruption of benefits --and has been a leader among federal agencies. Yet as our report of last October indicated, three key risks remained, mainly stemming from the large degree to which SSA interfaces with other entities in the sharing of information. One major risk concerned Year 2000 compliance of the 54 state Disability Determination Services (DDS) that provide vital support to the agency in administering SSA's disability programs. The second major risk concerned data exchanges, ensuring that information obtained from outside sources--such as other federal agencies, state agencies, and private businesses--was not "corrupted" by data being passed from systems that were not Year 2000 compliant. SSA exchanges data with thousands of such sources. Third, such risks were compounded by the lack of contingency plans to ensure business continuity in the event of systems failure. Our report made several specific recommendations to mitigate these risks. These included (1) expeditious completion of the assessment of mission-critical systems at state DDS offices and the use of those results to establish specific plans of action, (2) stronger oversight by SSA of DDS Year 2000 activities, (3) discussion of the status of DDS Year 2000 activities in SSA's quarterly reports to the Office of Management and Budget (OMB), (4) expeditious completion of SSA's Year 2000 compliance coordination with all data exchange partners, and (5) development of specific contingency plans that articulate clear strategies for ensuring the continuity of core business functions. SSA agreed with all of our recommendations, and actions to complete them are underway. We understand that the states are in various stages of addressing the Year 2000 problem, but note that SSA has begun to monitor these activities; among other things, it is requiring biweekly status reports from the DDSs. Further, as of this week, the agency planned to have a contingency plan available at the end of the month. The resources that SSA plans to invest in acquiring IWS/LAN are enormous: Over 7 years the agency plans to spend about $1 billion during phase I to replace its present computer terminals with "intelligent" workstations and local area networks. As of March 1, SSA had completed installation of about 30,000 IWSs and 800 LANs, generally meeting or exceeding its phase I schedule. The basic intelligent workstation that SSA is procuring includes a (1) 15-inch color display monitor, (2) 100-megahertz Pentium workstation with 32 megabytes (MB) of random access memory, (3) 1.2-gigabyte hard (fixed) disk drive, and (4) 16-bit network card with adaptation cable. Preliminary testing has indicated that the IWS/LAN workstation random access memory will need to be upgraded from 32 MB to at least 64 MB. Last year SSA's contractor, Unisys Corporation, submitted a proposal to upgrade to a processing speed higher than 100 megahertz at additional cost. Unisys noted that it was having difficulty in obtaining 100-megahertz workstations. Although personal computers available in today's market are about three times this speed, SSA stated that the 100-megahertz processing speed does meet its current needs. The agency is, however, continuing to discuss this issue with Unisys. As the expected time period for implementation of IWS/LAN will span the change of century, it is obviously important that all components be Year 2000 compliant. SSA's contract with Unisys does not, however, contain such a requirement. Moreover, SSA has acknowledged, and we have validated, that some of the earlier workstations that it acquired are not Year 2000 compliant. However, SSA maintains--and we have confirmed--that the operating system it has selected for IWS/LAN, Windows NT, corrects the particular Year 2000-related problem. SSA has also said that it is now testing all new hardware and software, including equipment substitutions proposed by Unisys, to ensure Year 2000 compliance before site installation. Phase II is intended to build upon acquisition of the initial IWS/LAN infrastructure, adding new hardware and software--such as database engines, scanners, and bar code readers--to support future process redesign initiatives. Contract award for phase II is planned for fiscal year 1999, with site installations between fiscal years 1999 and 2001. We have not identified any significant problems in SSA's installation of IWS/LAN equipment at its field offices to date, and the agency has taken steps to minimize adverse impact on service to the public while installation takes place. Some state DDSs, however, have recently raised concerns about lack of control over their networks and inadequate response time on IWS/LAN service calls, resulting in some disruption to their operations. SSA currently maintains central control. Under this arrangement, problems with local equipment must be handled by SSA's contractor, even though many DDSs feel they have sufficient technical staff to do the job. Because of this issue, states have said that they want SSA to pilot test IWS/LAN in one or more DDS offices to evaluate options that would allow states more flexibility in managing their networks. Florida, in fact, refused to accept more IWS/LAN terminals until this issue is resolved. SSA is now working with the DDSs to identify alternatives for providing the states with some degree of management control. Turning to managing the acquisition of information technology resources as an investment, SSA has--consistent with the Clinger-Cohen Act of 1996 and OMB guidance--followed several essential practices with IWS/LAN. This includes assessing costs, benefits, and risks, along with monitoring progress against competing priorities, projected costs, schedules, and resource availability. What SSA has not established, however, are critical practices for measuring IWS/LAN's contribution toward improving mission performance. While it does have baseline data and measures that could be used to assess the project's impact on performance, it lacks specific target goals and a process by which overall IWS/LAN impact on program performance can be gauged. Further, while OMB guidelines call for post-implementation evaluations to be completed, SSA does not plan to do this. In a September 1994 report, we noted that SSA had initiated action to identify cost and performance goals for IWS/LAN. SSA identified six categories of performance measures that could be used to track the impact of IWS/LAN technology on service delivery goals, and had planned to establish target productivity gains for each measure upon award of the IWS/LAN contract. At the conclusion of our review, however, SSA had not established targeted goals or a process for using performance measures to assess IWS/LAN's impact on agency productivity improvements. According to officials, the agency has no plans to use these measures in this way because it believes the results of earlier pilots sufficiently demonstrated that savings will be achieved with each IWS/LAN installation, and because the measures had been developed in response to a General Services Administration (GSA) procurement requirement. Since GSA no longer performs this role, SSA sees these actions as no longer necessary. Yet without specific goals, processes, and performance measurements, it will be difficult to assess whether IWS/LAN improves service to the public. Further, the Clinger-Cohen Act requires agencies to develop performance measures to assess how well information technology supports their programs. Knowing how well such technology improvements are actually working will be critical, given the expected jump in SSA's workload into the next century. The number of disability beneficiaries alone is expected to increase substantially between calendar years 1997 and 2005--from an estimated 6.2 million to over 9.6 million. Concurrent with phase I installation is development of the first major programmatic software application--the Reengineered Disability System (RDS)--to be installed on the IWS/LAN infrastructure. It is intended to support SSA disability claims processing under a new client/server environment. Pilot testing of RDS software to evaluate actual costs and benefits of the system and identify IWS/LAN phase II equipment needs began last August. However, performance and technical problems encountered during the RDS pilot have resulted in a planned 9-month delay--to July 1998--in implementing the pilot system in the first state, Virginia. This will likely cause corresponding delays in SSA's schedule for acquiring and implementing IWS/LAN phase II equipment, and further delays in national implementation of RDS. How software is developed is another critical consideration; whether the modernized processes will function as intended and achieve the desired gains in productivity will depend in large measure on the quality of the software. Yet software development is widely seen as one of the riskiest areas of systems development. SSA has recognized weaknesses in its own capability to develop software, and is improving its processes and methods. This comes at a critical time, since the agency is beginning development of its new generation of software to operate on the IWS/LAN to support the redesigned work processes of a client/server environment. Significant actions that SSA has initiated include (1) launching a formal software process improvement program, (2) acquiring assistance from a nationally recognized research and development center in assessing its strengths and weaknesses and in assisting with improvement, and (3) establishing management groups to oversee software process improvement activities. Key elements of the software improvement program, however, are still lacking--elements without which progress and success cannot be measured. These are: specific, quantifiable goals, and baseline data to use in assessing whether those goals have been attained. Until such features are available, SSA will lack assurance that its improvement efforts will result in the consistent and cost-effective production of high-quality software. Our report recommends that as part of its recently initiated pilot projects, SSA develop and implement plans that articulate a strategy and time frames for developing baseline data, identifying specific goals, and monitoring progress toward achieving those goals. We are encouraged by SSA's response, which included agreement and a description of steps it had begun to carry out these recommendations. For over 10 years, SSA has been providing, on request, a Personal Earnings and Benefit Estimate Statement (PEBES). The statement includes a yearly record of earnings, estimates of Social Security taxes paid, and various benefits estimates. Beginning in fiscal year 1995, such statements were sent annually to all eligible U.S. workers aged 60 and over; beginning October 1, 1999, the statements are to be sent to all eligible workers 25 and over--an estimated 123 million people. The public has generally found these to be useful in financial planning. In an effort to provide "world-class service" and be as responsive as possible to the public, SSA in March 1997 initiated on-line dissemination of PEBES to individuals via the Internet. The agency felt that using the Internet in this way would ensure that client data would be safeguarded and confidentiality preserved. Within a month, however, press reports of privacy concerns circulated, sparking widespread fear that the privacy of this information could not be guaranteed. SSA plans many initiatives using the Internet to provide electronic service delivery to its clients. As such, our testimony of last May before the Subcommittee on Social Security focused on Internet information security in general, describing its risks and approaches to making it more secure. The relative insecurity of the Internet makes its use as a vehicle for transmitting sensitive information--such as Social Security information--a decision requiring careful consideration. It is a question of balancing greater convenience against increased risk--not only that information would be divulged to those who should not have access to it, but also that the database itself could be compromised. For most organizations, a prudent approach to information security is three-pronged, including the ability to protect against security breaches at an appropriate level, detect successful breaches, and react quickly in order to track and prosecute offenders. The Internet security issue remains a daunting one, and SSA--like other federal agencies--will have to rely on commercial solutions and expert opinion; this is, however, an area in which there is no clear consensus. Shortly before our May testimony, the Acting Commissioner suspended on-line PEBES availability, promising a reexamination of the service that would include public forums around the country. After analyzing the results of those forums, the Acting Commissioner announced last September that a modified version of the on-line PEBES system would be available by the end of 1997. The new Commissioner, however, has placed implementation of the new system on hold. SSA has hired a private contractor to assess the risk of the modified system; we see this as an important, welcome step in determining the vulnerabilities involved in the use of the Internet. In summary, it is clear that SSA has made progress in dealing with its information technology challenges; it is equally clear, however, that such challenges will continue to face the agency, especially as it transitions to a new processing environment while concurrently dealing with the coming change of century. As a prime face of the government to virtually every American citizen, the stakes in how well the agency meets these continuing challenges are high. This concludes my statement. I would be happy to respond to any questions that you or other members of the Subcommittees may have at this time. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. 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 information technology challenges facing the Social Security Administration and its recently appointed commissioner. GAO noted that: (1) SSA made significant early progress in assessing and renovating mission-critical mainframe systems--those necessary to prevent the disruption of benefits--and has been a leader among federal agencies; (2) yet as GAO's report of last October indicated, three key risks remained, mainly stemming from the large degree to which SSA interfaces with other entities in the sharing of information; (3) one major risk concerned year 2000 compliance of the 54 state Disability Determination Services (DDS) that provide vital support to the agency in administering SSA's disability programs; (4) the second major risk concerned data exchanges, ensuring that information obtained from outside sources--such as other federal agencies, state agencies, and private businesses--was not corrupted by data being passed from systems that were not year 2000 compliant; (5) SSA exchanges data with thousands of such sources; (6) third, such risks were compounded by the lack of contingency plans to ensure business continuity in the event of systems failure; (7) the resources that SSA plans to invest in acquiring Intelligent Workstation/Local Area Network (IWS/LAN) are enormous; (8) over 7 years the agency plans to spend about $1 billion during phase I to replace its present computer terminals with intelligent workstations and local area networks; (9) as of March 1, SSA had completed installation of about 30,000 IWSs and 800 LANs, generally meeting or exceeding its phase I schedule; (10) GAO has not identified any significant problems in SSA's installation of IWS/LAN equipment at its field offices to date, and the agency has taken steps to minimize adverse impact on service to the public while installation takes place; (11) at the conclusion of GAO's review, however, SSA had not established targeted goals or a process or using performance measures to asses IWS/LAN's impact in agency productivity improvements; (12) SSA has recognized weaknesses in its own capability to develop software, and is improving its processes and methods; and (13) SSA plans many initiatives using the Internet to provide electronic service delivery to its clients.
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While many estates are kept open for legitimate reasons, we found that FSA field offices do not systematically determine the eligibility of all estates kept open for more than 2 years, as regulations require, and when they do conduct eligibility determinations, the quality of the determinations varies. Without performing annual determinations, an essential management control, FSA cannot identify estates being kept open primarily to receive these payments and be assured that the payments are proper. Generally, under the 1987 Act, once a person dies, farm program payments may continue to that person's estate under certain conditions. For most farm program payments, USDA regulations allow an estate to receive payments for the first 2 years after the death of the individual if the estate meets certain eligibility requirements for active engagement in farming. Following these 2 years, the estate can continue to receive program payments if it meets the active engagement in farming requirement and the local field office determines that the estate is not being kept open primarily to continue receiving program payments. Estates are commonly kept open for longer than 2 years because of, among other things, asset distribution and probate complications, and tax and debt obligations. However, FSA must annually determine that the estate is still active and that obtaining farm program payments is not the primary reason it remains open. Our review of FSA case file documents found the following. First, we found FSA did not consistently make the required annual determinations. Only 39 of the 181 estates we reviewed received annual eligibility determinations for each year they were kept open beyond the initial 2 years FSA automatically allows, although we found shortcomings with these determinations, as discussed below. In addition, 69 of the 181 estates had at least one annual determination between 1999 and 2005, but not with the frequency required. Indeed, the longer an estate was kept open, the less likely it was to receive all required determinations. For example, only 2 of the 36 estates requiring a determination every year over the 7-year period, 1999 through 2005, received all seven required determinations. FSA did not conduct any program eligibility determinations for 73, or 40 percent, of the 181 estates that required a determination from 1999 through 2005. Because FSA did not conduct the required determinations, the extent to which these estates remained open for reasons other than for obtaining program payments is not known. Sixteen of these 73 estates received more than $200,000 in farm program payments and 4 received more than $500,000 during this period. In addition, 22 of the 73 estates had received no eligibility determinations during the 7-year period we reviewed, and these estates had been open and receiving payments for more than 10 years. In one case, we found that the estate has been open since 1973. The following estates received farm program payments but did not receive FSA eligibility determinations for the period we reviewed: A North Dakota estate received farm program payments totaling $741,000 from 1999 through 2003. An Alabama estate--opened since 1981--received payments totaling $567,000 from 1999 through 2005. Two estates in Georgia--opened since 1989 and 1996, respectively-- received payments totaling more than $330,000 each, from 1999 through 2005. A New Mexico estate, open since 1991, received $320,000 from 1999 through 2005. Second, even when FSA conducted at least one eligibility determination, we found shortcomings. FSA sometimes approved eligibility for payments when the estate had provided insufficient information--that is, either no information or vague information. For example, in 20 of the 108 that received at least one eligibility determination, the minutes of FSA county committee meetings indicated approval of eligibility for payments to these estates, but the associated files did not contain any documents that explained why the estate remained active. FSA also approved eligibility on the basis of insufficient explanations for keeping the estate open. In five cases, executors explained that they did not want to close the estate but did not explain why. In a sixth case, documentation stated that the estate was remaining active upon the advice of its lawyers and accountants, but did not explain why. Some FSA field offices approved program payments to groups of estates kept open after 2 years without any apparent determination. In one case in Georgia, minutes of an FSA county committee meeting listed 107 estates as eligible for payments by stating that the county committee approved all estates open over 2 years. Two of the estates on this list of 107 were part of the sample that we reviewed in detail. In addition, another 10 estates in our sample, from nine different FSA field offices, were also approved for payments without any indication that even a cursory determination had been conducted. Third, the extent to which FSA field offices make eligibility determinations varies from state to state, which suggests that FSA is not consistently implementing its eligibility rules. Overall, FSA field offices in 16 of the 26 states we reviewed made less than one-half of the required determinations of their estates from 1999 to 2005. The percentage of estates reviewed by FSA ranged from 0 to 100 percent in the states we reviewed. Eligibility determinations could also uncover other problems. Under the three-entity rule, individuals receiving program payments may not hold a substantial beneficial interest in more than two entities also receiving payments. However, because a beneficiary of an Arkansas estate we reviewed received farm program payments through the estate in 2005, as well as through three other entities, the beneficiary was able to receive payments beyond what the three-entity rule would have allowed. FSA was unaware of this situation until we brought it to officials' attention, and FSA has begun taking steps to recover any improper payments. Had FSA conducted any eligibility determinations for this estate during the period, it might have determined that the estate was not eligible for these payments, preventing the beneficiary from receiving what amounted to a payment through a fourth entity. We informed FSA of the problems we uncovered during the course of our review. According to FSA field officials, a lack of sufficient personnel and time, and competing priorities for carrying out farm programs explain, in part, why many determinations were either not conducted or not conducted thoroughly. Nevertheless, officials told us that they would investigate these cases for potential receipt of improper payments and would start collection proceedings if they found improper payments. FSA cannot be assured that millions of dollars in farm program payments it made to thousands of deceased individuals from fiscal years 1999 through 2005 were proper because it does not have appropriate management controls, such as computer matching, to verify that it is not making payments to deceased individuals. In particular, FSA is not matching recipients listed in its payment databases with individuals listed as deceased in the Social Security Administration's Death Master File. In addition, complex farming operations, such as corporations or general partnerships with embedded entities, make it difficult for FSA to prevent improper payments to deceased individuals. FSA paid $1.1 billion in farm program payments in the names of 172,801 deceased individuals--either as individuals or as members of entities, from fiscal years 1999 through 2005, according to our matching of FSA's payment databases with the Social Security Administration's Death Master File. Of the $1.1 billion in farm payments, 40 percent went to individuals who had been dead for 3 or more years, and 19 percent went to individuals who had been dead for 7 or more years. Figure 1 shows the number of years in which FSA made farm program payments after an individual had died and the value of those payments. We identified several instances in which FSA's lack of management controls resulted in improper payments to deceased individuals. For example, FSA provided more than $400,000 in farm program payments from 1999 through 2005 to an Illinois farming operation on the basis of the ownership interest of an individual who had died in 1995. According to FSA's records, the farming operation consisted of about 1,900 cropland acres producing mostly corn and soybeans. It was organized as a corporation with four shareholders, with the deceased individual owning a 40.3-percent interest in the entity. Nonetheless, we found that the deceased individual had resided in Florida. Another member of this farming operation, who resided in Illinois and had signature authority for the operation, updated the operating plan most recently in 2004 but failed to notify FSA of the individual's death. The farming operation therefore continued to qualify for farm program payments on behalf of the deceased individual. As noted earlier, FSA requires farming operations to certify that they will notify FSA of any change in their operation and to provide true and correct information. According to USDA regulations, failure to do so may result in forfeiture of payments and an assessment of a penalty. FSA recognized this problem in December 2006 when the children of the deceased individual contacted the FSA field office to obtain signature authority for the operation. FSA has begun proceedings to collect the improper payments. USDA recognizes that its farm programs have management control weaknesses, making them vulnerable to significant improper payments. In its FY 2006 Performance and Accountability Report to the Office of Management and Budget, USDA reported that poor management controls led to improper payments to some farmers, in part because of incorrect or missing paperwork. In addition, as part of its reporting of improper payments information, USDA identified six FSA programs susceptible to significant risk of improper payments with estimated improper payments totaling over $2.8 billion in fiscal year 2006, as shown in table 1. Farm program payments made to deceased individuals indirectly--that is, as members of farming entities--represent a disproportionately high share of post-death payments. Specifically, payments to deceased individuals through entities accounted for $648 million--or 58 percent of the $1.1 billion in payments made to all deceased individuals from 1999 through 2005. In contrast, payments to all individuals through entities accounted for $35.6 billion--or 27 percent of the $130 billion in farm program payments FSA provided from 1999 through 2005. The complex nature of some types of farming entities, in particular, corporations and general partnerships, increases the potential for improper payments. For example, a significant portion of farm program payments went to deceased individuals who were members of corporations and general partnerships. Deceased individuals identified as members of corporations and general partnerships received nearly three- quarters of the $648 million that went to deceased individuals in all entities. The remaining one-quarter of payments went to deceased individuals of other types of entities, including estates, joint ventures, limited partnerships, and trusts. With regard to the number of deceased individuals who received farm program payments through entities, they were most often members of corporations and general partnerships. Specifically, of the 39,834 deceased individuals who received farm program payments through entities, about 57 percent were listed in FSA's databases as members of corporations or general partnerships. Furthermore, of the 172,801 deceased individuals identified as receiving farm program payments, 5,081 received more than one payment because (1) they were a member of more than one entity, or (2) they received payments as an individual and were a member of one or more entities. According to FSA field officials, complex farming operations, such as corporations and general partnerships with embedded entities, make it difficult for FSA to prevent making improper payments to deceased individuals. In particular, in many large farming operations, one individual often holds signature authority for the entire farming operation, which may include multiple members or entities. This individual may be the only contact FSA has with the operation; therefore, FSA cannot always know that each member of the operation is represented accurately to FSA by the signing individual for two key reasons. First, it relies on the farming operation to self-certify that the information provided is accurate and that the operation will inform FSA of any operating plan changes, which would include the death of an operation's member. Such notification would provide USDA with current information to determine the eligibility of the operation to receive the payments. Second, FSA has no management controls, such as computer matching of its payment databases with the Social Security Administration's Death Master File, to verify that an ongoing farming operation has failed to report the death of a member. FSA has a formidable task--ensuring that billions of dollars in program payments are made only to estates and individuals that are eligible to receive them. The shortcomings we have identified underscore the need for improved oversight of federal farm programs. Such oversight can help to ensure that program funds are spent as economically, efficiently, and effectively as possible, and that they benefit those engaged in farming as intended. In our report, we recommended that USDA conduct all required annual estate eligibility determinations, implement management controls to verify that an individual receiving program payments has not died, and determine if improper payments have been made to deceased individuals or to entities that failed to disclose the death of a member, and if so, recover the appropriate amounts. USDA agreed with these recommendations and has already begun actions to implement them. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Committee may have. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information about this testimony, please contact Lisa Shames, Director, Natural Resources and Environment, (202) 512-3841 or [email protected]. Key contributors to this testimony were James R. Jones, Jr., Assistant Director; Thomas M. Cook; and Carol Herrnstadt Shulman. 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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Farmers receive about $20 billion annually in federal farm program payments, which go to individuals and "entities," including corporations, partnerships, and estates. Under certain conditions, estates may receive payments for the first 2 years after an individual's death. For later years, the U.S. Department of Agriculture (USDA) must determine that the estate is not being kept open primarily to receive farm program payments. This testimony is based on GAO's report, Federal Farm Programs: USDA Needs to Strengthen Controls to Prevent Improper Payments to Estates and Deceased Individuals ( GAO-07-818 , July 9, 2007). GAO discusses the extent to which USDA (1) follows its regulations that are intended to provide reasonable assurance that farm program payments go only to eligible estates and (2) makes improper payments to deceased individuals. USDA has made farm program payments to estates more than 2 years after recipients died, without determining, as its regulations require, whether the estates were kept open to receive these payments. As a result, USDA cannot be assured that farm payments are not going to estates kept open primarily to obtain these payments. From 1999 through 2005, USDA did not conduct any of the required eligibility determinations for 73, or 40 percent, of the 181 estates GAO reviewed. Sixteen of these 73 estates had each received more than $200,000 in farm payments, and 4 had each received more than $500,000. Only 39 of the 181 estates received all annual determinations as required. Even when FSA conducted determinations, we found shortcomings. For example, some USDA field offices approved groups of estates for payments without reviewing each estate individually or without a documented explanation for keeping the estate open. USDA also cannot be assured that it is not making improper payments to deceased individuals. For 1999 through 2005, USDA paid $1.1 billion in farm payments in the names of 172,801 deceased individuals (either as an individual recipient or as a member of an entity). Of this total, 40 percent went to those who had been dead for 3 or more years, and 19 percent to those dead for 7 or more years. Most of these payments were made to deceased individuals indirectly (i.e., as members of farming entities). For example, over one-half of the $1.1 billion in payments went through entities from 1999 through 2005. In one case, USDA paid a member of an entity--deceased since 1995--over $400,000 in payments for 1999 through 2005. USDA relies on a farming operation's self-certification that the information it provides USDA is accurate; operations are also required to notify USDA of any changes, such as the death of a member. Such notification would provide USDA with current information to determine the eligibility of the operation to receive payments. The complex nature of some farming operations--such as entities embedded within other entities--can make it difficult for USDA to avoid making payments to deceased individuals.
| 2,910 | 621 |
In 1986, Congress amended Title IV-E of the Social Security Act to authorize federal funds targeted to assist youth aged 16 and over in making the transition from foster care to living independent of the child welfare system and created the Independent Living Program. This program was designed to prepare adolescents in foster care to live self-sufficiently once they exited the child welfare system. Several amendments were made to the Independent Living Program over the years, but the passage of FCIA and the creation of the Chafee Program represented the most significant changes in the federal Independent Living Program since its creation. FCIA doubled the federal funds available for independent living programs to $140 million each year. These funds are allocated to states based on their share of the nation's foster care population. In addition to providing increased funding, FCIA eliminated the minimum age limit of 16 years and provided states with the flexibility to define the age at which children in foster care are eligible for services to help them prepare for independent living, as long as services are provided to youth who are likely to remain in foster care until 18 years of age. The law also provided several new services to help youth make the transition to adulthood. It allowed states to use up to 30 percent of their state allotment for room and board for former foster care youth up to age 21. It allowed states the option to expand Medicaid coverage to former foster care adolescents between 18 and 21. Title IV-E was amended again in 2002 to provide foster care youth vouchers for postsecondary education and training under the Education and Training Vouchers (ETV) program and authorized an additional $60 million for states to provide postsecondary education and training vouchers up to $5,000 per year per youth. Eligible participants include youth otherwise eligible for services under the states' Chafee Programs, youth adopted from foster care after attaining the age of 16, and youth participating in the voucher program on their 21st birthday (until they turn 23 years old) as long as they are enrolled in a postsecondary education or training program and are making satisfactory progress toward completion of that program. In addition, the law required that states make every effort to coordinate their Chafee Programs with other federal and state programs for youth, such as the Runaway and Homeless Youth Program, abstinence education programs, local housing programs, programs for disabled youth, and school-to-work programs offered by high schools or local workforce agencies. Further, states were required to coordinate their programs with each Indian tribe in the state and offer the state's independent living services to Indian children. To receive funds under the Chafee Program, states were required to develop multiyear plans describing how they would design and deliver programs and to submit program certifications. The multiyear Chafee plans must include a description of the state's program design, including its goals, strategies, and its implementation plan for achieving the purposes of the law. States were also required to certify that they would operate a statewide independent living program that complied with the specific aspects of the law, such as providing training to foster parents, adoptive parents, workers in group homes, and case managers on issues confronting adolescents preparing for independent living. Further, to receive annual funds, ACF required states to submit annual reports that described the services provided and activities conducted under their Chafee Programs, including information on any program modifications and their current status of implementation; provide a record of how funds were expended; and include a description of the extent to which the funds assisted youth age 18 to 21 in making the transition to self-sufficiency. FCIA also required that HHS develop and implement a plan to collect information needed to effectively monitor and measure a state's performance, including the characteristics of youth served by independent living programs, the services delivered, and the outcomes achieved. Further, FCIA required HHS to conduct evaluations of independent living programs deemed to be innovative or of potential national significance using rigorous scientific standards to the maximum extent practicable, such as random assignment to treatment and control groups. While overall federal funding for state independent living programs doubled with the passage of FCIA, there were significant variations in the changes to state allocations, and the maximum amount of funds available at the time of our 2004 report for each eligible foster care youth ranged between $476 and $2,300. Under the previous independent living program, states received funds ranging from $13,000 in Alaska to more than $12 million in California. In the first year of funding under FCIA, Alaska and 8 other states received the guaranteed minimum of $500,000, while California received more than $27 million (see table 1). Some states were unable to spend all of their federal allocations in the first 2 years of increased funding under the program. For example, in 2001, 20 states returned nearly $10 million in federal funding to HHS, and in 2002, 13 states returned more than $4 million. ACF regional officials reported that one reason for these unspent funds was that some states did not initially have the infrastructure in place to quickly absorb the influx of funds. Data provided in a July 2007 Congressional Research Service memo to Congress showed that 9 states returned less than 1 percent of total Chafee funding in 2004 (see app. I). At the time of our 2004 report, we could not determine the exact amount of funding states had available to spend on each youth eligible for independent living services because of the lack of data on eligible youth emancipated from foster care. However, available data at that time on youth in foster care suggest that states may have different amounts of funds available for services to youth in foster care. We compared each state's 2004 FCIA allocation with its 2002 population of eligible youth in foster care. This comparison showed that maximum funding for independent living services ranged from $476 per foster care youth in West Virginia to almost $2,300 per foster care youth in Montana. These differences were due in part to the new provision that allowed states to define the age ranges within which youth were eligible for independent living services. For example, 4 states reported in our survey offering independent living services to youth at age 12, while 27 states reported offering services at age 14. In addition, the funding formula is based on the total number of all children in foster care. However, some states have a larger share of youth eligible for independent living services than other states, even when their eligibility age range is the same. For example, of the 15 states reporting in our survey that youth are eligible for services between the ages of 14 and 21, 3 states had 25 percent or less of their foster care population within this age range, while in 3 other states, this age range accounted for over 40 percent of the total foster care population. In our 2004 survey, 40 states reported expanding services to youth younger than they had previously served, and 36 states reported serving older youth, but states reported service gaps in critical areas, such as mental health and housing. The number of states that reported providing core independent living services, such as independent living skills assessments, daily living skills training, and counseling to youth younger than 16 more than doubled after FCIA. Similarly, more states reported offering these supports and services to youth who were emancipated from foster care. Many states also began to offer the new services to support youth that emancipated from foster care. These services include the Education and Training Vouchers, Medicaid health insurance, and assistance with room and board. ETV: All states, the District of Columbia, and Puerto Rico began receiving funds under the ETV program to assist youth seeking postsecondary education, but 26 states did not spend all of the funding received (see app. II). A report from the National Resource Center for Youth Development showed that states provide a range of benefits to youth eligible for ETVs. Over 90 percent of 38 state independent living coordinators responding to a survey reported offering financial support to youth for room and board, school supplies, equipment and uniforms, school-related fees, and transportation costs. Eighty-four percent of states made payments for child care for the dependents of youth, and 60 percent of state reported making payments for college or university health plans on behalf of youth. States were challenged to spend all of their funding allotment. Mississippi returned almost all of its 2004 ETV funds, and 14 other states returned over 20 percent of their funding allotment. Medicaid: Recent information from the American Public Human Services Association shows that all states are now using or planning to use the Chafee option or other means to extend Medicaid coverage to youth. In our 2004 survey, 31 of 50 state independent living coordinators had reported offering Medicaid benefits to at least some emancipated youth to help them maintain access to health care benefits while they transitioned to independence. In 2007, the American Public Human Services Association reported that 22 states planned or have already started using the Chafee option to offer Medicaid coverage to youth who age out of foster care. The study also found that the remaining 28 states and the District of Columbia were reported to be using other methods, such as the State Children's Health Insurance Program or the Medicaid waiver demonstration program, to extend coverage to youth. Housing assistance: In our 2004 survey, 46 states reported that they offered assistance with room and board to youth who had been emancipated from foster care, and the 4 states we visited reported offering a range of housing supports to assist youth. At the time of our visit, Connecticut provided several housing options to meet the needs of youth at varying levels of independence, including group homes, supervised apartment sites, and unsupervised apartment sites with periodic visits from case managers. While 3 other states we visited offered a more limited supply of housing options, all provided some type of housing subsidy or placement. Existing services: Chafee Program funds were also used to improve the quality of existing independent living services and refocus the attention of their programs, according to state officials we visited. For example, local officials in Florida said that prior to FCIA, training in daily living skills was provided haphazardly, and in many cases unqualified staff taught classes even though such training was considered a core component of their independent living program. At the time of our visit, Florida officials said that the state redesigned staff training, improved instructor quality, and was better prepared to provide youth with the skills necessary to live independently outside of the foster care system. States differed in the proportion of eligible youth served under their respective independent living programs. In our 2004 survey, 40 states reported serving about 56,000 youth--or approximately 44 percent of youth in foster care who were eligible for independent living services in these states. About one-third of reporting states were serving less than half of their eligible foster care youth population, while an equal percentage of states were serving three-fourths or more. While states expanded eligibility to younger youth, most services continued to be directed at youth age 16 and older in most of the states we visited. Certain gaps in the availability of critical services were reported, which may have contributed to the challenge of serving higher numbers of eligible youth. States also reported that these challenges were more prominent in rural areas. Service gaps included the following: Mental health services: Youth in foster care often require mental health services continuing beyond emancipation. However, states continue to be challenged in providing youth with a smooth transition between the youth and adult mental health systems. Of the 4 states we visited in 2004, 3 cited difficulties due to more stringent eligibility requirements in the adult system, different levels of services, and long waiting lists for services. Challenges with mental health services remained in 2006, when 32 state child welfare directors responding to our survey reported dissatisfaction with the level of mental health services. Mentoring services: Research studies indicate that the presence of positive adult role models is critical for youth in foster care because family separations and placement disruptions have been found to hinder the development of enduring bonds. Although the majority of states reported in our 2004 survey that they offered mentoring programs to youth, officials in the states we visited cited challenges in providing all youth with access to mentoring programs to establish and maintain such relationships. For example, in Connecticut, one program director reported challenges recruiting adults to serve as mentors, especially men willing to make a 1-year commitment to an adolescent boy. In addition, some state and local officials and service providers seemed unclear on what should be included in a high-quality mentoring program and how to identify qualified service providers. Securing safe and suitable housing: Providing appropriate housing also remains a critical service gap. Youth we spoke with across the 4 states we visited in 2004 said that locating safe and stable housing after leaving foster care was one of their primary concerns in their transition to independence, and state officials reported challenges meeting youths' housing needs. Youth reported difficulties renting housing because of a lack of an employment history, a credit history, or a cosigner. State and local officials in the states we visited said the availability of housing resources for foster youth during their initial transition from foster care depended on where they lived, and in some cases the benefits provided did not completely meet the needs of youth, or were available only to certain youth. For example, at the time of our visit, local officials in Washington reported that housing subsidies may not completely offset expenses for youth in expensive urban areas, like Seattle, and that rental housing in some rural areas was scarce. This service gap was identified by states again in our 2006 survey, as 31 state child welfare directors reported dissatisfaction with the level of housing for foster youth transitioning to independence. Youth and foster family engagement: State and local officials, as well as service providers in the 4 states we visited said that it was difficult to get some youth to participate in the independent living programs and that foster parents were sometimes reluctant partners. While youth were generally offered incentives, such as cash stipends, to participate in daily living skills training or other activities, officials emphasized that participation is voluntary and it is critical for foster parents to support and encourage youth participation in the program. After FCIA, 49 states reported increased coordination with a number of federal, state, and local programs that can provide or supplement independent living services, but officials from the 4 states we visited reported several barriers in developing the linkages necessary to access services under these programs across local areas. States we surveyed reported working with a range of service provides, such as Job Corps, workforce boards, and local housing agencies. States we visited used different strategies to develop linkages among state youth programs. Three of the states we visited reported establishing state- level work groups that included representatives from the independent living program and other state agencies to bring agency officials together to discuss the needs of youth in foster care and possible strategies for improving service delivery. For example, Florida's legislature mandated a state-level work group to facilitate information sharing at the state level among various agencies, such as the State Departments of Children and Families and Education, the Agency for Workforce Innovation, and the Agency for Health Care Administration. Additional strategies states developed to establish linkages with other federal, state, or local programs included establishing liaisons between agencies or programs or through less formal collaborative arrangements. Officials also reported developing linkages with other private resources in their communities, such as business owners, to provide services to youth in the independent living program. Despite states' efforts, we continued to find in our 2006 survey that states were least likely to address challenges in providing services such as mental health that are typically provided outside of the child welfare system by other agencies. Officials in the 4 states we visited in 2004 reported several barriers that hinder their ability to establish linkages with other agencies and programs, including the lack of information on the array of programs available in each state or local area and differences in program priorities. Officials from 3 states said that they relied on local officials to identify potential partners and initiate and maintain coordination efforts, and while individuals in some local areas may have developed successful collaborations with service providers in their area, these relationships have not always been expanded statewide. To some extent, this has been due to the fact that state and local child welfare officials differ in their awareness of resources available from other agencies. Some gaps in awareness may be partly due to turnover rates for caseworkers reported by the states we visited. Caseworkers' lack of knowledge about available programs may have contributed to foster parents and youth reporting that they were unaware of the array of services available from other federal, state, or local programs. In addition, officials cited barriers to establishing linkages with other federal and state programs because of different program priorities. Differences in performance goals among programs can affect the ability of independent living staff to obtain services for foster youth from other agencies. In North Carolina, state officials we visited in 2006 said that about 70 percent of children and families in the child welfare system received services from multiple public agencies, and the Catalog of Domestic Assistance (CFDA)--a repository of information on all federal assistance programs-- lists over 300 federal programs that provide youth and family services. In October 2003, the White House Task Force for Disadvantaged Youth recommended that the CFDA be modified to provide a search feature that can be used to identify locations where federally funded programs were operating. All states developed multiyear plans as required under FCIA and submitted annual progress reports to ACF for their independent living programs, but the absence of standard comprehensive information within and across state plans and reports precludes using them at the state and federal levels to monitor how well the programs are working to serve foster care youth. HHS has not yet implemented its plan to collect information to measure states' program performance, and while some states reported collecting some data, states have experienced difficulties in contacting youth to determine their outcomes. HHS has begun to evaluate selected independent living programs. State plans and annual reports: All states developed state plans as required by FCIA that described independent living services they planned to provide to foster care youth and submitted annual reports to ACF, but for several reasons, these plans and reports cannot be used to assess states' independent living programs. While ACF officials stated that the plans and annual reports served as the primary method the agency used to monitor states' use of the Chafee Program funds, ACF did not require states to use a uniform reporting format, set specific baselines for measuring progress, or report on youths' outcomes. As a result, each state developed plans and reports that varied in their scope and level of detail, making it difficult to determine whether states had made progress in preparing foster youth to live self- sufficiently. On the basis of our review of plans from all 50 states and the District of Columbia covering federal fiscal years 2001 through 2004, and annual reports for 45 states from federal fiscal years 2001 and 2002, we found the following: Few states both organized the information in their plans to address the purposes of FCIA and presented specific strategies they would use to meet these purposes. The plans vary in their usefulness in establishing outcomes the states intended to achieve for youth. Annual reports for all 45 states contained information that did not directly relate to information in their state plan, making it unclear whether the differences were due to service changes or missing information. Of the 90 annual progress reports we reviewed, 52 reports did not include clear data that could be used to determine progress toward meeting the goals of the states' independent living programs. ACF officials said that they recognize the limitations of these documents as tools to monitor states' use of independent living program funds, but explained that they rely on states' to self-certify that their independent living programs adhere to FCIA requirements. Staff in ACF's 10 regional offices conduct direct oversight of the program by reviewing the plans and reports, interpreting guidance, and communicating with the states. However, officials in three offices reported during our 2004 review that their review of the documents was cursory and that the plans and annual reports do not serve as effective monitoring tools. In addition, ACF officials reported that the Child and Family Services Review (CFSR) used to evaluate the states' overall child welfare systems could serve as a tool to monitor independent living programs, but the CFSR is limited in the type and amount of data collected on youth receiving independent living services. National Youth in Transition Database: ACF has not completed efforts to develop a plan to collect data on youths' characteristics, services, and outcomes in response to the FCIA requirement, and some states that are attempting to collect information on youths' outcomes are experiencing difficulties. In 2000, ACF started to develop the National Youth in Transition Database (NYTD) to collect information needed to effectively monitor and measure states' performance in operating independent living programs. The agency issued proposed rules on July 14, 2006, but as of July 2007, final rules governing the system have not been issued. The proposed rules include an approach to collect information on all youth who received independent living services, youth who are in foster care at age 17, and follow-up information on youth at ages 19 and 21. For any youth who receives independent living services from either the child welfare agency or another source supported by federal Chafee funds, the state must report a series of data elements, including the type of independent living services received, such as housing education or health education and risk prevention. These data are to be collected on an ongoing basis for as long as the youth receives services. In order to develop a system to identify youth outcomes, HHS proposes establishing information on a baseline population of youth at age 17. All youth who turn 17 years old while in foster care would be surveyed on a series of outcomes, such as their current employment status. States would be required to conduct follow-up surveys with the youth at ages 19 and 21. HHS would allow the states to pull a sample from this baseline population with which to conduct these follow-up surveys. For example, California had over 7,500 youth in care in 2004 who were 17 years old. On the basis of the proposed sampling methodology, the state would be allowed to survey a minimum of 341 19-year-olds in the follow-up effort. According to results from our survey, in federal fiscal year 2003, 30 states attempted to contact youth who had been emancipated from foster care for initial information to determine their status, including education and employment outcomes. Of those states, most reported that they were unsuccessful in contacting more than half of the youth. Further, 21 states reported attempting to follow up with emancipated youth after a longer period of time had elapsed but had trouble reaching all the youth. Similarly, officials in the states we visited reported that collecting outcome data is especially challenging since there is little they can do to find youth unless the youth themselves initiate the contact. Further, some officials were concerned about the value of the outcome data since they believe that youth who are doing well are more likely to participate in the follow-up interviews, thus skewing the results. When HHS issued the proposed rule, it provided strategies states could use to conduct the follow-up component of the NYTD requirements. For example, the document recommends letting the youth know up-front that the agency will be contacting them in the future; suggests keeping a "case file" that tracks any activity, such as reasons why a letter was returned; and suggests that the agency establish a toll-free phone line. Mutltistate evaluations: At the time of our 2004 review, ACF expected to complete the evaluations of four approaches to delivering independent living services by December 2007. However, it is unclear if that deadline will be achieved at this point. As required by FCIA, these evaluations are expected to use rigorous scientific standards, such as an experimental research design that randomly assigns youth in independent living programs to different groups: one that is administered the experimental treatment and one that is not. HHS initiated this effort in 2001 with a nationwide review of potentially promising approaches to delivering independent living services. HHS contracted with a research institute to conduct a nationwide search to identify independent living programs that meet the criteria of the evaluation and to conduct 5-year evaluations of the selected programs. On the basis of the search and the established criteria, HHS selected four programs for the evaluation (see table 2). In the report issued in 2004, we made recommendations to HHS (1) to make information available to states and local areas about other federal programs that may assist youth in their transition to self-sufficiency and provide guidance on how to access services under these programs and (2) to develop a standard reporting format for state plans and progress reports and implement a uniform process regional offices can use to assess states' progress in meeting the needs of youth in foster care and those recently emancipated from care. These recommendations have not been implemented. Preparing youth to successfully transition to independence is a daunting task that requires coordinated and continuous services across many social service systems including child welfare, health, education, and housing. The Chafee Program has provided a single funding stream that can be used to meet service needs across these social systems. However, this funding alone is not sufficient to overcome state challenges in meeting the varied service needs of emancipating youth. The child welfare system must work with housing agencies to remove barriers faced by youth with no employment history or cosigner, and with health agencies, to ensure a smooth transition between the youth and adult mental health systems. In addition, states continue to have difficulty building adequate service capacity for housing and mental health in all locales, and child welfare staff still struggle to identify the myriad of public and private sector programs that exist to assist youth. Our November 2004 report and our May 2007 testimony present recommendations we made to HHS to make information available to states and local areas about other federal programs that may assist youth in their transition to self-sufficiency. HHS did not comment on our 2004 recommendation, but disagreed with our recent recommendation to improve awareness of and access to various social services funded by the federal government. HHS stated that the recommendation was insufficient to address the need for additional services, and incorrectly implied that local child welfare agencies were not already aware of and using such resources. We acknowledged that increasing awareness of existing federal resources is not the only action needed, but in the course of our work across the years, continue to find that caseworkers are sometimes unaware of the full array of federal resources, such as health and housing, available in their locale, or had not coordinated with other agencies to use them. We continue to support the view that federal action, such as modifying the CFDA, would allow caseworkers and others to more easily identify services and service providers funded by federal agencies in closest proximity to the youth and families they serve. How well the Chafee Program has worked to improve outcomes for emancipated youth among states is still unknown 8 years after the passage of FCIA, and HHS has not yet implemented its information system that is intended to meet FCIA requirements for collecting and monitoring a state's performance. Given the significant variation in the number of youth served and services provided across states, an interim system for measuring state progress would seem to be warranted. However, while HHS has an oversight process to measure outcomes of state child welfare systems as a whole, this process no longer includes measures required by FCIA. Similarly, while ACF's regional offices conduct much of the federal oversight for the Chafee Program, the oversight tools currently in place do not provide standard information needed to measure and compare performance across states. Our 2004 report included a recommendation to develop a standard reporting format for state plans and progress reports and implement a uniform process regional offices can use to assess states' progress in meeting the needs of youth in foster care and those recently emancipated from care. These recommendations have not been implemented. HHS continues to disagree with our recommendation to develop a standard reporting format for state plans and progress reports, stating that such action would be overly prescriptive and impose an unnecessary burden on states. However, as reflected in our 2004 report, we continue to believe that strengthening the state reporting process is needed to provide some assurance of program accountability at the state and federal levels. HHS had agreed with our recommendation to establish a uniform process regional offices can use to assess states' progress and said that in 2005, ACF would develop and provide a review protocol to be used in regional office desk reviews of states' annual progress reports. However, ACF officials reported that they have not yet implemented such a review protocol. Mr. Chairman, this concludes my statement. I will be pleased to respond to any questions you or other members of the subcommittee may have. For further information, please contact Cornelia Ashby or Kay Brown at (202) 512-7215. Individuals making key contributions to this testimony include Lacinda Ayers and Sara L. Schibanoff. Percentage of allotment returned to the U.S. 6.5 Percentage of allotment returned to the U.S. Dollar amount returned to the U.S. Treasury 0 (0.01) $137,900,000 a. 0% (.001%) The total mandatory funds for this program are $140 million. However, the statute provides that a certain percentage of those funds be set aside for HHS to conduct (or fund) research, evaluation, and technical assistance. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Congress passed the Foster Care Independence Act of 1999 (FCIA), which doubled annual federal funds for independent living programs to $140 million. This testimony discusses (1) states' FCIA funding allocations, (2) services provided and remaining challenges, (3) state coordination of programs to deliver services, and (4) the states and the Department of Health and Human Services' (HHS) Administration for Children and Families' (ACF) progress toward meeting program accountability requirements. This testimony is primarily based on our 2004 report on FCIA (05-25), with updated information from our 2007 testimony on state child welfare challenges (07-850T). To conduct the 2004 work, we surveyed state independent living coordinators, conducted 4 state site visits, and reviewed states' plans and annual reports. Updated information from our 2007 testimony was taken primarily from a 2006 survey of state child welfare directors. States' funding allocations for independent living programs effectively ranged from a maximum of approximately $500 to $2,300 for each foster care youth who was eligible for independent living services, according to data available at the time of our 2004 report. Funding varied because of differences in states' eligibility requirements and the funding formula used to allocate funds. Although our 2004 survey of state independent living coordinators showed that 40 states reported expanding existing independent living services to younger youth and 36 states reported serving youth older than they had previously served, states varied in their ability to engage youth and to provide key services. About one-third of reporting states were serving less than half of their eligible foster care youth population, while an equal percentage of states were serving three-fourths or more. Our 2006 survey of state child welfare directors showed that critical gaps remain in providing services such as mental health and housing for youth transitioning to independence. Mental health barriers included differences in eligibility requirements and level of services between the youth and adult systems, and long waiting lists. Housing barriers included limited affordable housing in costly urban areas, scarce rental housing in rural areas, and problems obtaining a rental lease due to the lack of youth employment and credit history or a co-signer to guarantee payment. Almost all states that we surveyed in 2004 reported an increase in coordination with some federal, state, and local programs, but linkages with other federal and state youth-serving programs were not always in place to increase services available across local areas. Many programs exist at the federal, state, or local level that can be used to provide or supplement independent living services, and each state reported in our survey using some of these programs to provide services. Despite these coordination efforts, some states may not make full use of the available resources. Inconsistent availability of information on the array of programs that were operating in each state and local area was cited as a challenge in promoting coordination in both our prior and more current work. States and HHS have taken action to fulfill the accountability provisions of FCIA, but 8 years later, little information is available to assess program outcomes. All states developed multiyear plans for their programs and submitted annual reports, but using these documents to assess state performance was hindered by inconsistencies between the plans and reports, an absence of goals and baseline information to measure progress, and incomplete information on outcomes for the youth serviced. ACF started developing an information system in 2000 to monitor state performance, but final regulations directing states to begin collecting data and tracking outcomes are still pending. ACF is also conducting evaluations of selected independent living programs, but results are not yet available.
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