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FTA generally funds New Starts projects through FFGAs, which are required by statute to establish the terms and conditions for federal participation in a New Starts project. FFGAs also define a project's scope, including the length of the system and the number of stations; its schedule, including the date when the system is expected to open for service; and its cost. For projects to obtain FFGAs, New Starts projects must emerge from a regional, multimodal transportation planning process. The first two phases of the New Starts process--systems planning and alternatives analysis--address this requirement. The systems planning phase identifies the transportation needs of a region, while the alternatives analysis phase provides information on the benefits, costs, and impacts of different options, such as rail lines or bus routes, in a specific corridor versus a region. The alternatives analysis phase results in the selection of a locally preferred alternative, which is the New Starts project that FTA evaluates for funding. After a locally preferred alternative is selected, the project sponsor submits an application to FTA for the project to enter the preliminary engineering phase. When this phase is completed and federal environmental requirements under the National Environmental Policy Act are satisfied, FTA may approve the project's advancement into final design, after which FTA may recommend the project for an FFGA and advance the project into construction. FTA oversees grantees' management of projects from the preliminary engineering phase through the construction phase. To help inform administration and congressional decision makers about which projects should receive federal funds, FTA currently distinguishes among proposed projects by evaluating and assigning ratings to various statutory evaluation criteria--including both local financial commitment and project justification criteria--and then assigning an overall project rating. (See fig. 1.) These evaluation criteria reflect a range of benefits and effects of the proposed project, such as cost-effectiveness, as well as the ability of the project sponsor to fund the project and finance the continued operation of its transit system. FTA has developed specific measures for each of the criteria outlined in the statute. On the basis of these measures, FTA assigns the proposed project a rating for each criterion and then assigns a summary rating for local financial commitment and project justification. These two ratings are averaged together to create an overall rating, which is used in conjunction with a determination of the project's "readiness" for construction to determine what projects are recommended for funding. Projects are rated at several points during the New Starts process--as part of the evaluation for entry into the preliminary engineering and the final design phases, and yearly for inclusion in the New Starts Annual Report. As required by statute, the administration uses the FTA evaluation and rating process, along with the development phases of New Starts projects, to decide which projects to recommend to Congress for funding. Numerous changes have been made to the New Starts program over the last decade. These changes include statutory, regulatory, and administrative changes to the program. For example, we reported in 2005 that FTA had implemented 16 changes to the New Starts application, evaluation, rating, and project development oversight process since the fiscal year 2001 evaluation cycle. Additional changes have been made to the program since 2005. Examples of these changes made to the program over the last 10 years, in chronological order, include the following. New data collection requirements: Starting with the fiscal year 2004 evaluation cycle, FTA required project sponsors seeking an FFGA to submit a plan for the collection and analysis of information to determine the impacts of the project and the accuracy of the forecasts that were prepared during project planning and development. SAFETEA-LU subsequently codified this "before and after" study requirement. Evaluation measures revised: FTA revised its cost-effectiveness and mobility improvements criteria by adopting the Transportation System User Benefits (TSUB) measure that includes benefits for both new and existing transit system riders. Although project sponsors generally view the new cost-effectiveness measure of cost per hour of TSUB as an improvement over the previous measure of cost per new rider, we have reported that some project sponsors have had difficulties correctly calculating the TSUB value for their projects, resulting in delays and additional costs as they conduct multiple iterations of the TSUB measure. New analysis requirement added: Starting with the fiscal year 2005 evaluation cycle, FTA required project sponsors to complete risk assessments. Since implementation, the form and timing of the risk assessments have evolved since 2003, but the intent of the assessments remains to identify the issues that could affect the project's schedule or cost. Policy on funding recommendations changed: In 2005, the administration informed the transit community that it would target its funding recommendations to projects that achieve a cost-effectiveness rating of medium or higher. Previously, the administration had recommended projects for funding that had lower cost-effectiveness ratings, if they met all other criteria. New programs established: SAFETEA-LU established the Small Starts program, a new capital investment grant program, simplifying the requirements imposed for those seeking funding for lower-cost projects. This program is intended to advance smaller-scale projects through an expedited and streamlined evaluation and rating process. FTA subsequently introduced a separate eligibility category within the Small Starts program for Very Small Starts projects. Very Small Starts projects qualify for an even simpler evaluation and rating process. New evaluation criteria introduced: Given past concerns that the evaluation process did not account for a project's impact on economic development, SAFETEA-LU added economic development to the list of project justification criteria that FTA must use to evaluate and rate New Starts projects. Although the impetus for each change varied, FTA officials stated that, in general, all of the changes the agency has initiated were intended to make the process more rigorous, systematic, and transparent. This increased rigor, in turn, helps FTA and project sponsors deliver more New Starts projects within budget and on time, according to FTA. However, frequent changes to the New Starts program create challenges for project sponsors. For example, we have previously reported that some project sponsors told us that FTA did not create clear expectations or provide sufficient guidance about certain changes. In addition, we reported that project sponsors said some changes made the application process more expensive and required them to spend significantly more time to complete the application. We have heard similar concerns from project sponsors during our ongoing review. Specifically, some project sponsors we interviewed told us that they have had to redo completed analyses because FTA applies regulatory and administrative changes to projects in the pipeline. In general, according to project sponsors and other stakeholders we have spoken to, this rework adds time and costs to completing the New Starts project development process. FTA currently assigns a 50 percent weight to both the cost-effectiveness and the land use criteria when developing the project justification summary rating. The other project justification criteria are not weighted, although the mobility improvements criterion is used as a "tiebreaker." FTA officials have told us that they do not currently use the environmental benefits and operating efficiencies criteria in determining the project justification summary rating because the measures do not, as currently structured, provide meaningful distinctions among competing New Starts projects. FTA does not use the economic development criterion because of difficultly developing a measure that is separate and distinct from the land use criterion. We have found in the past that many project sponsors had similar views, noting that individual projects are too small to have much impact, in terms of, for example, air quality, on the whole region or the whole transit system. In contrast, FTA officials have told us that the cost-effectiveness and land use measures help to make meaningful distinctions among projects. For example, according to FTA, existing transit supportive land use plans and policies demonstrate an area's commitment to transit and are a strong indicator of a project's future success. Furthermore, according to many FTA officials, experts, and the literature we have consulted, FTA's cost-effectiveness measure accounts for most secondary project benefits, including economic development, because these benefits are typically derived from mobility improvements that reduce users' travel times. Therefore, developing new measures for these other criteria may result in the double-counting of certain project benefits. However, in 2008, we reported that FTA's evaluation measures could be underestimating total project benefits. FTA's measure of cost- effectiveness, for instance, considers how the mobility improvements from a proposed project will reduce users' travel times. Although this measure can capture most secondary project benefits, it does not account for benefits for non-transit users (e.g., highway travel time savings) or capture any economic development benefits that are not directly correlated to mobility improvements. The omission of these benefits means proposed projects that convey significant travel time savings for motorists, for example, are not recognized in the selection process. Beyond the cost- effectiveness measure, we reported that project sponsors and experts expressed frustration that FTA does not include certain criteria in the calculation of project ratings, such as economic development and environmental benefits. They noted that this practice limits the information captured on projects, particularly since these are important benefits of transit projects at the local level. As a result, FTA may be underestimating projects' total benefits, particularly in areas looking to use these projects as a way to relieve congestion or promote more high- density development. In these cases, however, the extent to which FTA's current approach to estimating benefits affects how projects are ranked in FTA's evaluation and ratings process is unclear. FTA officials have acknowledged these limitations, but noted that improvements in local travel models are needed to resolve some of these issues. In particular, many local models used to estimate future travel demand for New Starts are incapable of reliably estimating highway travel time savings as a result of the proposed project, according to FTA officials. There is great variation in the models local transportation planning agencies use to develop travel forecasts (which underlie many of the New Starts measures), producing significant variation in forecast quality and limiting the ability to assess quality against the general state of practice. In 2008, we made a series of recommendations designed to address the limitations of FTA's current evaluation process, including recommending that (1) the Secretary of Transportation seek additional resources to improve local travel models in the next authorizing legislation to improve the New Starts evaluation process and the measures of project benefits; (2) FTA establish a timeline for issuing, awarding, and implementing the result of its request for proposals on short- and long-term approaches to measuring highway user benefits from transit improvements; (3) the Administrators of FTA and Federal Highway Administration collaborate in efforts to improve the consistency and reliability of local travel models; and (4) the Administrator of FTA establish a timeline for initiating and completing its longer-term effort to develop more robust measures of transit projects' environmental benefits. FTA is working to address these recommendations. For instance, FTA conducted a colloquium on environmental benefits of transit projects in October 2008, which resulted in a discussion paper on the evaluation of economic development. Further, in a Federal Register Notice published on January 26, 2009, FTA issued and sought comments on a discussion paper on new ways of evaluating economic development effects. FTA is now reviewing comments on that paper. In May 2009, FTA also took steps to address concerns about the exclusion of some project justification criteria from the evaluation process. In a Notice of Availability for New Starts and Small Starts Policies and Procedures and Requests for Comments in the Federal Register, FTA proposed changing the weights assigned for the project justification criteria for New Starts projects. Specifically, FTA proposes to set the weights at 20 percent each for the mobility, cost-effectiveness, land use, and economic development criteria, and 10 percent each for operating efficiencies and environmental benefits. According to FTA, these changes reflect statutory direction that project justification criteria should be given "comparable, but not necessarily equal, numerical weight" in calculating the overall project rating. FTA is currently soliciting public comments on these proposed changes. We reported in 2008 that experts and some project sponsors we spoke with generally support FTA's quantitatively rigorous process for evaluating proposed transit projects but are concerned that the process has become too burdensome and complex, and as noted earlier, may underestimate certain project benefits. For example, several experts and transportation consultants told us that although it is appropriate to measure the extent to which transit projects create primary and secondary benefits, such as mobility improvements and economic development, it is difficult to quantify all of these projected benefits. Additionally, several project sponsors noted that the complexity of the evaluation process can necessitate hiring consultants to handle the data requests and navigate the application process--which could increase the project's costs. Our previous reviews of the New Starts program have noted similar concerns from project sponsors. For example, in 2007, we reported that a majority of project sponsors told us that the complexity of the requirements--such as the analysis and modeling required for travel forecasts--creates disincentives for entering the New Starts pipeline. Sponsors also said that the expense involved in fulfilling the application requirements, including the costs of hiring additional staff and consultants, discourages agencies with less resources from applying for this funding. In response to such concerns, FTA has tried to simplify the evaluation process in several ways. For example, as previously mentioned, FTA established the Very Small Starts eligibility category within the Small Starts program for projects less than $50 million in total cost. This program further simplifies the application requirements in place for the Small Starts program, which funds lower-cost projects, such as bus rapid transit and streetcar projects. Additionally, in its New Starts program, FTA no longer rates projects on the operating efficiencies criterion because, according to FTA, operating efficiencies are already sufficiently captured in FTA's cost-effectiveness measures, and the measure did not adequately distinguish among projects. Thus, projects no longer have to submit information on operating efficiencies. Likewise, FTA no longer requires project sponsors to submit information on environmental benefits because it found that the information gathered did not adequately distinguish among projects and that EPA's ambient air quality rating was sufficient. FTA also commissioned a study by Deloitte in June 2006 to review the project development process and identify opportunities for streamlining or simplifying the process. This study identified a number of ways that FTA's project development process could be streamlined, including revising the policy review and issuance cycle to minimize major policy and guidance changes to every 2 years and conducting a human capital assessment to identify skill gaps and opportunities for reallocating resources in order to enhance FTA's ability to review and assist New Starts projects in a timely and efficient manner. According to FTA, the agency has implemented 75 percent of Deloitte's recommendations; some of the other recommendations are on hold pending the upcoming reauthorization of the surface transportation program, including the New Starts program. As part of our ongoing work, we are reviewing existing research, including past GAO reports, analyzing data on the length of time it takes for projects to complete the New Starts process, and interviewing project sponsors, industry stakeholders and consultants, and transportation experts to identify options to expedite project development in the New Starts program. Using these sources, we have preliminarily identified the following options. While each option could help expedite project development, each option has advantages and disadvantages to consider and some options could require legislative changes. In addition, each option would likely require certain trade-offs, namely reducing the level of rigor in the evaluation process in exchange for a more streamlined process. The discussion that follows is not intended to endorse any potential option, but instead to describe some potential options for expediting project development. We will continue to work with FTA and other stakeholders to identify other options as well as examine the merits and challenges of all identified options for inclusion in our report later this summer. Tailor the New Starts evaluation process to risks posed by the projects: Project sponsors, consultants, and experts we interviewed suggested that FTA adopt a more risk-based evaluation process for New Starts projects based on the project's costs or complexity, the federal share of the project's costs, or the project sponsor's New Starts experience. For example, FTA could align the level of oversight with the proposed federal share of the project--that is, the greater the financial exposure for the federal government, the greater the level of oversight. Similarly, FTA could reduce or eliminate certain reviews for project sponsors who have successfully developed New Starts projects in the past, while applying greater oversight to project sponsors who have no experience with the New Starts process. We have noted the value in using risk-based approaches to oversight. For example, we have previously reported that assessing risks can help agencies allocate finite resources and help policy makers make informed decisions. By adopting a more risk-based approach, FTA could allow select projects to move more quickly through the New Starts process and more efficiently use its scarce resources. However, the trade-off of not applying all evaluation measures to every project is that FTA could miss the opportunity to detect problems early in the project's development. Consider greater use of letters of intent and early systems work agreements: The linear, phased evaluation process of the New Starts program hampers project sponsors' ability to utilize alternative project delivery methods, such as design-build, according to project sponsors. These alternative project delivery methods have the potential to develop a project cheaper and quicker than traditional project delivery methods can. However, project sponsors told us it is difficult to attract private sector interest early enough in the process to use alternative project delivery methods because there is no guarantee that the project will ultimately receive federal funding through the New Starts program. The Deloitte study also noted that New Starts project sponsors miss the opportunity to use alternative project delivery methods because of the lack of early commitment of federal funding for the projects. To encourage the private sector involvement needed, project sponsors, consultants, and experts we interviewed suggested that FTA use letters of intent or early systems work agreements. Through a letter of intent, FTA announces its intention to obligate an amount from future available budget authority to a project. A challenge of using letters of intent is that they can be misinterpreted as an obligation of federal funds, when in fact they only signal FTA's intention to obligate future funds should the project meet all New Starts criteria and requirements. In contrast, an early systems work agreement obligates an amount of available budget authority to a project. The challenge of using an early systems work agreement is that FTA can only use these agreements with projects that will be granted an FFGA, thus limiting FTA's ability to use these agreements for projects in the pipeline. Consistently use road maps or similar project schedules: Project sponsors said that FTA should more consistently use road maps or similar tools to define the project sponsor's and FTA's expectations and responsibilities for moving the project forward. Without establishing these expectations, project sponsors have little information about how long it will take FTA to review its request to move from alternatives analysis to preliminary engineering, for example. This lack of information makes it difficult for the project sponsor to effectively manage the project. Given the benefits of clearly setting expectations, Deloitte recommended that FTA use road maps for all projects. FTA has used road maps for select projects, but the agency does not consistently use them for all projects. A limitation of using road maps is that expected time frames are subject to change--that is, project schedules often change as a project evolves throughout the development process. Furthermore, every project is unique, making it difficult to set a realistic time frame for each phase of development. Consequently, the road maps can provide only rough estimates of expected time frames. Combine two or more project development phases: Project sponsors and consultants told us that waiting for FTA's approval to enter preliminary engineering, final design, and construction can cause delays. While FTA determines whether a project can advance to the next project development phase, work on the project essentially stops. Project sponsors can advance the project at their own risk, meaning they could have to redo the work if FTA does not subsequently approve an aspect of the project. The amount of time it takes for FTA to determine whether a project can advance can be significant. For example, one project sponsor told us that FTA's review of its application to advance from alternatives analysis to preliminary engineering took 8 months; about the same amount of time it took the project sponsor to complete alternatives analysis. FTA officials told us the length of time for reviews depends on a number of factors, most importantly the completeness and accuracy of the project sponsor's submissions. To reduce the "start/stop" phenomena project sponsors described, FTA could seek a legislative change to combine two or more of the statutorily required project development phases--for example, combining the preliminary engineering and final design phases. The Deloitte study also recommended that FTA redefine or more clearly define the project phases to more accurately reflect FTA's current requirements and to better accommodate alternative delivery methods. Apply changes only to future projects: Project sponsors told us that the frequent changes to the New Starts program can result in additional costs and delays as project sponsors are required to redo analyses to reflect the changes. In an attempt to create a process that provides more stability for project sponsors, in May 2006, FTA modified its policy to allow a project that has been approved for entry into final design not be subject to changes in the New Starts policy and guidance. However, this policy change does not apply to projects approved for entry into preliminary engineering, which is the New Starts project development phase that has the most requirements for project sponsors and the phase where project sponsors told us that frequent changes to the project by sponsors and to the New Starts process by FTA result in additional costs and delays. Furthermore, another project sponsor noted that new requirements cause delays because each element of a proposed project is interrelated, so changing one requirement can stop momentum on a project. To avoid this rework, some project sponsors, consultants, and experts we interviewed suggested that FTA apply changes only to future projects, not projects currently in preliminary engineering. However, by not applying changes to projects in preliminary engineering, FTA could miss the opportunity to enhance its oversight of these projects. 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. For further information on this testimony, please contact A. Nicole Clowers, Acting Director, Physical Infrastructure Issues, at (202) 512-2834, or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this testimony were Kyle Browning, Gary Guggolz, Raymond Sendejas, and Carrie Wilks. Public Transportation: Improvements Are Needed to More Fully Assess Predicted Impacts of New Starts Projects. GAO-08-844. Washington, D.C.: July 25, 2008. Public Transportation: Future Demand Is Likely for New Starts and Small Starts Programs, but Improvements Needed to the Small Starts Application Process. GAO-07-917. Washington, D.C.: July 27, 2007. Public Transportation: New Starts Program Is in a Period of Transition. GAO-06-819. Washington, D.C.: August 30, 2006. Public Transportation: Preliminary Information on FTA's Implementation of SAFETEA-LU Changes. GAO-06-910T. Washington, D.C.: June 27, 2006. Opportunities Exist to Improve the Communication and Transparency of Changes Made to the New Starts Program. GAO-05-674. Washington, D.C.: June 28, 2005. Mass Transit: FTA Needs to Better Define and Assess Impact of Certain Policies on New Starts Program. GAO-04-748. Washington, D.C.: June 25, 2004. Mass Transit: FTA Needs to Provide Clear Information and Additional Guidance on the New Starts Ratings Process. GAO-03-701. Washington, D.C.: June 23, 2003. Mass Transit: FTA's New Starts Commitments for Fiscal Year 2003. GAO-02-603. Washington, D.C.: April 30, 2002. Mass Transit: FTA Could Relieve New Starts Program Funding Constraints. GAO-01-987. Washington, D.C.: August 15, 2001. Mass Transit: Implementation of FTA's New Starts Evaluation Process and FY 2001 Funding Proposals. GAO/RCED-00-149. Washington, D.C.: April 28, 2000. Mass Transit: Status of New Starts Transit Projects With Full Funding Grant Agreements. GAO/RCED-99-240. Washington, D.C.: August 19, 1999. Mass Transit: FTA's Progress in Developing and Implementing a New Starts Evaluation Process. GAO/RCED-99-113. Washington, D.C.: April 26, 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 New Starts program is an important source of new capital investment in mass transportation. As required by the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, the Federal Transit Administration (FTA) must prioritize transit projects for funding by evaluating, rating, and recommending projects on the basis of specific financial commitment and project justification criteria, such as cost-effectiveness, economic development effects, land use, and environmental benefits. To be eligible for federal funding, a project must advance through the different project development phases of the New Starts program, including alternatives analysis, preliminary engineering, and final design. Using the statutorily identified criteria, FTA evaluates projects as a condition for advancement into each project development phase of the program. This testimony discusses the (1) key challenges associated with the New Starts program and (2) options that could help expedite project development in the New Starts program. This testimony is based on GAO's extensive body of work on the New Starts program and ongoing work--as directed by Congress. For this work, GAO reviewed FTA documents and interviewed FTA officials, sponsors of New Starts projects, and representatives from industry associations. The FTA reviewed the information in this testimony and provided technical comments. Previous GAO work has identified three key challenges associated with the New Starts program. First, frequent changes to the New Starts program have sometimes led to confusion and delays. Numerous changes have been made to the New Starts Program over the last decade, such as revising and adding new evaluation criteria and requiring project sponsors to collect new data and complete new analyses. Although FTA officials told GAO that changes were generally intended to make the process more rigorous, systematic, and transparent, project sponsors said the frequent changes sometimes caused confusion and rework, resulting in delays in advancing projects. Second, the current New Starts evaluation process measures do not capture all project benefits. For example, FTA's cost-effectiveness measure does not account for highway travel time savings and may not capture all economic development benefits. FTA officials have acknowledged these limitations, but noted that improvements in local travel models are needed to resolve some of these issues. FTA is also conducting research on ways to improve certain evaluation measures. Third, striking the appropriate balance between maintaining a robust evaluation and minimizing a complex process is challenging. Experts and some project sponsors GAO spoke with generally support FTA's quantitatively rigorous process for evaluating proposed transit projects but are concerned that the process has become too burdensome and complex. In response to such concerns, FTA has tried to simplify the evaluation process in several ways, including hiring a consulting firm to identify opportunities to streamline or simplify the process. As part of ongoing work, GAO has preliminarily identified options to help expedite project development within the New Starts program. These options include tailoring the New Starts evaluation process to risks posed by the projects, using letters of intent more frequently, and applying regulatory and administrative changes only to future projects. While each option could help expedite project development in the New Starts process, each option has advantages and disadvantages to consider. For example, by signaling early federal support of projects, letters of intent and early systems work agreements could help project sponsors use potentially less costly and time-consuming alternative project delivery methods, such as design-build. However, such early support poses some risk, as projects may stumble in later project development phases. Furthermore, some options, like combining one or more statutorily required project development phases, would require legislative action.
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Today there is widespread frustration with the budget process. It is attacked as confusing, time-consuming, burdensome, and repetitive. In addition, the results are often disappointing to both participants and observers. Although frustration is nearly universal, there is less agreement on what specific changes would be appropriate. This is not surprising. It is in the budget debate that the government determines in which areas it will be involved and how it will exercise that involvement. Disagreement about the best process to reach such important decisions and how to allocate precious resources is to be expected. We have made several proposals based on a good deal of GAO work on the budget, including the structure of the budget and the budget process.These proposals emphasize the need to improve the recognition of the long-term impact of today's budget decisions and advance steps to strengthen or better ensure accountability. In previous reports and testimonies, we have said that the nation's economic future depends in large part upon today's budget and investment decisions. Therefore, it is important for the budget to provide a long-term framework and be grounded in a linkage of fiscal policy with the long-term economic outlook. This would require a focus both on overall fiscal policy and on the composition of federal activity. In previous reports, we have cautioned that the objective of enhancing long-term economic growth through overall fiscal policy is not well served by a budget process which focuses on the short-term implications of various spending decisions. It is important to pay attention to the long-term overall fiscal policy path, to the longer-term implications of individual programmatic decisions, and to the composition of federal spending. very short term, planning for longer-range economic goals requires exploring the implications of budget decisions well into the future. By this, we do not mean detailed budget projections could be made over a 30-year time horizon, but it is important to recognize that for some programs a long-term perspective is critical to understanding the fiscal and spending implications of a decision. The current 5-year time horizon may work well for some programs, but for retirement programs, pension guarantees, and mortgage-related commitments--for example--a longer-time horizon is necessary. Although the surest way of increasing national savings and investment would be to reduce federal dissaving by eliminating the deficit, the composition of federal spending also matters. We have noted that federal spending can be divided into two broad categories based on the economic impact of that spending--consumption spending having a short-term economic impact and investment spending intended to have a positive effect on long-term private sector economic growth. We have argued that the allocation of federal spending between investment and consumption is important and deserves explicit consideration. However, the current budget process does not prompt the executive branch or the Congress to make explicit decisions about how much spending should be for long-term investment. The budget functions along which the resolution is structured represent one categorization by "mission," but they are not subdivided into consumption and investment. Appropriations subcommittees provide funding by department and agency in appropriations accounts that do not distinguish between investment and consumption spending. In short, the investment/consumption decision is not one of the organizing themes for the budget debate. We have suggested that an appropriate and practical approach to supplement the budget's focus on macroeconomic issues would be to incorporate an investment component within the discretionary caps set by BEA. Such an investment component would direct attention to the trade-offs between consumption and investment but within the overall fiscal discipline established by the caps. It would provide policymakers with a new tool for setting priorities between the long term and the short term. Within the declining unified budget deficit path, a target for investment spending could be established for the appropriate level of investment to ensure that it is considered formally in the budget process. In addition to changes aimed at improving the focus on the long term, we have continued to emphasize the importance of enforceability, accountability, and transparency. We describe these three elements together because it is difficult to have accountability without an enforcement mechanism and without transparency to make the process understandable to those outside it. Accountability in this context has several dimensions: accountability for the full costs of commitments that are to be made and accountability for actions taken--which requires targeting enforcement to actions. In addition, it may encompass the broader issue of taking responsibility for responding to unexpected events. Transparency is important not only because in a democracy the budget debate should be accessible to the citizenry but also because without it, there can be little ultimate accountability to the public. In this area, as in others I discuss today, there has been progress. For example, enforcement provisions in BEA have worked within their scope: the discretionary caps and controls on expanding entitlements have held. The design of the law has provided accountability for the costs of actions taken and for compliance with rules. However, accountability for the worse-than-expected deficits in the past has been diffuse. For credibility and for success, we need to consider bringing more responsibility for the results of unforeseen actions into the system. We have previously suggested that Congress might want to consider introducing a "lookback" into its system of budgetary controls. Under such a process, the current Congressional Budget Office (CBO) deficit projections would be compared to those projected at the time of a prior deficit reduction agreement and/or the most recent reconciliation legislation. For a difference exceeding a predetermined amount, the Congress would decide explicitly--through a vote--whether to accept the slippage or to act to bring the deficit path closer to the original goal by mandating actions to narrow this gap. required to recommend whether none, some, or all of the overage should be recouped. The Congress could be required to vote either on the President's proposal or an alternative one. Neither of these "lookback" processes determine an outcome; both seek to increase accountability for decisions about the path of federal spending. Taken together, the changes we have suggested, which could be made within the current budget process, would move us toward increased focus on important decisions and increased accountability for those decisions. Also, as discussed below, additional financial reporting and management reforms underway hold tremendous potential for helping to improve greatly the quality of information available to further enhance budget decision-making. The budget should be formulated using accurate and reliable financial data on actual spending and program performance. Audited financial statements and reports ought to be the source of these data. Ideally, we should expect such reports to address (1) the full costs of achieving program results, (2) the value of what the government owns and what it owes to others, (3) the government's ability to satisfy future commitments if current policies were continued, and (4) the government's ability to detect and correct problems in its financial systems and controls. Unfortunately, financial accounting information to date has not always been reliable enough to use in federal decision-making or to provide the requisite public accountability for the use of taxpayers' money. Good information on the full costs of federal operations is frequently absent or extremely difficult to reconstruct and reliable information on federal assets and liabilities is all too often lacking. While GAO has been actively urging improvements in this area for over 20 years, complete, useful financial reporting is not yet in place. The good news is that tools are now being put in place that promise to get the federal government's financial house in order. First, beginning for fiscal year 1996, all major agencies, covering about 99 percent of the government's outlays, are required to prepare annually financial statements and have them audited. Second, an audited governmentwide financial statement is required to be produced every year starting with fiscal year 1997. Third, FASAB is recommending new federal accounting standards that will yield more useful and relevant financial statements and information. The basis for much of this progress is the CFO Act's requirements for annual financial statement audits. Audits for a select group of agencies under the Act's original pilot program highlighted problems of uncollected revenues and billions of dollars of unrecognized liabilities and potential losses from such programs as housing loans, veterans compensation and pension benefits, and hazardous waste cleanup. Such audits are bringing important discipline to agencies' financial management and control systems. Thanks to the benefits achieved from these pilot audits, the Congress extended this requirement, in the 1994 Government Management Reform Act, to the government's 24 major departments and agencies. That act also mandated an annual consolidated set of governmentwide financial statements--to be audited by GAO--starting for fiscal year 1997. These statements will provide an overview of the government's overall costs of operations, a balance sheet showing the government's assets and liabilities, and information on its contribution to long-term economic growth and the potential future costs of current policies. These reports will provide policymakers and the public valuable information to assess the sustainability of federal commitments. The CFO Act also went beyond these auditing and reporting requirements to spell out an agenda of other long overdue reforms. It established a CFO structure in 24 major agencies and the Office of Management and Budget (OMB) to provide the necessary leadership and focus. It also set expectations for the deployment of modern systems to replace existing antiquated, often manual, processes; the development of better performance and cost measures; and the design of results-oriented reports on the government's financial condition and operating performance by integrating budget, accounting, and program information. measures into the reports and developing reports more specifically tailored to the government's needs. The creation of FASAB was the culmination of many years of effort to achieve a cooperative working relationship between the three principal agencies responsible for overall federal financial management--OMB, Treasury, and GAO. Its establishment represents a major stride forward because financial management can only improve if these principal agencies involved in setting standards, reporting, and auditing work together. As you know, FASAB was established in October 1990 by the Secretary of the Treasury, the Director of OMB, and me to consider and recommend accounting principles for the federal government. The 9-member board is comprised of representatives from the three principals, CBO, the Department of Defense, one civilian agency (presently Energy), and three representatives from the private sector, including the Chairman, former Comptroller General Elmer B. Staats. FASAB recommends accounting standards after considering the financial and budgetary information needs of the Congress, executive agencies, other users of federal financial information and comments from the public. OMB, Treasury, and GAO then decide whether to adopt the recommended standards; if they do, the standards are published by GAO and OMB and become effective. FASAB will soon complete the federal government's first set of comprehensive accounting standards developed under this consensus approach. Key to the FASAB approach for developing these standards was extensive consultation with users of financial statements early in its deliberations to ensure that the standards will result in statements that are relevant to both the budget process as well as agencies' accountability for resources. Users were interested in getting answers to questions on such topics as: Budgetary integrity--What legal authority was provided to finance government activities and was it used correctly? Operating performance--How much do programs cost and how were they financed? What was achieved? What are the government's assets and are they well managed? What are its liabilities and how will they be paid for? Stewardship--Has the government's overall financial capacity to satisfy current and future needs and costs improved or deteriorated? What are its future commitments and are they being provided for? How will the government's programs affect the future growth potential of the economy? Systems and control--Does the government have sufficient controls over its programs so that it can detect and correct problems? The FASAB principals have approved eight basic standards and statements, which I will refer to as FASAB standards in my testimony today, and approval of the final one for revenue accounting is expected this spring. This will complete the body of basic accounting and cost accounting standards for all federal agencies to use in preparing financial reports and developing meaningful cost information. The basic standards and statements are: Objectives of Federal Financial Reporting--A statement of general concepts on the objectives of financial reporting by the U.S. government providing the basic framework for the Board's work. Entity and Display--A statement of general concepts on how to define federal financial reporting entities and what kinds of financial statements those entities should prepare. Managerial Cost Accounting Concepts and Standards--A statement of general concepts combined with a statement of specific standards emphasizing the need to relate cost information with budget and financial information to provide better information for resource allocation and performance measurement. Accounting for Selected Assets and Liabilities--A statement of specific standards for accounting for basic items such as cash, accounts receivable, and accounts payable. Accounting for Direct Loans and Loan Guarantees--A statement of accounting standards responding to the Credit Reform Act of 1990. Accounting for Inventory and Related Property--A statement of standards for accounting for inventories, stockpiled materials, seized and forfeited assets, foreclosed property, and goods held under price support programs. Accounting for Liabilities of the Federal Government--A statement of standards for federal insurance and guarantee programs, pensions and post-retirement health care for federal workers, and other liabilities, including contingent liabilities. Accounting for Property, Plant and Equipment--A statement of standards for accounting for the various types of property (including heritage assets), plant and equipment held by the government. Accounting for Revenue and Other Financing Sources--A statement of standards for accounting for inflows of resources (whether earned, demanded, or donated) and other financing sources. A standard for stewardship reporting is also scheduled for completion this spring. While not part of the package of basic standards, it will help inform decisionmakers about the magnitude of federal resources and financial responsibilities and the federal stewardship role over them. The standards and new reports are being phased in over time. Some are effective now; all that have been issued will be effective for fiscal year 1998. OMB defines the form and content of agency financial statements in periodic bulletins to agency heads. The most recent guidance incorporates FASAB standards for selected assets and liabilities, credit programs, and inventory. In the fall, OMB will be issuing new guidance reflecting the rest of the FASAB standards. Since the enactment of the CFO Act, OMB's form and content guidance has stressed the use of narrative "Overview" sections preceding the basic financial statements as the best way for agencies to relate mission goals and program performance measures to financial resources. Each financial statement includes an Overview describing the agency, its mission, activities, accomplishments, and overall financial results and condition. It also should discuss what, if anything, needs to be done to improve either program or financial performance, including an identification of programs or activities that may need significant future funding. OMB also requires that agency financial statements include a balance sheet, a statement of operations, and a statement reconciling expenses reported on the statement of operations to related amounts presented in budget execution reports. Based on FASAB's standards, OMB is making efforts to design new financial reports that contain performance measures and budget data to provide a much needed, additional perspective on the government's actual performance and its long-term financial prospects. Financial reports based on FASAB's standards will provide valuable information to help sort out various kinds of long-term claims. The standards envision new reports on a broad range of liabilities and liability-like commitments and assets and asset-like spending. Liabilities, such as the federal debt, would be reported on a balance sheet, along with assets owned by federal agencies, like buildings. recognition as liabilities on the balance sheet. FASAB is still considering what types of estimates would be most useful if stewardship reporting is applied to social insurance. To give a picture of the government's capacity to sustain current public services, stewardship reporting will also include 6-year projections of receipt and outlay data for all programs based on data submitted for the President's budget. Stewardship reports based on FASAB standards would also provide information on federal investments intended to have future benefits for the nation, thus providing actual data on the budget's investment component that GAO has recommended and which I discussed earlier. Stewardship reporting would cover federal investments and some performance information for programs intended to improve the nation's infrastructure, research and development, and human capital due to their potential contribution to the long-term productive capacity of the economy. These kinds of activities would not be reflected on the balance sheet because they are not assets owned by the federal government but rather programs and subsidies provided to state and local governments and the private sector for broader public purposes. Stewardship reporting recognizes that, although these investments lack the traditional attributes of assets, such programs warrant special analysis due to their potential impact on the nation's long-term future. Linking costs to the reported performance levels is the next challenge. FASAB's cost accounting standards--the first set of standards to account for costs of federal government programs--will require agencies to develop measures of the full costs of carrying out a mission or producing products or services. Thus, when implemented, decisionmakers would have information on the costs of all resources used and the cost of support services provided by others to support activities or programs--and could compare these costs to various levels of program performance. Perseverance will be required to sustain the current momentum in improving financial management and to successfully overcome decades of serious neglect in fundamental financial management operations and reporting methods. Implementing FASAB standards will not be easy. FASAB has allowed lead time for implementing the standards so that they can be incorporated into agencies' systems. Nevertheless, even with this lead time, agencies may have difficulty in meeting the schedule. It is critical that the Congress and the executive branch work together to make implementation successful. As the federal government continues to improve its accountability and reporting of costs and performance, the more useful and reliable data need to be used to influence decisions. That brings me to the task of better integrating financial data and reports into the budget decision-making process. The ultimate goal of more reliable and relevant financial data is to promote more informed decision-making. For this to happen, the financial data must be understood and used by program managers and budget decisionmakers. The changes underway to financial reporting have been undertaken with a goal of making financial data more accessible to these decisionmakers. The budget community's involvement in the FASAB standard-setting process has contributed to this. Still, the future challenge remains to further integrate financial reports with the budget to enhance the quality and richness of the data considered in budget deliberations. Improving the linkages between accounting and budgeting also calls for considering certain changes in budgeting such as realigned account structures and the selective use of accrual concepts. The chief benefit of improving this linkage will be the increased reliability of the data on which we base our management and budgetary decisions. The new financial reports will improve the reliability of the budget numbers undergirding decisions. Budgeting is a forward-looking enterprise, but it can clearly benefit from better information on actual expenditures and revenue collection. Under FASAB standards, numbers from the budget will be included in basic financial statements and thus will be audited for the first time. Having these numbers audited was one of the foremost desires of budget decisionmakers consulted in FASAB's user needs study and stems from their suspicion that the unaudited numbers may not always be correct. The new financial reports will also offer new perspectives and data on the full costs of program outputs and agency operations that are currently not reported in the cash-based budget. Information on full costs generated pursuant to the new FASAB standards would provide decisionmakers a more complete picture of actual past program costs and performance when they are considering the appropriate level of future funding. For example, the costs of providing Medicare are spread among at least three budget accounts. Financial reports would pull all the relevant costs together. The different account structures that are used for budget and financial reporting are a continuing obstacle to using these reports together and may prevent decisionmakers from fully benefiting from the information in financial statements. Unlike financial reporting, which is striving to apply the full cost concept when reporting costs, the budget account structure is not based on a single unifying theme or concept. The current budget account structure evolved over time in response to specific needs. The budget contains over 1,300 accounts. They are not equal in size; nearly 80 percent of the government's resources are clustered in less than 5 percent of the accounts. Some accounts are organized by the type of spending (such as personnel compensation or equipment) while others are organized by programs. Accounts also vary in their coverage of cost, with some including both program and operating spending while others separate salaries and expenses from program subsidies. Or, a given account may include multiple programs and activities. When budget account structures are not aligned with the structures used in financial reporting, additional analyses or crosswalks would be needed so that the financial data could be considered in making budget decisions. If the Congress and the executive branch reexamine the budget account structure, the question of trying to achieve a better congruence between budget accounts and the accounting system structure, which is tied to performance results, should be considered. In addition to providing a new, full cost perspective for programs and activities, financial reporting has prompted improved ways of thinking about costs in the budget. For the most part, the budget uses the cash basis, which recognizes transactions when cash is paid or received. Financial reporting uses the accrual basis, which recognizes transactions when commitments are made, regardless of when the cash flows. Cash-based budgeting is generally the best measure to reflect the short-term economic impact of fiscal policy as well as the current borrowing needs of the federal government. And for many transactions, such as salaries, costs recorded on a cash basis do not differ appreciably from accrual. However, for a select number of programs, cash-based budgeting does not adequately reflect the future costs of the government's commitments or provide appropriate signals on emerging problems. For these programs, accrual-based reporting may improve budgetary decision-making. The accrual approach records the full cost to the government of a decision--whether to be paid now or in the future. As a result, it prompts decisionmakers to recognize the cost consequences of commitments made today. Accrual budgeting is being done under the Credit Reform Act for credit programs such as the federal family education loan program and the rural electrification and telephone direct loan program. It may be appropriate to extend its use to other programs such as federal insurance programs--an issue we are currently studying at the request of the Chairman, House Budget Committee. Our work to date has revealed shortcomings with cash-based budgeting for insurance programs, but also highlighted difficulties in estimating future costs for some of them due to the lack of adequate data or to sensitivity to the assumptions used to model future costs. The potential distortions arising from the cash-based approach must be weighed against the risks and uncertainties involved in estimating longer-term accrued costs for some programs. Our upcoming report on budgeting for insurance will address these issues. Small changes in the right direction are important, but to make the kind of difference we are all seeking will require pulling all this together for budget and oversight. Thanks in large part to the legislative impetus of the CFO Act and GPRA, decisionmakers will ultimately have available unprecedented, reliable information on both the financial condition of programs and operations as well as the performance and costs of these activities. While these initiatives carry great potential, they require continued support by the agencies and the Congress. GPRA set forth the major steps federal agencies need to take towards a results-oriented management approach. They are to (1) develop a strategic plan, (2) establish performance measures focused on "outcomes" or results expressed in terms of the real difference federal programs make in people's lives and use them to monitor progress in meeting strategic goals, and (3) link performance information to resource requirements through annual performance plans. I have supported the intent of GPRA and believe that it offers great potential for enhancing decision-making and improving the management of federal programs. A growing number of federal agencies is beginning to see that a focus on outcomes can lead to dramatic improvements in effectiveness. However, our work also has shown that a fundamental shift in focus to include outcomes does not come quickly or easily. The early experiences of many GPRA pilots show that outcomes can be very difficult to define and measure. They also found that a focus on outcomes can require major changes in the services that agencies provide and processes they use to provide those services. Given that the changes envisioned by GPRA do not come quickly or easily, strong and sustained congressional attention to GPRA implementation is critical. Without it, congressional and executive branch decisionmakers may not obtain the information they need as they seek to create a government that is more effective, efficient, and streamlined. Authorization, appropriation, budget, and oversight committees all have key interests in ensuring that GPRA is successful because, once fully implemented, it should provide valuable data to help inform the decisions that each committee must make. OMB has attempted to prompt progress by giving special emphasis in its budget submission guidance to increasing the use of information on program performance in budget justifications. In preparation for the fiscal year 1997 budget cycle, OMB held performance reviews last May with agencies on performance measures and in September 1995 issued guidance on preparing and submitting strategic plans. Further progress in implementing GPRA will occur as performance measures become more widespread and agencies begin to use audited financial information in the budget process to validate and assess agency performance. GAO, OMB, and the CFO Council have also given thought as to how to best report data and information to decisionmakers. While there are a myriad of legislatively mandated reporting requirements under separate laws, such as GPRA, the Federal Managers' Financial Integrity Act, the CFO Act, and the Prompt Pay Act, decisionmakers need a single report relating performance measures, costs, and the budget. This reporting approach is consistent with the CFO Council's proposal for an Accountability Report, which OMB is pursuing. On a pilot basis, OMB is having six agencies produce Accountability Reports providing a comprehensive picture of each agency's performance pursuant to its stated goals and objectives. The ultimate usefulness of the Accountability Report will hinge on its specific content and the reliability of information presented. We will work with OMB and agencies throughout the pilot program. We agree with the overall streamlined reporting concept and believe that, to be most useful, the Accountability Report must include an agency's financial statements and related audit reports. Accountability reports could then be used as the basis for annual oversight hearings, something I have long advocated. Such serious scrutiny of programs and activities is especially important as we seek to reduce the deficit. Oversight hearings based on complete sets of reports could be the basis for considering changes in federal roles and in program design as well as reviewing the adequacy of agencies' accountability and performance. Finding the most effective reporting and analytical approaches will require a great deal of collaboration and communication. Appropriations, budget, and authorizing committees need to be full partners in supporting the implementation of these initiatives. The new financial reports based on FASAB's recommended standards will provide much-needed additional perspective on the long-term prospects for government programs and finances. It can be used with other kinds of actuarial and economic analyses already available in making budget decisions. In conclusion, reforms are needed on three fronts--in the budget process, in accountability and reporting for costs and performance, and in using the improved reports to better inform policy and budget decisions. Improved financial management and reports are essential to improving the government's ability to provide accountability for public resources. Continuing fiscal pressures will place a premium on the proper stewardship of increasingly scarce public resources. Recent efforts to improve federal financial reporting will, if properly implemented, provide the tools needed to redress long-standing weaknesses. on the current and future stakes involved in our decisions may help policymakers make decisions focused more on the long-term consequences. The public also stands to gain from these initiatives, both from improved accountability for public resources and more informed decisions. Mr. Chairman, this concludes my statement. I would be happy to respond to questions. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO discussed how the federal government could improve its financial management and budgets. GAO noted that: (1) over the last 6 years, the government has established a solid framework for improving its financial management through legislative mandates, an accounting standards advisory board, and budget process improvements; (2) the budget process should provide a long-term perspective and link fiscal policy to the long-term economic outlook; (3) the Administration and Congress need to make explicit decisions about investment and consumption spending and identify them within the budget; (4) budget enforcement, accountability, and transparency need to be enhanced, possibly through a look-back procedure and particularly in the areas of deficit and mandatory spending; (5) to enhance budget decisionmaking, agency and governmentwide financial statements audits should provide accurate and reliable financial data on actual spending and program performance; (6) the advisory board has approved eight government accounting standards addressing such areas as budget integrity, operating performance, and systems and control and will complete a stewardship standard by the spring of 1996; (7) the Office of Management and Budget is designing new financial reports to increase information on actual performance and long-term financial prospects; and (8) realigning account structures and selective use of accrual concepts in the budget would link accounting and budgeting and improve budget and management decisionmaking by disclosing the full cost of programs and operations.
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The number of families receiving welfare cash assistance fell significantly after the creation of TANF, decreasing by almost 50 percent from a monthly average of 3.2 million families in fiscal year 1997 to a low of 1.7 million families in fiscal year 2008 (see fig. 1). Several factors likely contributed to this caseload decline, such as the strong economy of the 1990s, declines in the number of eligible families participating, concurrent policy changes, and state implementation of TANF requirements, including those related to work participation. However, since fiscal year 2008 and the beginning of the recent economic recession, the number of families receiving TANF cash assistance has increased by 13 percent to a monthly average of 1.9 million families in fiscal year 2010. Comparing the types of families that receive TANF cash assistance, the number of two-parent families increased at a faster rate than single-parent families or child-only cases, in which only the children receive benefits, during this time period. The number of child-only cases has increased slightly from fiscal year 2000 to fiscal year 2008; however, these cases make up an increasing proportion of the total number of families receiving cash assistance because TANF cases with adults in the assistance unit have decreased substantially. Specifically, the number of TANF child-only cases increased from approximately 772,000 cases to approximately 815,000 cases, but the number of families with adults receiving assistance decreased from about 1.5 million to about 800,000 cases (fig. 2). As a result, the share of child-only cases in the overall TANF caseload increased from about 35 percent to about half. There are four main categories of "child-only" cases in which the caregiver (a parent or non-parent) does not receive TANF benefits: (1) the parent is receiving Supplemental Security Income; (2) the parent is a noncitizen or a recent legal immigrant; (3) the child is living with a non-parent caregiver, often a relative; and (4) the parent has been sanctioned and removed from the assistance unit for failing to comply with program requirements, and the family's benefit has been correspondingly reduced. Families receiving child-only assistance are generally not subject to work requirements. Between fiscal years 2000 and 2008, increases in two of the categories were statistically significant: children living with parents who were ineligible because they received SSI benefits and children living with parents who were ineligible because of their immigration status. Cases in which the parents were ineligible due to immigration status almost doubled and increased from 11 percent of the TANF child-only caseload in fiscal year 2000 to 19 percent in fiscal year 2008 (see fig. 3). This increase of 8 percentage points is statistically significant and represents an increase from about 83,000 in fiscal year 2000 to over 155,000 in fiscal year 2008, with the greatest increase occurring in California. However, in some cases, the relationship between the child and the adult living in the family is not known. The number of these cases decreased significantly over the same period, and it is possible that some of the increase in cases with ineligible parents due to SSI receipt or immigration status resulted from better identification of previously unknown caregivers. However, given available data, we were unable to determine how much of the increase was due to better reporting versus an actual increase in the number of cases. Both the composition of the overall TANF caseload, as well as the composition of the TANF child-only caseload, varies by state. For example, in December 2010, 10 percent of TANF cases in Idaho were single-parent families, compared to almost 80 percent in Missouri. In both of these states, child-only cases comprised the rest of their TANF caseloads. Concerning the variation in child-only cases by state, almost 60 percent of TANF child-only cases in Tennessee included children living with non-parent caregivers, compared to 31 percent in Texas, according to state officials. As the overall number of families receiving TANF cash assistance has declined, so has state spending of TANF funds on cash assistance. TANF expenditures for cash assistance declined from about 73 percent of all expenditures in fiscal year 1997 to 30 percent in fiscal year 2009 (see fig. 4) as states shifted spending to purposes other than cash assistance, which is allowed under the law. States may use TANF funds to provide cash assistance as well as a wide range of services that further the program's goals, including child care and transportation assistance, employment programs, and child welfare services. While some of this spending, such as that for child care assistance, relates directly to helping current and former TANF cash assistance recipients work and move toward self-sufficiency, other spending is directed to a broader population that did not ever receive TANF cash assistance. Tracking the number of families receiving monthly cash assistance--the traditional welfare caseload--no longer captures the full picture of families being assisted with TANF funds. As states began providing a range of services beyond cash assistance to other low-income families, data collection efforts did not keep pace with the evolving program. Because states are primarily required to report data to HHS on families receiving TANF cash assistance but not other forms of assistance, gaps exist in the information gathered at the federal level to understand who TANF funds are serving and services provided, and to ensure state accountability. For example, with the flexibility allowed under TANF, states have used a significant portion of their TANF funds to augment their child care subsidy programs. However, states are not required to report on all families provided TANF-funded child care, leaving an incomplete picture of the number of children receiving federally funded child care subsidies. Overall, data on the total numbers of families served with TANF funds and how states use TANF funds to help families and achieve program goals in ways beyond their welfare-to-work programs is generally unavailable. When we first reported on these data limitations to this Subcommittee in 2002, we noted that state flexibility to use TANF funds in creative ways to help low-income families has resulted in many families being served who are not captured in the data reported to the federal government. At that time, it was impossible to produce a full count of all families served with TANF funds, and that data limitation continues today. Because job preparation and employment are key goals of TANF, one of the federal measures of state TANF programs' performance is the proportion of TANF cash assistance recipients engaged in allowable work activities. Generally, states are held accountable for ensuring that at least 50 percent of all families receiving TANF cash assistance participate in one or more of the 12 specified work activities for an average of 30 hours per week. However, before DRA, concerns had been raised about the consistency and comparability of states' work participation rates and the underlying data on TANF families participating in work activiti Although DRA was generally expected to strengthen TANF work requirements and improve the reliability of work participation data and program integrity by implementing federal definitions of work activities and participation verification requirements, the proportion of families receiving TANF cash assistance who participated in work activities for the required number of hours each week changed little after DRA, as did the types of work activities in which they most frequently participated. Specifically, in fiscal years 2007 through 2009, from 29 to 30 percent of TANF families participated in work activities for the required number of hours, which is similar to the 31 to 34 percent of families who did so in each year from fiscal years 2001 through 2006. Among families that met their work requirements both before and after DRA, the majority participated in unsubsidized employment. The next most frequent work es. activities were job search and job readiness assistance, vocational educational training, and work experience. Although fewer than 50 percent of all families receiving TANF cash assistance participated in work activities for the required number of hours both before and after DRA, many states have been able to meet their work participation rate requirements because of various policy and funding options allowed in federal law and regulations. Specifically, factors that influenced states' work participation rates included not only the number of families receiving TANF cash assistance who participated in work activities, but also 1. decreases in the number of families receiving TANF cash assistance, 2. state spending on TANF-related services beyond what is required, 3. state policies that allow working families to continue receiving TANF 4. state policies that provide nonworking families cash assistance outside of the TANF program. Beyond families' participation in the 12 work activities, the factor that states have commonly relied on to help them meet their required work participation rates is the caseload reduction credit. Specifically, decreases in the numbers of families receiving TANF cash assistance over a specified time period are accounted for in each state's caseload reduction credit, which essentially then lowers the states' required work participation rate from 50 percent. For example, if a state's caseload decreases by 20 percent during the relevant time period, the state receives a caseload reduction credit equal to 20 percentage points, which results in the state work participation rate requirement being adjusted from 50 to 30 percent. While state caseload declines have generally been smaller after DRA because the act changed the base year for the comparison from fiscal year 1995 to fiscal year 2005, many states are still able to use caseload declines to help them lower their required work participation rates. For example, in fiscal year 2009, 38 of the 45 states that met their required work participation rates for all TANF families did so in part because of their caseload declines (see fig.5). However, while states' caseload reduction credits before DRA were based primarily on their caseload declines, after DRA, states' spending of their own funds on TANF-related services also became a factor in some states' credits. Specifically, states are required to spend a certain amount of their funds every year in order to receive their federal TANF block grants. However, if states spend in excess of the required amount, they are allowed to correspondingly increase their caseload reduction credits. In fiscal year 2009, 32 of the 45 states that met their required work participation rates for all families receiving cash assistance claimed state spending beyond what is required toward their caseload reduction credits. In addition, 17 states would not have met their rates without claiming these expenditures (see fig. 5). Among the states that needed to rely on excess state spending to meet their work participation rates, most relied on these expenditures to add between 1 and 20 percentage points to their caseload reduction credit s (see fig. 6). As traditional cash assistance caseloads declined and states broadened the types of services provided and the number of families served, existing data collection efforts resulted in an incomplete picture of the TANF program at the national level. In effect, there is little information on the numbers of people served by TANF funds other than cash assistance and no real measure of how services supported by TANF funds meet the goals of welfare reform. This leaves the federal government with underestimates of the numbers served and potentially understated results from these funds. In addition, as before DRA, states have continued to take advantage of the various policy and funding options available to increase their TANF work participation rates. As a result, while measuring work participation of TANF recipients is key to understanding the success of state programs in meeting one of the federal purposes of TANF, whether states met the required work participation rates provides only a partial picture of state TANF programs' effort and success in engaging recipients in work activities. Although the DRA changes to TANF work requirements were expected to strengthen the work participation rate as a performance measure and move more families toward self-sufficiency, the proportion of TANF recipients engaged in work activities remains unchanged. States' use of the modifications currently allowed in federal law and regulations, as well as states' policy choices, have diminished the rate's usefulness as the national performance measure for TANF, and shown it to be limited as an incentive for states to engage more families in work. Lack of complete information on how states use funds to aid families and to measure work participation hinders decision makers in considering the success of TANF and what trade-offs might be involved in any changes to program requirements. In addressing these issues, care must to be taken to ensure that data requirements are well thought out and do not present an unreasonable burden on state programs. We provided drafts of the reports we drew on for this testimony to HHS for its review, and copies of the agency's written responses can be found in the appendices of the relevant reports. We also provided HHS a draft of this testimony for technical comments on the new information on child- only TANF cases and updated TANF work participation data. HHS had no technical comments. Chairman Davis and Ranking Member Doggett, and Members of the Subcommittee, this concludes my statement. I would be pleased to respond to any questions you may have. For questions about this statement, please contact Kay E. Brown at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this statement include James Bennett, Rachel Frisk, Alex Galuten, Gale Harris, Jean McSween, and Cathy Roark. The state in this example would have its minimum work participation rate reduced to 26 percent for all TANF families.
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The Temporary Assistance for Needy Families (TANF) program, created in 1996, is one of the key federal funding streams provided to states to assist low-income families. A critical aspect of TANF has been its focus on employment and self-sufficiency, and the primary means to measure state efforts in this area has been TANF's work participation requirements. When the Deficit Reduction Act of 2005 (DRA) reauthorized TANF, it also made changes that were generally expected to strengthen these work requirements. Given the impending extension or reauthorization of TANF, this testimony primarily draws on previous GAO work to focus on (1) how the welfare caseload and related spending have changed since TANF was created and (2) how states have met work participation rates since DRA. To address these issues, in work conducted from August 2009 to May 2010, GAO analyzed state data reported to the Department of Health and Human Services (HHS); surveyed state TANF administrators in 50 states and the District of Columbia; conducted site visits to Florida, Ohio, and Oregon, selected to provide geographic diversity and variation in TANF program characteristics; and reviewed relevant federal laws, regulations, and research. In July 2011, GAO updated this work by analyzing state data reported to HHS since that time. In addition, GAO gathered information on caseload changes through its forthcoming work on TANF child-only cases. Between fiscal years 1997 and 2008, the total number of families receiving welfare cash assistance decreased by almost 50 percent. At the same time, there have also been changes in the types of families receiving cash assistance. Specifically, child-only cases--in which the children alone receive benefits--increased from about 35 percent of the overall TANF caseload in 2000 to about half in 2008. As the number of families receiving TANF cash assistance declined, state spending shifted to support purposes other than cash assistance, which is allowed under the law. However, because states are primarily required to report data to HHS on families receiving cash assistance and not on families receiving other forms of aid funded by TANF, this shift in spending has left gaps in the information gathered at the federal level to understand who TANF funds are serving and ensure state accountability. Nationally, the proportion of TANF families who met their work requirements changed little after DRA was enacted, and many states have been able to meet their work participation rate requirements because of various policy and funding options allowed in federal law and regulations. Although federal law generally requires that a minimum of 50 percent of families receiving TANF cash assistance in each state participate in work activities, both before and after DRA, about one-third of TANF families nationwide met these requirements. Nonetheless, many states have been able to meet their required work participation rates because of policy and funding options. For example, states receive a caseload reduction credit, which generally decreases each state's required work participation rate by the same percentage that state caseloads decreased over a specified time period. States can further add to their credits, and decrease their required work rates, by spending their own funds on TANF-related services beyond the amount that is required to receive federal TANF funds. In fiscal year 2009, 7 states met their rates because 50 percent or more of their TANF families participated in work activities for the required number of hours. However, when states' caseload decreases and additional spending were included in the calculation of state caseload reduction credits, 38 other states were also able to meet their required work participation rates in that year.
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In December 2007, the United States entered what has turned out to be the deepest recession since the end of World War II. In responding to this downturn, the Recovery Act employs a combination of tax relief and government spending. About one-third of the funds provided by the act are for tax relief to individuals and businesses; one-third is in the form of temporary increases in entitlement programs to aid people directly affected by the recession and provide some fiscal relief to states; and one- third falls into the category of grants, loans, and contracts. As of September 30, 2009, approximately $173 billion, or about 22 percent, of the $787 billion provided by the Recovery Act had been paid out by the federal government. Nonfederal recipients of Recovery Act-funded grants, contracts, and loans are required to submit reports with information on each project or activity, including the amount and use of funds and an estimate of jobs created or retained. Of the $173 billion paid out, about $47 billion--a little more than 25 percent--is covered by this recipient report requirement. Neither individuals nor recipients receiving funds through entitlement programs, such as Medicaid, or through tax programs are required to report. In addition, the required reports cover direct jobs created or retained as a result of Recovery Act funding; they do not include the employment impact on materials suppliers (indirect jobs) or on the local community (induced jobs), as shown in figure 1. To implement the recipient reporting data requirements, OMB has worked with the Recovery Accountability and Transparency Board (Recovery Board) to deploy a nationwide data collection system at www.federalreporting.gov, while the data reported by recipients are available to the public for viewing and downloading on www.recovery.gov (Recovery.gov). OMB's June 22, 2009, guidance on recipient reporting also includes a requirement for data quality review. Prime recipients have been assigned the ultimate responsibility for data quality checks and the final submission of the data. Because this is a cumulative reporting process, additional corrections can take place on a quarterly basis. The first of the required recipient reports cover cumulative activity since the Recovery Act's passage in February 2009 through the quarter ending September 30, 2009. As shown in figure 2, OMB specified time frames for different stages in the reporting process: for this current report, prime recipients and delegated subrecipients were to prepare and enter their information from October 1 to October 10; prime recipients were able to review the data for completeness and accuracy from October 11 to October 21, and a federal agency review period began October 22. The final recipient reporting data for the first round of reports were first made available on October 30. To assess the reporting process and data quality efforts, GAO performed an initial set of edit checks and basic analyses on the final recipient report data that first became available at Recovery.gov on October 30, 2009. We built on information collected at the state, local, and program level as part of our bimonthly reviews of selected states' and localities' uses of Recovery Act funds. These bimonthly reviews focus on Recovery Act implementation in 16 states and the District of Columbia, which contain about 65 percent of the U.S. population and are estimated to receive collectively about two-thirds of the intergovernmental federal assistance funds available through the Recovery Act. To understand state quality review and reporting procedures, we visited the 16 selected states and the District of Columbia during late September and October 2009 and discussed with prime recipients projects associated with 50 percent of the total funds reimbursed as of September 4, 2009, for that state in the Federal-Aid Highway Program administered by the Department of Transportation (DOT). Prior to the start of the reporting period on October 1, we obtained information on prime recipients' plans for the jobs data collection process. After the October 10 data reporting period, we went back to see if prime recipients had followed their own plans and subsequently talked with at least two subrecipients to gauge their reactions to the reporting process and assess the documentation they were required to submit. We gathered and examined issues raised by recipients in these jurisdictions regarding reporting and data quality and interviewed recipients on their experiences using the Web site reporting mechanism. During the interviews, we looked at state plans for managing, tracking, and reporting on Recovery Act funds and activities. In a similar way, we examined a nonjudgmental sample of Department of Education (Education) Recovery Act projects at the prime and subrecipient level. We also collected information from selected transit agencies and housing authorities as part of our bimonthly Recovery Act reviews. To gain insight into and understanding of quality review at the federal level, we interviewed federal agency officials who have responsibility for ensuring a reasonable degree of quality across their program's recipient reports. We assessed the reports from the Inspectors General (IG) on Recovery Act data quality reviews from 15 agencies. We are also continuing to monitor and follow up on some of the major reporting issues identified in the media and by other observers. For example, a number of press articles have discussed concerns with the jobs reporting done by Head Start grantees. According to a Health and Human Services (HHS) Recovery Act official, HHS is working with OMB to clarify the reporting policy as it applies to Head Start grantees. We will be reviewing these efforts as they move forward. For our discussion of how macroeconomic data and methods and recipient reporting together can be used to assess the employment effects of the Recovery Act, we analyzed economic and fiscal data using standard economic principles and reviewed the economic literature on the effect of monetary and fiscal policies for stimulating the economy. We also reviewed the guidance that OMB developed for Recovery Act recipients to follow in estimating the effect of funding activities on employment, reviewed reports that the Council of Economic Advisers (CEA) issued on the macroeconomic effects of the Recovery Act, and interviewed officials from CEA, OMB, and the Congressional Budget Office (CBO). Our work was conducted in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audits 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 we obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. As detailed in our report, our analysis and fieldwork indicate there are significant issues to be addressed in reporting, data quality, and consistent application of OMB guidance in several areas. Erroneous or questionable data entries. Many entries merit further attention due to an unexpected or atypical data value or relationship between data. Quality review by federal agencies and prime recipients. o Coverage: While OMB estimates that more than 90 percent of recipients reported, questions remain about the other 10 percent. o Review: Over three quarters of the prime reports were marked as having undergone review by a federal agency, while less than 1 percent were marked as having undergone review by the prime recipient Issues in the calculation of full-time equivalents (FTE). Different interpretations of OMB guidance compromise the ability to aggregate the data. We performed an initial set of edit checks and basic analyses on the recipient report data available for download from Recovery.gov on October 30. As part of our review, we examined the relationship between recipient reports showing the presence or absence of any full-time equivalent (FTE) counts with the presence or absence of funding amounts shown in either or both data fields for "amount of Recovery Act funds received" and "amount of Recovery Act funds expended." Forty-four percent of the prime recipient reports showed an FTE value. However, as shown in table 1, we identified 3,978 prime recipient reports where FTEs were reported but no dollar amount was reported in the data fields for amount of Recovery Act funds received and amount of Recovery Act funds expended. These records account for 58,386 of the total 640,329 FTEs reported. There were also 9,247 reports that showed no FTEs but did show some funding amount in either or both of the funds received or expended data fields. The total value of funds reported in the expenditure field on these reports was $965 million. Those recipient reports showing FTEs but no funds and funds but no FTEs constitute a set of records that merits closer examination to understand the basis for these patterns of reporting. Our review also identified a number of cases in which other anomalies suggest a need for review: discrepancies between award amounts and the amounts reported as received, implausible amounts, or misidentification of awarding agencies. While these occurred in a relatively small number of cases, they indicate the need for further data quality efforts. OMB guidance assigns responsibility for data quality to the prime recipient and provides for federal agency review. A correction could be initiated by either the prime recipient or the reviewing agency. OMB requires that federal agencies perform limited data quality reviews of recipient data to identify material omissions and significant reporting errors and notify the recipients of the need to make appropriate and timely changes to erroneous reports. The prime recipient report records we analyzed included data on whether the prime recipient and the agency reviewed the record in the data quality review time frames. Over three quarters of the prime recipient reports were marked as having undergone federal agency review. Less than 1 percent of the records were marked as having undergone review by the prime recipient. The small percentage reviewed by the prime recipients themselves during the OMB review time frame warrants further examination. While it may be the case that the recipients' data quality review efforts prior to initial submission of their reports were seen as not needing further revision during the review timeframe, it may also be indicative of problems with the process of noting and recording when and how the prime recipient reviews occur and the setting of the review flag. In addition, the report record data included a flag as to whether a correction was initiated. Overall, slightly more than a quarter of the reports were marked as having undergone a correction during the period of review. In its guidance to recipients for estimating employment effects, OMB instructed recipients to report solely the direct employment effects as "jobs created or retained" as a single number. Recipients are not expected to report on the employment impact on materials suppliers ("indirect" jobs) or on the local community ("induced" jobs). OMB guidance stated that "the number of jobs should be expressed as 'full-time equivalents (FTEs),' which is calculated as total hours worked in jobs created or retained divided by the number of hours in a full-time schedule, as defined by the recipient." Consequently, the recipients are expected to report the amount of labor hired or not fired as result of having received Recovery Act funds. It should be noted that one FTE does not necessarily equate to the job of one person. Organizations may choose to increase the hours of existing employees, for example, which can certainly be said to increase employment but not necessarily be an additional job in the sense of adding a person to the payroll. Problems with the interpretation of this guidance or the calculation of FTEs were one of the most significant problems we found. Jobs created or retained expressed in FTEs raised questions and concerns for some recipients. While reporting employment effects as FTEs should allow for the aggregation of different types of jobs--part-time, full-time, or temporary--and different employment periods, if the calculations are not consistent, the ability to aggregate the data is compromised. One source of inconsistency was variation in the period of performance used to calculate FTEs, which occurred in both the highway and education programs we examined. For example, in the case of federal highways projects, some have been ongoing for six months, while others started in September 2009. In attempting to address the unique nature of each project, DOT's Federal Highway Administration (FHWA) faced the issue of whether to report FTE data based on the length of time to complete the entire project (project period of performance) versus a standard period of performance, such as a calendar quarter, across all projects. According to FHWA guidance, which was permitted by OMB, FTEs reported for each highway project are expressed as an average monthly FTE. Because FTEs are calculated by dividing hours worked by hours that represent a full-time schedule, a standard period of performance is important if numbers are to be added across programs. As an illustration, take a situation in which one project employed 10 people full time for 1 month, another project employed 10 people full time for 2 months, and a third project employed 10 people full time for 3 months. FHWA's use of average monthly FTE would result in FTEs being overstated compared either with using OMB's June 22 guidance or to standardizing the reports for one quarter. Under FHWA's approach, 30 FTEs would be reported (10 for each of the three projects); on the other hand, using a standardized measure, 20 FTEs would be reported (3-1/3 for the first project, 6-2/3 for the second project, and 10 for the third). Conversely, if a project starts later than the beginning of the reporting period, applying OMB's June 22 guidance, which requires reporting of FTEs on a cumulative basis, could result in reporting fewer FTEs than would be the case under a standardized reporting period approach. In either case, failure to standardize on a consistent basis prevents meaningful comparison or aggregation of FTE data. This was also an issue for education programs. For example, in California, two higher education systems calculated FTE differently. In the case of one, they chose to use a 2-month period as the basis for the FTE performance period. The other chose to use a year as the basis for the FTE. The result is almost a three-to-one difference in the number of FTEs reported for each university system in the first reporting period. Although Education provides alternative methods for calculating an FTE, in neither case does the guidance explicitly state the period of performance of the FTE. OMB's decision to convert jobs into FTEs provides a consistent lens to view the amount of labor being funded by the Recovery Act, provided each recipient uses a standard time frame in calculating the FTE. The current OMB guidance, however, creates a situation where, because there is no standard starting or ending point, an FTE provides an estimate for the life of the project. Without normalizing the FTE, aggregate numbers should not be considered, and the issue of a standard period of performance is magnified when looking across programs and across states. Recipients were also confused about counting a job created or retained even though they knew the number of hours worked that were paid for with Recovery Act funds. While OMB's guidance explains that in applying the FTE calculation for measuring the number of jobs created or retained recipients will need the total number of hours worked that are funded by the Recovery Act, it could emphasize this relationship more thoroughly throughout its guidance. While there were problems of inconsistent interpretation of the guidance, the reporting process went relatively well for highway projects. DOT had an established procedure for reporting prior to enactment of the Recovery Act. As our report shows, in the cases of Education and the Department of Housing and Urban Development, which do not have this prior reporting experience, we found more problems. State and federal officials are examining identified issues and have stated their intention to deal with them. In our report, we make a number of recommendations to OMB to improve the consistency of FTE data collected and reported. OMB should continue to work with federal agencies to increase recipient understanding of the reporting requirements and application of the guidance. Specifically, OMB should clarify the definition and standardize the period of measurement for FTEs and work with federal agencies to align this guidance with OMB's guidance and across agencies; given its reporting approach, consider being more explicit that "jobs created or retained" are to be reported as hours worked and paid for with Recovery Act funds; and continue working with federal agencies and encourage them to provide or improve program-specific guidance to assist recipients, especially as it applies to the full-time equivalent calculation for individual programs. Given some of the issues that arose in our review of the reporting process and data, we also recommend that OMB should work with the Recovery Board and federal agencies to re-examine review and quality assurance processes, procedures, and requirements in light of experiences and identified issues with this round of recipient reporting and consider whether additional modifications need to be made and if additional guidance is warranted. In commenting on a draft of our report, OMB staff told us that OMB generally accepts the report's recommendations. It has undertaken a lessons-learned process for the first round of recipient reporting and will generally address the report's recommendations through that process. As recipient reporting moves forward, we will continue to review the processes that federal agencies and recipients have in place to ensure the completeness and accuracy of data, including reviewing a sample of recipient reports across various Recovery Act programs to assure the quality of the reported information. As existing recipients become more familiar with the reporting system and requirements, these issues may become less significant; however, communication and training efforts will need to be maintained and in some cases expanded as new recipients of Recovery Act funding enter the system. In addition to our oversight responsibilities specified in the Recovery Act, we are also reviewing how several federal agencies collect information and provide it to the public for selected Recovery Act programs, including any issues with the information's usefulness. Our subsequent reports will also discuss actions taken on the recommendations in this report and will provide additional recommendations, as appropriate. While the recipient reports provide a real-time window on the use and results of Recovery Act spending, the data will represent only a portion of the employment effect, even after data quality issues are addressed. A fuller picture of the employment effect would include not only the direct jobs reported but also the indirect and induced employment gains resulting from government spending. In addition, the entitlement spending and tax benefits included in the Recovery Act also create employment. Therefore, both the data reported by recipients and other macroeconomic data and methods are helpful in gauging the overall employment effects of the stimulus. Economists will use statistical models to estimate a range of potential effects of the stimulus program on the economy. In general, the estimates are based on assumptions about the behavior of consumers, business owners, workers, and state and local governments. Neither the recipients nor analysts can identify with certainty the impact of the Recovery Act because of the inability to compare the observed outcome with the unobserved, counterfactual scenario (in which the stimulus does not take place). At the level of the national economy, models can be used to simulate the counterfactual, as CEA and others have done. At smaller scales, comparable models of economic behavior either do not exist or cover only a very small portion of all the activity in the macroeconomy. Our report discusses a number of the issues that are likely to affect the impact of the Recovery Act, including the potential effect of different types of stimulus. We also discuss state and sectoral employment trends and that the impact of the Recovery Act will vary across states. The employment effects of Recovery Act funds are likely to vary with the condition of a state's labor market, as measured by its unemployment rate. Labor markets in every state weakened over the course of the recession, but the degree to which this has occurred varies widely across states. Figure 3 illustrates this--it shows the geographic distribution of the magnitude of the recession's impact on unemployment as measured by the percentage change in unemployment between December 2007 and September 2009. The impact of funds allocated to state and local governments will also likely vary with states' fiscal conditions. Finally, let me provide the committee with an update on allegations of fraud, waste, and abuse made to our FraudNet site. As of November 13, 2009, FraudNet has received 106 Recovery Act-related allegations that were considered credible enough to warrant further review. We referred 33 allegations to the appropriate agency Inspectors General for further review and investigation. Our Forensic Audits and Special Investigations unit is actively pursuing 8 allegations, which include wasteful and improper spending; conflicts of interest; and grant, contract, and identity fraud. Another 9 are pending further review by our criminal investigators, and 15 were referred to other GAO teams for consideration in their ongoing work. We will continue to monitor these referrals and will inform the committee when outstanding allegations are resolved. The remaining 41 allegations were found not to address waste, fraud, or abuse; lacked specificity; were not Recovery Act-related; or reflected only a disagreement with how Recovery Act funds are being disbursed. We consider these allegations to be resolved and no further investigation is necessary. Mr. Chairman and Members of the Committee, this concludes my statement. I would be pleased to respond to any questions you may have. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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 report being issued today on the first set of recipient reports made available in October 2009 in response to the American Recovery and Reinvestment Act's section 1512 requirement. On October 30, Recovery.gov (the federal Web site on Recovery Act spending) reported that more than 100,000 recipients had reported hundreds of thousands of jobs created or retained. GAO is required to comment quarterly on the estimates of jobs created or retained as reported by direct recipients of Recovery Act funding from federal agencies. In the first quarterly GAO report, being released today, we address the following issues: (1) the extent to which recipients were able to fulfill their reporting requirements and the processes in place to help ensure recipient reporting data quality and (2) how macroeconomic data and methods, and the recipient reports, can be used to help gauge the employment effects of the Recovery Act. Because the recipient reporting effort will be an ongoing process of cumulative reporting, our review represents a snapshot in time. At this juncture, given the national scale of the recipient reporting exercise and the limited time frames in which it was implemented, the ability of the reporting mechanism to handle the volume of data from a wide variety of recipients represents a solid first step in moving toward more transparency and accountability for federal funds; however, there is a range of significant reporting and quality issues that need to be addressed. Consequently, our report contains several recommendations to improve data quality that Office of Management and Budget (OMB) staff generally agreed to implement. We will continue to review the processes that federal agencies and recipients have in place to ensure the future completeness and accuracy of data reported. Finally, our report notes that because the recipient reports cover about one-third of Recovery Act funds, both the data in those reports and other macroeconomic data and methods together can offer a more complete view of the overall employment impact of the Recovery Act. As detailed in our report, our analysis and fieldwork indicate there are significant issues to be addressed in reporting, data quality, and consistent application of OMB guidance in several areas. Many entries merit further attention due to an unexpected or atypical data value or relationship between data. As part of our review, we examined the relationship between recipient reports showing the presence or absence of any full-time equivalent (FTE) counts with the presence or absence of funding amounts shown in either or both data fields for "amount of Recovery Act funds received" and "amount of Recovery Act funds expended." Forty-four percent of the prime recipient reports showed an FTE value. However,we identified 3,978 prime recipient reports where FTEs were reported but no dollar amount was reported in the data fields for amount of Recovery Act funds received and amount of Recovery Act funds expended. These records account for 58,386 of the total 640,329 FTEs reported. While OMB estimates that more than 90 percent of recipients reported, questions remain about the other 10 percent. Less than 1 percent of the records were marked as having undergone review by the prime recipient. The small percentage reviewed by the prime recipients themselves during the OMB review time frame warrants further examination. While it may be the case that the recipients' data quality review efforts prior to initial submission of their reports were seen as not needing further revision during the review timeframe, it may also be indicative of problems with the process of noting and recording when and how the prime recipient reviews occur and the setting of the review flag. In addition, the report record data included a flag as to whether a correction was initiated. Overall, slightly more than a quarter of the reports were marked as having undergone a correction during the period of review. In its guidance to recipients for estimating employment effects, OMB instructed recipients to report solely the direct employment effects as "jobs created or retained" as a single number. Problems with the interpretation of this guidance or the calculation of FTEs were one of the most significant problems we found. Jobs created or retained expressed in FTEs raised questions and concerns for some recipients. One source of inconsistency was variation in the period of performance used to calculate FTEs, which occurred in both the highway and education programs we examined. While there were problems of inconsistent interpretation of the guidance, the reporting process went relatively well for highway projects. DOT had an established procedure for reporting prior to enactment of the Recovery Act. As our report shows, in the cases of Education and the Department of Housing and Urban Development, which do not have this prior reporting experience, we found more problems. State and federal officials are examining identified issues and have stated their intention to deal with them.
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We have been reporting on the department's financial management as an area of high risk since 1995. As discussed in our recent report on the results of our review of the fiscal year 2000 Financial Report of the U.S. Government, DOD's financial management deficiencies, taken together, continue to represent the single largest obstacle to achieving an unqualified opinion on the U.S. government's consolidated financial statements. To date, none of the military services or major DOD components have passed the test of an independent financial audit because of pervasive weaknesses in financial management systems, operations, and controls. These weaknesses not only hamper the department's ability to produce timely and accurate financial management information, but also make the cost of carrying out missions unnecessarily high. Ineffective asset accountability and the lack of effective internal controls continue to adversely affect visibility over its estimated $1 trillion investment in weapon systems and inventories. Such information is key to meeting military objectives and readiness goals. Further, unreliable cost and budget information related to nearly a reported $1 trillion of liabilities and about $347 billion of net costs negatively affects DOD's ability to effectively measure performance, reduce costs, and maintain adequate funds control. As the results of the department's fiscal year 2000 financial audit and other recent auditors' reports demonstrate, DOD continues to confront serious weaknesses in the following areas. Budget execution accounting. The department was unable to reconcile an estimated $3.5 billion difference between its available fund balances according to its records and Treasury's at the end of fiscal year 2000-- similar in concept to individuals reconciling their checkbooks with their bank statements. In addition, the department made frequent adjustments of recorded payments between appropriation accounts, including adjustments to cancelled appropriation accounts of at least $2.7 billion during fiscal year 2000. In addition, a number of obligations were incorrect or unsupported. For example, auditors found that $517 million of the $891 million in recorded Air Force fiscal year 2000 obligations tested were not supported. Further, the department could not fully and accurately account for an estimated $1.8 billion of transactions that were held in suspense accounts at the end of fiscal year 2000. The net effect of DOD's problems in this area is that it does not know with certainty the amount of funding it has available. Until the department can effectively reconcile its available fund balances and Treasury's, ensure that payments are posted to the correct appropriation accounts, and post amounts held in suspense accounts to the proper appropriation accounts, the department will have little assurance that reported appropriation balances are correct. Such information is essential for DOD and the Congress to determine if funds are available that could be used to reduce current funding requirements or that could be reprogrammed or transferred to meet other critical program needs. Environmental and disposal liabilities. The amounts of environmental and disposal liabilities the department has reported over the last few years has varied by tens of billions of dollars--from $34 billion in fiscal year 1998, up to $80 billion in fiscal year 1999, and down to $63 billion in fiscal year 2000. However, these reported amounts potentially excluded billions of dollars of future liabilities associated with DOD's non-nuclear weapons; conventional munitions; training ranges; and other property, plant and equipment--such as landfills. For example, we recently reported that while DOD reported a fiscal year 2000 liability of $14 billion associated with its environmental cleanup of training ranges, other DOD estimates show that this liability could exceed $100 billion. Obtaining reliable estimates of the department's environmental liability is an important factor for DOD managers and oversight officials to consider with respect to the likely timing of related funding requests and DOD's ability to carry out its environmental cleanup and disposal responsibilities. Asset accountability. DOD has continued to experience problems in properly accounting for and reporting on its weapon systems and support equipment. Material weaknesses continue in the central systems DOD relies on to maintain visibility over assets critical to meeting military objectives and readiness goals. For example, in fiscal year 1999, auditors found that Army's central visibility system excluded information on 56 airplanes, 32 tanks, and 36 Javelin command-launch units. Auditors' fiscal year 2000 financial audit testing showed that previously identified problems in the systems and processes that DOD relied on to account for and control its large investment in weapon systems had not yet been corrected. In addition, DOD's inability to account for and control its huge investment in inventories has been an area of major concern for many years. For example, auditors' fiscal year 2000 reviews revealed that (1) Army did not perform required physical counts for wholesale munitions with an estimated value of $14 billion and (2) central accountability and visibility records at four Army test facilities excluded data on about 62,000 missiles, rockets, and other ammunition items that were on hand. In addition, physical counts at the Defense Logistics Agency's 20 distribution depots showed that none of the depots achieved the department's goal of 95 percent inventory record accuracy--with error rates ranging from 6 to 26 percent. As a result of continuing problems in this area, the department continues to spend more than necessary to procure inventory and at the same time, experience equipment readiness problems because of the lack of key spare parts. For example, we reported that because of long-standing weaknesses in controls over shipments, the department's inventories are at high risk for undetected loss and theft. At the same time, and for a number of years, insufficient spare parts have been recognized as a major contributor to aircraft performing at lower mission capable rates than expected. Our recent reporting disclosed that inaccurate, inconsistent, and missing pricing data for weapon system spare parts undermined military units' ability to buy needed spare parts. Net cost information unreliable. A continuing inability to capture and report the full cost of its programs represents one of the most significant impediments facing the department. DOD does not yet have the systems and processes in place to capture the required cost information from the hundreds of millions of transactions it processes each year. Consequently, while DOD reported $347 billion in total net costs for its fiscal year 2000 operations, it was unable to support this amount. The lack of reliable, cost-based information hampers DOD across nearly all its programs and operations. For example, recent reporting highlights the adverse impact the lack of such information has had on the department's studies conducted under Office of Management and Budget (OMB) Circular A-76 and its performance measurement and cost reduction efforts. For example, in December 2000, we reported that our review of DOD functions that were studied over the past 5 years for potential outsourcing under OMB Circular A-76 showed that while DOD reported that savings had occurred as a result of these studies, we could not determine the precise amounts of any such savings because the department lacks actual cost data. Lacking complete and accurate overall life-cycle cost information for weapon systems impairs DOD and congressional decisionmakers' ability to make fully informed judgments on funding comparable weapon systems. DOD has acknowledged that the lack of a cost accounting system is the single largest impediment to controlling and managing weapon system costs, including the cost of acquiring, managing, and disposing of weapon systems. In addition, the measures used in the department's reporting under the Government Performance and Results Act (GPRA) often did not address the cost-based efficiency aspect of performance, making it difficult for DOD to fully assess the efficiency of its performance. For example, we reported that while DOD's performance plan for 2001 included 45 unclassified metrics, few metrics contained efficiency measures based on costs. Financial management systems. DOD lacks integrated, transaction- driven, double entry accounting systems that are necessary to properly control assets and control costs. DOD has acknowledged that, overall, its reported network of 167 critical financial management systems does not comply with the Federal Financial Management Improvement Act's federal financial management systems requirements. DOD's transaction processing, using a large network of systems relied on to carry out its financial management operations, is overly complex and error-prone. Each of the military services continue to operate many stand- alone, nonstandard financial processes and systems. As a result, millions of transactions must be manually keyed and rekeyed into the vast number of systems involved in any given DOD business process. To further complicate processing, transactions must be recorded using a coding structure that, as illustrated in the following figure, can exceed 50 digits. DOD uses such coding--which according to DOD can exceed 75 digits--to accumulate appropriation, budget, and management information for contract payments. In addition, such accounting coding often differs--in terms of type, quantity, and format of data required--by military service and fund type. As a result, financial accountability is lacking and financial management information available for day-to-day decision-making is poor. Weak systems and controls leave the department vulnerable to fraud and improper payments. For example, DOD continues to overpay contractors. Although the full extent of overpayments is not known, the department has an annual budget for purchases involving contractors of over $130 billion. In October 2000, we reported that of the $3.6 billion DOD reported in its fiscal year 1999 financial statements as uncollected debt related to a variety of contract payment problems, at least $225 million represented improper payments, including duplicate payments, overpayments, and payments for goods not received. Without effective controls over this important area, DOD will continue to risk erroneously paying contractors millions of dollars and incur additional, unnecessary costs to collect amounts owed from contractors. DOD has initiated a number of departmentwide reform initiatives to improve its financial operations as well as other key business support processes. These initiatives have produced some incremental improvements, but have not resulted in the fundamental reform necessary to resolve these long-standing management challenges. The underlying causes for the department's inability to resolve its long- standing financial management problems, as well as the other areas of its operations most vulnerable to waste, fraud, abuse, and mismanagement were first identified in our May 1997 testimony. These conditions remain largely unchanged today. Specifically, we believe the underlying reasons for the department's inability to put fundamental reforms of its business operations in place are a lack of top-level leadership and management accountability for cultural resistance to change, including service parochialism and a lack of results-oriented goals and performance measures and monitoring; and inadequate incentives for seeking change. Lack of leadership and accountability. DOD has not routinely established accountability for performance to specific organizations or individuals that have sufficient authority to accomplish desired goals. For example, under the CFO Act, it is the responsibility of agency CFOs to establish the mission and vision for the agency's future financial management. However, at DOD, the Comptroller--who is by statute the department's CFO--has direct responsibility for only an estimated 20 percent of the data relied on to carry out the department's financial management operations. The department has learned through its efforts to meet the Year 2000 computing challenge that to be successful, major improvement initiatives must have the direct, active support and involvement of the Secretary and Deputy Secretary of Defense. Such top- level support helps guarantee that daily activities throughout the department remain focused on achieving shared, agency-wide outcomes. DOD experience has suggested that top management has not had a proactive, consistent, and continuing role in building capacity, integrating daily operations for achieving performance goals, and in creating incentives. Sustaining top management commitment to performance goals is a particular challenge for DOD. In the past, a turnover rate among the department's top political appointees of 1.7 years hindered long-term planning and follow-through. Cultural resistance and parochialism. Cultural resistance to change and service parochialism have also played a significant role in impeding DOD management reforms. DOD has acknowledged that it confronts decades-old problems deeply grounded in the bureaucratic history and operating practices of a complex, multifaceted organization, and that many of these practices were developed piecemeal and evolved to accommodate different organizations, each with its own policies and procedures. For example, as discussed in our July 2000 report, the department has encountered resistance to developing departmentwide solutions under the Secretary's broad-based Defense Reform Initiative (DRI). The department established a Defense Management Council--including high-level representatives from each of the military services--which was intended to serve as the "board of directors" to help break down organizational stovepipes and overcome cultural resistance to changes called for under DRI. However, we found that the council's effectiveness was impaired because members were not able to put their individual military services' or DOD agencies' interests aside to focus on departmentwide approaches to long-standing problems. We have also seen an inability to put aside parochial views and cultural resistance to change impeding reforms in the department's weapon system acquisition and inventory management areas. For example, as we recently reported, while the individual military services conduct considerable analyses justifying major acquisitions, these analyses can be narrowly focused and do not consider joint acquisitions with the other services. In the inventory management area, DOD's culture has supported buying and storing multiple layers of inventory rather than managing with just the amount of stock needed. Unclear goals and performance measures. Further, DOD's reform efforts have been handicapped by the lack of clear, hierarchically linked goals and performance measures. As a result, DOD managers lack straightforward road maps showing how their work contributes to attaining DOD's strategic goals, and they risk operating autonomously rather than collectively. In some cases, DOD had not yet developed appropriate strategic goals, and in other cases, its strategic goals and objectives were not linked to those of the military services and defense agencies. As part of our assessment of DOD's Fiscal Year 1999 Performance Report, we reported that it did not include goals or measures for addressing its contracting challenge, and it was not clear whether the department had achieved identified key program outcomes. The department's 1999 performance report did not provide any information on whether DOD is achieving any reduction in the important area of erroneous payments to contractors nor did it provide any cost-based measures for whether the department had achieved its desired outcome of putting in place a more efficient and cost-effective infrastructure and associated operating procedures. Many of the department's business processes in operation today are mired in old, inefficient processes and systems, many of which are based on 1950s and 1960s technology. The department faces a formidable challenge in responding to technological advances that are changing traditional approaches to business management as it moves to modernize its systems. For fiscal year 2000, DOD reported total information technology investments of over $21 billion supporting a wide range of military operations as well as its business functions, including an estimated $7.6 billion in major information system projects. While DOD plans to invest billions of dollars in modernizing its financial management and other business support systems, it does not yet have an overall blueprint-- or enterprise architecture--in place to guide and direct these investments. Lack of incentives for change. The final underlying cause of the department's inability to carry out needed fundamental reform is the lack of incentives for making more than incremental change to existing "business as usual" processes, systems, and structures. Traditionally, DOD has focused on justifying its need for more funding rather than on the outcomes its programs produced. DOD generally measures its performance by the amount of money spent, people employed, or number of tasks completed. Incentives for DOD decisionmakers to implement changed behavior have been minimal or nonexistent. This underlying problem has perhaps been most evident in the department's acquisition area. In DOD's culture, the success of a manager's career has depended more on moving programs and operations through the DOD process rather than on achieving better program outcomes. The fact that a given program may have cost more than estimated, took longer to complete, and did not generate results or perform as promised is secondary to fielding a new program. To effect real change, actions are needed to (1) break down parochialism and reward behaviors that meet DOD-wide and congressional goals, (2) develop incentives that motivate decisionmakers to initiate and implement efforts that are consistent with better program outcomes, and (3) facilitate a congressional focus on results-oriented management, particularly with respect to resource allocation decisions. The new Secretary of Defense has stated that he intends to include financial management reform among his top priorities. The Secretary faces a monumental task in putting in place such a fundamental reform. The size and complexity of DOD's operations are unparalleled. DOD is not only responsible for an estimated $1 trillion in assets and liabilities, but also for supporting personnel on an estimated 500 bases in 137 countries and territories throughout the world. It has also estimated that it makes $24 billion in monthly disbursements, and that in a given fiscal year, the department may have as many as 500 or more active appropriations. Given the unparalleled nature of DOD's operations, combined with its deeply entrenched financial management weaknesses, it will not be possible to fully resolve these problems overnight. Changing how DOD carries out its financial management operations is going to be tough work. Going forward, various approaches could be used to address the underlying causes of DOD's financial management challenges. But, consistent with our previous testimony before your subcommittee, as well as the results of our survey of world-class financial management organizations and other recent reviews, there are several elements that will be key to any successful approach to reform address the department's financial management challenges as part of a comprehensive, integrated, DOD-wide business process reform; provide for active leadership by the Secretary of Defense and resource control to implement needed financial management reforms; establish clear lines of responsibility, authority, and accountability for such reform tied to the Secretary; incorporate results-oriented performance measures tied to financial management reforms; provide appropriate incentives or consequences for action or inaction; establish an enterprisewide architecture to guide and direct financial management modernization investments; and ensure effective oversight and monitoring. Integrated business process reform strategy. As we have reported in the past, establishing the right goal is essential for success. Central to effectively addressing DOD's financial management problems will be the recognition that they cannot be addressed in an isolated or piecemeal fashion separate from the other major management challenges and high- risk areas facing the department. Successfully reengineering the department's processes supporting its business operations will be critical if DOD is to effectively address deep-rooted organizational emphasis on maintaining "business as usual" across the department. Financial management is a crosscutting issue that affects virtually all of DOD's business processes. For example, improving its financial management operations so that they can produce useful, reliable, and timely cost information will be essential if the department is to effectively measure its progress toward achieving many key outcomes and goals across virtually the entire spectrum of DOD's business operations. At the same time, the department's financial management problems--and, most importantly, the keys to their resolution--are deeply rooted in and dependent upon developing solutions to a wide variety of management problems across DOD's various organizations and business functions. The department has reported that an estimated 80 percent of the data needed for sound financial management comes from the department's other business operations, such as its acquisition and logistics communities. DOD's vast array of costly, non-integrated, duplicate, inefficient financial management systems is reflective of the lack of an enterprise wide, integrated approach to addressing its management challenges. DOD has acknowledged that one of the reasons for the lack of clarity in its reporting under the GPRA was that most of the program outcomes the department is striving to achieve are interrelated. Active leadership and resource control. The department's successful Year 2000 effort illustrated and our survey of leading financial management organizations captured the importance of strong leadership from top management. As we have stated many times before, strong, sustained executive leadership is critical to changing a deeply rooted corporate culture--such as the existing "business as usual" culture at DOD--and successfully implementing financial management reform. The personal, active involvement of the Deputy Secretary of Defense played an important role in building entity wide support for the department's Year 2000 initiatives. Given the long-standing and deeply entrenched nature of the department's financial management problems combined with the numerous competing DOD organizations, each operating with varying and often parochial views and incentives, such visible, sustained top-level leadership will be critical. Clear lines of responsibility and accountability. Establishing clear lines of responsibility, decision-making authority, and resource control for actions across the department tied to the Secretary will also be a key to reform. As we reported with respect to the department's implementation of its DRI, such an accountability structure should emanate from the highest levels and include the secretaries of each of the military services as well as heads of the department's various business areas. Results-oriented performance. As discussed in our report on DOD's major performance and accountability challenges, establishing a results- orientation will be another key element of any approach to reform. Such an orientation should draw upon results that could be achieved through commercial best practices, including outsourcing and shared servicing concepts. Personnel throughout the department must share the common goal of establishing financial management operations that not only produce financial statements that can withstand the test of an audit but, more importantly, also routinely generate useful, reliable, and timely financial information for day-to-day management purposes. In addition, we have previously testified that DOD's financial management improvement efforts should be measured against an overall goal of effectively supporting DOD's basic business processes, including appropriately considering related business process system interrelationships, rather than determining system-by-system compliance. Such a results-oriented focus is also consistent with an important lesson learned from the department's Year 2000 experience. DOD's initial Year 2000 focus was geared toward ensuring compliance on a system-by-system basis and did not appropriately consider the interrelationship of systems and business areas across the department. It was not until the department shifted to a core mission and function review approach that it was able to achieve the desired result--greatly reducing its Year 2000 risk. Incentives and consequences. Another key to breaking down parochial interests and stovepiped approaches that have plagued previous reform efforts will be establishing mechanisms to reward organizations and individuals for behaviors that comply with DOD-wide and congressional goals. Such mechanisms should provide appropriate incentives and penalties to motivate decisionmakers to initiate and implement efforts that result in fundamentally reformed financial management operations. Enterprise architecture. Establishing an enterprise wide financial management architecture will be essential for the department to effectively manage its large, complex system modernization effort now underway. As we testified last year, the Clinger-Cohen Act requires agencies to develop and maintain an integrated system architecture. Such an architecture can help ensure that the department invests only in integrated, enterprise wide business system solutions, and conversely, will help move resources away from non-value added legacy business systems and nonintegrated business system development efforts. In addition, without an architecture, DOD runs the serious risk that its system efforts will result in perpetuating the existing system environment that suffers from systems duplication, limited interoperability, and unnecessarily costly operations and maintenance. In a soon to be issued report, we point out that DOD lacks a financial management enterprise architecture to guide and constrain the billions of dollars it plans to spend to modernize its financial management operations and systems. Monitoring and oversight. Ensuring effective monitoring and oversight of progress will also be a key to bringing about effective implementation of the department's financial management and related business process reform. We have previously testified that periodic reporting of status information to OMB, the Congress, and the audit community was another key lesson learned from the department's successful effort to address its Year 2000 challenge. Finally, this Subcommittee's annual oversight hearings, as well the active interest and involvement of other cognizant Defense committees, will continue to be key to effectively achieving and sustaining DOD's financial management and related business process reform milestones and goals. In closing, while DOD has made incremental improvement, it has a long way to go to address its long-standing, serious financial management weaknesses as part of a comprehensive, integrated reform of the department's business support operations. Such an overhaul must include not only DOD's financial management and other management challenges, but also its high-risk areas of information technology and human capital management. Personnel throughout the department must share the common goal of reforming the department's business support structure.
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The results of the Defense Department (DOD) financial audit for fiscal year 2000 highlight long-standing financial management weaknesses that continue to plague the military. These weaknesses not only hamper the department's ability to produce timely and accurate financial management information but also unnecessarily increase the cost of carrying out its missions. Although DOD has made incremental improvement, it has a long way to go to overcome its long-standing, serious financial management weaknesses as part of a comprehensive, integrated reform of the department's business support operations. Such an overhaul must include not only DOD's financial management and other management challenges but also its high-risk areas of information technology and human capital management. Personnel throughout the department must share the common goal of reforming the department's business support structure. Without reengineering, DOD will have little chance of radically improving its cumbersome and bureaucratic processes.
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To help measure the quality of the 2000 Census and to possibly adjust for any over- or undercounts of various demographic groups, the Bureau designed the A.C.E. program, a separate and independent sample survey conducted as part of the 2000 Census. When matched to the census data, A.C.E. data were to enable the Bureau to use statistical estimates of net coverage errors to adjust final census tabulations. However, in March 2003, after much research and deliberation, the Bureau decided against using any A.C.E. estimates of coverage error to adjust the 2000 Census, because of several methodological concerns. The Bureau measured the accuracy of the 1990 Census as well, and recommended statistically adjusting the results. However, the Secretary of Commerce determined that the evidence to support an adjustment was inconclusive and decided not to adjust the 1990 Census. In 1999 we examined how these statistical population estimates might have redistributed federal assistance among the states had they been used to calculate formula grants. Looking toward the 2010 Census, the Bureau plans to use statistical population estimates to (1) produce estimates of components of census net and gross coverage error (the latter includes misses and erroneous enumerations) in order to assess accuracy, (2) determine whether the strategic goals of the census are met, and (3) identify ways to improve the design of future censuses. The Bureau does not plan to use statistical estimates of the population for adjusting census data based on its belief that the 2000 Census demonstrated "that the science is insufficiently advanced to allow making statistical adjustment to population counts of a successful decennial census in which the percentage of error is presumed to be so small that adjustment would introduce as much or more error than it was designed to correct." In fiscal year 2004, the federal government administered 1,172 grant programs, with $460.2 billion in combined obligations. However, as shown in table 1, most of these obligations were concentrated in a small number of grants. For example, Medicaid was the largest formula grant program, with federal obligations of $183.2 billion, or nearly 40 percent of all grant obligations, in fiscal year 2004. The top 20 grant programs comprised around two-thirds of all federal grant programs, with $307.9 billion in obligations for fiscal year 2004 (SSBG is not included in table 1, because with obligations of $1.7 billion, it is not among the top 20 formula grant programs). Based on our simulations, recalculating allocations of key programs using statistical population estimates, states would have shifted less than 0.25 percent of $161.4 billion in Medicaid and SSBG formula grant funding. The two key programs analyzed--Medicaid and SSBG--together received federal allocations of $161.4 billion in fiscal year 2004. Federal allocations for Medicaid (excluding such administrative costs as processing, making payments to service providers, and monitoring the quality of services to beneficiaries) were $159.7 billion, by far the highest federal allocation in fiscal year 2004. Using statistical population estimates to recalculate federal Medicaid allocations to states, states would have shifted 0.23 percent of $159.7 billion in federal Medicaid funds in fiscal year 2004 and 0.25 percent of $1.7 billion in SSBG funds would have shifted as a result of the simulations in fiscal year 2005. (Appendix IV contains tables showing the difference between using estimated and actual population data from the 1990 and 2000 Censuses for Medicaid and SSBG.) Because the two programs allocate state funding using different formulas, funding reallocations for the two programs may produce results that are different from one another for a particular state. For example, using the 2000 statistical population estimates, which were lower for Minnesota than the official census population count, Minnesota's Medicaid allocation would have remained the same. This is because Medicaid allocations are subject to a floor, and Minnesota was already receiving the minimum required reimbursement. However, it would have lost funding under SSBG, because the statistical population estimates from the 2000 Census, and the subsequent recalculations, would have reduced funding. In another example, the District of Columbia allocation would have remained the same for 2000 under Medicaid, because the District of Columbia receives a special rate that is higher than its calculated rate, but it would have gained funding under SSBG because its population, as measured by the 2000 Census, was originally lower than the census population estimates. (For information on how these formulas are calculated, see app. I.) Using statistical population estimates to recalculate federal Medicaid allocations, states would have shifted 0.23 percent of $159.7 billion of federal Medicaid funds overall in fiscal year 2004 as a result of the simulation. If statistical population estimates had been used, of the overall allocation of $159.7 billion of federal funds, 22 states would have received more Medicaid funding, 17 states would have received less, while 11 states and the District of Columbia would have received the same. The gaining states would have received an additional $208.5 million, and the losing states would have received $368 million less in funding. Based on our simulation of the formula funding for Medicaid---Nevada would have gained 1.47 percent in grant funding and Wisconsin would have lost 1.46 percent. (Appendix IV contains tables showing the difference between using estimated and actual population data from the 1990 and 2000 Censuses to recalculate Medicaid allocations.) Figure 1 shows the state-by-state result--gain or loss--of recalculated Medicaid grant funding using the statistical population estimates. Most of the estimated increases in state allocations would have tended to congregate in the northwestern, southwestern, and southeastern regions of the country and Hawaii and Alaska. Most of the estimated decreases in state allocations would have tended to congregate in the northcentral region of the country. The southeastern and northeastern regions would have experienced both increases and decreases in funding and all southeastern states except Florida would have experienced increases. Figure 2 shows how much (as a percentage) and where Medicaid funding would have shifted as a result of using statistical population estimates for recalculating formula grant funding by state. We estimate that 20 states would have received an increase in allocations from more than 0 to less than 1 percent, while 2 states would have increased by more than 1 percent. Conversely, 7 states would have experienced a decrease in allocations of greater than one to less than 1.5 percent; 10 states' allocations would have decreased by more than 0 to less than 1 percent; and 11 states and the District of Columbia would have experienced no change because the shift would have fallen below the floor and above the ceiling that are built into the FMAP formula. Using statistical population estimates to recalculate federal SSBG allocations, 0.25 percent of $1.7 billion in SSBG funds would have shifted in fiscal year 2005 as a result of the simulation. The total $1.7 billion SSBG allocation would not have changed, because SSBG receives a fixed annual appropriation. In other words, those states receiving additional funds would have reduced the funds of other states. In short, 27 states and the District of Columbia would have gained $4.2 million and 23 states would have lost a total of $4.2 million. Based on our simulation of the formula funding for SSBG, Washington, D.C. would have gained 2.05 percent in grant funding and Minnesota would have lost 1.17 percent. (Appendix IV contains tables showing the difference between using estimated and actual population data from the 1990 and 2000 Censuses for SSBG funding.) Figure 3 shows the state-by-state result--gain or loss--of recalculated SSBG grant funding using statistical population estimates. Because the reallocations are based on the same census statistical population estimates as the Medicaid estimated reallocations, most of the estimated increases in state allocations would have tended to congregate in the southeastern, southwestern, and northwestern regions of the country, as they did in our Medicaid simulation. The estimated decreases would have been grouped in the northcentral region and several states of the northeastern region of the country. The northeastern region would also have experienced both increases and decreases in funding. Wyo. Mich. R.I. Conn. Nebr. Pa. N.J. Ill. Ind. Del. Colo. Kans. Mo. W.Va. Va. Md. Ky. D.C. N.C. Okla. Tenn. N.Mex. Ark. S.C. Miss. Ala. Ga. Tex. La. Fla. Figure 4 shows how much (as a percentage) and where SSBG funding would have shifted as a result of using statistical population estimates for recalculating formula grant funding by state. By recalculating SSBG state allocations using the statistical population estimates for states based on 2003 Census population numbers, we estimate that 27 states would have experienced an increase from more than 0 to less than 1 percent; the District of Columbia would have increased by more than 2 percent; 2 states' allocations would have decreased by more than one percent; and 21 states' allocations would have decreased by more than 0 to less than 1 percent. For the Medicaid program, recalculating state allocations using statistical population estimates based on the 2000 Census would have changed the funding for 39 states in fiscal year 2004. In particular, 22 states would have increased their allocations by $208.5 million, 17 states would have decreased them by $368.0 million, and 11 states and the District of Columbia would have had no change. By contrast, recalculating state allocations using statistical population estimates based on the 1990 Census, the number of changing states would have remained the same but the amounts shifting among the states would have changed in fiscal year 1997. Table 2 presents the comparative information from the two analyses. The allocations for the gaining states would have decreased by almost 50 percent, from $402.4 million for the 1990 Census to $208.5 million for the 2000 Census, while the allocations for the losing states would have increased by 7 percent, from $344.6 million to $368.0 million. While total allocations under the Medicaid program increased by over 75 percent from fiscal year 1997 to fiscal year 2004, the relative or percentage change in state funding would have decreased in our simulation of recalculations of state allocations using statistical population estimates. We have a similar finding for the SSBG program. Our recalculation of state allocations would have resulted in a smaller change in allocations when we compare the results of our recalculation using statistical population estimates based on the 2000 Census to the results based on the 1990 Census. The change in funding would have been reduced by half using the statistical population estimates based on the 2000 Census. Total SSBG state allocations decreased by 26 percent between fiscal year 1998 and fiscal year 2005, and the percentage shift in funding would also have been reduced, from 0.37 percent to 0.25, using the statistical population estimates based on the 2000 Census. In summary, using the statistical population estimates based on the 2000 Census to recalculate Medicaid and SSBG allocations would have resulted in a smaller shift in program funding than using the statistical population estimates based on the 1990 Census. This is because the difference between the actual and estimated population counts was smaller for the 2000 Census compared to the 1990 Census. As mentioned earlier, the recalculated allocations are the result of simulations using statistical population estimates and were done for the purpose of illustrating the sensitivity of these two formula grant programs to alternative population estimates. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from its issuance date. At that time we will send copies of the report to other interested congressional committees, the Secretary of Commerce, the Secretary of Health and Human Services, the Director of the U.S. Census Bureau, and the Director of the Office of Management and Budget. We will make copies available to others upon request. This report will also be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me on (202) 512-6806 or by email at [email protected]. GAO staff who made major contributions to this report are listed in appendix VI. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. As agreed with your offices, we identified (1) the top 20 formula grant programs based on the amount of funds targeted by any means, and (2) how much money would have been allocated using census data for certain formula grant programs, and the prospective impact of using estimated population counts from the 1990 and 2000 Censuses to recalculate state allocations for these grant programs. We use the term "allocation" to include Department of Health and Human Services (HHS) reimbursement to states of Medicaid expenditures subject to the Federal Medical Assistance Percentage (FMAP) formula and Social Services Block Grant (SSBG) state allotments. We use the term "statistical population estimates" to refer to the results of the coverage measurement programs that the Census Bureau (Bureau) conducted following the 1990 and 2000 Censuses. To identify the top 20 formula grant programs based on the amount of funds targeted by any means, we used fiscal year 2004 grants expenditure and obligations data from the Bureau's Consolidated Federal Funds Report (CFFR), the most recent data available at the time of our review. While we recently reported on inaccuracies in the CFFR, we determined that the CFFR is adequate for purposes of identifying the top 20 federal formula grant programs because it shows the overall magnitude of these programs. Because the CFFR lists direct expenditures or obligations, the amount shown for Medicaid in table 1 is different from the Medicaid allocations shown in the rest of the report, where we use state expenditure data subject to the FMAP formula, which exclude administrative costs. Administrative costs for which Medicaid reimburses states include nine broad tasks: (1) inform potentially eligible individuals and enroll those who are eligible, (2) determine what benefits it will cover in what settings, (3) determine how much it will pay for the benefits it covers and from whom to buy those services, (4) set standards for providers and managed care plans from which it will buy covered benefits and contract with those who meet the standards, (5) process and make payments to service providers, (6) monitor the quality of services to beneficiaries, (7) ensure that state and federal health care funds are not spent improperly or fraudulently, (8) have a process for resolving grievances, and (9) collect and report information for effective administration and program accountability. To determine how much money was allocated using census population counts for Medicaid and SSBG, we obtained population and income data from the Department of Commerce (Commerce). Additionally, we obtained Medicaid expenditures, SSBG allocations, and certain other information from HHS. Table 3 displays the census population counts for 1990 and 2000 and their statistical estimates. We obtained state per capita income--the ratio of personal income to population--for 2000, 2001, and 2002 from Commerce and replicated the actual FMAP for 2005 using fiscal year 2004 state expenditure data. For the SSBG state allocation formula, we obtained state population estimates for 2003 and replicated the SSBG allocations for 2005. The official 1990 Census population counts and statistical population estimates from the 1990 coverage measurement program known as the Post-Enumeration Survey (PES) come from our earlier report. To analyze the prospective impact of estimated population counts on the money allocated to the states through these two grant programs, we recalculated the state allocations using statistical estimates of the population that were developed for the 1990 and 2000 Censuses in lieu of the actual census numbers. We used the population estimates, which are based on the 2000 Census counts, and then adjusted these population estimates by the difference between the 2000 official population counts and the statistical estimates of the population (A.C.E.). Our procedure to simulate the formula allocations using adjusted counts was to (a) obtain the population estimates used to calculate the Medicaid FMAP and SSBG allocations, (b) subtract the A.C.E. population estimates from the official 2000 Census population counts, and (c) add the difference from (b) to the population estimates from (a). We included the 50 states and the District of Columbia in our calculations, but did not include the territories: American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the Virgin Islands, because their allocations use formulas that are different from those used by the 50 states we analyzed. To verify our approach, we spoke with Department of Commerce and Department of Health and Human Services officials who administer these grant programs about the procedures they use to calculate the formula funding amounts. Importantly, our analyses of Medicaid and SSBG are simulations and were conducted only to illustrate the sensitivity of these two grant programs to alternative population estimates. Both the Census Bureau and GAO deem the 1990 and 2000 statistical population estimates as unreliable and they should not be used for any purposes that legally require data from the decennial census. Medicaid is an entitlement program. The federal share of total Medicaid program costs is determined using the FMAP, a statutory formula that calculates the portion of each state's Medicaid expenditures that the federal government will pay. Our Medicaid simulation uses the fiscal year 2005 FMAP, which applies 2001 through 2002 personal income and population data, and fiscal year 2004 expenditure data. The formula calculates the federal matching rate for each state on the basis of its per capita income (PCI) in relation to national PCI. States with a low PCI receive a higher federal matching rate, and states with a high PCI receive a lower rate. If applying the formula renders a state's reimbursement less than 50 percent of its allowable expenditures, the state is still entitled to be reimbursed for a minimum of 50 percent--or "floor"--of what it spent. Conversely, a state cannot be reimbursed for more than 83 percent of allowable expenditures--the "ceiling." Thus, if one used the A.C.E. statistical estimates to recalculate state Medicaid allocations, states' reimbursements for allowable expenditures would not be less than 50 percent, the "floor," or more than the "ceiling." Our calculations do not include administrative costs, because they are not subject to the FMAP formula. The Medicaid data we used in our calculations include the Indian Health and the Family Planning programs, which are not subject to the allocation formula. Agency officials told us that the expenditures for these two programs are so small in relation to the total Medicaid expenditures that they do not materially affect the calculations of state allocations subject to the FMAP formula. The SSBG federal grant is for a fixed amount determined in an annual appropriation, and its formula is set up so that an increase in funding to any state is offset by a decrease to others. To estimate the prospective impact of using statistical population estimates to recalculate allocations for SSBG, we used 2003 population data adjusted by the difference between the 2000 Census and the A.C.E. estimates and fiscal year 2005 allocations to the states for our analysis--the data HHS used in its fiscal year 2005 grant allocations to the states. Unlike Medicaid, SSBG includes administrative costs in its population-based formula to calculate state allocations. Program Objectives: To provide financial assistance to states for payment of medical care on behalf of cash assistance recipients, children, pregnant women, and the aged who meet income and resource requirements and other categorically eligible groups. Federal Agency: Department of Health and Human Services (HHS), Centers for Medicare & Medicaid Services. Fiscal Year 2004 Obligations: $183.2 billion. (Federal allocations excluding administrative costs: $159.7 billion.) Formula Calculation: Eligible medical expenses are reimbursed based on the per capita income of the state. The federal reimbursement rate, known as the Federal Medical Assistance Percentage (FMAP), ranges from a minimum of 50 percent to a maximum of 83 percent. Most administrative expenses are reimbursed at a flat rate of 50 percent but may be as high as 100 percent as is the case with immigration status verification. Formula Constraints: No state may receive a matching percentage below 50 percent or in excess of 83 percent. FMAP = Federal Medical Assistance Percentage. PCI = Per capita personal income. PI = Personal income. Pop = State population. Pop: Department of Commerce, Bureau of Economic Analysis, and Census Bureau. Amount Shifted: $368 million, or a 0.23 percent overall loss of the total $159.7 billion allocated among the states as a result of the simulation. Comments: Allotment amounts were calculated for fiscal year 2004, the latest year for which data were available. Total federal allotment includes some amounts for Family Planning and Indian Health Services that are not subject to the FMAP. We use the term "allocation" to include HHS reimbursement to states of Medicaid expenditures subject to the federal FMAP formula (net of administrative costs). Program Objectives: To enable states to provide social services directed toward the following goals: (1) reducing dependency; (2) promoting self- sufficiency; (3) preventing neglect, abuse, or exploitation of children and adults; (4) preventing or reducing inappropriate institutional care; and (5) securing admission or referral for institutional care when other forms of care are not appropriate. Federal Agency: Department of Health and Human Services, Administration for Children and Families. Fiscal Year 2004 Obligations: $1.7 billion. Formula Calculation: State funding is allocated in proportion to each state's share of the national population. Formula Constraints: None. Amt = Funds available for allocation to states. Pop = A state's population count. Amt: Department of Health and Human Services, Administration for Children and Families. Pop: Department of Commerce, Census Bureau. Amount Shifted: $4.2 million, or 0.25 percent of the total $1.7 billion allocated. The Social Services Block Grant (SSBG) federal grant is for a fixed amount determined in an annual appropriation; an increase in funding to any state is offset by a decrease in others. Comment: We use the term "allocation" to include SSBG state allotments. SSBG state allotments are based on each state's population in proportion to the total U.S. population. In addition to the individual named above, Robert Goldenkoff, Assistant Director, as well as Faisal Amin, Robert Dinkelmeyer, Carlos Diz, Gregory Dybalski, Amy Friedlander, and Sonya Phillips made key contributions to this report.
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Decennial census data need to be as accurate as possible because the population counts are used for, among other purposes, allocating federal grants to states and local governments. The U.S. Census Bureau (Bureau) used statistical methods to estimate the accuracy of 1990 and 2000 Census data. Because the Bureau considered the estimates unreliable due to methodological uncertainties, they were not used to adjust the census results. Still, a key question is how sensitive are federal formula grants to alternative population estimates, such as those derived from statistical methods? GAO was asked to identify (1) the top 20 formula grant programs based on the amount of funds targeted by any means, and (2) the amount of money allocated for Medicaid and Social Services Block Grant (SSBG), and the prospective impact of estimated population counts from the 1990 and 2000 Censuses on state allocations for these two programs. Importantly, as agreed, GAO's analysis only simulates the formula grant reallocations. We used fiscal year 2004 Medicaid state expenditure and 2005 SSBG state allocation data, the most recent data available. In fiscal year 2004, the top 20 formula grant programs together had $308 billion in obligations, or 67 percent of the total $460.2 billion obligated by the 1,172 federal grant programs. Medicaid was the largest formula grant program, with obligations of $183.2 billion, or nearly 40 percent of all grant obligations. The federal government allocated $159.7 billion to states in Medicaid funds (not including administrative costs such as processing and making payments to service providers) and $1.7 billion in SSBG funds. Recalculating these allocations using statistical population estimates from the Accuracy and Coverage Evaluation and the Post Enumeration Survey--independent sample surveys designed to estimate the number of people that were over- and undercounted in the 2000 and 1990 Censuses--would have produced the following results. First, a total of 0.23 percent ($368 million) of federal Medicaid funds would have been shifted overall among the states in fiscal year 2004 and 0.25 percent ($4.2 million) of SSBG funds would have shifted among the states in fiscal year 2005 as a result of the simulations using statistical population estimates from the 2000 Census. Second, with respect to Medicaid, 22 states would have received additional funding, 17 states would have received less funding, and 11 states and the District of Columbia would have received the same amount of funding using statistical population estimates from the 2000 Census. Based on a fiscal year 2004 federal Medicaid allocation to the states of $159.7 billion, Nevada would have been the largest percentage gainer, with an additional 1.47 percent in funding, and Wisconsin would have lost the greatest percentage--1.46 percent. Third, with respect to SSBG, 27 states and the District of Columbia would have gained funding, and 23 states would have lost funding using statistical population estimates from the 2000 Census. Based on a fiscal year 2005 SSBG allocation of $1.7 billion, Washington, D.C. would have been the biggest percentage gainer, receiving an additional 2.05 percent in funding, while Minnesota would have lost the greatest percentage funding--1.17 percent. Fourth, statistical population estimates from the 2000 Census would have shifted a smaller percentage of funding compared to those using the 1990 Census because the difference between the actual and estimated population counts was smaller in 2000 compared to 1990.
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JPDO has made progress in planning NextGen by facilitating collaboration among its partner agencies, working to finalize key planning documents, and improving its collaboration and coordination with FAA. Among the challenges JPDO faces are institutionalizing collaboration among the partner agencies, and identifying and exploring questions related to which entity will fund and conduct the research and development needed to meet NextGen requirements. JPDO has made progress in many areas in planning NextGen, as we reported in November 2006. I will highlight just a few of those areas in this testimony. First, JPDO has taken several actions that are consistent with practices that facilitate interagency collaboration--an important point given how critical such collaboration is to the success of JPDO's mission. For example, the JPDO partner agencies worked together to develop a high level plan for NextGen along with eight strategies that broadly address the goals and objectives for NextGen. JPDO has since issued two annual updates to this plan, as required by Congress. Also, JPDO's organizational structure involves federal and nonfederal stakeholders throughout. This structure includes a federal interagency senior policy committee, an institute for nonfederal stakeholders, and eight integrated product teams that bring together federal and nonfederal experts to plan for and coordinate the development of technologies that will address JPDO's eight broad strategies. JPDO has also begun leveraging the resources of its partner agencies in part by reviewing their research and development programs, identifying work to support NextGen, and working to minimize duplication of research programs across the agencies. For example, one opportunity for coordination involves aligning aviation weather research across FAA, NASA, and the Departments of Commerce and Defense, developing a common weather capability, and integrating weather information into NextGen. In addition to developing and updating its high-level integrated plan, first published in December 2004, JPDO has been working to develop several critical documents that form the foundation of NextGen planning, including a draft concept of operations and an enterprise architecture. The concept of operations describes how the transformational elements of NextGen will operate in 2025. It is intended to establish general stakeholder buy-in to the NextGen end state, a transition path, and a business case. The enterprise architecture follows from the concept of operations and will describe the system in more detail (using the federal enterprise architecture framework). It will be used to integrate NextGen efforts of the partner agencies. The draft concept of operations has been posted to JPDO's Web site for stakeholder review and comment. According to JPDO, an expanded version of the enterprise architecture is expected in mid-2007. Progress has also been made in improving the collaboration and coordination between JPDO and FAA--the agency largely responsible for the implementation of NextGen systems and capabilities. FAA has expanded and revamped its Operational Evolution Plan (OEP)--renamed the Operational Evolution Partnership--to become FAA's implementation plan for NextGen. The OEP is being expanded to apply to all of FAA and is intended to become a comprehensive description of how the agency will implement NextGen, including the required technologies, procedures, and resources. An ATO official told us that the new OEP is to be consistent with JPDO's key planning documents and partner agency budget guidance. According to FAA, the new OEP will allow it to demonstrate appropriate budget control and linkage to NextGen plans and will force FAA's research and development to be relevant to NextGen's requirements. According to FAA documents, the agency plans to publish the new OEP in June 2007. In an effort to further align FAA's efforts with JPDO's plans for NextGen, FAA has created a NextGen Review Board to oversee the OEP. This Review Board will be co-chaired by JPDO's Director and ATO's Vice President of Operations Planning. Initiatives, such as concept demonstrations or research, proposed for inclusion in the OEP, will now need to go through the Review Board for approval. Initiatives are to be assessed for relation to NextGen requirements, concept maturity, and risk. An ATO official told us that the new OEP process should also help identify some smaller programs that might be inconsistent with NextGen and which could be discontinued. Additionally, as a further step towards integrating ATO and JPDO, the administration's reauthorization proposal calls for the JPDO Director to be a voting member of FAA's Joint Resources Council and ATO's Executive Council. Although JPDO has established a framework for collaboration, it has faced a challenge in institutionalizing this framework. As JPDO is a coordinating body, it has no authority over its partner agencies' key human and technological resources needed to continue developing plans and system requirements for NextGen. For example, JPDO has been working to establish a memorandum of understanding (MOU) with its partner agencies to more clearly define partner agencies' roles and responsibilities since at least August 2005. As of March 16, 2007, however, the MOU remained unsigned. Another key activity for strengthening the collaborative effort will be synchronizing the NextGen enterprise architecture with the partner agencies' enterprise architectures. These types of efforts, which would better institutionalize JPDO's collaborative framework throughout the partner agencies, will be critical to JPDO's ability to leverage the necessary funding for developing NextGen. Institutionalization would help ensure that, as administrations and staffing within JPDO change over the years, those coming into JPDO will have a clear understanding of their roles and responsibilities and of the time and resource commitments entailed. JPDO faces a challenge in developing a comprehensive cost estimate for the NextGen effort. In its recent 2006 Progress Report, JPDO reported some cost estimates related to FAA's NextGen investment portfolio, which I will discuss in more detail later in this statement. However, JPDO is still working to develop an understanding of the future requirements of its other partner agencies and the users of the system. JPDO stated that it sees its work in estimating costs as an ongoing process. The office notes that it will gain additional insight into the business, management, and technical issues and alternatives that will go into the long-term process of implementing NextGen as it continues to work with industry, and that it expects its cost estimates to continue to evolve. Another challenge facing JPDO is exploring potential gaps in the research and development necessary to achieve some key NextGen capabilities and to keep the development of new systems on schedule. In the past, a significant portion of aeronautics research and development, including intermediate technology development, has been performed by NASA. However, our analysis of NASA's aeronautics research budget and proposed funding shows a 30 percent decline, in constant 2005 dollars, from fiscal year 2005 to fiscal year 2011. To its credit, NASA plans to focus its research on the needs of NextGen. However, NASA is also moving toward a focus on fundamental research and away from developmental work and demonstration projects. FAA is currently assessing its capacity to address these issues. Currently it is unknown how all of the significant research and development activities inherent in the transition to NextGen will be conducted or funded. Still another challenge facing JPDO is ensuring that all relevant stakeholders are involved in the effort. Some stakeholders, such as current air traffic controllers and technicians, will play critical roles in NextGen, and their involvement in planning for and deploying the new technology will be important to the success of NextGen. In November 2006, we reported that air traffic controllers were not involved in the NextGen planning effort. Controllers are beginning to become involved as the controllers' union is now represented on a key planning body. However, technicians are currently not participating in NextGen efforts. Input from current air traffic controllers who have recent experience controlling aircraft and current technicians who will maintain the new equipment is important is considering human factors and safety issues. Our work on past air traffic control modernization projects has shown that a lack of stakeholder or expert involvement early and throughout a project can lead to cost increases and delays. Addressing human factors issues is another key challenge for JPDO. For example, the NextGen concept of operations envisions that pilots will take on a greater share of the responsibility for maintaining safe separation and other tasks currently performed by controllers--raising human factors questions about whether pilots can safely perform these additional duties. According to JPDO, the change in the roles of controllers and pilots is the most important human factors issue involved in creating NextGen but will be difficult to research because data on pilot behavior are not readily available for use in creating models. Finally, we reported in November 2006 that establishing credibility was viewed by the majority of the expert panelists we consulted as a challenge facing JPDO. This view partially stems from past experiences in which the government has stopped some modernization efforts after industry invested in supporting technologies. Stakeholders' belief that the government is fully committed to NextGen will be important as efforts to implement NextGen technologies move forward. Another credibility challenge for JPDO is convincing stakeholders that the collaborative effort is making progress toward facilitating implementation. To address this challenge, the new Director of JPDO is planning to implement some structural and procedural changes to the office. For example, the Director has proposed changing JPDO's integrated product teams into "working groups" that would task small teams with exploring specific issues and delivering discrete work products. These changes have not yet been implemented at JPDO and it will take some time before the effectiveness of these changes can be evaluated. FAA is a principal player in JPDO's efforts and will be the chief implementer of NextGen. Successful implementation will depend, in part, on how well FAA addresses its challenges of institutionalizing its recent improvement in managing air traffic control modernization efforts, addressing the cost challenges of implementing NextGen while safely maintaining the current air traffic control system, and obtaining the expertise needed to implement a system as complex as NextGen. I turn now to these challenges. A successful transition to NextGen will depend, to a great extent, on FAA's ability to manage the acquisition and integration of multiple NextGen systems. Since 1995, we have designated FAA's air traffic control modernization program as high risk because of systemic management and acquisition problems. In recent years, FAA has taken a number of actions to improve its management of acquisitions. Realization of NextGen goals could be severely compromised if FAA's improved processes are not institutionalized and carried over into the implementation of NextGen, which is an even more complex and ambitious undertaking than past modernization efforts. To its credit, FAA has taken a number of actions to improve its acquisition management. By creating the Air Traffic Organization (ATO) in 2003, and appointing a Chief Operating Officer (COO) to head ATO, FAA established a new management structure and adopted more leading practices of private sector businesses to address the cost, schedule, and performance shortfalls that have plagued air traffic control acquisitions. ATO has worked to create a flatter organization, with fewer management layers, and has reported reducing executive staffing by 20 percent and total management by 16 percent. In addition, FAA uses a performance management system to hold managers responsible for the success of ATO. More specifically, to better manage its acquisitions and address problems we have identified, FAA has established strategic goals to improve its acquisition workforce culture and build towards a results-oriented, high-performing organization; developed and applied a process improvement model to assess the maturity of its software and systems acquisitions capabilities resulting in, among other things, enhanced productivity and greater ability to predict schedules and resources; and reported that it has established a policy and guidance on using Earned Value Management (EVM) in its acquisition management system and that 19 of its major programs are currently using EVM. Institutionalizing these improvements throughout the agency (i.e., providing for their duration beyond the current leadership by ensuring that reforms are fully integrated into the agency's structure and processes and have become part of its organizational culture) will continue to be a challenge for FAA. For example, the agency has yet to implement its cost estimating methodology, although, according to the agency, it has provided training on the methodology to employees. Furthermore, FAA has not established a policy to require use of its process improvement model on all major acquisitions for the national airspace system. Until the agency fully addresses these legacy issues, it will continue to risk program management problems affecting cost, schedule, and performance. With a multi-billion dollar acquisition budget, addressing these issues is as important as ever. While FAA has implemented many positive changes to its management processes, it currently faces the loss of key leaders. We have reported that the experiences of successful transformations and change management initiatives in large public and private organizations suggest that it can take 5 to 7 years or more until such initiatives are fully implemented and cultures are transformed in a sustainable manner. Such changes require focused, full-time attention from senior leadership and a dedicated team. FAA's management improvements are relatively recent developments, and the agency will have lost two of its significant agents for change--the Administrator and the COO--by the end of September. The administrator's term ends in September 2007; the COO left in February 2007, after serving 3 years. This situation is exacerbated by the fact that the current Director of JPDO is also new, having assumed that position in August 2006. For the management and acquisition improvements to further permeate the agency, and thus provide a firm foundation upon which to implement NextGen, FAA's new leaders will need to demonstrate the same commitment to improvement as the outgoing leaders. This continued commitment to change is critical over the next few years, as foundational NextGen systems begin to be implemented. Expeditiously moving to find a new COO will help sustain this momentum. JPDO recently reported some estimated costs for NextGen, including specifics on some early NextGen programs. JPDO believes the total federal cost for NextGen infrastructure through 2025 will range between $15 billion and $22 billion. JPDO also reported that a preliminary estimate of the corresponding cost to system users, who will have to equip with the advanced avionics that are necessary to realize the full benefits of some NextGen technologies, ranges between $14 and $20 billion. JPDO noted that this range for avionics costs reflects uncertainty about equipage costs for individual aircraft, the number of very light jets that will operate in high-performance airspace, and the amount of out-of-service time required for installation. In its Capital Investment Plan for fiscal years 2008-2012, FAA includes estimated expenditures for eleven line items that are considered NextGen capital programs. The total 5-year estimated expenditures for these programs are $4.3 billion. In fiscal year 2008, only six of the line items are funded for a total of roughly $174 million; funding for the remaining five programs would begin with the fiscal year 2009 budget. According to FAA, in addition to capital spending for NextGen, the agency will also spend an estimated $300 million on NextGen-related research and development from fiscal years 2008 through 2012. Also, the administration's budget for fiscal year 2008 for FAA includes $17.8 million to support the activities of JPDO. It is important to note that while FAA must manage the costs associated with the NextGen transformation, it must simultaneously continue to fund and operate the current national airspace system. In fact, the Department of Transportation's Inspector General has reported that the majority of FAA's capital funds go toward the sustainment of current air traffic systems and that, over the last several years, increasing operating costs have crowded out funds for the capital account. Efforts to sustain the current system are particularly important given the safety concerns that could be involved with system outages--the number of which has increased steadily over the last few years as the system continues to age. For example, the adequacy of FAA's maintenance of existing systems was raised following a power outage and equipment failures in Southern California that caused hundreds of flight delays during the summer of 2006. Investigations by the DOT Inspector General into these incidents identified a number of underlying issues, including the age and condition of equipment. Nationwide, the number of scheduled and unscheduled outages of air traffic control equipment and ancillary support systems has been increasing (see fig. 1). According to FAA, increases in the number of unscheduled outages indicate that systems are failing more frequently. FAA also notes that the duration of unscheduled equipment outages has also been increasing in recent years from an average of about 21 hours in 2001 to about 40 hours in 2006, which may indicate, in part, that maintenance and troubleshooting activities are requiring more effort and longer periods of time. However, the agency considers user impact and resource efficiency when planning and responding to equipment outages, according to an FAA official. As a result, although some outages will have longer restoration times, FAA believes that they do not adversely affect air traffic control operations. It will be important for FAA to monitor and address equipment outages to ensure the safety and efficiency of the legacy systems and a smooth transition to NextGen. As part of managing the costs of system sustainment and system modernization, FAA is seeking ways to reduce costs by introducing infrastructure and operational efficiencies. For example, FAA plans to produce cost savings through outsourcing and facility consolidations. FAA is outsourcing flight service stations and estimates a $2.2 billion savings over 12 years. Similarly, FAA is seeking savings through outsourcing its planned nationwide deployment of Automatic Dependent Surveillance- Broadcast (ADS-B), a critical surveillance technology for NextGen. FAA is planning to implement ADS-B through a performance-based contract in which FAA will pay "subscription" charges for the ADS-B services and the vendor will be responsible for building and maintaining the infrastructure. (FAA also reports that the ADS-B rollout will allow the agency to remove 50 percent of its current secondary radars, saving money in the ADS-B program's baseline.) As for consolidating facilities, FAA is currently restructuring its administrative service areas from nine offices to three offices, which FAA estimates will save up to $460 million over 10 years. We have previously reported that FAA should pursue further cost control options, such as exploring additional opportunities for contracting out services and consolidating facilities. However, we recognize that FAA faces challenges with consolidating facilities, an action that can be politically sensitive. In recognition of this sensitivity, the administration has proposed in FAA's reauthorization proposal that the Secretary of Transportation be authorized to establish an independent, five-member Commission, known as the Realignment and Consolidation of Aviation Facilities and Services Commission, to independently analyze FAA's recommendations to realign facilities or services. The Commission would then send its own recommendations to the President and to Congress. In the past, we have noted the importance of potential cost savings through facility consolidations; however, it must also be noted that any such consolidations must be handled through a process that solicits and considers stakeholder input throughout, and fully considers the safety implications of any proposed facility closures or consolidations. In the past, a lack of expertise contributed to weaknesses in FAA's management of air traffic control modernization efforts, and industry experts with whom we spoke questioned whether FAA will have the technical expertise needed to implement NextGen. In addition to technical expertise, FAA will need contract management expertise to oversee the systems acquisitions and integration involved in NextGen. In November, we recommended that FAA examine its strengths and weaknesses with regard to the technical expertise and contract management expertise that will be required to define, implement, and integrate the numerous complex programs inherent in the transition to NextGen. In response to our recommendation, FAA is considering convening a blue ribbon panel to study the issue and make recommendations to the agency about how to best proceed with its management and oversight of the implementation of NextGen. We believe that such a panel could help FAA begin to address this challenge. To conclude, transforming the national airspace system to accommodate much greater demand for air transportation services in the years ahead will be an enormously complex undertaking. JPDO has made strides in meeting its planning and coordination role as set forth by Congress, and FAA has taken several steps in recent years that better position it to successfully implement NextGen. If JPDO and FAA can build on their recent achievements and overcome the many challenges they face, the transition to NextGen stands a much better chance for success. Mr. Chairman, this concludes my statement. I am pleased to answer any questions you or members of the Subcommittee might have. For further information on this testimony, please contact Susan Fleming at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony include Gerald Dillingham, Matthew Cook, Anne Dilger, Sharon Dyer, Colin Fallon, Heather Krause, Edmond Menoche, Faye Morrison, and Carrie Wilks. 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 skies over America are becoming more crowded every day. The consensus of opinion is that the current aviation system cannot be expanded to meet this projected growth. Recognizing the need for system transformation, in 2003 Congress authorized the Joint Planning and Development Office (JPDO) and requires the office to operate in conjunction with multiple federal agencies, including the Departments of Transportation, Commerce, Defense, and Homeland Security; the Federal Aviation Administration (FAA); the National Aeronautics and Space Administration (NASA); and the White House Office of Science and Technology Policy. JPDO is responsible for coordinating the related efforts of these partner agencies to plan the transformation to the Next Generation Air Transportation System (NextGen): a fundamental redesign of the national airspace system. FAA will be largely responsible for implementing the policies and systems necessary for NextGen, while safely operating the current air traffic control system. GAO's testimony focuses on (1) the progress that JPDO has made in planning NextGen and some challenges it continues to face and (2) the challenges that FAA faces transitioning to NextGen. GAO's statement is based on our recent reports as well as ongoing work, all of which has been conducted in accordance with generally accepted government auditing standards. JPDO has made substantial progress in planning NextGen, but continues to face several challenges. JPDO has established a framework to facilitate federal interagency collaboration and is involving nonfederal stakeholders in its planning efforts. JPDO has begun leveraging the resources of its partner agencies and is finalizing key planning documents such as the concept of operations and the enterprise architecture. The draft concept of operations has been posted to JPDO's Web site for public comment and the enterprise architecture is expected to be completed in the next few months. JPDO and FAA have improved their collaboration and coordination by expanding and revamping FAA's Operational Evolution Plan--renamed the Operational Evolution Partnership--which is intended to provide an implementation plan for FAA for NextGen. Among the challenges JPDO faces are institutionalizing the interagency collaboration that is so central to its mission, developing a comprehensive cost estimate, and addressing potential gaps in research and development for NextGen. In transitioning to NextGen, FAA faces several challenges. Although FAA has taken several actions to improve its management of current air traffic control modernization efforts, institutionalizing these improvements will require continued strong leadership, particularly since the agency will have lost two of its key agents for change by September 2007. Costs are another challenge facing FAA as it addresses the resource demands that NextGen will likely pose, while continuing to maintain the current air traffic control system. Finally, determining whether it has the technical and contract management expertise necessary to implement NextGen is a challenge for FAA.
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In recent years, Congress has passed legislation designed to strengthen the linkage between SES performance and pay. Congress established a new performance-based pay system for the SES and permitted agencies with SES appraisal systems, which have been certified as making meaningful distinctions based on relative performance, to apply a higher maximum SES pay rate and a higher annual cap on total SES compensation. We have testified that such SES and senior-level employee performance-based pay systems serve as an important step for agencies in creating alignment or "line of sight" between executives' performance and organizational results. By 2004, an agency could apply a higher cap on SES pay and total compensation if OPM certifies and OMB concurs that the agency's performance management system, as designed and applied, aligns individual performance expectations with the mission and goals of the organization and makes meaningful distinctions in performance. Since 2004, VA has received approval to increase the cap on SES pay and total compensation, which includes bonuses. By law, only career SES appointees are eligible for SES bonuses. As stated previously, agencies with certified senior performance appraisal systems are permitted higher caps on SES base pay and total compensation. With a certified system, for 2006, an agency was authorized to increase SES base pay to $165,200 (Level II of the Executive Schedule) and total compensation to $212,100 (the total annual compensation payable to the Vice President). Those agencies without certified systems for 2006 were limited to a cap of $152,000 for base pay (Level III of the Executive Schedule) and $183,500 (Level I of the Executive Schedule) for total compensation. SES performance bonuses are included in SES aggregate total compensation. Agencies are permitted to award bonuses from 5 to 20 percent of an executive's rate of basic pay from a pool that cannot exceed the greater of 10 percent of the aggregate rate of basic pay for the agency's career SES appointees for the year preceding, or 20 percent of the average annual rates of basic pay to career SES members for the year preceding. VA requires that each SES member have an executive performance plan or contract in place for the appraisal year. According to VA's policy, the plan must reflect measures that balance organizational results with customer satisfaction, employee perspectives, and other appropriate measures. The plan is to be based on the duties and responsibilities established for the position and also reflect responsibility for accomplishment of agency goals and objectives, specifying the individual and organizational performance or results to be achieved for each element. Toward the end of the appraisal period, each executive is to prepare a self-assessment relative to the job requirements in the approved performance plan, and his or her supervisor then rates the executive on each element and provides a summary rating. Specifically, according to VA's policy on the rating process, the rater is to assess the accomplishment of each established performance requirement, consider the impact of the individual requirement on overall performance of the element, and assign one achievement level for each element. The VA rating is a written record of the appraisal of each critical and other performance element and the assignment of a summary rating level by the rater. The summary of each SES member rating passes to the appropriate reviewing official (if applicable) and PRBs for consideration. VA uses four PRBs to review and prepare recommendations on SES member ratings, awards, and pay adjustments: Veterans Affairs, Veterans Health Administration, Veterans Benefits Administration, and Office of Inspector General. The Veterans Affairs PRB has a dual role in VA in that it functions as a PRB for SES members who work for VA's central offices, such as the Office of the Assistant Secretary for Management and the Office of the Assistant Secretary for Policy and Planning, and those employed by the National Cemetery Administration. It also reviews the policies, procedures, and recommendations from the Veterans Health Administration and Veterans Benefits Administration PRBs. The Secretary appoints members of three of the four PRBs on an annual basis; members of the Office of Inspector General PRB are appointed by the VA Inspector General. VA's PRBs must have three or more members appointed by the agency head or Inspector General for the Office of Inspector General PRB and can include all types of federal executives from within and outside the agency. As required by OPM, when appraising career appointees or recommending performance awards for career appointees, more than one-half of the PRB membership must be career SES appointees. Federal law prohibits PRB members from taking part in any PRB deliberations involving their own appraisals. Appointments to PRBs must also be published in the Federal Register. According to a VA official in the Office of Human Resources and Administration, appointments are made on basis of the position held, and consideration is given to those positions where the holder would have knowledge about the broadest group of executives. Typically, the same VA positions are represented on the PRB each year, and there is no limit on the number of times a person can be appointed to a PRB. VA's PRBs vary in size, composition, and number of SES members considered for bonuses. For example, in 2006, VA's Veterans Health Administration PRB was composed of 18 members and made recommendations on 139 SES members while its Veterans Benefits Administration PRB was composed of 7 members and made recommendations on 50 SES members. In 2006, six PRB members sat on multiple PRBs, and 1 member, the Deputy Chief of Staff, sat on three PRBs--the Veterans Affairs, Veterans Health Administration, and Veterans Benefits Administration PRBs. With the exception of the Office of Inspector General PBR, members of PRBs are all departmental employees, a practice that is generally consistent across cabinet-level departments. The Office of Inspector General PRB is composed of 3 external members--officials from other federal agencies' offices of inspector generals--which is generally consistent with PRBs for other federal offices of inspector general. Under VA's policy, each PRB develops its own operating procedures for reviewing ratings and preparing recommendations. The Veterans Health Administration and Veterans Benefits Administration PRBs are to submit their procedures to the chairperson of the Veterans Affairs PRB for approval and are to include a summary of procedures used to ensure that PRB members do not participate in recommending performance ratings for themselves or their supervisors. VA policy requires any SES member who wishes to be considered for a bonus to submit a two-page justification based on his or her performance plan addressing how individual accomplishments contribute towards organizational and departmental goals, as well as appropriate equal employment opportunity and President's Management Agenda accomplishments. While federal law and OPM regulations permit career SES members rated fully successful or higher to be awarded bonuses, VA's policy calls for bonuses to generally be awarded to only those rated outstanding or excellent and who have demonstrated significant individual and organizational achievements during the appraisal period. Beyond these policies, each PRB determines how it will make its recommendations. For example, a VA official from its Office of Human Resources and Administration told us that the Veterans Affairs PRB bases it's bonus recommendations on an array of the numerical scores assigned based on the executive core qualifications. The information that each PRB receives from its component units also varies. For example, the Veterans Benefits Administration PRB members receive ratings and recommended pay adjustments and bonus amounts from Veterans Benefits Administration units. VA policy requires formal minutes of all PRB meetings that are to be maintained for 5 years. The official from the Office of Human Resources and Administration told us that the minutes are limited to decisions made, such as the recommended bonus amount for each SES member considered, and generally do not capture the deliberative process leading to such decisions. Data provided by VA on one VA component--the Veterans Integrated Services Network--showed that of the bonuses proposed for fiscal year 2006, the Veterans Health Administration PRB decreased 45 and increased 9 of the bonuses initially proposed to that PRB and left the amounts of 64 unchanged. At the conclusion of their deliberations, the Veterans Health Administration and Veterans Benefits Administration PRBs send their recommendations to the Under Secretary for Health and Under Secretary for Benefits, respectively, who, at their sole discretion, may modify the recommendations for SES members under their authority. No documentation of the rationale for modifications is required. The recommendations, as modified, are then forwarded to the chairperson of the Veterans Affairs PRB, who reviews the decisions for apparent anomalies, such as awarding bonuses that exceed maximum amounts. The chairperson of the Veterans Affairs PRB then forwards the recommendations from the Veterans Health Administration, Veterans Benefits Administration, and Veterans Affairs PRBs to the Secretary for approval. The Secretary makes final determinations for SES member performance bonuses, with the exception of SES members in VA's Office of Inspector General. Recommendations from the Office of Inspector General PRB are sent directly to the VA Inspector General for final decision without review by the Veterans Affairs PRB or approval by the Secretary. The Secretary has sole discretion in accepting or rejecting the recommendations of the PRBs. According to an official in the Office of Human Resources and Administration, the Secretary modified 1 recommendation in 2006, but a prior secretary modified over 30 in one year. Recommendations for bonuses for members of the Veterans Affairs, Veterans Health Administration, and Veterans Benefits Administration PRBs are made after the PRBs conclude their work. The highest-level executives of each board rank the members of their respective PRBs and make recommendations, which are submitted to the Secretary. The Secretary determines any bonuses for the highest-level executives of the boards. In 2006, VA's bonus pool was $3,751,630, or 9 percent of the aggregate basic pay of its SES members in 2005. VA awarded an average of $16,606 in bonuses in fiscal year 2006 to 87 percent of its career SES members. At headquarters, approximately 82 percent of career SES members received bonuses and 90 percent received bonuses in the field. Additionally, those in headquarters were awarded an average of about $4,000 more in bonuses than the career SES members in field locations. Table 1 shows the average bonus amount, percentage receiving bonuses, and total rated at VA among career SES members and by headquarters and field locations for 2004 through 2006. In 2005, according to OPM's Report on Senior Executive Pay for Performance for Fiscal Year 2005, the most recent report available, VA awarded higher average bonuses to its career SES than any other cabinet- level department. OPM data show that six other cabinet-level departments awarded bonuses to a higher percentage of their career SES members. When asked about possible reasons for VA's high average bonus award, a VA official in the Office of Human Resources and Administration cited the outstanding performance of VA's three organizations and the amount allocated to SES member bonuses. Both OPM and OMB play a role in the review of agency's senior performance appraisal systems and have jointly developed certification criteria. OPM issues guidance each year to help agencies improve the development of their SES performance appraisal systems and also reviews agency certification submissions to ensure they meet specified criteria. To make its own determination, OMB examines agency's performance appraisal systems against the certification criteria, primarily considering measures of overall agency performance, such as an agency's results of a Program Assessment Rating Tool review or President's Management Agenda results. Specifically, to qualify for the use of SES pay flexibilities, OPM and OMB evaluate agencies' senior performance appraisal systems against nine certification criteria. These certification criteria are broad principles that position agencies to use their pay systems strategically to support the development of a stronger performance culture and the attainment of the agencies' missions, goals, and objectives. These are alignment, consultation, results, balance, assessments and guidelines, oversight, accountability, performance, and pay differentiation. See appendix I for a description of the certification criteria. There are two levels of performance appraisal system certification available to agencies: full and provisional. To receive full certification, the design of the systems must meet the nine certification criteria, and agencies must, in the judgment of OPM and with concurrence from OMB, provide documentation of prior performance ratings to demonstrate compliance with the criteria. Full certification lasts for 2 calendar years. Provisionally certified agencies are also granted the authority to apply higher caps on SES pay and total compensation just as those with fully certified systems are, even though agencies with provisional certification do not meet all nine of the certification criteria. Provisional certification lasts for 1 calendar year. According to OPM, the regulations were designed to cover initial implementation of the certification process. Now that all agencies have been under the system, all nine criteria must be met for an agency to be certified, even provisionally. According to OPM, for an agency to receive full certification in 2007, it must show that it has 2 years of making performance differentiation in ratings, pay, and award; and that the agency performance plans fully met all the criteria without requiring extensive revision. After OMB concurrence, the Director of OPM certifies the agency's performance appraisal system and formally notifies the agency with a letter specifying provisional, full certification, or no certification. Of the 42 performance appraisal systems that were certified in 2006, only the Department of Labor's system received full certification. According to OPM's Web site, as of June 5, 2007, four agencies had received full certification of their senior performance appraisal systems--the Department of Commerce for 2007 through 2008, the Department of Labor for 2006 through 2007, the Federal Communications Commission for 2007 through 2008, and the Federal Energy Regulatory Commission for 2007 through 2008. If provisional or no certification is recommended, the letter from OPM provides the agency with specific areas of concern identified through the review process. These comments may direct an agency to focus more on making meaningful distinctions in performance or improving the type of performance measures used to evaluate SES members. For example, in OPM's 2007 certification guidance, the OPM Director asked agencies to place more emphasis on achieving measurable results, noting that many plans often fall short of identifying the measures used to determine whether results are achieved. In addition, OPM asked agencies to highlight in their 2007 certification requests any description or evidence of improvements made as a result of comments from OPM or OMB in response to the agency's 2006 certification submission. VA received provisional certification for each of the years 2004 through 2006. In 2006, the letter from OPM to VA discussing its decision to grant the VA provisional certification rather than full certification, OPM stated that while the VA "system met certification criteria, clear alignment and measurable results must be evident in all plans across the entire agency." In addition, OPM said that it expected to see "well over 50 percent of an executive's performance plan focused on business results" and that VA "needs to ensure its 2007 executive performance plans weight business results appropriately." VA officials told us that the 2007 submission is in draft and they expect to submit it to OPM by the June 30, 2007, deadline. Our preliminary review of VA's requirements for performance plans contained in its 2006 submission and 2007 draft submission show that VA made changes to the policy requirements for its performance plans to reflect a greater emphasis on measurable results. Specifically, the elements of the job requirement in the 2007 policies provides that each critical element and performance element will be weighted, which was not previously required in 2006. These performance requirements, according to the policy, will be described in terms of specific result(s) with metrics that the SES member must accomplish for the agency to achieve its annual performance goals and represent at least 60 percent of the overall weight of the performance plan. The policy further states that the expected results should be specific, measurable, and aggressive yet achievable, results-oriented, and time-based. Responding to concerns expressed by members of Congress and media reports about SES member bonuses, VA's Secretary recently requested that OPM review its performance management program for senior executives to ensure that its processes are consistent with governing statutes and OPM regulations and guidance. VA officials indicated that while OPM's review encompasses some of the same areas as those required for 2007 certification, VA requested a separate report from OPM. We have stated that it is important for OPM to continue to carefully monitor the implementation of agencies' systems and the certification process with the goal of helping all agencies to receive full certification of their system. Requiring agencies with provisional certification to reapply annually rather than every 2 years helps to ensure continued progress in fully meeting congressional intent in authorizing the new performance- based pay system. VA has achieved provisional certification of its SES performance management system for 2004 through 2006. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to respond to any questions that you have. For further information regarding this statement, please contact J. Christopher Mihm 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 testimony. Individuals making key contributions to this statement included George Stalcup, Director; Belva Martin, Assistant Director; Carole J. Cimitile; Karin Fangman; Tamara F. Stenzel; and Greg Wilmoth. Individual performance expectations must be linked to or derived from the agency's mission, strategic goals, program/policy objectives, and/or annual performance plan. Individual performance expectations are developed with senior employee involvement and must be communicated at the beginning of the appraisal cycle. Individual expectations describe performance that is measurable, demonstrable, or observable, focusing on organizational outputs and outcomes, policy/program objectives, milestones, and so forth. Individual performance expectations must include measures of results, employee and customer/stakeholder satisfaction, and competencies or behaviors that contribute to outstanding performance. The agency head or a designee provides assessments of the performance of the agency overall, as well as each of its major program and functional areas, such as reports of agency's goals and other program performance measures and indicators, and evaluation guidelines based, in part, upon those assessments to senior employees, and appropriate senior employee rating and reviewing officials. The guidance provided may not take the form of quantitative limitations on the number of ratings at any given rating level. The agency head or designee must certify that (1) the appraisal process makes meaningful distinctions based on relative performance; (2) results take into account, as appropriate, the agency's performance; and (3) pay adjustments and awards recognize individual/organizational performance. Senior employee ratings (as well as subordinate employees' performance expectations and ratings for those with supervisor responsibilities) appropriately reflect employees' performance expectations, relevant program performance measures, and other relevant factors. Among other provisions, the agency must provide for at least one rating level above Fully Successful (must include an Outstanding level of performance), and in the application of those ratings, make meaningful distinctions among executives based on their relative performance. The agency should be able to demonstrate that the largest pay adjustments, highest pay levels (base and performance awards), or both are provided to its highest performers, and that, overall, the distribution of pay rates in the SES rate range and pay adjustments reflects meaningful distinctions among executives based on their relative performance. 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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Key practices of effective performance management for the Senior Executive Service (SES) include the linkage or "line of sight" between individual performance and organizational success, the importance of linking pay to individual and organizational performance, and the need to make meaningful distinctions in performance. GAO identified certain principles for executive pay plans that should be considered to attract and retain the quality and quantity of executive leadership necessary to address 21st century challenges, including that they be sensitive to hiring and retention trends; reflect knowledge, skills, and contributions; and be competitive. This testimony focuses on the Department of Veterans Affairs' (VA) process for awarding bonuses to SES members, the amount and percentage of bonuses awarded for fiscal years 2004 through 2006 based on data reported by VA, and the Office of Personnel Management's (OPM) and the Office of Management and Budget's (OMB) roles in certifying federal agencies SES performance appraisal systems. GAO analyzed VA's policies and procedures for awarding bonuses and data provided by VA on the amount and percentages of bonuses and interviewed knowledgeable VA officials. Information on OPM's and OMB's certification process was based on our 2007 report on OPM's capacity to lead and implement reform VA requires that each senior executive have an executive performance plan or contract in place for the appraisal year that reflects measures that balance organization results with customer satisfaction, employee perspectives, and other appropriate measures. VA uses four performance review boards (PRB) to review and make recommendations on SES ratings, awards, and pay adjustments based on these performance plans. VA's Secretary appoints members of three of the four boards on the basis of the position held within the agency, and consideration is given to those positions where the holder would have knowledge about the broadest group of executives. Members of the fourth board are appointed by VA's Inspector General. VA's PRBs vary in size, composition, and number of SES members considered for bonuses, and each PRB, within the scope of VA's policies, develops its own procedures and criteria for making bonus recommendations. According to VA policy, bonuses are generally awarded only to those rated outstanding or excellent and who have demonstrated significant individual and organizational achievements during the appraisal period. According to data reported by OPM, in fiscal year 2005, VA awarded higher bonus amounts to its career SES than any other cabinet-level department; however, according to OPM's data, six other cabinet-level departments awarded bonuses to a higher percentage of their career SES. OPM and OMB evaluate agencies' SES performance appraisal systems against nine certification criteria jointly developed by the two agencies and determine that agencies merit full, provisional, or no certification. VA has been granted provisional certification in each of the years 2004 through 2006. Our review of VA's requirements for SES performance plans as represented in both its 2006 submission and 2007 draft submission to OPM show that VA made changes to the requirements for its performance plans to reflect greater emphasis on measurable results.
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TRICARE beneficiaries used the program's pharmacy benefit to fill almost 134 million outpatient prescriptions in fiscal year 2012. Through its acquisition process, DOD contracts with a pharmacy benefit manager-- currently Express Scripts--to provide access to a retail pharmacy network and operate a mail order pharmacy for beneficiaries, and to provide administrative services. Under TRICARE, beneficiaries have three primary health plan options in which they may participate: (1) a managed care option called TRICARE Prime, (2) a preferred-provider option called TRICARE Extra, and (3) a fee-for-service option called TRICARE Standard. TRICARE beneficiaries may obtain medical care through a direct-care system of military treatment facilities or a purchased-care system consisting of network and non-network private sector primary and specialty care providers, and hospitals. In addition, TRICARE's pharmacy benefit-- offered under all TRICARE health plan options--provides beneficiaries with three options for obtaining prescription drugs: from military treatment facility pharmacies, from network and non-network retail pharmacies, and through the TRICARE mail-order pharmacy. TRICARE's pharmacy benefit has a three-tier copayment structure based on whether a drug is included in DOD's formulary and the type of pharmacy where the prescription is filled. (See table 1.) DOD's formulary includes a list of drugs that all military treatment facilities must provide, and a list of drugs that military treatment facilities may elect to provide on the basis of the types of services offered at that facility (e.g., cancer drugs at facilities that provide cancer treatment).as "non-formulary" on the basis of its evaluation of their cost and clinical effectiveness. Non-formulary drugs are available to beneficiaries at a higher cost, unless the provider can establish medical necessity. See Pub. L. No. 110-181, SS 703, 122 Stat. 3, 188 (codified at 10 U.S.C. SS 1074g(f)). This act provides that with respect to any prescriptions filled on or after January 28, 2008, the TRICARE retail pharmacy program is to be treated as an element of DOD for purposes of procurement of drugs by federal agencies under 38 U.S.C. SS 8126 to ensure that drugs paid for by DOD that are dispensed to TRICARE beneficiaries at retail pharmacies are subject to federal pricing arrangements. manufacturers are required to refund to DOD the difference between the federal pricing arrangements and the retail price paid for prescriptions filled dating back to the NDAA's enactment on January 28, 2008. As of July 31, 2013, according to DOD, its total estimated savings from fiscal year 2009 through fiscal year 2013 were about $6.53 billion as a result of these refunds. DOD's TRICARE Management Activity is responsible for overseeing the TRICARE program, including the pharmacy benefit. Within this office, the Pharmaceutical Operations Directorate (hereafter referred to as the program office) is responsible for managing the pharmacy benefit (including the contract to provide pharmacy services), and the Acquisition Management and Support Directorate (hereafter referred to as the contracting office) is responsible for managing all acquisitions for the TRICARE Management Activity. The two offices together manage the acquisition process for the pharmacy services contract. (See fig. 2.) The program office and the contracting office provide the clinical expertise and acquisition knowledge, respectively, for the acquisition planning, evaluation of proposals, and award of the pharmacy services contract. The acquisition process for DOD's pharmacy services contract includes three main phases: (1) acquisition planning, (2) RFP, and (3) award. Acquisition planning. In the acquisition planning phase, the program office, led by the program manager, is primarily responsible for defining TRICARE's contract requirements--the work to be performed by the contractor--and developing a plan to meet those requirements. The program office also receives guidance and assistance from the contracting office in the development and preparation of key acquisition documents and in the market research process. The market research process can involve the development and use of several information-gathering tools, including requests for information (RFI), which are publicly released documents that allow the government to obtain feedback from industry on various acquisition elements such as the terms and conditions of the contract. RFIs are also a means by which the government can identify potential offerors and determine whether the industry can meet its needs. In addition, we have previously reported that sound acquisition planning includes an assessment of lessons learned to identify improvements. Towards the end of this phase, officials in the program and contracting offices work together to revise and refine key acquisition planning documents. RFP. In the RFP phase, the contracting officer--the official in the contracting office who has the authority to enter into, administer, modify, and terminate contracts--issues the RFP, the proposals. Award. In the award phase, the program and contracting offices are responsible for evaluating proposals and awarding a contract to the offeror representing the best value to the government based on a combination of technical and cost factors. To monitor the contractor's performance under the contract after award, the contracting officer officially designates a program office official as the contracting officer's representative (COR), who acts as the liaison between the contracting officer and the contractor and is responsible for the day-to-day monitoring of contractor activities to ensure that the services are delivered in accordance with the contract's performance standards. The draft monitoring plan for the upcoming pharmacy services contract includes 30 standards--related to timeliness of claims processing, retail network access, and beneficiary satisfaction, among other things--against which the contractor's performance will be measured. RFPs include a description of the contract requirements, the anticipated terms and conditions that will be contained in the contract, the required information that the prospective offerors must include in their proposal, and the factors that will be used to evaluate proposals. DOD has department-wide acquisition training and experience requirements for all officials who award and administer DOD contracts, including the pharmacy services contract, as required by law. Training is primarily provided through the Defense Acquisition University, and is designed to provide a foundation of acquisition knowledge, but is not targeted to specific contracts or contract types. In addition, all CORs must meet training and experience requirements specified in DOD's Standard for Certification of Contracting Officer's Representatives (COR) for Service Acquisitions issued in March 2010. See appendix I for more information on the certification standards for and experience of officials who award and administer the pharmacy services contract. In September 2010, DOD issued guidance to help improve defense acquisition through its Better Buying Power Initiative. DOD's Better Buying Power Initiative encompasses a set of acquisition principles designed to achieve greater efficiencies through affordability, cost control, elimination of unproductive processes and bureaucracy, and promotion of competition; it provides guidance to acquisition officials on how to implement these principles. The principles are also designed to provide incentives to DOD contractors for productivity and innovation in industry and government. DOD used market research to align the requirements for the upcoming pharmacy services contract with industry best practices and promote competition. DOD also identified changes to the requirements for the upcoming and current contracts in response to changes in legislation, efforts to improve service delivery, and contractor performance. DOD solicited information from industry during its acquisition planning for the upcoming pharmacy services contract through the required market research process, including issuing RFIs and a draft RFP for industry comment, to identify changes to requirements for its pharmacy services contract. Specifically, DOD used market research to align the requirements for the upcoming contract with industry best practices and promote competition. Align contract requirements with industry best practices. DOD issued five RFIs from 2010 through 2012 related to the upcoming contract. RFIs are one of several market research Although DOD is not methods available to federal agencies. required to use them, RFIs are considered a best practice for service acquisitions in the federal government.provided DOD with the opportunity to assess the capability of potential offerors to provide services that DOD may incorporate in the upcoming pharmacy services contract. In many of the RFIs, The RFIs DOD asked questions about specific market trends so that it could determine if changes were needed to the upcoming contract requirements to help align them with industry best practices. For example, DOD issued one RFI in November 2010 that asked about establishing a mechanism that would allow for centralized distribution of specialty pharmaceuticals and preserve DOD's federal pricing arrangements. Specialty pharmaceuticals--high- cost injectable, infused, oral, or inhaled drugs that are generally more complex to distribute, administer, and monitor than traditional drugs--are becoming a growing cost driver for pharmacy services. According to DOD officials, the RFI responses received from industry generally reinforced their view that the RFP should define any specialty pharmacy owned or sub-contracted by the contractor as a DOD specialty mail-order outlet, which would subject it to the same federal pricing arrangements as the mail- order pharmacy. Promote competition. DOD has also used the RFI process to obtain information on promoting competition. DOD recognized that a limited number of potential offerors may have the capability to handle the pharmacy services contract given the recent consolidation in the pharmacy benefit management market and the large size of the TRICARE beneficiary population. DOD contracting officials told us that, in part because of the department's Better Buying Power Initiative to improve acquisition practices, they have a strong focus on maintaining a competitive contracting environment for the pharmacy services contract, thereby increasing the use of market research early in the acquisition planning process. For example, DOD's December 2011 RFI asked for industry perspectives on the length of the contract period. DOD was interested in learning whether a longer contract period would promote competition. DOD officials told us that the responses they received confirmed that potential offerors would prefer a longer contract period because it would allow a non-incumbent more time to recover any capital investment made as part of implementing the contract. The RFP for the upcoming contract includes a contract period of 1 base year and 7 option years. DOD also used the RFI process to confirm that there were a sufficient number of potential offerors to ensure full and open competition for the pharmacy services contract. DOD officials told us that they found there were at least six potential offerors, which gave them confidence that there would be adequate competition. Since the start of the current pharmacy services contract in 2009, DOD has identified changes to the contract requirements in response to legislative changes to the pharmacy benefit, efforts to improve service delivery to beneficiaries, and improvements identified through monitoring of the current contractor's performance. In each instance, DOD officials needed to determine whether to make the change for the upcoming contract, or whether to make the change via a modification to the current contract. According to DOD officials, there were over 300 modifications to the current pharmacy services contract; 23 of these were changes to the work to be done by the contractor. DOD officials told us that it is not possible to build a level of flexibility into the contract to accommodate or anticipate all potential changes (and thus avoid modifications to the contract), because doing so would make it difficult for offerors to determine pricing in their proposals. Legislative changes to the pharmacy benefit. Legislative changes have been one key driver of DOD's revisions to its pharmacy services contract requirements. For example, one legislative change required DOD to implement the TRICARE Young Adult program, which resulted in DOD adding a requirement for the contractor to extend pharmacy services to eligible military dependents through the age of 26. This change was made as a modification under the current contract. Another legislative change that necessitated changes to the contract requirements was the increase in beneficiary copayments for drugs obtained through mail-order or retail pharmacies, enacted as part of the NDAA for fiscal year 2013, which DOD changed through a modification to the current contract. A third legislative change to the pharmacy benefit was the mail-order pilot for maintenance drugs for TRICARE for Life beneficiaries. DOD officials incorporated this change in the requirements for the upcoming pharmacy services contract, as outlined in the RFP. Efforts to improve service delivery. DOD has also updated contract requirements to improve service delivery to beneficiaries under the pharmacy services contract. DOD initiated a modification to the current contract to require the contractor to provide online coordination of benefits for beneficiaries with health care coverage from multiple insurers. Specifically, the contractor is required to ensure that pharmacy data systems include information on government and other health insurance coverage to facilitate coverage and payment determinations. According to DOD officials, this change is consistent with the updated national telecommunication standard from the National Council for Prescription Drug Programs, which provides a uniform format for electronic claims processing. According to DOD officials, this change to the contract requirements eliminates the need for beneficiaries to file paper claims when TRICARE is the secondary payer, simplifying the process for beneficiaries and reducing costs for DOD. Another modification to the current contract to improve service delivery was to require the contractor to provide vaccines through its network of retail pharmacies. According to DOD officials, this modification was made to allow beneficiaries to access vaccines through every possible venue, driven by the 2010 H1N1 influenza pandemic. Contractor performance. DOD officials told us that improvements identified through the monitoring of contractor performance have also led to changes in contract requirements. Through the CORs' monitoring of the contractor's performance against the standards specified in the contract, the CORs may determine that a particular standard is not helping to achieve the performance desired or is unnecessarily restrictive. For example, DOD officials told us that in the current contract, they had a three- tiered standard for paper claims processing (e.g., 95 percent of paper claims processed within 10 days, 99 percent within 20 days, and 100 percent within 30 days). Through monitoring the contractor's performance, the CORs determined that there was a negligible difference between the middle and high tiers, and holding the contractor to this performance standard was not beneficial. The requirements for the upcoming contract as described in the RFP only include two tiers--95 percent of claims processed within 14 calendar days, and 100 percent within 28 calendar days. When making changes to contract requirements, DOD officials told us they try to ensure that the requirements are not overly prescriptive, but rather outcome-oriented and performance-based. For example, DOD officials told us that they allowed the pharmacy and managed care support contractors to innovate and apply industry best practices regarding coverage and coordination of home infusion services. According to DOD officials, the contract requirements regarding home infusion are focused on the desired outcome--providing coordination of care for beneficiaries needing these services with the physician as the key decision maker--and DOD officials facilitated meetings between the pharmacy contractor and managed care support contractors to determine the details of how to provide the services. This approach is consistent with DOD's Better Buying Power principles that emphasize the importance of well-defined contract requirements and acquisition officials' understanding of cost-performance trade-offs. This approach also addresses a concern we have previously identified regarding overly prescriptive contract requirements in TRICARE contracts; specifically, in our previous work on the managed care support contracts, we reported that DOD's prescriptive requirements limited innovation and competition among contractors. Since retail pharmacy services were carved out about 10 years ago, DOD has not conducted an assessment of the appropriateness of its current pharmacy services contract structure that includes an evaluation of the costs and benefits of alternative structures. Alternative structures can include a carve-in of all pharmacy services into the managed care support contracts, or a structure that carves in a component of pharmacy services, such as the mail-order pharmacy, while maintaining a carve-out structure for other components. DOD officials told us they believe that DOD's current pharmacy services contract structure continues to be appropriate, as it affords more control over pharmacy data and allows for more detailed data analyses and increased transparency about costs. DOD's continued use of a carve-out contract structure for pharmacy services is consistent with findings from research and perspectives we heard from industry group officials--that larger employers are more likely to carve out pharmacy services to better leverage the economies of scale and cost savings a stand-alone pharmacy benefit manager can achieve.These arrangements may also provide more detailed information on drug utilization that can be helpful in managing drug formularies and their associated costs. In its December 2007 report, the Task Force on the Future of Military Health Care recommended examining an alternative structure for the pharmacy services contract.health care system, the task force reviewed DOD's pharmacy benefit program, recommending that DOD pilot a carve-in pharmacy contract structure within one of the TRICARE regions with a goal of achieving better financial and health outcomes as a result of having more integrated pharmacy and medical services. The managed care support contractors we spoke with expressed similar concerns. However, DOD did not agree with the task force's recommendation. In its response, DOD assessed the In addition to other aspects of DOD's benefits of the current structure and affirmed the department's commitment to this structure. Potential cost savings. In its response to the task force report, DOD did not concur with the recommendation to pilot a carve-in pharmacy contract structure, in part because of the cost savings achieved through the carve-out. Specifically, DOD stated that the carve-out arrangement is compatible with accessing federal pricing arrangements and other discounts available for direct purchases. DOD stated in its response that, under a carve-in arrangement, even on a pilot basis, it would lose access to discounts available for direct purchases, including some portion of the $400 million in annual discounts available for drugs dispensed at retail pharmacies under the NDAA for fiscal year 2008. DOD officials told us that this loss would result from the managed care support contractor being the purchaser of the drugs, rather than DOD. DOD also stated that it would possibly lose access to the volume discounts obtained for drugs purchased for the mail-order pharmacy and military treatment facility pharmacies under a carve-in structure. DOD officials told us that these disadvantages of a carve-in structure remain the same today. Additionally, during this review, DOD noted that dividing the TRICARE beneficiary population among contractors under a carve-in would dilute the leverage a single pharmacy benefit manager would have in the market. For example, DOD would lose economies of scale for claims processing services provided by the pharmacy contractor, resulting in increased costs. However, research studies have found, and officials from TRICARE's managed care support contractors told us, that a contract structure with integrated medical and pharmacy services could result in cost savings for DOD. For example, one recent study found that employers with carve-in health plans had 3.8 percent lower total medical care costs compared to employers with pharmacy services carved out. The researchers attributed the cost difference, in part, to increased coordination of care for the carve-in plans, leading to fewer adverse events for patients, resulting in fewer inpatient admissions; they reported that plans with a carve-out arrangement had 7 percent higher inpatient admissions. Similarly, representatives from one managed care support contractor we spoke with stated they thought they could achieve similar cost savings to what DOD currently has through its federal pricing arrangements by using integrated medical and pharmacy services as a means of reducing costs in a carve-in arrangement. Being able to analyze integrated, in-house medical and pharmacy data may help health plans to lower costs by identifying high-cost beneficiaries, including those with chronic conditions such as asthma and diabetes, and targeting timely and cost-effective interventions for this population. Potential health benefits from data integration. In recommending that DOD pilot a carve-in pharmacy contract structure, one of the task force's goals was to improve health outcomes as a result of integrated medical and pharmacy services. DOD noted in its task force response that it could achieve this goal under the current carve-out contract structure by including requirements in the pharmacy services contract and managed care support contracts requiring data sharing between the contractors. While the current contract requires the pharmacy and managed care support contractors to exchange data for care coordination, current TRICARE managed care support contractors told us there continue to be challenges with data sharing to facilitate disease management. Contractors expressed similar concerns about sharing medical and pharmacy data as part of our previous work related to DOD's managed care support contracts. Additionally, during this review, officials from one of the managed care support contractors told us that they continue to find it challenging to generate data that provide a holistic view of beneficiaries when medical and pharmacy data remain separate. Representatives from another managed care support contractor told us that their disease management staff faced challenges in analyzing pharmacy data for groups of patients they were managing. They also told us that if these staff had more complete and real-time access to pharmacy data, as they would under a carve-in structure, they could be more proactive in assisting DOD's efforts to identify patients who should participate in disease management programs. Additionally, researchers have found that disease management interventions may be challenging to conduct in a carve-out arrangement due to the lack of fully integrated medical and pharmacy data. According to DOD officials, any changes to the current contract structure would result in less efficient and inconsistent pharmacy service delivery across the three TRICARE regions, as officials observed when the retail pharmacy benefit was part of the managed care support contracts. One of DOD's reasons for the initial carve-out was a concern that pharmacy services were not being consistently implemented across the TRICARE regions. For example, DOD officials told us that two health plans in different TRICARE regions were able to have different preferred drugs within the same therapeutic class, and while both drugs may be included on DOD's formulary, beneficiaries in different parts of the country were not being consistently provided with the same drug. In addition, according to DOD, beneficiaries were dissatisfied with a benefit that was not portable across TRICARE regions--specifically, retail pharmacy networks differed by region, so beneficiaries who moved from one TRICARE region to another would have to change retail pharmacy networks. With one national pharmacy services contract, DOD officials said they can ensure that the formulary is implemented consistently and that beneficiaries have access to the same retail pharmacy network across the TRICARE regions. Since the current pharmacy services contract structure was implemented almost 10 years ago, DOD has not incorporated an assessment of the contract structure that includes an evaluation of alternative structures into its acquisition planning activities. DOD officials told us that they consider their task force response to be an assessment of the current contract structure. While the response included a justification for the current structure, it did not include an evaluation of the potential costs and benefits of alternative structures, such as carving in all or part of the pharmacy benefit. In addition, the acquisition plan for the upcoming contract described two alternative carve-out configurations (separate contracts for the mail-order and retail pharmacies and a government- owned facility to house drugs for the mail-order pharmacy contract). However, the plan similarly did not include an evaluation of the potential costs and benefits of these options, nor did the plan include an evaluation of any carve-in alternatives. DOD officials told us there are no current plans to conduct such an evaluation as part of the department's acquisition planning efforts. DOD officials also told us that they continue to believe the current structure is appropriate because the current carve-out structure provides high beneficiary satisfaction and is achieving DOD's original objectives, namely consistent provision of benefits, access to federal pricing arrangements, and transparency of pharmacy utilization and cost data. Further, officials told us that the current carve-out structure is more efficient to administer with one pharmacy services contractor than the previous carve-in structure that involved multiple managed care support contractors. While DOD officials believe the current structure is appropriate, there have been significant changes in the pharmacy benefit management market in the past decade. These changes include mergers, as well as companies offering new services that may change the services and options available to DOD. For example, representatives from one managed care support contractor we spoke with told us that they can offer different services to DOD today than they were able to offer when pharmacy services were part of the managed care support contracts. While the contractor had previously sub-contracted with a separate pharmacy benefit manager to provide pharmacy services under its managed care support contract, this contractor's parent company now provides in-house pharmacy benefit management services for its commercial clients. Additionally, according to the parent company of another managed care support contractor, its recent decision to bring pharmacy benefit management services in-house will enhance its ability to manage total health care costs and improve health outcomes for clients who carve in pharmacy services. As we have previously reported, sound acquisition planning includes an assessment of lessons learned to identify improvements. The time necessary for such activities can vary greatly, depending on the complexity of the contract. We have also reported that a comparative evaluation of the costs and benefits of alternatives can provide an evidence-based rationale for why an agency has chosen a particular alternative (such as a decision to maintain or alter the current pharmacy services contract structure). We have reported that such an evaluation would consider possible alternatives and should not be developed solely to support a predetermined solution. With each new pharmacy services contract, DOD officials have the opportunity to conduct acquisition planning activities that help determine whether the contract--and its current structure--continues to meet the department's needs, including providing the best value and services to the government and beneficiaries. These activities can include changing requirements as necessary, learning about current market trends, and incorporating new information and lessons learned. Acquisition planning can also incorporate an assessment of the pharmacy services contract structure that includes an evaluation of the potential costs and benefits of alternative contract structures. Incorporating such an evaluation into the acquisition planning for each new pharmacy services contract can provide DOD with an evidence-based rationale for why maintaining or changing the current structure is warranted. Without such an evaluation, DOD cannot effectively demonstrate to Congress and stakeholders that it has chosen the most appropriate contract structure, in terms of costs to the government and services for beneficiaries. To provide decision makers with more complete information on the continued appropriateness of the current pharmacy services contract structure, and to ensure the best value and services to the government and beneficiaries, we recommend that the Secretary of Defense direct the Assistant Secretary of Defense (Health Affairs) to take the following two actions: conduct an evaluation of the potential costs and benefits of alternative contract structures for the TRICARE pharmacy services contract; and incorporate such an evaluation into acquisition planning. We provided a draft of this report to DOD for comment. DOD generally concurred with our findings and conclusions and concurred with our recommendations. DOD also commented that based on past experience with alternative contract structures, it is confident that the current contract structure is the most cost efficient and beneficial. In response to our recommendation that DOD conduct an evaluation of the potential costs and benefits of alternative contract structures for the TRICARE pharmacy services contract, DOD commented that there is a lack of data to support inferences that a carve-in arrangement would result in cost savings to the government, and noted that the full development of two separate RFPs would be necessary to provide a valid cost comparison. While detailed cost estimates can be a useful tool for DOD, they are not the only means of evaluating alternative structures for the pharmacy services contract. For example, as we noted in our report, DOD has previously used RFIs to obtain information from industry to inform its decisions about the pharmacy services contract, and this process also may be helpful in identifying costs and benefits of alternative contract structures. In response to our recommendation that DOD incorporate such an evaluation into acquisition planning, DOD commented that it included an evaluation of its past contract experience into acquisition planning for the upcoming pharmacy services contract. However, as noted in our report, the acquisition plan for the upcoming contract did not include an evaluation of the potential costs and benefits of alternative contract structures, and DOD did not directly address how it would include such an evaluation in its acquisition planning activities. We continue to emphasize the importance of having an evidence-based rationale for why maintaining or changing the current structure is warranted. With each new pharmacy services contract, DOD officials have the opportunity to determine whether the contract continues to meet the department's needs, including providing the best value to the government and services to beneficiaries. In addition, DOD stated in its comments that our report did not address its direct-care system and noted that carving pharmacy services back into the managed care support contracts would fragment the pharmacy benefit and undermine its goal of integrating all pharmacy points of service. Our review was focused on DOD's purchased-care system for providing pharmacy services, although we did provide context about the direct-care system as appropriate. Furthermore, we did not recommend any specific structure for DOD's pharmacy services contract, but rather that DOD evaluate the costs and benefits of alternative structures such that it can have an evidence-based rationale for its decisions. DOD's comments are reprinted in appendix II. DOD also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to appropriate congressional committees; the Secretary of Defense; the Assistant Secretary of Defense (Health Affairs); and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Department of Defense (DOD) officials who award and administer the TRICARE pharmacy services contract are required to meet relevant certification standards applicable to all DOD acquisition officials and, according to DOD officials, some of these officials also have pharmacy- specific experience. The training and related education and experience requirements are tailored to different levels of authority and, due to the size and complexity of the pharmacy services contract, the contracting officer and program manager for the pharmacy services contract are required to be certified at the highest levels, which require the most training and experience. In addition, all contracting officer's representatives (COR) must meet specific training and experience requirements based on the complexity and risk of the contracts they will be working with, and the two CORs for the pharmacy services contract are also required to meet the highest COR certification level. For example, the CORs for the pharmacy services contract must complete at least 16 hours of COR-specific continuing education every 3 years, which is twice the amount required for low-risk, fixed-price contracts. DOD's department-wide acquisition training is primarily provided through the Training is designed to provide a Defense Acquisition University.foundation of acquisition knowledge but is not targeted to specific contracts or contract types. Beyond DOD's required training, the contracting officer, program manager, and CORs also have specialized experience in pharmacy and related issues. See table 2 for the specific certification standards for and pharmacy-specific experience of the officials responsible for awarding or administering the pharmacy services contract. In addition to the contact named above, Janina Austin, Assistant Director; Lisa Motley; Laurie Pachter; Julie T. Stewart; Malissa G. Winograd; and William T. Woods made key contributions to this report.
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DOD offers health care coverage--medical and pharmacy services--to eligible beneficiaries through its TRICARE program. DOD contracts with managed care support contractors to provide medical services, and separately with a pharmacy benefit manager to provide pharmacy services that include the TRICARE mail-order pharmacy and access to a retail pharmacy network. This is referred to as a carve-out contract structure. DOD's current pharmacy contract ends in the fall of 2014. DOD has been preparing for its upcoming contract through acquisition planning, which included identifying any needed changes to contract requirements. Senate Report 112-173, which accompanied a version of the NDAA for fiscal year 2013, mandated that GAO review DOD's health care contracts. For this report, GAO examined: (1) how DOD identified changes needed, if any, to requirements for its upcoming pharmacy services contract; and (2) what, if any, assessment DOD has done of the appropriateness of its current contract structure. GAO reviewed DOD acquisition planning documents and federal regulations, and interviewed officials from DOD and its pharmacy services contractor. The Department of Defense (DOD) used various methods to identify needed changes to requirements for its upcoming pharmacy services contract. During acquisition planning for the upcoming TRICARE pharmacy services contract, DOD solicited feedback from industry through its market research process to align the contract requirements with industry best practices and promote competition. For example, DOD issued requests for information (RFI) in which DOD asked questions about specific market trends, such as ensuring that certain categories of drugs are distributed through the most cost-effective mechanism. DOD also issued an RFI to obtain information on promoting competition, asking industry for opinions on the length of the contract period. DOD officials told us that responses indicated that potential offerors would prefer a longer contract period because it would allow a new contractor more time to recover any capital investment made in implementing the contract. The request for proposals for the upcoming contract, issued in June 2013, included a contract period of 1 base year and 7 option years. DOD also identified changes to contract requirements in response to legislative changes to the TRICARE pharmacy benefit. For example, the National Defense Authorization Act (NDAA) for fiscal year 2013 required DOD to implement a mail-order pilot for maintenance drugs for beneficiaries who are also enrolled in Medicare Part B. DOD officials incorporated this change in the requirements for the upcoming pharmacy services contract. DOD has not conducted an assessment of the appropriateness of its current pharmacy services contract structure that includes an evaluation of the costs and benefits of alternative structures. Alternative structures can include incorporating all pharmacy services into the managed care support contracts--a carve-in structure--or a structure that incorporates certain components of DOD's pharmacy services, such as the mail-order pharmacy, into the managed care support contracts while maintaining a separate contract for other components. DOD officials told GAO they believe that DOD's current carve-out contract structure continues to be appropriate, as it affords more control over pharmacy data that allows for detailed data analyses and cost transparency, meets program goals, and has high beneficiary satisfaction. However, there have been significant changes in the pharmacy benefit management market in the past decade, including mergers and companies offering new services that may change the services and options available to DOD. GAO has previously reported that sound acquisition planning includes an assessment of lessons learned to identify improvements. Additionally, GAO has reported that a comparative evaluation of the costs and benefits of alternatives can provide an evidence-based rationale for why an agency has chosen a particular alternative. Without this type of evaluation, DOD cannot effectively demonstrate that it has chosen the most appropriate contract structure in terms of costs to the government and services for beneficiaries. GAO recommends that DOD conduct an evaluation of the potential costs and benefits of alternative structures for the TRICARE pharmacy services contract, and incorporate such an evaluation into acquisition planning. DOD concurred with GAO's recommendations.
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Postsecondary institutions that serve large proportions of economically disadvantaged and minority students are eligible to receive grants from Education through Title III and Title V of the Higher Education Act, as amended, to improve academic and program quality, expand educational opportunities, address institutional management issues, enhance institutional stability, and improve student services and outcomes. Institutions eligible for funding under Titles III and V include Historically Black Colleges and Universities (HBCUs), Tribal Colleges, Hispanic Serving Institutions (HSIs), Alaska Native and Native Hawaiian Institutions, and other undergraduate institutions of higher education that serve low-income students. While these institutions differ in terms of the racial and ethnic makeup of their students, they serve a disproportionate number of financially needy students and have limited financial resources, such as endowment funds, with which to serve them. (See app. I for characteristics of Title III and Title V institutions and their students.) Title III and Title V statutory provisions generally outline broad program goals for strengthening participating institutions, but provide grantees with flexibility in deciding which approaches will best meet their needs. An institution can use the grants to focus on one or more activities that will help it achieve the goals articulated in its comprehensive development plan--a plan that each applicant must submit with its grant application outlining its strategy for achieving growth and self-sufficiency. The statutory and regulatory eligibility criteria for all of the programs, with the exception of the HBCU program, contain requirements that institutions applying for grants serve a significant number of economically disadvantaged students. See table 1 for additional information about eligibility requirements. Historically, one of the primary missions of Title III has been to support Historically Black Colleges and Universities, which play a significant role in providing postsecondary opportunities for African American, low- income, and educationally disadvantaged students. These institutions receive funding, in part, to remedy past discriminatory action of the states and the federal government against black colleges and universities. For a number of years, all institutions that serve financially needy students-- both minority serving and nonminority serving--competed for funding under the Strengthening Institutions Program, also under Title III. However, in 1998, the Higher Education Act was amended to create new grant programs specifically designated to provide financial support for Tribal Colleges, Alaska Native and Native Hawaiian Institutions, and Hispanic Serving Institutions. These programs have provided additional opportunities for Minority Serving Institutions to compete for federal grant funding. In 1999, the first year of funding for the expanded programs, 55 Hispanic Serving, Tribal, Alaska Native, and Native Hawaiian Institutions were awarded grants, and as of fiscal year 2006, 197 such institutions had new or continuation grants. (See table 2). The grant programs are designed to increase the self-sufficiency and strengthen the capacity of eligible institutions. Congress has identified many areas in which institutions may use funds for improving their academic programs. Authorized uses include, but are not limited to, construction, maintenance, renovation or improvement of educational facilities; purchase or rental of certain kinds of equipment or services; support of faculty development; and purchase of library books, periodicals, and other educational materials. In their grant performance reports, the six grantees we recently reviewed most commonly reported using Title III and Title V grant funds to strengthen academic quality; improve support for students and student success; and improve institutional management and reported a range of benefits. To a lesser extent, grantees also reported using grant funds to improve their fiscal stability. However, our review of grant files found that institutions experienced challenges, such as staffing problems, which sometimes resulted in implementation delays. Efforts to Improve Academic Quality--Four of the six grantees we reviewed reported focusing at least one of their grant activities on improving academic quality. The goal of these efforts was to enhance faculty effectiveness in the classroom and to improve the learning environment for students. For example, Ilisagvik College, an Alaska Native Serving Institution, used part of its Title III, part A Alaska Native and Native Hawaiian grant to provide instruction and student support services to prepare students for college-level math and English courses. According to the institution, many of its students come to college unprepared for math and English, and grant funds have helped the school to increase completion rates in these courses by 14 percentage points. Efforts to Improve Support for Students and Student Success--Four of the six grantees we reviewed reported focusing at least one of their grant activities on improving support for students and student success. This area includes, among other things, tutoring, counseling, and student service programs designed to improve academic success. Sinte Gleska, a tribal college in South Dakota, used part of its Title III grant to fund the school's distance learning department. Sinte Gleska reported that Title III has helped the school develop and extend its programs, particularly in the area of course delivery through technology. In addition, the school is able to offer its students access to academic and research resources otherwise not available in its rural isolated location. Efforts to Improve Institutional Management--Four of the six grantees we reviewed reported focusing at least one of their grant activities on improving institutional management. Examples in this area include improving the technological infrastructure, constructing and renovating facilities, and establishing or enhancing management systems, among others. For example, Chaminade University, a Native Hawaiian Serving Institution, used part of its Title III grant to enhance the school's academic and administrative information system. According to Chaminade University, the new system allows students to access class lists and register on-line, and readily access their student financial accounts. Additionally, the Title III grant has helped provide students with the tools to explore course options and develop financial responsibility. Efforts to Improve Fiscal Stability at Grantee Institutions--Two of the six institutions we reviewed reported focusing at least one of their grant activities on improving its fiscal stability. Examples include activities such as establishing or enhancing a development office, establishing or improving an endowment fund, and increasing research dollars. Development officers at Concordia College, a historically black college in Alabama, reported using its Title III grant to raise the visibility of the college with potential donors. While grantees reported a range of uses and benefits, four of the six grantees also reported challenges in implementing their projects. For example, one grantee reported delays in implementing its management information system due to the turn-over of experienced staff. Another grantee reported project delays because needed software was not delivered as scheduled. In addition, Education officials told us that common problems for grantees include delays in constructing facilities and hiring. As a result of these implementation challenges, grantees sometimes need additional time to complete planned activities. For example, 45 percent of the 49 grantees in the Title V, developing Hispanic Serving Institutions program that ended their 5-year grant period in September 2006 had an available balance greater than $1,000, ranging from less than 1 percent (about $2,500) to 16 percent (about $513,000) of the total grant. According to Education regulations, grantees generally have the option of extending the grant for 1 year after the 5-year grant cycle has ended to obligate remaining funds. Education has established a series of new objectives, strategies, and performance measures that are focused on key student outcomes for Title III and Title V programs. As part of Education's overall goal for higher education within its 2007-2012 Strategic Plan, Education established a supporting strategy to improve the academic, administrative, and fiscal stability of HBCUs, HSIs, and Tribal Colleges. Education has also established objectives in its annual program performance plans to maintain or increase student enrollment, persistence, and graduation rates at all Title III and Title V institutions, and has developed corresponding performance measures. When we reported on Education's strategic planning efforts in our 2004 report, it measured its progress in achieving objectives by measuring outputs, such as the percentage of institutional goals that grantees had related to academic quality that were met or exceeded. However, these measures did not assess the programmatic impact of its efforts. Education's new objectives and performance measures are designed to be more outcome focused. In addition, the targets for these new performance measures were established based on an assessment of Title III and Title V institutions' prior performance compared to performance at all institutions that participate in federal student financial assistance programs. Education officials told us that they made these changes, in part, to address concerns identified by the Office of Management and Budget that Education did not have specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program Education needs to take additional steps to align some of its strategies and objectives, and develop additional performance measures. GAO has previously reported that performance plans may be improved if strategies are linked to specific performance goals and the plans describe how the strategies will contribute to the achievement of those goals. We found insufficient links between strategies and objectives in Education's strategic plans and annual program performance plans. Specifically, Education needs to better link its strategies for improving administrative and fiscal stability with its objectives to increase or maintain enrollment, persistence, and graduation rates because it is unclear how these strategies impact Education's chosen outcome measures. In fact, GAO and other federal agencies have previously found Education faces challenges in measuring institutional progress in areas such as administrative and fiscal stability. To address part of this problem, Education is conducting a study of the financial health of low-income and minority serving institutions supported by Title III and Title V funds to determine, among other things, the major factors influencing financial health and whether the data Education collects on institutions can be used to measure fiscal stability. Education officials expect the study to be completed in 2008. Education made changes designed to better target monitoring and assistance in response to recommendations we made in our 2004 report; however, additional work is needed to ensure the effectiveness of these efforts. Specifically, we recommended that the Secretary of Education take steps to ensure that monitoring and technical assistance plans are carried out and targeted to at-risk grantees and the needs of grantees guide the technical assistance offered. Education needed to take several actions to implement this recommendation, including completing its electronic monitoring tools and training programs to ensure that department staff are adequately prepared to monitor and assist grantees and using appropriately collected feedback from grantees to target assistance. Education has taken steps to better target at-risk grantees, but more information is needed to determine its effectiveness. In assessing risk, department staff are to use a variety of sources, including expenditure of grant funds, review of performance reports, and federally required audit reports. However, according to a 2007 report issued by Education's Office of Inspector General, program staff did not ensure grantees complied with federal audit reporting requirements. As a result, Education lacks assurance that grantees are appropriately managing federal funds, which increases the potential risk for waste, fraud, and abuse. In addition to reviewing grantee fiscal, performance, and compliance information, program staff are also required to consider a number of factors affecting the ability of grantees to manage their grants in the areas of project management and implementation, funds management, communication, and performance measurement. Education reports that identifying appropriate risk factors have been a continuous process and that these factors are still being refined. On the basis of results of the risk assessments, program staff are to follow up with grantees to determine whether they are in need of further monitoring and assistance. Follow-up can take many forms, ranging from telephone calls and e-mails to on-site compliance visits and technical assistance if issues cannot not be readily addressed. In targeting grantees at risk, Education officials told us that the department has recently changed its focus to improve the quality of monitoring while making the best use of limited resources. For example, Education officials said that risk criteria are being used to target those grantees most in need of sites visits rather than requiring staff to conduct a minimum number each year. Based on information Education provided, program staff conducted site visits at 28 of the 517 institutions receiving Title III and Title V funding in fiscal year 2006, but a more extensive review is required to determine the nature and quality of them. Education's ability to effectively target monitoring and assistance to grantees may be hampered because of limitations in its electronic monitoring system, which are currently being addressed. Education implemented this system in December 2004 and all program staff were required to use the system as part of their daily monitoring activities. The system was designed to access funding information from existing systems, such as its automated payment system, as well as to access information from a departmental database that contains institutional performance reports. According to Education, further refinements to its electronic monitoring system to systematically track and monitor grantees. For example, the current system does not allow users to identify the risk by institution. Education also plans to automate and integrate the risk-based plan with their electronic monitoring system. Education anticipates the completion of system enhancements by the end of 2007. Because efforts are ongoing, Education has limited ability to systematically track grantee performance and fiscal information. Regarding training, Education reports that it has expanded course offerings to program staff specific to monitoring and assistance. Education officials told us that the department has only a few mandated courses, but noted that a number of training courses are offered, such as grants monitoring overview and budget review and analysis, to help program staff acquire needed skills for monitoring and assistance. However, because Education recently moved to a new training recordkeeping system that does not include information from prior systems, we were unable to determine the extent to which program staff participated in these offerings. We reported in 2004 that staff were unaware of the guidelines for monitoring grantees and more information is needed to determine the extent to which new courses are meeting the needs of program staff. While Education provides technical assistance through program conferences, workshops, and routine interaction between program officers and grantees, Education's ability to target assistance remains limited, in that its feedback mechanisms may not encourage open communication. Education officials told us that they primarily rely on grantee feedback transmitted in annual performance reports and communication between program officers and grantees. As we reported in 2004, Education stated that it was considering ways to collect feedback separate from its reporting process for all its grant programs but no such mechanisms have been developed. We previously recommended that the Secretary of Education take steps to ensure that monitoring and technical assistance plans are carried out and targeted to at-risk grantees and the needs of grantees guide the technical assistance offered. These steps should include completing its automated monitoring tools and training programs to ensure that department staff are adequately prepared to monitor and assist grantees and using appropriately collected feedback from grantees to target assistance. Education agreed with our recommendation, and has taken actions to target its monitoring and technical assistance to at-risk grantees. However, additional study is needed to determine the effectiveness of these 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 at this time. For further information regarding this testimony, please contact me at (202) 512-7215. Individuals making key contributions to this testimony include Debra Prescott, Tranchau (Kris) Nguyen, Claudine Pauselli, Christopher Lyons, Carlo Salerno, Sheila McCoy, and Susan Bernstein. Federal grants include Pell Grants and other federal grants awarded to individual students. This is an admission policy whereby the institution will accept any student who applies. (2) Data for average percentage of students with federal grant aid is from fiscal year 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Institutions that may receive funding under Titles III and V include Historically Black Colleges and Universities (HBCUs), Tribal Colleges, Hispanic Serving Institutions, Alaska Native Serving Institutions, Native Hawaiian Serving Institutions, and other postsecondary institutions that serve low-income students. In fiscal year 2006, these programs provided $448 million in funding for over 500 grantees, nearly double fiscal year 1999 funding of $230 million. GAO examined these programs to determine (1) how institutions used their Title III and Title V grants and the benefits they received from using these grant funds, (2) what objectives and strategies the Department of Education (Education) has developed for Title III and Title V programs, and (3) to what extent Education monitors and provides assistance to these institutions. This testimony updates a September 2004 report on these programs (GAO-04-961). To update our work, GAO reviewed Education policy and planning documents, and program materials and grantee performance reports; interviewed Education officials; and analyzed Education data on grantee characteristics. In their performance reports, the six grantees we reviewed most commonly reported using Title III and Title V grant funds to strengthen academic quality; improve support for students and student success; and improve institutional management and reported a wide range of benefits. For example, Sinte Gleska, a tribal college in South Dakota, used part of its Title III grant to fund the school's distance learning department, to provide students access to academic and research resources otherwise not available in its rural isolated location. Our review of grant files found that institutions experienced challenges, such as staffing problems, which sometimes resulted in implementation delays. For example, one grantee reported delays in implementing its management information system due to the turn over of experienced staff. As a result of these implementation challenges, grantees sometimes need additional time to complete planned activities. Although Education has established outcome based objectives and performance measures, it needs to take steps to align some strategies and objectives, and develop additional performance measures. Education has established an overall strategy to improve the academic, administrative, and fiscal stability of grantees, along with objectives and performance measures focused on student outcomes, such as graduation rates. In 2004, we reported that Education's strategic planning efforts in were focused on program outputs that did not assess programmatic impacts, such as the percentage of goals that grantees met or exceeded, rather than outcomes. While Education has made progress in developing outcome based measures, we found insufficient links between its strategies for improving administrative and fiscal stability with its student outcome objective. To address challenges in measuring institutional progress in areas such as administrative and fiscal stability, Education is conducting a study of the financial health of low income and minority serving institutions supported by Title III and Title V. Education has made changes to better target monitoring and assistance in response to recommendations GAO made in 2004, however, additional study is needed to determine the effectiveness of these efforts. For example, Education uses risk indicators designed to better target grantees that may require site visits. While Education implemented an electronic monitoring system, it lacks the ability to systematically track grantee performance as designed. While Education provides technical assistance through various methods, its ability to target assistance remains limited in that its feedback mechanisms may not encourage open communication. Specifically, Education relies on grantee performance reports that are tied to funding decisions to solicit feedback.
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The National Capital Revitalization and Self-Government Improvement Act, Public Law 105-33 (the Revitalization Act), approved August 5, 1997, directed the Authority and the District of Columbia government to develop and implement management reform plans for nine major city agencies and four citywide functionsduring fiscal years 1998 and 1999. Funding for management reform was to be provided, for the most part, by existing budget authority within agencies and by the fiscal year 1998 surplus that resulted from the federal government's assumption of the cost of certain functions previously financed through District revenue. The law gave the Authority the power to allocate surplus funds to management reform projects. The Authority reported in the FiscalYear1998Annual PerformanceReport:AReportonServiceImprovementsandManagement Reform,dated October 30, 1998, that the projects were selected using management reform criteria of customer satisfaction; empowering employees; long-term service delivery improvements; and greater internal capacity (through infrastructure changes, staff training, and automation). In September 1997, the Authority hired 11 consultants, at a cost of $6.6 million, to develop management reform plans for these agencies and functions. The District's management reform team, consisting of the Chairman of the Authority, the former Mayor, the Chairman of the City Council, and the heads of each agency, approved the projects for implementation. The Authority then hired a Chief Management Officer (CMO) who was delegated responsibility for these projects. The CMO implemented a system to manage these projects that included development of operational plans, identification of the official directly responsible for each project, and periodic monitoring of each project. Agencies were required to report monthly on expenditures and the results of the projects. On October 30, 1998, the Authority reported in its Fiscal Year1998AnnualPerformanceReportthat 69 projects had been completed. In January 1999, the Authority returned responsibility for the nine city agencies and four citywide functions to the newly elected Mayor. District officials told us that the current administration established a new reform agenda that incorporated a small number of the remaining management reform projects. Specifically, the District selected 20of the remaining 200 projects that it considered to be the best projects to be continued in fiscal year 1999. The District also initiated 7 new projects, for a total of 27 projects that were funded in fiscal year 1999. To determine the status and results of the District's management reform initiatives, we reviewed pertinent financial documents and reports provided by the Office of the Chief Financial Officer (OCFO), the Authority, the office of the former CMO, and the D.C. City Council. We also interviewed the Deputy Mayor for Operations, the Chief Financial Officer, and other officials from those offices and the Authority. We did not audit the District's management reform funds or expenditures, and accordingly, we do not express an opinion or any other form of assurance on these reported amounts. Our work was done in accordance with generally accepted government auditing standards between April and June 2000. I will now discuss in more detail the matters I highlighted earlier. Authority and District officials have not consistently tracked the disposition of management reform initiatives from fiscal years 1998 and 1999. These officials were unable to provide adequate information on whether these management reform projects from fiscal years 1998 and 1999 achieved their intended goals or objectives. Although this information may be available on an agency-by-agency basis, currently, the District has no systematic process for monitoring and reporting on this information. During fiscal years 1998 and 1999, the District budgeted over $300 million to begin implementing over 250 management reform projects. The reported fiscal year 1998 investment in management reform of about $293 million included $112.6 million of operating fundsand $180.3 million of capital funds. For fiscal year 1999, the investment in management reform of $36.2 million included $30.9 million of operating funds and $5.3 million of capital funds. Of the $36.2 million, about $33 million was federal appropriations provided to the Authority specifically for management reform.Table 1 shows the total funds provided to the District for management reform for fiscal years 1998 through 2000, the amounts reported as obligated, estimated savings from those initiatives, and reported savings from those initiatives. The status of the funds appropriated for the management reform projects initially identified in fiscal year 1998 and the disposition of those projects is as follows: The District reported in its Final Fiscal Year 1998 Management Reform Summary of Operating and Capital Funds, as of September 30, 1998, that of the $292.8 million budgeted for management reform, approximately $126.9 million had been spent and about $165.9 million was available at the end of fiscal year 1998. Of this amount, approximately $2.3 million of operating funds lapsed,resulting in about $163.6 million remaining at the end of fiscal year 1998. About $3.2 million of operating funds (included in the $163.6 million above), which was not allocated to any particular project, was carried over to fiscal year 1999 for management reform projects in accordance with the District of Columbia Appropriations Act of 1999, Public Law 105-277. The remainder was allocated to 35 former management reform initiatives that were designated as capital projects and were no longer considered part of the management reform program. According to the District's Expenditure Data on Capital Projects report, the $160.4 million in capital funds (included in the $163.6 million previously mentioned) unspent at the end of fiscal year 1998 was carried over into fiscal year 1999 for the 35 projects. Included in the 35 projects were initiatives for the Automated Integrated Tax System, implementing the Real Property Inventory System, and implementing a new Motor Vehicle Information System. According to the Authority, 69 projects had been completed. Included in the completed projects were the modification of the Department of Corrections Employee Pay Plan and an increase in the number of building inspections. Although the District's Final Fiscal Year 1998 Management Reform Summary reported fiscal year spending on these management reform projects totaling about $127 million, the District could not specifically identify the amount of funds spent that was used to pay consultants, contractors, and District employees. According to District officials, the former CMO requested information regarding funds spent for consultants and contractors from the agencies during fiscal year 1998. This information was reported to the OCFO on a monthly basis. However, we found that the data was inconsistent, and no such information related to these management reform projects was requested in fiscal year 1999. The District, however, has acknowledged that management reform funds were used for projects other than management reform; for example, about $11.3 million was used for the pay increase for District of Columbia Public School teachers. District officials told us that the new administration of Mayor Williams inherited approximately 200 projects in various stages of completion. Rather than continue with the entire agenda, the new administration reviewed the projects and selected those it considered to be the best projects for incorporation into agencies' long-term plans. In consultations with the Authority, the new administration chose the 20 best projects and added 7 new projects, giving it a total of 27 projects funded in fiscal year 1999. To implement these 27 management reform projects during fiscal year 1999, the District budgeted approximately $36.2 million, $33 million of which was federal appropriations. Twenty-six of these projects were funded with $30.9 million in operating funds and one project received about $5.3 million in capital funds. The District reported in its Fiscal Year 1999 Management and Regulatory Reform Funds, Agency Expenditure Summary as of May 15, 2000, that of the $36.2 million budgeted, approximately $29.1 million had been spent and about $7.1 million lapsed at the end of fiscal year 1999. As of June 16, 2000, the District had not determined the status of the 27 management reform projects for fiscal year 1999. In February 2000, the Office of the Deputy Mayor for Operations asked District agencies responsible for the projects to provide information on the original project goals and the results that had been achieved. According to District officials, they obtained information on only a few projects. The Deputy Mayor for Operations told us that he expected to have the status of each project by mid-June. As of June 26, 2000, we had not received this information. Included in the fiscal year 1999 budget was a line item that indicated that management reform initiatives would save approximately $10 million. District officials told us that these estimated savings were based on assumptions by the former CMO that an investment of about $93 million in operating funds would yield permanent cost savings. The estimated savings by agency were not defined in the fiscal year 1999 Appropriations Act; therefore, District officials determined the allocated savings based on the amount of each agency's management reform investment. As of June 1, 2000, of the $10 million expected in savings, District officials reported that about 15 percent, or $1.5 million, had been realized. The fiscal year 2000 budget also included $41 million of projected savings from various initiatives, including management reform productivity savings. However, in discussions with us, District officials said that the management reform productivity savings and other savings included in the fiscal year 2000 budget are not likely to be realized. The $41 million in projected savings was comprised of the following: $7 million in management reform productivity savings; $14 million in savings resulting from the implementation of the District of Columbia Supply Schedule; and $20 million in productivity banksavings. The District does not know whether any savings will be realized from the $7 million of management reform productivity savings. District officials told us that the former CMO and the Authority set the goal of $7 million; however, no one identified the savings targets related to specific management reform initiatives prior to the formulation of the fiscal year 2000 budget. The District does not expect any savings in fiscal year 2000 from the $14 million, which was to be derived from the District's establishment of a District Supply Schedule. District officials told us that the new Chief Procurement Officer had reviewed the D.C. Supply Schedule initiative in the summer of 1999 and determined that it did not offer advantages beyond existing federal schedules that District agencies were already utilizing. The District expects no savings from the $20 million productivity bank project, nor are these savings directly related to any management reform initiatives. The timing of congressional approval of the federal budget resulted in productivity bank funds not being available to agencies until the second quarter of fiscal year 2000. According to District officials, the timing of the budget approval, combined with the same year repayment requirement, has discouraged agencies from taking advantage of this fund, as productivity savings are often realized in small amounts within the first year and in increasing amounts in subsequent years. Originally proposed by the previous Mayor's 1996 plan, ATransformed GovernmentofthePeopleofWashington,D.C., this group of initiatives was included as an appendix to the fiscal year 1998 budget. The projects, which ranged from reducing the number of District employees to streamlining services to promote economic development, were estimated to save about $152.4 million. According to District and Authority officials, many of the initiatives listed in the plan have not been implemented and no savings have been realized. In many instances, the initiatives have been overtaken by other events, such as the National Capital Improvement and Revitalization Act of 1997. Because so few of the initiatives have been implemented, District officials told us that information is not available to determine the net benefit to the District either in terms of dollars saved or improved efficiencies and effectiveness of District services. Since fiscal year 1998, the District Government has budgeted over $300 million to implement management reform initiatives or projects. During this same period, District budgets have stated that management reform initiatives and other cost-saving initiatives would save about $200 million. To date, only $1.5 million of management reform savings have been documented. Additional savings might have been realized, but the Authority and District officials had not systematically assessed project results and savings. In addition, they did not adequately track the costs of these projects and, as a result, sufficient information is not available to show how these funds were spent. These management reform projects and targeted savings have been an integral part of recent District budgets and identify important reforms needed to improve services. Mr. Chairman, this concludes my statement. I will be happy to answer any questions that you or Members of the Subcommittee may have. For further information regarding this testimony, please contact Gloria L. Jarmon at (202) 512-4476 or by e-mail at [email protected]. Individuals making key contributions to this testimony included Norma Samuel, Linda Elmore, Timothy Murray, and Bronwyn Hughes. Event unobligated as of the end of the fiscal year. The President signed into law the District of Columbia FY 2000 Appropriations Act, P. L. 106-113. The act directed the CFO of the District to make reductions of $7 million for management reform savings in local funds to one or more of the appropriation headings in the act. The Authority notified the Deputy Mayor for Operations that it was conducting a closeout review of the results of the management reform initiatives and requested information about each of the initiatives through calendar year 1999. The Deputy Mayor for Operations distributed a survey to the agencies requesting the results of the fiscal year 1999 management reform initiatives. The Deputy Mayor for Operations provided the Authority a partial response to its January 14, 2000, request. The Authority notified the Deputy Mayor for Operations of its intent to finalize its closeout review of the results of the fiscal year 1999 management reform initiatives. To track the results of the initiatives, the Authority asked the Deputy Mayor for Operations to submit survey responses from each agency. The District's proposed Fiscal Year 2001 Operating Budget and Financial Plan includes an estimated $37 million in management reform productivity savings. The Deputy Mayor for Operations provided GAO with a draft project status report of the fiscal year 1999 management reform operating projects as of September 30, 1999. (916354)
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Pursuant to a congressional request, GAO discussed the District of Columbia's management reform initiatives. GAO noted that: (1) over the past 3 fiscal years, the District government has proposed hundreds of management reform initiatives that were estimated to save millions of dollars as well as improve government services; (2) however, as of June 1, 2000, the District had only reported savings of about $1.5 million related to these initiatives and had not consistently tracked the status of these projects; (3) neither the District of Columbia Financial Responsibility a nd Management Assistance Authority nor the District could provide adequate details on the goals achieved for all of the projects that had been reported as completed or in various stages of completion; (4) the District does not have a systematic process to monitor these management reform projects and determine where savings or customer service improvements have been realized; and (5) the District cannot say for certain how funds designated for management reform have been spent or whether the key goals of these initiatives have been realized.
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Advances in the use of information technology and the Internet are transforming the way federal agencies communicate, use information, deliver services, and conduct business. To increase the ability of citizens to interact with the federal government electronically, in 1998 the Congress enacted GPEA. GPEA makes OMB responsible for ensuring that federal agencies meet the act's October 21, 2003, implementation deadline. In May 2000, OMB issued GPEA implementation guidance, which lays out a process and principles for agencies to employ in evaluating the use and acceptance of electronic documents and signatures. The guidance calls for agencies to examine business processes that might be revamped to employ electronic documents, forms, or transactions; identify customer needs and demands; consider the costs, benefits, and risks associated with making the transition to electronic environments; and develop plans and strategies for recordkeeping and security. In September 2000, we concluded that OMB's GPEA guidance--as well as the guidance and supplementary efforts being undertaken by Treasury, the National Archives and Records Administration, the Departments of Justice and Commerce and others-- provided a useful foundation of information to assist agencies with GPEA implementation and the transition to electronic government (e- government). Our report also laid out information technology management challenges that are fundamental to the success of GPEA. OMB's May guidance also required each agency, by October 2000, to develop and submit a GPEA implementation plan and schedule. According to this guidance, these plans were to prioritize implementation of systems and system modules based on achievability and net benefit. Further, agencies were required to coordinate their GPEA plans and schedules with their strategic information technology (IT) planning activities and report progress annually. In July 2000 OMB issued supplemental guidance that provided a structured, standardized format for agency reporting of GPEA implementation plans. Unlike the May 2000 guidance, which discussed a wide range of activities needed for an agency to comply with GPEA, this new guidance focused on specific kinds of data that OMB was expecting agencies to submit in the October 2000 plans. The new guidance specified that the plans be divided into four parts: First, agencies were to provide a cover letter describing their overall strategy and actions to comply with the act. This letter is the part of the plan that provides an agencywide perspective on GPEA compliance efforts. Second, agencies were required to provide data in tabular form regarding information-collection activities approved by OMB under the Paperwork Reduction Act (PRA), which mandates that OMB review how agencies collect and use information. The data tables were to include a column showing when an electronic option would be completed (if one was being planned) and whether electronic signatures were to be used. Third, agencies were requested to provide an additional table showing interagency reporting, information-dissemination activities, and other agency-identified transactions. According to OMB's guidance, "interagency reporting" encompasses ongoing, periodic reports, such as personnel and payroll reports, which are exchanged among agencies. "Information-dissemination activities" refers to information products intended for the general public, such as the periodic release of labor statistics. Like the PRA-based inventory, this list was to include a column showing when an electronic option would be completed, if planned, and whether electronic signatures were to be used. Lastly, supplemental information was also to be provided about any of the previously listed transactions that the agency had determined to pose a "high risk," such as those involving particularly sensitive information or very large numbers of respondents. This section of the plan was to include a description of the transactions, their sensitivity, and additional risk management measures that would be taken. Let me now turn to the three agency plans you asked us to review. According to Treasury's plan, the department's GPEA-related activities are a critical component of the overall departmental effort to fundamentally redefine the way it performs its critical missions. According to the plan, a key element of that effort was the development of an e-government strategic plan--just published this month--which Treasury is using as a framework for selecting and implementing electronic initiatives. In addition to its internal initiatives, Treasury's plan notes that the department has been involved in governmentwide actions to advance electronic government and comply with GPEA. A key example is Pay.gov, an Internet portal developed by its Financial Management Service. According to the plan, the services of Pay.gov can help agencies meet GPEA requirements to accept forms electronically by 2003 by offering a package of electronic financial services to assist agencies, such as enabling end-users to submit agency forms and authorize payments, presenting agency bills to end-users, and establishing the identity of end- users and reporting information about transactions back to the agencies. Once fully operational, this service could help agencies throughout the federal government to more easily reach the goals of GPEA. According to the department's deputy chief information officer (CIO), the progress of major GPEA-related initiatives at Treasury is being monitored through monthly CIO meetings with representatives from each of the department's various bureaus and by using an investment management tool. The Deputy CIO added that compliance with GPEA is also included in the criteria that Treasury uses in its investment review process for evaluating newly proposed information technology projects. Treasury used its database of information collections identified under PRA as a starting point for preparing the required data tables for its GPEA implementation plan. PRA information collections include such things as requests for forms and publications, tax-related forms, and business- production reports. To refine the list, the department's CIO organization convened a group comprising representatives from Treasury's IT policy and strategy group, CIO development team, bureau representatives, and policy office representatives. The group reviewed the PRA collections and added a records management initiative that had not been part of the original database. Treasury's plan provides the kind of information stipulated in OMB's July 2000 guidance. Altogether, Treasury identified 336 PRA information- collection processes that are subject to GPEA. According to the plan, 23 of these are scheduled for conversion to an electronic option in 2001, 36 are scheduled for 2002, and 84 are scheduled for 2003. Of the remaining initiatives, 80 were reported to already be converted, two are scheduled for conversion in 2004, and 111 were not assigned a completion date for conversion. In all but one case where the conversion date was beyond October 2003 or not assigned, Treasury included explanations, as required by OMB's guidance. Further, Treasury identified 105 initiatives offering an electronic option for interagency reporting, information-dissemination activities, and other transactions, and four transactions identified as high risk. For those initiatives included in Treasury's plan that did not specify completion dates, the department plans to include that information when it becomes available, according to the deputy CIO. The plan also is expected to be updated as the bureaus and department offices make progress toward completing its initiatives. According to its October 2000 plan, EPA is currently undertaking three major activities in an effort to provide e-government services and comply with GPEA. The first initiative is to establish a new rule that would permit electronic reporting and recordkeeping and establish the requirements necessary to ensure that electronic documents are valid and authentic. EPA has drafted the proposed new rule, and it is currently being reviewed by administration officials. Agency officials expect it to be approved this year, with a final rule to be published in 2002. The second major initiative is the development of a computer network facility known as the Central Data Exchange. This new facility is to be the central point of entry for all electronic reporting, and is expected to provide security, authentication, error detection, and distribution capabilities. EPA expects the facility to be fully operational by the fall of 2002. The third major initiative is to improve EPA's information security. We have previously reported on significant weaknesses in EPA's information security program. The October 2000 plan states that the agency has made significant progress in improving its cyber defenses by implementing security confidentiality protocols and procedures. Further, agency officials state that they are actively exploring the use of electronic signatures and public key infrastructure (PKI) technology to ensure the security, confidentiality, and non-repudiation of sensitive data collections. EPA used an iterative process to develop its October 2000 plan. Starting with its internal PRA database as a baseline, Office of Environmental Information personnel created a template of information collections that was sent to each program office for validation and for completion of additional GPEA-related data. The agency's final plan contains a detailed inventory of its PRA information collections. An EPA official said that this inventory and its related attachments include all of the information regarding plans for electronic interagency reporting, information dissemination activities, and high-risk transactions, as required by OMB. EPA identified 279 data-collection activities applicable to GPEA. Through iterative reviews, it determined that 108 of these were not candidates for electronic reporting for reasons such as that they involved interaction with only a few members of the public or because filling out a paper form was deemed to not be a significant burden. According to the agency's plan, of the 171 data collections that were considered suitable for electronic reporting, 21 have already been converted, 3 are scheduled for 2001, 13 are scheduled for 2002, and 96 are scheduled for 2003. The remaining 38 data collections that will not be ready for electronic reporting by the GPEA deadline all involve the reporting of confidential business information. The electronic transmission of this type of data poses additional risks that EPA does not plan to have fully addressed by October 2003. Agency officials state that they are in the process of assessing these data collections to determine how to collect these data centrally and in a secure form. By 2003 they expect that they will be testing methods of secure transmission but do not expect them to be operational until after the GPEA deadline. According to EPA officials, in anticipation of a request by OMB for updated information on the data-collection inventories, they sent a letter to the program offices asking for such updated information. Using these responses, EPA officials plan to update their data-collection inventory. DOD's October 2000 GPEA plan does not include a description of the department's overall strategy and efforts to comply with GPEA. Likewise, DOD officials could not provide us with documentation specifically addressing a departmentwide implementation strategy. Officials from DOD's Office CIO told us that major GPEA-related activities within the department are focused on enabling and enhancing electronic business applications and that the department's strategic plans for business process transformation include objectives that incidentally address the goals of GPEA. Examples include the department's paperless contracting project--which aims to achieve paperless processes for many aspects of contracting and invoicing--and its Central Contractor Registration System, which contains electronic information about contractors and vendors. The bulk of DOD's departmentwide activity is focused on developing a PKI to control access to sensitive information and provide security for electronic transactions via digital signatures. To assemble the department's plan, officials from the CIO's office began by providing the military services and other departmental components with listings of their information collections reported under PRA and requested that they provide GPEA information for those items and add any others that might be appropriate. The services and components, in turn, relayed the data requests to their sub-components until a level was reached that could provide information about the specific collections. The data were then reported back up to the office of the CIO, where they were consolidated into a single report for OMB. The data tables provided in DOD's plan generally conform to the format specified in OMB's July 2000 guidance. The tables indicate that DOD conducted 449 information collection-activities meeting OMB's reporting requirements for PRA. They also identify 13 interagency reporting and information dissemination activities, as well as four transactions that were determined to pose a high risk. The Office of the CIO did not review the data it received from the various DOD components for completeness or accuracy before reporting the information to OMB in October 2000. In reviewing the data, we found indications that some may be inaccurate, incomplete, or duplicative. For example, the Defense Security Service made 238 entries for data-collection activities that included little of the information requested by OMB and appeared, in many cases, not appropriate as separate entries. In discussions with us, DOD officials agreed that the Defense Security Service had reported incomplete and possibly inaccurate information and said that they would request that the service correct it. The Office of the CIO has taken steps to follow up on the information submitted by the military services and DOD components. In January 2001, the CIO issued a memorandum to the services and components forwarding OMB's May 2000 guidance on GPEA implementation. The memo stated that CIOs of the DOD components would be expected to apply it during their continued planning, development, redesign, operation, and oversight of department systems. According to CIO officials, this memo is the first formal DOD guidance document specifically addressing GPEA. Further, in April, the DOD CIO office requested that the services and components review the accuracy of their portions of the GPEA implementation plan. However, DOD CIO officials indicated that only one official--from the Office of the Assistant Secretary of Defense (Public Affairs)--had responded to this information request, and that was to correct possible errors for a single item. Mr. Chairman, you also asked us to assess the Personnel and Readiness portion of DOD's plan. For this category, DOD reported 76 PRA information-collection activities and ten interagency reporting and information-dissemination activities. DOD provided a projected completion date for one of the 76 PRA-type activities and for two of the ten interagency and information-dissemination activities. Additionally, we found that 38 of the 76 PRA information collections and four of the ten interagency reporting and information-dissemination activities were likely duplicate entries. We met with officials from the Office of the CIO and the Undersecretary of Defense for Personnel and Readiness and pointed out the potential duplication. The officials agreed and subsequently notified us that Personnel and Readiness had corrected the discrepancies. In our discussions with agency officials, several themes emerged as significant challenges in meeting the goals of GPEA. First, all three agencies have determined that the security assurances provided through the use of PKI technology will be needed to enable many of their sensitive electronic transactions. As I mentioned earlier, DOD's Office of the CIO is developing a departmentwide PKI, and the office is working with the General Services Administration (GSA) to make its PKI interoperable with GSA's governmentwide Access Certificates for Electronic Services program. EPA is also pilot-testing the use of electronic signatures and digital certificates through GSA's program, and has applied for a grant from GSA to conduct a PKI interoperability project. Treasury is also closely involved in the governmentwide effort to develop PKI, having recently chaired the CIO Council's Federal PKI Steering Committee. According to Treasury's deputy CIO, the department will be challenged to develop its own PKI because it will need to pool resources from, and coordinate activities with, all of its bureaus. Second, EPA and Treasury both commented about the importance of adequately planning for and implementing computer network and telecommunications infrastructures to provide the capacity and connectivity needed to support the electronic traffic generated by new or enhanced electronic offerings. According to agency officials, many types of transactions covered by GPEA will require the support of new enterprisewide infrastructure. For example, EPA's Central Data Exchange project is a major infrastructure undertaking that will be critical to enabling the electronic exchange of information between EPA and state environmental agencies. Likewise, Treasury is developing the Treasury Communications Enterprise to provide a common departmentwide communications infrastructure to support electronic government initiatives throughout the department. Third, agencies will need adequate capabilities for storing, retrieving, and disposing of electronic records. EPA officials expressed concern about the status of governmentwide electronic recordkeeping standards, which have not yet been finalized. Many electronic systems are already being developed and implemented that may be incompatible with future standards. As we reported last September, federal agencies face additional information management challenges that are also fundamental to the success of GPEA. Specifically, agencies will need to use disciplined investment management practices to ensure that the full costs of providing electronic filing, recordkeeping, and transactions prompted by GPEA are identified and examined within the context of expected benefits; and ensure that IT human capital needs are addressed so that staff can effectively operate and maintain new e-government systems, adequately oversee related contractor support, and deliver responsive service to the public. OMB will also be challenged in its oversight role of ensuring that agencies comply with GPEA. As I mentioned, OMB's initial guidance issued in May 2000 prescribed policies and procedures for agencies to follow in implementing the act. For example, the guidance states that agencies should prioritize GPEA implementation based on achievability and net benefit. A number of the prescribed procedures were focused on agencywide strategic actions, such as examining business processes that might be revamped to employ electronic documents, forms, or transactions; identifying customer needs and demands as well as the existing risks associated with fraud, error, or misuse; and evaluating electronic signature alternatives, including risks, costs, and practicality. However, the GPEA implementation plans submitted by federal agencies do not provide sufficient information with which to assess whether agencies have been engaging in these processes. While OMB's subsequent July reporting guidance called for a brief cover letter describing an agency's overall strategy and actions to comply with the act, it did not stipulate a full report on the variety of strategic activities and other tasks that agencies were expected to perform, and their schedules for carrying them out. Further, the format prescribed for the information-collection data tables does not provide for any indication of whether electronic implementation has been prioritized based on achievability and net benefit. OMB may wish to consider whether a more comprehensive agency status report is necessary in order to gain better insight into agencywide GPEA planning. Specifically, agencies could be asked to report on the status of the specific tasks outlined in OMB's May 2000 guidance, and provide milestones for completing tasks that are still underway. This would allow OMB to better assess whether individual agencies are likely to achieve the objectives of the act. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions that you or other members of the Committee may have at this time. For information about this testimony, please contact me at (202) 512-6408 or by e-mail at [email protected]. Individuals making key contributions to this testimony include Felipe Colon, Jr., John de Ferrari, Steven Law, Juan Reyes, Elizabeth Roach, Jamelyn Smith, and Yvonne Vigil. (310422)
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The Government Paperwork Elimination Act (GPEA) requires that by 2003 federal agencies provide the public the option of submitting, maintaining, and disclosing required information--such as employment records, tax forms, and loan applications--electronically, instead of on paper. In October 2000, federal agencies submitted GPEA implementation plans to the Office of Management and Budget (OMB), which is responsible for executive branch oversight of GPEA. The plans submitted by the the Department of the Treasury and the Environmental Protection Agency (EPA) generally provide the kind of information that was specified in OMB's July 2000 guidance. However, the Department of Defense's (DOD) plan did not describe the department's overall GPEA strategy and, in some cases, the data provided for specific information collections may be inaccurate, incomplete or duplicative. Officials at all three agencies said that they faced challenges in complying with GPEA, particularly with regard to implementing adequate security assurances for sensitive electronic transactions and in planning for and implementing computer network infrastructures. Furthermore, OMB will be challenged in providing oversight of agency GPEA activities because the plans submitted by the agencies go not document key strategic actions, nor do they specify when they will be undertaken. Taken in isolation, the plans do not provide enough information to assess agencies' progress in meeting the objectives of the act. OMB may wish to require agencies to report on major agencywide activities, including specific planned tasks and milestones and the rationale for adopting them.
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The Congress, among others, has been concerned about the academic achievement gap between economically disadvantaged students and their more advantaged peers. The disparity between poor students' performance on standardized tests and the performance of their nonpoor peers is well documented, and there is broad consensus that poverty itself adversely affects academic achievement. For example, on the National Assessment of Educational Progress (NAEP) reading assessment, 14 percent of fourth grade students who qualified for the free and reduced lunch program (a measure of poverty) performed at or above the proficient level in comparison to 41 percent of those students who did not qualify for the program. Furthermore, research has indicated the importance of socioeconomic status as a predictor of student achievement. Research has shown that the achievement gap falls along urban and nonurban lines as well: students living in high-poverty, urban areas are even more likely than other poor students to fall below basic performance levels. In addition to the achievement gap between poor and nonpoor students, concerns exist that this gap may be related to differences between per- pupil spending among schools that serve poor and nonpoor communities. School district spending is generally related to wealth and tax levels, and differences in school district spending can have an impact on spending at the school level. Recently, efforts have been made to achieve greater spending equity. Using a variety of approaches, a number of states have targeted some additional funding to poor students to amend the unequal abilities of local districts to raise revenues for public schools. Comparing spending between schools in simple dollar terms provides one way to check for differences; however, this type of straightforward comparison may be insufficient to explain spending differences because it does not capture the higher cost of educating students with special needs. Schools with similar spending per pupil may actually be at a comparative disadvantage when adjustments are made to account for differing compositions of student needs. Though not definitive, some research shows that children with special needs--low-income students, students with disabilities, and students with limited English proficiency--may require additional educational resources to succeed at the level of their nondisadvantaged peers. Because these additional resources require higher spending, some researchers have adjusted per-pupil expenditures by "weighting" these students to account for the additional spending they may be required. Weighting counts each student with special needs as more than one student, so that the denominator in the expenditures to students ratio is increased, causing the weighted per-pupil expenditure figure to decrease accordingly. For example, a school with an enrollment of 100 students may have 20 low-income students, 20 students with disabilities, and 10 students with limited English proficiency. Weighting these three groups of special needs students twice as heavily as other students causes weighted enrollment to rise to 150 students. If spending per-pupil is $4,000 without weighting, it drops to $2,667 when weights are applied. The actual size of the weights assigned to low-income students, students with disabilities, and students with limited English proficiency is subject to debate and generally ranges between 1.2 and 2.0 for low-income students, between 1.9 and 2.3 for students with disabilities, and between 1.10 and 1.9 for students with limited English proficiency. The inner city schools selected for our study had high proportions of children in poverty in comparison to the selected suburban schools. The elected inner city schools also generally had more students with limited English proficiency than their suburban counterparts. However, the proportions of students with disabilities in our selected inner city and suburban schools differed within and among metropolitan areas. In Denver, the selected inner city schools consistently had a higher proportion of students with disabilities than the selected suburban schools while in Fort Worth, the suburban schools had a higher proportion of students with disabilities. (See table 1 for total enrollment and percentages of children in poverty, students with disabilities, and students with limited English proficiency for selected schools in the seven metropolitan areas reviewed in this study.) Differences in school spending can affect characteristics that may be related to student achievement. There is a large body of research on factors that may directly or indirectly contribute to student achievement. Spending has been the factor most studied for its effect on student achievement. Differences in student outcomes have also been related to factors such as teacher quality, class size, quality of educational materials, and parental involvement. Our study describes how some of these factors may differ across selected inner city and suburban schools. Differences in per-pupil spending between selected inner city and suburban schools varied by metropolitan areas in our study. Inner city schools in Boston, Chicago, and St. Louis generally spent more per pupil than neighboring suburban schools, whereas selected suburban schools in Fort Worth and New York almost always spent more per pupil than the inner city schools. In Denver and Oakland, no clear pattern of spending emerged. Three factors generally explained spending differences between inner city and suburban schools: (1) average teacher salaries; (2) student- teacher ratios; and (3) ratios of students to student support staff, such as guidance counselors, librarians, and nurses. When we adjusted per-pupil expenditures to account for the extra resources students facing poverty, disabilities, and limited English proficiency might need, inner city schools almost always spent less per pupil than suburban schools. To compensate for additional challenges faced by schools in these areas, federal education dollars are generally targeted to low-income areas. As a result, federal funds have played an important role in increasing funding to inner city schools. Differences between inner city and suburban school per-pupil spending were related to the particular metropolitan area studied and generally seemed to be most influenced by teacher salaries. The selected inner city schools tended to outspend the suburban schools in the Boston, Chicago, and St. Louis metropolitan areas. For example, in the Boston metropolitan area, the lowest spending inner city school spent more per pupil than the highest spending suburban school. (See fig. 1 for a comparison of per-pupil spending at selected inner city and suburban schools in these areas.) In contrast, in the Fort Worth and New York metropolitan areas, suburban schools generally outspent inner city schools. For example, among the selected schools in the Fort Worth metropolitan area, the lowest spending suburban school had per-pupil expenditures 21 percent higher than the highest spending inner city school. (See fig. 2 for a comparison of per- pupil spending at selected inner city and suburban schools in these areas.) In Denver and Oakland, an examination of spending differences among the selected suburban and inner city schools revealed mixed results. That is, analysis of spending differences showed no general pattern of spending that favored either inner city or suburban schools. (See fig. 3 for a comparison of per-pupil spending at selected inner city and suburban schools in the Denver and Oakland metropolitan areas.) Among the schools in our study, three factors influenced per-pupil spending: average teacher salaries, student-teacher ratios, and the ratio of students to student support staff. Average teacher salaries appeared to have the greatest impact on per-pupil spending, followed by lower student- teacher ratios and lower ratios of students to student support staff. Average teacher salaries influenced per-pupil spending in areas where inner city schools spent more per pupil (Boston and Chicago), where suburban schools spent more per pupil (New York), and where spending was mixed (Oakland). For example, in Chicago, where inner city schools generally outspent suburban schools, the median inner city school average teacher salary was $47,851, compared with $39,852 in the suburbs. In Oakland, where spending between suburban schools and inner city schools was mixed, the average teacher salary at the median spending school was $60,395 and per-pupil spending was $4,849, compared with $52,440 and $4,022 at the median spending inner city school. Student-teacher ratios and ratios of students to student support staff were factors that could offset the influence of teacher salaries in explaining per- pupil spending. For example, in Fort Worth, where the three suburban schools typically spent more per student than inner city schools, inner city teacher salaries were generally higher than suburban teacher salaries. However, ratios of students to both teachers and student support staff were lower in our selected suburban schools. For example, the median spending inner city school in Fort Worth had 21 students per teacher, compared with 17 students per teacher in the suburbs. Additionally, the median spending inner city school had 1 student support staff professional for every 162 students, whereas in the suburbs the ratio was 1 to 68. (Table 2 lists factors contributing to higher per-pupil spending--average teacher salaries, student-teacher ratios, and ratios of students to support staff--for the median spending school in each reviewed metropolitan area.) Despite higher per-pupil spending by about half of the inner city schools in our study, inner city schools generally spent less compared with neighboring suburban schools when spending was weighted to account for differing compositions of student needs. To account for the greater costs that may be associated with educating low-income students, students with disabilities, and students with limited English proficiency, some researchers have used formulas that weight these students more heavily than other students. In a similar fashion, we applied weights to our per- pupil expenditure data. The use of the lowest and medium weights had little impact on spending differences between inner city and suburban schools. Inner city schools in Boston, Chicago, and St. Louis continued to outspend neighboring suburban schools in most cases. For example, in Chicago, when students were weighted with the lowest weight, the median per-pupil spending for inner city school was $3,743 per pupil compared with $2,996 for the suburban school. Similarly, the use of medium weights generally did not result in higher per-pupil spending at suburban schools. For example, using medium weights, the median inner city school in Chicago still spent more than the median suburban school, although the difference was smaller--$3,089 compared with $2,858. However, when the highest weight was applied, inner city per-pupil spending fell below suburban school spending in almost all cases. For example, in Chicago when the highest weight was applied, per-pupil spending at the median inner city school was less than that of the suburban school, $2,629 as compared with $2,734. Similarly, in the New York metropolitan area, where suburban schools we reviewed outspent inner city schools, the use of the highest weights to adjust for student needs caused the differences between inner city and suburban school spending to be substantially enlarged. (See fig. 4 for examples of how spending changes as different weights are applied for per-pupil spending at the median inner city and suburban schools in four metropolitan areas.) Because federal programs, such as Title I, specifically target funds to schools in low-income areas, these federal funds generally helped reduce or eliminate the gap between selected inner city and suburban schools in terms of per-pupil expenditures. In the Denver and St. Louis metropolitan areas, federal funds generally eliminated the gap between inner city and suburban schools' per-pupil spending. In Fort Worth, without federal funds per-pupil spending at the selected inner city schools would have been about 63 percent of selected suburban schools, and in Oakland, per-pupil spending would have been about 78 percent of suburban schools. However, selected inner city schools in Boston and Chicago would have still spent more than suburban schools without federal funds. (See table 3 for a comparison of inner city and suburban per child spending with and without federal dollars.) Factors that may relate to student achievement differed between inner city and suburban schools in our study. Research has shown a positive relationship between student achievement and factors such as teacher experience, lower enrollment, more library books and computer resources, and higher levels of parental involvement. Among the 24 schools we visited, the average student achievement scores were generally lower in inner city than in suburban schools. Along with lower achievement scores, these inner city schools were more likely to have a higher percentage of first-year teachers, whose lack of experience can be an indicator of lower teacher quality. In addition, in comparison to the suburban schools, inner city schools generally were older, had higher student enrollments, and had fewer library books per pupil and less technological support. Finally, the type of in-school parental involvement in the inner city and suburban schools differed. In general, at the schools we visited in the metropolitan areas of Fort Worth, New York, Oakland, and St. Louis, inner city students' average achievement scores on state reading assessment tests were lower than scores at the neighboring suburban schools. Two schools were exceptions to this pattern. In St. Louis, we specially selected one high-performing inner city school; students at this school performed higher than students at the three suburban schools we visited. In the Fort Worth metropolitan area, one inner city school performed slightly higher than two of the three suburban schools we visited. (See fig. 5 for average student achievement scores for selected schools in the four metropolitan areas.) Although the selected inner city schools' student achievement scores were generally lower, this pattern did not appear to be related to or consistent with per-pupil spending. That is, higher-performing schools were not necessarily schools that were high in per-pupil spending. For example, per-pupil spending at the highest-performing inner city school in Fort Worth we visited was $3,058, which was higher than one selected inner city school, lower than the other selected inner city school, and lower than each of the suburban schools. First-year teachers in the 24 schools we visited generally constituted a higher percentage of the faculty in inner city schools than suburban schools. First-year teachers comprised more than 10 percent of the teaching staff in 8 of the 12 inner city schools, but the same was true in just 4 of 12 suburban schools. However, both the percent of first-year teachers and differences between inner city and suburban schools varied among the 4 metropolitan areas. (See fig. 6 for the percentage of first-year teachers by school and metropolitan area.) For example, in the New York metropolitan area there were no first-year teachers at 2 of the suburban schools, but at 2 inner city schools first-year teachers were 24 and 13 percent of the faculty. In the Fort Worth metropolitan area, 2 of the suburban schools had almost twice the percent of first-year teachers as the two inner city schools with the highest percent of first-year teachers. Notably, the percentage of first-year teachers was low at the two high- performing inner city schools. In Oakland, the percentage of first-year teachers at the high-performing inner city school was 6 percent, compared with 12 percent at the other two inner city schools. In St. Louis, the high- performing inner city school had no first-year teachers, whereas the other two inner city schools had 11 and 16 percent. As noted earlier in the report, average teacher salaries in large part accounted for most of the differences in school spending. The fact that teaching staff at inner city schools were generally comprised of higher percentages of first-year teachers is not inconsistent with the finding on teacher salaries. The average teacher salary at a school includes the salaries of all teachers in the school, from first-year teachers to the most senior staff. For example, in a school with a high proportion of first-year teachers the average teacher salary could still be higher than that of another school because of higher proportions of tenured teachers and the district's salary structure. The enrollment of the 12 inner city schools we visited tended to be higher than that of the 12 suburban schools we visited, but enrollment varied across and within metropolitan areas. The national average elementary school enrollment is 443, and schools with enrollments over 600 are considered "large," regardless of the school's capacity. In three out of the four metropolitan areas we visited, Fort Worth, New York, and Oakland, the enrollment at the inner city schools was consistently higher than the national average enrollment. In addition, 6 of the 12 inner city schools we visited had enrollments over 600 students. In contrast, enrollments exceeded 600 in only 2 of the 12 suburban schools we visited. (See fig. 7 for enrollments at the selected schools.) Among the schools we visited, most of the inner city schools were older than 50 years, which is higher than the national average of 43 years. Furthermore, 7 of the oldest 10 buildings were inner city schools, 2 having been built in the 19th century. In contrast, most of the suburban schools we visited were less than 40 years old. In addition to the physical condition of the buildings, playground facilities in the inner city schools differed greatly from facilities in the suburban schools. Inner city schools we visited were less likely to have playground equipment and expansive play areas. For example, the playgrounds in St. Louis suburban schools all had green fields and a variety of playground equipment. In this same metropolitan area, only one of the inner city schools had any playground equipment and at the other two schools asphalt lots were the single outdoor recreational facility. Figure 8 shows the playgrounds of an inner city school and a suburban school in the St. Louis metropolitan area. Overall, the inner city schools we visited had fewer library books per child and were less likely to have a computer laboratory than suburban schools. Most of the suburban schools visited were below the national average of 2,585 books per 100 students--7 of the 12 schools had more than 2,000 books per 100 students. However, only 3 of the inner city schools visited had more than 2,000 books per 100 students. For example, in New York City, the 3 selected inner city schools had fewer than 1,000 library books per 100 students, whereas the 3 selected suburban schools had more than 2,000 library books per 100 students and one had more than 3,000. Notably, the high-performing inner city school in St. Louis had 2,813 library books per 100 students, more than any of the suburban schools we visited in that area. Similarly, the high-performing inner city school in Oakland had 2,244 books per 100 students, which was more than the other two Oakland inner city schools and 2 of the 3 selected suburban schools. Furthermore, only 7 of the 12 selected inner city schools had a full-time librarian, whereas all but one suburban school had a full-time librarian. (See fig. 9 for the number of library books per 100 students at selected schools.) Our site visits also revealed a difference between inner city and suburban schools in terms of the presence of a computer laboratory. Eleven of the 12 suburban schools we visited had a computer laboratory, whereas 8 of the inner city schools visited had such a facility. Among schools with computer laboratories, however, the ratio of students to laboratory computers was similar among inner city and suburban schools. Parents of children attending the suburban schools we visited were more involved in on-site school activities than parents of inner city children.According to the suburban school principals, parental involvement in their schools was typically very high and included participation in volunteer activities, attendance at parent-teacher conferences, and providing financial support to the school. Parent volunteerism at suburban schools could be quite substantial. For example, parents at one suburban school in the Oakland metropolitan area provided 24,000 hours of volunteer time during the school year. Inner city principals characterized parents as concerned and interested in their children's education, though less likely to attend parent-teacher conferences and volunteer in school. A number of inner city principals we interviewed also noted that while parents generally wanted to help their children succeed in school, they often lacked the necessary finances, skills, or education to offer additional assistance beyond that offered by the school. Our findings suggest that spending differences between the inner city schools and suburban schools in our review do exist, but these differences for the most part depend upon the metropolitan area. In some metropolitan areas, inner city schools spent more per pupil whereas in others suburban schools spent more per pupil. Spending differences, regardless of metropolitan area for the most part, seemed to be the result of differences in salaries and student to teacher and staff ratios. However, the very heavy concentration of poverty in inner city schools may place them at a spending disadvantage, even when spending is equal. In addition, the suburban schools, as well as the high-performing inner city schools we visited, generally had more experienced teachers, lower enrollments, more library books per child, and more parental in-school volunteer activities than the other inner city schools in this study. These factors are important to consider in improving the performance of inner city schools. We provided a draft of this report to the Department of Education for review and comment. Education's Executive Secretariat confirmed that department officials had reviewed the draft and had no comments. We are sending a copy of this report to the Secretary of Education. 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 or your staff have any questions about this report, please call me at (202) 512-7215. See appendix III for other staff acknowledgments. The objectives of our study were to provide information on similarities and differences between (1) per-pupil spending in selected inner city and suburban schools and (2) other characteristics that may relate to student achievement, such as, teacher experience, school enrollment, educational materials, physical facilities, and parental involvement. To address the first objective, we reviewed the literature on spending differences, interviewed experts about the issues and approaches to measuring spending data, and collected spending and related school data on 42 inner city and suburban schools. To address the second objective, we examined the literature, interviewed experts about relationships between student achievement and school characteristics, and visited 24 inner city and suburban schools to collect information on student achievement, the quality and availability of educational materials, the condition of the buildings and facilities, and type and extent of parental involvement. This appendix discusses the scope of the study, criteria for selecting metropolitan areas and schools, and the methods employed to describe and explain observed spending differences. This study focused on similarities and differences between inner city schools and suburban schools. This is different and distinct from a study of similarities and differences between urban and suburban schools, or urban and suburban districts, as urban schools and districts generally include a wider range of poverty than inner city schools. This study covered selected inner city and suburban schools in seven metropolitan areas. Metropolitan areas were purposively selected to reflect diversity on the basis of geography and size. We used geographic areas from the Northeast, Midwest, South, and West. Three size categories were used: (1) very large, (2) large, and (3) medium. We defined these by population. Very large: areas where the central city of a metropolitan area had a population of more than 1 million residents; Large: areas where the central city of a metropolitan area had a population between 500,000 and 1 million residents; Medium: areas where the central city of a metropolitan area had a population between 250,000 and 500,000 residents. The metropolitan areas selected for inclusion in the study were Boston, Chicago, Denver, Fort Worth, Miami, New York, Oakland, and St. Louis. Inner city and suburban schools in Miami were dropped from the study because the district did not provide the necessary data. (See table 4 for the selected metropolitan areas.) For this study, in consultation with experts, we defined "inner city" as a contiguous geographic area that (1) had a poverty rate of 40 percent or higher, (2) was located within the "central core" of a city with a population of at least 250,000 persons, and (3) the city is the central city of a metropolitan with a population of at least 1 million persons. We defined suburb as the geographic area that is (1) outside the boundaries of a central city with a population of at least 250,000 persons, (2) inside the boundaries of the metropolitan statistical area (SMSA) of the central city, as defined by the Office of Management and Budget and used by the census, and (3) the metropolitan area has a population of at least 1 million persons. In total, we collected spending data on 42 schools, 21 inner city and 21 suburban public elementary schools in seven metropolitan areas, and gathered information on (1) school-level per-pupil spending and federal revenues, and (2) school, teacher, other staff, and student characteristics for the 2000-01 school year. In addition, we conducted site visits at 24 of the selected schools. These schools were located in the New York, St. Louis, Fort Worth, and Oakland metropolitan areas. We visited them in order to obtain supplementary information on characteristics that might affect student achievement, such as facilities, educational materials, and types of parental involvement. The study was designed to compare "typical" inner city and "typical" suburban schools, rather than those schools with extreme poverty or wealth. We consulted with experts about our design. We used the factors described below to select typical schools. Our goal was to make comparisons that would reflect likely differences, if any, between the inner city and suburban schools in a given metropolitan area. To select the inner city schools, we (1) consulted with local experts in each metropolitan area to identify the geographic area of the central city of the SMSA generally considered the inner city, (2) calculated census child poverty rates for each census tract within the inner city area, (3) retained identified census tracts with census child poverty rates higher than 40 percent, (4) ranked the census tracts by poverty rate, and (5) identified the three inner city census tracts closest to the 50th percentile, that is, the median poverty census tracts of the inner city.We then selected the public elementary school that served those census tracts, but purposely excluded schools that were special schools, for example, magnet schools, science academies, etc. Where possible, we attempted to include one high-performing inner city school in each metropolitan area we visited. We used Dispelling the Myth, an Education Trust (EdTrust) database of high-poverty, high-performing schools, for this selection. Dispelling the Myth is an ongoing EdTrust project to identify high-poverty and high-minority schools that have high student performance or have made substantial improvement in student achievement. We identified schools in that database with a student poverty rate greater than 50 percent and an overall achievement score on the most recent state reading assessment test above the 50th percentile. Because the EdTrust database used free and reduced lunch eligibility as its criterion for poverty, we further verified that the school was located in an inner city census tract as defined by this study serving an area with a census child poverty rate greater than 40 percent. We purposely excluded schools that were special schools, for example, magnet schools, science academies, etc. Inner city schools from the St. Louis and Oakland metropolitan areas met these criteria. The identified high-performing inner city school in St. Louis replaced a selected school. The identified high- performing inner city school in Oakland, however, was a school that would have been selected through the described census tract approach and was, therefore, treated similarly to the other selected inner city schools. (See table 5 for the selected inner city census tracts and child poverty rates.) To select suburban schools, we (1) collected census child poverty rates for all school districts in the defined suburban area outside the central city of the selected metropolitan area and within the same state as the central city; (2) ranked by census child poverty rates in the suburban school districts; and (3) identified the three suburban school districts closest to the 50th percentile, that is, the median suburban school districts, based upon child poverty rates. We dropped districts that were contiguous or had a 5 to 17-year-old population of less than 500 and replaced them with the district with the next closest median level child poverty that did not have any of these attributes. For those districts, we selected the elementary school of the district. If more than one elementary school served the school district, we selected the elementary school in the district with the median child poverty rate (as determined by free and reduced lunch eligibility) for elementary schools in that district. (See table 6 for the child poverty rates for the selected suburban school districts.) From 42 selected schools we obtained detailed information for the 2000-01 school year on (1) school spending and federal revenues, (2) staffing and teacher experience, and (3) student characteristics. The practical difficulties of conducting any data collection effort may introduce errors, commonly referred to as nonsampling errors. For example, difficulties in how a particular question is interpreted or in the sources of information that are available can introduce unwanted variability into the results. We took steps in the development of the instrumentation, the data collection, and the data editing and analysis to minimize these errors. We pretested our data collection instrument with the Boston school district and called individual district officials to clarify answers. Completed instruments were examined for inconsistencies, and follow-up calls were made to districts to clarify imprecise responses or data that were unusually different from other respondent data. School spending data included (1) instructional staff salaries, (2) certified professional staff salaries, (3) administrative staff salaries, (4) operations staff salaries, (5) education materials and supplies spending, and (6) building maintenance and repair spending. In addition, schools reported federal sources of revenue. School, staff, and student information included numbers of (1) regular education teachers, special education, English as a second language instructional staff, and other specialized instructional staff, for example, art teachers, reading teachers; (2) regular education teacher assistants, special education teacher assistants, and other instructional staff teacher assistants, for example, art teacher assistants, reading teacher assistants; (3) student support professional and nonprofessional staff by job title; (4) administrators and administrative assistants by job title; (5) operations staff by job title; (6) the number of first-year teachers; (7) total enrollment; (8) number of students with disabilities and number of students with limited English proficiency; (9) race and ethnicity of students; and (10) the number of students eligible for free and reduced lunch. Data on student achievement, facilities, educational materials, and parental involvement that may contribute to academic achievement were obtained from site visits to 12 inner city and 12 suburban schools. We developed a site visit protocol and pretested it at site visits to inner city and suburban schools in the New York and Baltimore metropolitan areas. We obtained information on student achievement. In Fort Worth, we used Grade 3 reading scores on the Texas Assessment of Academic Skills. In New York, we used Grade 4 scores on the State English Language Arts Assessment. In Oakland, we used Grade 4 reading scores on the Stanford 9 test. In St. Louis, we used Grade 3 Communication Arts scores on the Missouri Assessment Program. In each metropolitan area, we contrasted the achievement scores of the selected schools to the state average. Depending upon data, information was collected as a dichotomous variable (yes/no), date or period of time, number, or ranked scale assessment. (See table 7 for school site visit information collected, assessment measure, and description of the measurement scale.) For each metropolitan area, per-pupil spending for each of the three inner city schools and three suburban schools were ordered and paired, that is, the lowest spending inner city school was paired with the lowest spending suburban school, the middle spending inner city school was paired with the middle spending suburban school, and the highest spending inner city school was paired with the highest spending suburban school. To examine factors that explained differences in school spending, we conducted regression analysis. Regression analysis is a statistical methodology that measures the relationship between one variable and one or more other variables. In our regression model, we tried to determine the extent to which total per-pupil spending at a selected individual school could be explained by (1) average teacher salary at the school, (2) adjusted student-teacher ratio at the school, (3) the ratio of students to student support staff at the school, and (4) annual spending at the school on building maintenance and repair. The variables in the model were defined as follows: Total per-pupil spending--total dollars spent by the school in the 2000-01 school year divided by total enrollment. Average teacher salary--total salary expenditure for teachers at the school divided by the number of teachers. Teacher salary was used in the regression to capture the salary structure at the school. Adjusted student-teacher ratio--total enrollment adjusted for students with special educational needs divided by the total certified instructional staff. Adjusted enrollment differed from total enrollment in that the adjusted enrollment included an additional weight of 100 percent for each child receiving special education instruction at the school and 50 percent for students with limited English proficiency. Adjusted enrollment was used to capture the direct higher spending by the school for students with special needs. Teachers included: regular classroom teachers, special education teachers, teachers of students with limited English proficiency, art teachers, music teachers, physical education teachers, reading teachers, teachers for the gifted and talented, science teachers, and computer laboratory teachers.Teaching assistants and paraprofessionals were not included because their direct involvement with instruction was not always certain. The ratio of students to student support staff at the school was computed by dividing the total enrollment by the total certified professional staff. Support staff was not adjusted for students with special needs because it was assumed that at the school level support staff to student time is less dependent upon the disability of the child. Total certified professional staff included: administrators, health providers, and certified staff providing services to students. Spending on building maintenance and repair at the school included contracted maintenance and repair and salary expenditures for building custodians and maintenance workers for the 2000-01 school year. (See table 8 for the regression results for factors explaining differences in per-pupil spending at the selected schools.) Appendix II presents selected data on the 42 schools examined in the seven metropolitan areas, as well as additional information obtained from site visits at 24 schools. This appendix contains three tables of school-level information collected from selected inner city and suburban schools in seven metropolitan areas. Table 9 contains student characteristic information. Student characteristic information includes enrollment, child poverty measured by the census, percent of students with disabilities, percent of students with limited English proficiency, and percent of children that are minority. Table 10 contains actual spending per child, then spending per child at low, medium, and high weights for selected schools in seven metropolitan areas. Table 11 includes information on the percent of first-year teachers, federal dollars per child, and federal dollars as a percent of total spending. In addition to those named above, Elisabeth Anderson, Shannon McKay, Eve Veliz, and Sarit Weisburd made key contributions to this report. Luann Moy provided important methodological contributions to the review of the research. Patrick DiBattista also provided key technical assistance.
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The No Child Left Behind Act of 2001 has focused national attention on the importance of ensuring each child's access to equal educational opportunity. The law seeks to improve the performance of schools and the academic achievement of students, including those who are economically disadvantaged. The Congress, among others, has been concerned about the education of economically disadvantaged students. This study focused on per-pupil spending, factors influencing spending, and other similarities and differences between selected high-poverty inner city schools and selected suburban schools in seven metropolitan areas: Boston, Chicago, Denver, Fort Worth, New York, Oakland, and St. Louis. Among the schools GAO reviewed, differences in per-pupil spending between inner city and suburban schools varied across metropolitan areas, with inner city schools spending more in some metropolitan areas and suburban schools spending more in other areas. The inner city schools that GAO examined generally spent more per pupil than suburban schools in Boston, Chicago, and St. Louis, while in Fort Worth and New York the suburban schools in GAO's study almost always spent more per pupil than the inner city schools. In Denver and Oakland, spending differences between the selected inner city and suburban schools were mixed. In general, higher per-pupil expenditures at any given school were explained primarily by higher staff salaries regardless of whether the school was an inner city or suburban school. Two other explanatory factors were student-teacher ratios and ratios of students to student support staff, such as guidance counselors, nurses, and librarians. Federal funds are generally targeted to low-income areas to compensate for additional challenges faced by schools in those areas. In some cases, the infusion of federal funds balanced differences in per-pupil expenditures between the selected inner city and suburban schools. There is a broad consensus that poverty itself adversely affects academic achievement, and inner city students in the schools reviewed performed less well academically than students in the suburban schools. The disparity in achievement may also be related to several other differences identified in the characteristics of inner city and suburban schools. At the schools GAO visited, inner city schools generally had higher percentages of first-year teachers, higher enrollments, fewer library resources, and less in-school parental involvement--characteristics that some research has shown are related to school achievement.
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As the principal component of the NAS, FAA's ATC system must operate continuously--24 hours a day, 365 days a year. Under federal law, FAA has primary responsibility for operating a common ATC system--a vast network of radars; automated data processing, navigation, and communications equipment; and traffic control facilities. FAA meets this responsibility by providing such services as controlling takeoffs and landings and managing the flow of air traffic between airports. Users of FAA's services include the military, other government users, private pilots, and commercial aircraft operators. Projects in FAA's modernization program are primarily organized around seven functional areas--automation, communications, facilities, navigation and landing, surveillance, weather, and mission support. Over the past 16 years, FAA's modernization projects have experienced substantial cost overruns, lengthy schedule delays, and significant performance shortfalls. To illustrate, the centerpiece of that modernization program--the Advanced Automation System (AAS)--was restructured in 1994 after estimated costs to develop the system tripled from $2.5 billion to $7.6 billion and delays in putting significantly less-than-promised system capabilities into operation were expected to run 8 years or more over original estimates. The Congress has appropriated over $25 billion for ATC modernization between fiscal years 1982 and 1998. FAA estimates that it plans to spend an additional $11 billion through fiscal year 2003 on projects in the modernization program. Of the over $25 billion appropriated to date, FAA has reported spending about $5.3 billion on 81 completed projects and $15.7 billion on about 130 ongoing projects. Of the remaining funds, FAA has reported spending about $2.8 billion on projects that have been cancelled or restructured and $1.6 billion for personnel-related expenses associated with systems acquisition. (See app. I for a list of completed projects.) FAA has fielded some equipment, most recently a new voice communications system. However, delays in other projects have caused the agency to implement costly interim projects. Furthermore, the agency is still having difficulties in acquiring new systems within agreed-to schedule and cost parameters. FAA has been fielding new ATC systems. For example, in February 1997, FAA commissioned the last of 21 Voice Switching and Control System (VSCS) units. As one of the original projects in the 1983 modernization plan, the VSCS project encountered many difficulties during its early years. Since the project was restructured in 1992, FAA has been successful in completing the first phase of the project--installing the equipment into existing en route controller workstations. The second phase is now underway--making VSCS interface with the new display replacement equipment that is being installed in the en route centers. During the past year, FAA has commissioned 183 additional systems or units of systems. For example, FAA commissioned an additional 97 units for its Automated Surface Observing System, which brings the total of commissioned units to 230 out of 597 that are planned. (See app. II for details on the implementation status of 17 major ongoing modernization projects and app. III for data on changes in their cost and schedules.) Problems with modernization projects have caused delays in replacing FAA's aging equipment, especially the automation equipment in the en route and terminal facilities. We found that FAA has added four interim projects--three for the TRACONs and one for the en route centers--reported to cost about $655 million--to sustain and enhance current automated air traffic control equipment. FAA began its first program for the TRACONs in 1987 and expects to complete its third program in 2000. In general, these programs provide new displays and software and upgrade hardware and data-processing equipment to allow TRACONs to handle increased traffic. One program for the en route centers--the Display Complex Channel Rehost--was completed in 1997. Under this program, FAA transferred existing software from obsolete display channel computers to new more reliable and maintainable computers at five en route centers. The cost for interim projects could go even higher if FAA decides to implement an interim solution to overcome hardware problems and resolve year 2000 date requirements with the Host computer system. FAA is assessing the Host computer's microcode--low-level machine instructions used to service the main computer--with a plan to resolve any identified year 2000 date issues, while at the same time preparing to purchase and implement new hardware--Interim Host--for each of its 20 en route centers before January 1, 2000. FAA expects to incur costs of about $160 million during fiscal years 1998 and 1999 for the Interim Host. Two key components of the modernization effort--the Wide Area Augmentation System (WAAS) and the Standard Terminal Automation Replacement System (STARS)--have encountered delays and cost increases. In September 1997, FAA estimated total life cycle costs for WAAS at $2.4 billion ($900 million for facilities and equipment and $1.5 billion for operations). In January 1998, the estimate had increased by $600 million to $3 billion ($1 billion for facilities and equipment and $2 billion for operations). The increased costs for facilities and equipment are attributable to FAA's including previously overlooked costs for periodically updating WAAS' equipment. The revised cost estimate for operations and maintenance is largely attributable to higher than expected costs to lease geostationary satellites. In developing WAAS, FAA has also encountered delays. When signing the original development contract with Wilcox Electric in August 1995, FAA planned for the initial system to be operational by December 1997. Because of concerns about the contractor's performance, however, FAA terminated the original contract and signed a development contract with Raytheon (formerly Hughes Aircraft) in October 1996 that called for the initial system to be operational by April 1999. The 16-month schedule slippage was caused by problems with the original contractor's performance, design changes, and increased software development. Last year, we reported that the implementation of STARS--particularly at the three facilities targeted for operating the system before fiscal year 2000--will likely be delayed if FAA and its contractor experience any difficulties in developing the software. These difficulties have materialized. In January 1998, FAA reported that more delays are likely because software requirements could increase to resolve air traffic controllers' dissatisfaction with the system's computer-human interface. FAA also reported an unexpected cost increase of $35 million for STARS during fiscal year 1998. It attributed the increase to such factors as adding resources to maintain the program's schedule and the effects of any design changes to address new computer-human interface concerns. Also, the estimated size of software development--measured in source lines of code--is now 50 percent larger than the original November 1996 estimate. FAA has requested a reprogramming of fiscal year 1998 funds to address this cost increase. Our reviews have identified some of the root causes of long-standing problems with FAA's modernization and have recommended solutions to them. Among the causes of these problems were the lack of a complete and enforced systems architecture, unreliable cost information, lack of mature software acquisition processes, and an organizational culture that did not always act in the agency's long-term best interest. While FAA has begun to implement many of our recommendations, it will need to stay focused on continued improvement. FAA has proceeded to modernize its many ATC systems without the benefits of a complete systems architecture, or overall blueprint, to guide their development and evolution. In February 1997, we reported that FAA has been doing a good job of defining one piece of its architecture--the logical architecture. That architecture describes FAA's concept of operations, business functions, high-level descriptions of information systems and their interrelationships, and information flows among systems. This high-level architecture will guide the modernization of FAA's ATC systems over the next 20 years. We identified shortcomings in two main areas. FAA's system modernization lacked a technical architecture and an effective enforcement mechanism. FAA generally agreed with the recommendation in our February 1997 report to develop a technical architecture and has begun the task. We will continue to monitor FAA's efforts. Also, to be effective, the architecture must be enforced consistently. FAA has no organizational entity responsible for enforcing architectural consistency. Until FAA defines and enforces a complete ATC systems architecture, the agency cannot ensure compatibility among its existing and future programs. We also recommended in the February 1997 report that FAA develop a management structure for enforcing the architecture that is similar to the provisions of the Clinger-Cohen Act of 1996 for department-level Chief Information Officers (CIO). FAA disagrees with this recommendation because it believes that the current location of its CIO, within the research and acquisition line of business, is effective. We continue to believe that such a structure is necessary. FAA's CIO does not report directly to the Administrator and does not have organizational or budgetary authority over those who develop ATC systems or the units that operate and maintain them. Furthermore, the agency's long history of problems in managing information technology projects reflects weaknesses in its current structure. In January 1997, we reported that FAA lacks reliable cost-estimating processes and cost-accounting practices needed to effectively manage investments in information technology, which leaves it at risk of making ill-informed decisions on critical multimillion, even billion, dollar air traffic control systems. Without reliable cost information, the likelihood of poor investment decisions is increased, not only when a project is initiated, but also throughout its life cycle. We recommended that FAA improve its cost-estimating processes and fully implement a cost-accounting system. Our recent review of the reliability of FAA's reported financial information and the possible program and budgetary effects of reported financial statement deficiencies again highlights the need for reliable cost information. The audit of FAA's 1996 financial statement disclosed many problems in reporting of operating materials and supplies and property and equipment. Many of these problems resulted from the lack of a reliable system for accumulating project cost accounting information. Although FAA has begun to institutionalize defined cost-estimating processes and to acquire a cost-accounting system, it will be awhile before FAA and other decisionmakers have accurate information to determine and control costs. In March 1997, we reported that FAA's processes for acquiring software--the most costly and complex component of ATC systems--are ad hoc, sometimes chaotic, and not repeatable across projects. As a result, FAA is at great risk of acquiring software that does not perform as intended and is not delivered on time and within budget. Furthermore, FAA lacks an effective approach for improving its processes for acquiring software. In the March 1997 report, we recommended that FAA improve its software acquisition capabilities by institutionalizing mature acquisition processes and reiterated our prior recommendation that FAA establish a management structure similar to the department-level CIOs to instill process discipline. FAA concurred with part of our recommendation and has initiated efforts to improve its software acquisition processes. These efforts, however, are not comprehensive, are not complete, and have not yet been implemented agencywide. Furthermore, FAA disagrees with our recommendation related to its management structure. Without establishing strong software acquisition processes and an effective management structure, FAA risks making the same mistakes it did on failed systems acquisition projects. In August 1996, we reported that an underlying cause of FAA's ATC acquisition problems is its organizational culture--the beliefs, the values, and the attitudes and expectations shared by an organization's members that affect their behavior and the behavior of the organization as a whole.We found that FAA's acquisitions were impaired when employees acted in ways that did not reflect a strong commitment to mission focus, accountability, coordination, and adaptability. We recommended that FAA develop a comprehensive strategy for cultural change that (1) addresses specific responsibilities and performance measures for all stakeholders throughout FAA and (2) provides the incentives needed to promote the desired behaviors and achieve agencywide cultural change. In response to our recommendations, FAA issued a report outlining its overall strategy for changing its acquisition culture and describing its ongoing actions to influence organizational culture and improve its life cycle acquisition management processes. For example, the Acquisition and Research (ARA) organization has proposed restructuring its personnel system to tie pay to performance based on 15 measurable goals, each with its own performance plan. ARA's proposed personnel system is under consideration by the Administrator. In our August 1996 report, we also noted that the Integrated Product Development System, based on integrated teams, was a major FAA initiative to address the shortcomings with its organizational culture. According to an ARA program official, FAA has 15 integrated product teams, the majority of which have approved plans. The official indicated that all team members have received training to prepare them for their roles and that ARA is developing a set of standards to measure the performance of the integrated teams. However, the official also acknowledged that FAA has had difficulty in gaining commitment to the integrated team concept throughout the agency because offices outside of ARA have been resistant to integrated teams. To help overcome institutional cultural barriers, FAA and external stakeholders have been discussing the establishment of a special program office responsible for the acquisition of free flight systems. Although, the details of how such an office would operate have not been put forward, one option would be for this office to have its own budget and the authority to make certifications and regulations and to determine system requirements. Such an office could be viewed as the evolutionary successor to the integrated product team system. Another approach being considered by FAA is the establishment of a single NAS manager at the level of associate administrator to eliminate traditional "stovepipes" between the acquisition and air traffic organizations. As FAA considers recommendations to create a new structure, we believe that it would be advantageous for FAA to implement our recommendation to create a management structure similar to the department-level CIO as called for in the Clinger-Cohen Act. Having an effective CIO, with the organizational and budgetary authority to implement and enforce a complete, agencywide systems architecture would go a long way towards eliminating traditional "stovepipes" between integrated product teams, as well as between the acquisition and air traffic organizations. Furthermore, the agency could gain valuable insight from the experiences of other organizations that have implemented similar structures. Regardless of future direction, FAA recognizes that considerable work is needed to modify behaviors and create comprehensive cultural change. A continued focus on cultural change initiatives will be critical in the years ahead. While FAA is involving external and internal stakeholders in revising its approach to the modernization program, it will need to stay focused on implementing solutions to the root causes of past problems, ensure that all aspects of its acquisition management system are effectively implemented, and quickly address the looming crisis with the year 2000 date requirements. The FAA Administrator has begun an outreach effort with the aviation community to build consensus on and seek commitment to the future direction of the agency's modernization program. Similar to our findings on the logical architecture, a review of this program by the NAS Modernization Task Force concluded that the architecture under development builds on the concept of operations for the NAS and identifies the programs needed to meet the needs of the user community. However, the task force found that the architecture is not realistic because of (1) an insufficient budget; (2) the preponderance of risks associated primarily with certifying and deploying new equipment and with users' cost to acquire equipment; and (3) unresolved institutional issues and a lack of user commitment. The task force recommended a revised approach that would be less costly and would be focused more on providing near-term user benefits. Under this revised approach, FAA would (1) implement a set of core technologies to provide immediate user benefits; (2) modify the Flight 2000 initiative to address critical risk areas associated with key communications, navigation, and surveillance programs; and (3) proceed with implementing critical time-driven activities related to the Host computer and the year 2000 problems and with implementing such systems as STARS, surveillance radars, and en route displays to replace aging infrastructure. The details on how FAA intends to implement the task force's recommendations are not yet known. However, from our discussions with task force officials, their practical effect would be that the development and the deployment of some current programs would be accelerated while others would be slowed down. Meanwhile, FAA would continue developing programs like STARS and the Display System Replacement and work to ensure that its computers recognize the year 2000. For example, under the revised approach, the WAAS program would be slowed down after Phase I, which is scheduled to provide initial satellite navigation capabilities by 1999, to enable FAA to resolve technical issues and explore how costs could be reduced. Further development would be subject to review and risk mitigation under the expanded Flight 2000 initiative. FAA faces both opportunities and challenges as it revises the modernization program. On the one hand, FAA has an opportunity to regain user confidence by delivering systems that benefit them. On the other hand, FAA is challenged to follow through with its investment management process improvements. We urge FAA to proceed cautiously as it attempts to expedite the deployment of key technologies to avoid repeating past practices, such as undue concern for schedules at the expense of disciplined systems development and careful, thorough testing. FAA will need to resist this temptation, as the results are typically systems that cost more than expected, are of low quality, and are late as well. Concerned that burdensome procurement rules were a primary contributor to FAA's acquisition problems, the Congress exempted FAA from many procurement rules. In response, the agency implemented its Acquisition Management System (AMS) on April 1, 1996, to improve its acquisition of new technology. AMS is intended to provide high-level acquisition policy and guidance and to establish rigorous investment management practices. We are currently reviewing FAA's investment management approach, including its practices and processes for selecting, controlling, and evaluating projects, and expect to report later this year. As FAA continues to implement AMS and embarks on a revised modernization approach, it will need to establish baselines for individual projects and performance measurements to track key goals. Under AMS, an acquisition project should have a baseline, which establishes the performance, life-cycle cost, schedule, and benefit boundaries within which the program is authorized to operate. Having an effective investment analysis capability is important in developing these baselines. In its May 1997 report on AMS, FAA noted that it has focused more attention on investment management analyses. The agency reported that it has established several investment analysis teams of individuals with expertise in such areas as cost estimating, market analysis, and risk assessment to help prepare program baselines to use in determining the best way to satisfy mission needs. Although FAA has begun efforts to establish new baselines for projects that were underway prior to AMS, program evaluation officials question the availability and the quality of operations and maintenance data that are being used to estimate life-cycle project costs. FAA's history of unplanned cost increases, most recently seen with its STARS and WAAS programs, coupled with past deficiencies in cost estimating processes and practices point to the need to use reliable and complete data to establish realistic baselines. As for performance measurements, FAA does not have a unified effort underway to effectively measure progress toward achieving acquisition goals. FAA has established a goal to reduce the time to field systems by 50 percent and to reduce the cost of acquisitions by 20 percent during the first 3 years under AMS. FAA also plans to measure performance in such other critical areas as customer satisfaction and the quality of products and services. According to FAA's evaluation, while individual organizations are attempting to measure progress in meeting the two goals, a coordinated agencywide measurement effort is lacking. FAA's failure to field systems on time and within cost indicates the need for a comprehensive system of performance measurements that can help provide systematic feedback about accomplishments and progress in meeting mission objectives. The need for such measurements will become even more critical as FAA expedites the deployment of some projects. Clearly identified performance measurements will help FAA, the Congress, and system users assess how well the agency achieves its goals. On January 1, 2000, computer systems worldwide could malfunction or produce inaccurate information simply because the century has changed. Unless corrected, such failures could have a costly, widespread impact. The problem is rooted in how dates are recorded and computed. For the past several decades, systems have typically used two digits to represent the year, such as "97" for 1997, to save electronic storage space and reduce operating costs. This practice, however, makes 2000 indistinguishable from 1900, and the ambiguity could cause systems to malfunction in unforeseen ways or to fail completely. FAA's challenge is great. Correcting this problem will be difficult and expensive, and must be done while such systems continue to operate. In less than 2 years, hundreds of computer systems that are critical to FAA's operations, such as monitoring and controlling air traffic, could fail to perform as needed unless proper date-related calculations can be made. FAA's progress in making its systems ready for the year 2000 has been too slow. We have reported that, at its current pace, it will not make it in time. The agency has been severely behind schedule in completing basic awareness and assessment activities--critical first and second phases in an effective year 2000 program. For example, just this month FAA appointed a program manager who reports to the Administrator. Delays in completing the first two phases have left FAA little time for critical renovation, validation, and implementation activities--the final three phases in an effective year 2000 program. With less than 2 years left, FAA is quickly running out of time, making contingency planning for continuity of operations even more critical. If critical FAA systems are not year 2000 compliant and ready for reliable operation on January 1 of that year, the agency's capability in several areas--including the monitoring and controlling of air traffic--could be severely compromised. The potential serious consequences could include degraded safety, grounded or delayed flights, increased airline costs, and customer inconvenience. We have made a number of recommendations aimed at expediting the completion of overdue awareness and assessment activities. Mr. Chairman, this concludes my statement. We will be happy to answer any questions from you or any Member of the Subcommittee. Automated Radar Terminal System (ARTS) IIIA Assembler (22-02) Additional ARTS IIIA at FAA Technical Center (22-05) Consolidated Notice to Airmen System (23-03) Visual Flight Rules Air Traffic Control Tower Closures (22-14) Altitude Reporting Mode of Secondary Radar (Mode-C) (21-10) Enhanced Target Generator Displays (ARTS III) (22-03) National Airspace Data Interchange Network IA (25-06) Hazardous In Flight Weather Advisory Service (23-08) (continued) En Route Automated Radar Tracking System Enhancements (21-04) Sustain New York Terminal Radar Approach Control (TRACON) (22-18) National Radio Communication System (26-14) Direct Access Radar Channel System (21-03) National Airspace Data Interchange Network II (25-07) Modernization of Unmanned FAA Buildings and Equipment (26-08) Large Airport Cable Loop Systems (26-05) Interfacility Data Transfer System for Edwards Air Force Base Radar Approach Control (35-20) Acquisition of Flight Service Facilities (26-10) (continued) Radar Pedestal Vibration Analysis (44-43) Low-Level Wind Shear Alert System (23-12) Brite Radar Indicator Tower Equipment (22-16) National Implementation of the "Imaging" Aid for Dependent Converging Runway Approaches (62-24) Integrated Communications Switching System (23-13) System Engineering and Integration Contract (26-13) National Airspace Data Interchange Network II Continuation (35-07) Instrument Landing System and Visual Navaids Engineering and Sparing (44-24) Oceanic Display and Planning System (21-05) Integrated Communications Switching System Logistics Support (43-14) Replacement of Controllers Chairs (42-24) ARTS IIIA-Expand 1 Capacity and Provide Mode C Intruder Capability (32-20) (continued) Civil Aviation Registry Modernization (56-24) Precision Automated Tracking System (56-16) National Airspace Integrated Logistic Support (56-58) Long Range Radar Radome Replacement (44-42) Installed at en route centers to allow processing of existing air traffic control software on new equipment. Project comprised a variety of tower and terminal replacement and modernization projects. Project was continued in the Capital Investment Plan under projects 42-13 and 42-14. Also known as the Radio Communications Link project, it was designed to convert aging "special purpose" Radar Microwave Link System into a "general purpose" system for data, voice, and radar communications among en route centers and other major FAA facilities. Project was activated to sustain and upgrade air traffic control operations and acquire eight terminal radars awaiting the full implementation of the Advanced Automation System. Project comprised a variety of diverse support projects and has been continued in the Capital Investment Plan under Continued General Support (46-16). Over the past decade, we have reported on FAA's progress in meeting schedule commitments for last-site implementation, which signals completion of the project. Prior to this year, we have used the dates from the 1983 NAS modernization plan. This year, after discussions with FAA officials, we are measuring FAA's progress against an interim date--which in most cases represents the date of contract award or investment decision. We will continue to show the original date, but will only measure progress against the interim date. 57 TDLS I57 TDLS IIStage 0: 21 Stage 1 and 2: 21 0 TDLS is the Tower Data Link Services. TDLS I (Predeparture Clearance/Flight Data Input/Output CRT/Rank Emulation) has been commissioned at all 57 sites; TDLS II (Digital-Automatic Terminal Information Service) has been installed at all 57 sites and commissioned at 48 sites. 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 Federal Aviation Administration's (FAA) program to modernize its National Airspace System (NAS), focusing on: (1) the status of key modernization projects; (2) FAA's actions to implement recommendations to correct modernization problems; and (3) the opportunities and challenges facing FAA as it embarks upon its new modernization approach. GAO noted that: (1) since 1982, Congress has appropriated over $25 billion to the modernization program; (2) while FAA has fielded some equipment, historically, the agency has experienced considerable difficulty in delivering systems with promised cost and schedule parameters; (3) as a result, FAA has been forced to implement costly interim projects; (4) meanwhile, two key systems--the Wide Area Augmentation System and the Standard Terminal Automation Replacement System--have encountered cost increases and schedule delays; (5) GAO's work has pinpointed the root causes of FAA's modernization problems and has recommended actions to overcome them; (6) most recently, GAO found shortcomings in the areas of systems architecture or the overall modernization blueprint, cost estimating and accounting, software acquisition, and organizational culture; (7) although FAA has begun to implement many of GAO's recommendations, sustained management attention is required to improve the management of the modernization program; (8) FAA is collaborating with and seeking commitment from users in developing a new approach to make the modernization less costly and to provide earlier user benefits; (9) the challenge for FAA is to have disciplined processes in place in order to deliver projects as promised; and (10) FAA will also need to quickly address the looming year 2000 computer crisis to ensure that critical air traffic control systems do not malfunction or produce inaccurate information simply because the date has changed.
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Following the terrorist attacks of September 11, 2001, the United States began military operations to combat terrorism both in the United States and overseas. Operations to defend the United States from terrorist attacks are known as Operation Noble Eagle. Overseas operations to combat terrorism are known as Operation Enduring Freedom, which takes place principally in Afghanistan, and Operation Iraqi Freedom, which takes place in and around Iraq. Figure 1 shows the primary locations where U.S. forces conducted operations in support of the war in fiscal year 2003. To support the war in fiscal year 2003, Congress appropriated $68.7 billion to DOD: $6.1 billion in the Consolidated Appropriations Resolution, 2003, and $62.6 billion in the Emergency Wartime Supplemental Appropriations Act, 2003. While most of these funds were only available for expenditure in fiscal year 2003, some could be expended in subsequent fiscal years. Of the $68.7 billion appropriated for GWOT, almost $16 billion was appropriated in the fiscal year 2003 Wartime Supplemental to a transfer account called the Iraqi Freedom Fund. The Iraqi Freedom Fund is a special account providing funds for additional expenses for ongoing military operations in Iraq, and those operations authorized by P.L. 107-40 (Sept. 13, 2001), Authorization for Use of Military Force, and other operations and related activities in support of the global war on terrorism. Congress has also appropriated funds for the reconstruction of Iraq and Department of State and U.S. Agency for International Development projects. We are reviewing the contracts involved in the reconstruction, as well as the funding for other projects and will be issuing separate reports on these issues. As of September 30, 2003, DOD reported obligating a total of over $61 billion in fiscal year 2003 in support of the war. Among the operations that comprised the war on terrorism, Operation Iraqi Freedom amounted to about $39 billion or 64 percent of the total obligations, as shown in figure 2. The obligations reported for Iraqi Freedom are probably understated and the obligations reported for Operation Enduring Freedom overstated because, according to DOD officials, the initial obligations associated with the build up to Iraqi Freedom were charged to Enduring Freedom. Officials in the Office of the Under Secretary of Defense (Comptroller) reclassified reported obligations to the appropriate operation after Iraqi Freedom began, based on anticipated and projected GWOT operations. Of the overall reported amount obligated within DOD for GWOT during fiscal year 2003, the Army reported the largest amount of obligations, 46 percent of the total, as shown in figure 3. (The Army had the largest number of military personnel engaged in the war.) In addition to the obligations reported by the other military services, about 13 percent of DOD's GWOT obligations were reported by a total of 15 other DOD organizations, such as the Defense Information Systems Agency and the Defense Logistics Agency. Of these DOD organizations, the Defense Logistics Agency reported the largest amount of obligations--over $3.6 billion. The obligations reported for GWOT fall into three categories--operation and maintenance, military personnel, and investment. Operation and maintenance account funds obligated in support of the war are used for a variety of purposes, including transportation of personnel, goods, and equipment; unit operating support costs; and intelligence, communications, and logistics support. Military personnel funds obligated in support of the war cover the pay and allowances of mobilized reservists as well as special payments or allowances for all qualifying military personnel both active and reserve, such as Imminent Danger Pay and Family Separation Allowance. Investment funds obligated for the war are used for procurement, military construction, and research, development, test and evaluation. As shown in figure 4, GWOT obligations reported in the operation and maintenance account amount to almost $44 billion or 71 percent of the total. The Consolidated Department of Defense Terrorist Response Cost Report displays obligations in all accounts by specific categories. As previously cited, chapter 23 of the DOD Financial Management Regulations, which governs how all DOD organizations report financial data for contingency operations, defines these categories. Within the operation and maintenance account, the operating support category had the largest amount of reported obligations for fiscal year 2003--over $32 billion or 74 percent of the total. This category, which includes obligations incurred for such things as training, operational support, equipment maintenance, and troop support, had the highest level of obligations, in part reflecting the cost of using civilian contractors to provide housing, food, water, and other services to over 180,000 troops deployed overseas in support of GWOT. A large part of the operating support costs category--48 percent-- is in two miscellaneous categories, other supplies and equipment ($7 billion) and other services and miscellaneous contracts ($8.5 billion). Most of the remaining reported GWOT obligations, $15.6 billion or 26 percent, were in the military personnel accounts. Within the military personnel account, the category reserve component called to active duty had the highest level of reported obligations--almost $9.3 billion or 59 percent of the total. This category captures the obligations reported for the salaries paid to reservists mobilized for active duty. According to service officials, more reservists were called to active duty than originally estimated and remained on active duty longer than planned. As with operation and maintenance obligations, there was also a large miscellaneous category, other military personnel, which accounted for about $3.8 billion, or 24 percent, of all military personnel obligations. In discussing the results of our analysis with the Office of the Under Secretary of Defense (Comptroller) and the military services, there was recognition of the large amount of obligations captured in miscellaneous categories. The Office of the Under Secretary of Defense (Comptroller) is considering how best to provide more specific detail in future cost reports. The adequacy of funding available for fiscal year 2003 GWOT obligations reported in military personnel and operation and maintenance accounts varied by service. The funding available for the war consists of funds directly appropriated to the military services for GWOT, the net transfer of funds from the Iraqi Freedom Fund, and reprogrammed funds originally appropriated to the services for peacetime operations. Within the military personnel accounts, as shown in table 1, in fiscal year 2003 the Army, Navy, and Air Force reported more obligations in support of the war than they received in funding for the war. To cover the shortfall in GWOT funding, these services had to use funds appropriated for their budgeted peacetime operations. Officials from each of these services explained that the shortfall was a relatively small portion of their budgeted peacetime military personnel account. For example, the Army's reported shortfall of $155.2 million represents less than 1 percent of its total peacetime appropriation. The Marine Corps, which had augmented its GWOT military personnel appropriation with funds from its peacetime military personnel account, ended the fiscal year with slightly less in obligations than it had in available funding--$1.8 million or less than 1 percent of its peacetime appropriation. Within the operation and maintenance accounts, as shown in table 2, in fiscal year 2003 the Army, Air Force, and Navy received funding that exceeded their reported GWOT obligations. At the same time the Marine Corps reported more GWOT obligations than it received in funding. In discussing our analysis of the difference between GWOT obligations and funding with the Army, Air Force, and Navy, we were told the following. The Army reported slightly more funding than obligations for the war. At the end of fiscal year 2003, the Army reported obligations that initially appeared to be more than $500 million less than the available funding. However, as of January 2004, the Army has subsequently updated its fiscal year 2003 reporting to reflect about $470 million in additional reported obligations. According to Army officials, the Army had not included in the September 30, 2003, consolidated cost report $494 million in obligations reported to support the Coalition Provisional Authority in Iraq. The Army received GWOT funding in fiscal year 2003 to support this organization, but the obligations were not captured in the Army's accounting system used to record most other Army obligations. The Army also cancelled some obligations made before the end of the fiscal year, resulting in a total adjustment to the fiscal year 2003 cost report of $470 million. Thus the Army ended the year with about $30 million more in funding than reported obligations. Air Force officials told us that the $176.6 million, which appeared to be unobligated GWOT funding, was actually obligated late in the fiscal year. According to the officials, that amount was obligated for flying operations requirements that the Air Force decided were related to the war, but were not reported as such. Navy officials told us that the apparent unobligated GWOT funds ($299 million) were in fact obligated in support of the war but were originally, and incorrectly, reported as obligations in support of budgeted peacetime operations. These officials said that they would be updating their reporting for obligations incurred in fiscal year 2003 to reflect an additional $299 million in operation and maintenance obligations for the war. At the same time, the Navy returned $198 million to the Iraqi Freedom Fund that it believed was in excess of its operation and maintenance requirements for the war. The available funding in table 2 was adjusted to reflect the return of the $198 million. Returning these funds is in keeping with recommendations we made in our September 2003 report discussed above to monitor the obligation of funds in the services' operation and maintenance accounts and ensure that all funds transferred to the services that are not likely to be obligated by the end of the fiscal year are transferred back to the Iraqi Freedom Fund. In subsequent work we plan to review GWOT obligations to detail the specific purposes for which funds were used and to determine whether the service requirements for which funding was obligated were war-related. The additional Air Force flying operations' requirements and the funds the Navy recharacterized as being in support of the war will be included in that review. While the Marine Corps obligated $72.5 million more for GWOT than it had in funds at the end of fiscal year 2003, it, like the Navy, returned money to the Iraqi Freedom Fund. At the end of fiscal year 2003, Marine Corps officials believed that they could not obligate $152.2 million that had been transferred to the Marine Corps' operation and maintenance account from the Iraqi Freedom Fund before the end of the fiscal year and so transferred it back to the fund. In retrospect, however, the Marines obligated more than expected. According to Marine Corps officials, this shortfall was covered by using normal peacetime operation and maintenance appropriations that units deployed in support of GWOT were not going to use. As noted with the Army and Navy analyses, the services have reported obligation updates to the Office of the Under Secretary of Defense (Comptroller) for inclusion in the Defense Finance and Accounting Service's Consolidated DOD Terrorist Response Cost report for fiscal year 2003. The Defense Finance and Accounting Service is issuing monthly fiscal year 2003 update reports as the obligation data is updated, which must be added to the report as of September 30, 2003, to determine the total fiscal year 2003 obligations reported in support of GWOT. In official oral comments on a draft of this report, officials from DOD's Office of the Under Secretary of Defense (Comptroller) stated that the department had no objections to the report. DOD also provided technical comments and we have incorporated them as appropriate. We are sending copies of this report to the Chairmen and Ranking Minority Members of the House and Senate Budget Committees, the Secretary of Defense, the Secretaries of the military services, and the Director, Office of Management and Budget. We will also make copies available to others on request. In addition, the report will available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff has any questions, please contact me on (757) 552-8100 or by e-mail at [email protected]. Major contributors to this report were Steve Sternlieb, Ann Borseth, Madelon Savaides, Leo Sullivan, and John Buehler.
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The Global War on Terrorism--principally involving operations in Afghanistan and Iraq--was funded in fiscal year 2003 by Congress's appropriation of almost $69 billion. To assist Congress in its oversight of spending, GAO is undertaking a series of reviews relating to contingency operations in support of the Global War on Terrorism. In September 2003, GAO issued a report that discussed fiscal year 2003 obligations and funding for the war through June 2003. This report continues the review of fiscal year 2003 by analyzing obligations reported in support of the Global War on Terrorism and reviews whether the amount of funding received by the military services was adequate to cover DOD's obligations for the war from October 1, 2002, through September 30, 2003. GAO will also review the war's reported obligations and funding for fiscal year 2004. In fiscal year 2003, DOD reported obligations of over $61 billion in support of the Global War on Terrorism. GAO's analysis of the obligation data showed that 64 percent of fiscal year 2003 obligations reported for the war on terrorism went for Operation Iraqi Freedom; among the DOD components, the Army had the most obligations (46 percent); and among appropriation accounts the operation and maintenance account had the highest level of reported obligations (71 percent). The adequacy of funding available for the Global War on Terrorism for fiscal year 2003 military personnel and operation and maintenance accounts varied by service. For military personnel, the Army, Navy, and Air Force ended the fiscal year with more reported obligations for the war than funding and had to cover the shortfalls with money appropriated for their budgeted peacetime personnel costs. For operation and maintenance accounts, the Army, Navy, and Air Force appeared to have more funding than reported obligations for the war. However, the Navy and Air Force have stated that the seeming excess funding ($299 million and $176.6 million respectively) were in support of the war on terrorism, but had not been recorded as such. Therefore, Navy and Air Force obligations exactly match funding. The Marine Corps used funds appropriated for its budgeted peacetime operation and maintenance activities to cover shortfalls in funding for the war.
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HUD provides mortgage insurance on more than 13,000 privately owned multifamily properties under various programs designed to help low- and moderate-income households obtain affordable rental housing. In recent years, HUD had experienced a significant growth in the number of defaulted multifamily mortgages because of financial, operating, or other problems. As of July 1993, HUD held more than 2,400 mortgages with unpaid principal balances totaling about $7.5 billion, more than 2,000 of which were assigned to HUD as a result of default. HUD's Federal Housing Administration (FHA) insures mortgage lenders against financial losses in the event owners default on their mortgages. When a default occurs, a lender may assign the mortgage to HUD and receive an insurance claim payment from the agency. HUD then becomes the new lender for the mortgage. HUD's policy is to attempt to restore the financial soundness of the mortgage through a workout plan. If a workout plan is not feasible, HUD may, as a last resort, initiate foreclosure in order to sell the property and recover all or part of the debt. If HUD is unsuccessful in selling a property at a foreclosure sale, it may acquire ownership of the property. HUD retains these properties in its "HUD-owned inventory" until it can sell or otherwise dispose of them. The Housing and Community Development Amendments of 1978 (12 U.S.C. 1701z-11), as amended, required that in disposing of properties, HUD preserve a certain number of units as affordable housing for low-income households. To accomplish this requirement and to ensure that units remain affordable to eligible households, HUD normally uses a federal rental subsidy program called section 8 project-based assistance. Under this program, households do not have to pay more than 30 percent of their adjusted income for rent. Through contracts with HUD, owners are then reimbursed the difference between a unit's rent and the portion paid by the renter. HUD's ability to sell a large number of foreclosed properties while preserving affordable units for low-income households was significantly impeded by a shortage of federal funds needed to support section 8 project-based contracts. As a result, in some cases, HUD assumed ownership of the properties rather than sell them to other purchasers at foreclosure sales. HUD then operated these properties until funding for section 8 was available. To facilitate the sale of some properties, in 1991 HUD started using alternatives to providing section 8 project-based assistance that were allowed by the property disposition legislation. These alternatives included getting the purchaser to agree to keep the required number of units available and affordable to lower-income persons for 15 years and to charge occupant households no more than 30 percent of their income for rent. Under this procedure, HUD required new owners, as well as any subsequent owners, to set aside the same number of units that they would have been required to allocate for the section 8 program. Purchasers agreed to fill these rent-restricted units with tenants meeting the same household income eligibility criteria as used in the section 8 program. Use of the rent-restriction approach was limited to properties that, at the time HUD paid off the mortgage lender, were not receiving any HUD subsidy (such as a below market interest rate loan) or were receiving rental assistance payments for fewer than 50 percent of their units. HUD generally assumes that because occupants will pay no more than 30 percent of their adjusted household income toward the rent, the owner's rental income would be reduced on the rent-restricted units. Accordingly, HUD adjusts the minimum bid prices it is willing to accept on the properties downward to the point that the properties should have a positive cash flow even if the owner received no rental income on the rent-restricted units. Because rent-restricted units can reduce a property's cash flow, HUD has found that the rent-restriction procedure is usually financially feasible only when a relatively small proportion of a property's total units (usually no more than 10 percent) have rent restrictions. Through December 1994, HUD had used the rent-restriction alternative in the sale of 62 properties, or about 17 percent of the properties sold. The 62 properties contained 10,595 units, of which 1,344 were rent-restricted units. HUD's instructions for disposing of multifamily properties did not provide HUD field offices or purchasers of HUD properties with clear directions for implementing the rent-restriction alterative. Field offices therefore made different judgments as to what requirements should apply--particularly whether or not properties should be subject to certain rules and practices that had been used in connection with the section 8 project-based rental assistance program. Consequently, field offices incorporated different, sometimes conflicting, requirements into sale documents and accompanying deed restrictions. HUD first issued instructions for implementing the rent-restriction approach as part of a July 1991 notice prescribing procedures that field offices were to use in selling defaulted mortgages at foreclosure sales. (These instructions did not apply to sales of HUD-owned properties.) The notice described the conditions under which rent restrictions could be used, the length of time the restrictions were to remain in effect at each property, and the limitations on tenants' rents. The notice also included two, slightly different standard-use agreements that HUD used in writing sales contracts for properties sold at foreclosure. One agreement was to be included in sales contracts when HUD was also requiring that the purchaser perform repairs to a property after the sale; the other was to be used when HUD was not requiring the purchaser to perform post-sale repairs. Both agreements required purchasers to maintain a specified number of units as affordable housing for 15 years and to limit what households pay toward rent to no more than what they would be charged under the section 8 project-based rent subsidy program. Both agreements also required purchasers to follow certain procedures that were required under the section 8 project-based program. First, purchasers had to maintain waiting lists of eligible applicants and fill vacant restricted units on a first-come, first-served basis but give preference to applicants who were involuntarily displaced, living in substandard housing, or paying more than 50 percent of their household income for rent. Also, both agreements required purchasers to annually verify the income of households occupying restricted units using procedures similar to those used in the section 8 project-based program.While neither of these procedures was specifically required by the property disposition legislation, HUD field office officials believed that they were appropriate because they help ensure that proper controls are used in the management of rent-restricted properties. Moreover, several officials believed that the procedure for filling vacancies is beneficial because it can place more of the cost of providing affordable housing on property owners since it essentially requires the owners to accept low-income households on a first-come, first-served basis even if they would not pay the full rental cost. The primary difference between the two agreements was that the agreement for properties without post-sale repair requirements stated that rent-restricted units could not be occupied by households that continued to possess a section 8 voucher or certificate after occupancy. Several of the field office officials we talked with said that this requirement was appropriate because they believed that rent-restricted units were intended to serve unassisted households. In September 1992, HUD issued instructions for the sale of HUD-owned properties. These instructions, however, differed from the 1991 instructions in that the use agreements only required that purchasers restrict rents on the specified number of units for 15 years and limit rents paid by the occupants to what would be charged under the section 8 project-based program. The use agreements did not require waiting lists or annual income verification procedures and did not prohibit occupancy by section 8 voucher or certificate holders. Thus the agreements gave purchasers greater latitude in filling vacancies--essentially allowing them to exclude a household from their rent-restricted units if the renter could not pay the full rent, either directly or through a rent subsidy assigned to the household. In June 1993, HUD replaced the 1991 and 1992 instructions with instructions that applied both to properties sold at foreclosure and to HUD-owned properties. The use agreements included in the 1993 instructions were essentially the same as the 1992 use agreements with respect to requirements for rent-restricted units. The 1993 instructions thus eliminated any specific requirements for (1) filling vacancies from waiting lists on a first-come, first-served basis; (2) verifying household incomes; and (3) prohibiting section 8 voucher and certificate holders from occupying rent-restricted units. Property disposition officials told us that these changes were made to reduce government regulation and to delegate more authority to field offices. In September 1993, HUD's Office of General Counsel (OGC) specifically directed field offices to discontinue use of the 1991 use agreement that prohibited section 8 voucher or certificate holders from occupying rent-restricted units. Although field offices had approved sales contracts containing the 1991 use agreement, the OGC subsequently concluded that excluding voucher and certificate holders violated section 204 of the Housing and Community Development Amendments of 1978. (Section 204 prohibits property owners from unreasonably refusing to lease units to anyone simply because he or she held a section 8 voucher or certificate.) HUD headquarters officials told us in November 1994 that the difference in use agreements for rent-restricted units since 1991 occurred unintentionally. The officials said that because of the relatively few properties sold with rent restrictions, they considered the instructions to be a low priority and thus had given them little attention. The officials said that there is no reason why requirements for rent-restricted units should differ because of the type of sale or because post-sale repairs are required. The officials also told us that after discussing the lack of guidance with us in June 1994, HUD issued interim instructions to field offices in July 1994, advising them to direct owners to use waiting lists, annually certify household incomes, and not exclude section 8 voucher and certificate holders. Also, according to the officials, HUD will incorporate these specific requirements into new use agreements that the agency will develop to reflect the rent-restriction provisions of the Multifamily Housing Property Disposition Reform Act of 1994. The officials said that the revised use agreements should be completed after the regulations implementing the 1994 act are finalized. In its comments on our draft report, HUD said that new use agreement riders would be ready for field offices' use in sales contracts by April 1, 1995. HUD's inconsistent guidance has led to different requirements being used for owners of properties with rent-restricted units. In a review of 32 properties sold with rent restrictions from February 1993 through June 30, 1994, we found an equal split between properties with the more specific use agreements issued in 1991 and properties with the more general use agreements issued in 1992 and 1993. In six instances, however, the responsible field office had used the more specific 1991 use agreements during 1994, well after they had been replaced by the more general agreements in June 1993. We also found that several field offices were continuing to actively discourage purchasers from counting certificate and voucher holders toward satisfying rent-restriction requirements even after the OGC, in September 1993, advised them of section 204 and its applicability. HUD property disposition officials told us that they intended to give field offices flexibility to modify the 1993 use agreements on the basis of local preferences, but that field offices should not be discouraging voucher and certificate holders from occupying rent-restricted units. The three properties we visited illustrate how HUD's waiting list requirements can influence the extent to which a property owner actually experiences reduced rental income because of rent-restricted units. Two of these properties were formerly HUD-owned and, therefore, were sold under the more general use agreements, without requirements for filling vacancies from waiting lists on a first-come, first-served basis. The third property was sold with a 1991 use agreement that specifically required use of a waiting list. On-site managers at the two properties sold with the 1992 use agreement told us that they did not accept tenants in rent-restricted units unless the households also had a section 8 voucher or certificate or unless 30 percent of their adjusted income (i.e., what the tenant would have to pay) equalled the full rent. Households that did not have certificates or vouchers or that did not have the necessary income to pay the full rent were turned away. In contrast, the third property was using a waiting list to fill unoccupied units. This particular 280-unit property had 55 rent-restricted units. Because the waiting list provided a systematic selection process, applicants were selected on a first-come, first-served basis. None of the 55 households residing in the rent-restricted units had vouchers or certificates or sufficiently high incomes; therefore, the owner was receiving less than the full rent on each of the units. According to data provided by the on-site management company, the property was receiving an average of $357 less than the full monthly rental income for each of the rent-restricted units. Until recently, HUD headquarters' and field offices' actions to oversee compliance with the rent-restriction agreements were limited. However, in July 1994, HUD directed its field offices to review compliance at a number of selected properties. The field offices found that 2 of the 16 properties they reviewed had not fully complied with their rent-restriction agreements. The property owners disagreed, and HUD was reviewing the cases as of November 1994. HUD did not issue instructions to its field offices for monitoring compliance with rent-restriction agreements until we discussed the matter with its property disposition officials in June 1994. The officials told us that they had not required field offices to monitor purchasers' compliance with rent-restriction agreements because they considered this to be a low priority, given the relatively small number of properties that had been sold with rent restrictions. However, the officials agreed that some form of oversight was needed. HUD issued a memorandum in July 1994 that required field offices to perform a one-time on-site compliance review at each property having more than 20 rent-restricted units. The agency also provided general guidelines for monitoring compliance and a checklist to use during the review. The memorandum also stated that HUD was considering various alternatives and would later provide instructions for the long-term monitoring of projects to ensure that they remain in compliance with the terms and conditions of the use agreements under which they were sold. According to HUD officials, these instructions were to be prepared after the field offices completed the initial compliance reviews. Field offices were directed to complete their compliance reviews by August 15, 1994. However, because the July 1994 memorandum did not require the field offices to formally report the results of the reviews to HUD headquarters, a second memorandum was issued in September 1994 that extended the time for completing and reporting on the reviews until October 1994. The results of the compliance reviews were reported to HUD headquarters in October 1994. In all, 25 properties containing a total of 949 rent-restricted units met the criteria to be reviewed (i.e., they contained 20 or more rent-restricted units). However, reviews at 9 of the 25 properties were postponed for several months because the properties had only been recently sold and had not yet had time to fully implement their rent-restriction procedures. The field offices determined that 14 of the remaining 16 properties complied with the provisions of their use agreements and that 2 properties were not in compliance. As of November 1994, HUD was reviewing these two cases to determine what actions, if any, should be taken. HUD property disposition officials said that they were satisfied with the overall compliance found to date. HUD property disposition officials told us that the agency had planned to develop instructions to field offices for the long-term monitoring of owners' compliance with rent-restriction agreements, but as of December 1994, they did not have a specific target date for issuing them. In commenting on our draft report, HUD said that it would issue revised monitoring procedures to its field offices by May 1, 1995. In April 1994, the Congress enacted the Multifamily Housing Property Disposition Reform Act (P.L. 103-233), which revised the procedures HUD may use to dispose of multifamily properties. Although rent-restriction agreements are likely to continue as an important aspect of HUD's multifamily property disposition activities, future use of the current rent-restriction alternative is likely to decrease. The act authorizes HUD to use rent restrictions as a means of complying with a number of its requirements (such as ensuring that units in certain properties that do not receive project-based section 8 assistance remain available and affordable to low-income families). The act gives HUD broad discretionary authority to use rent restrictions and to discount sales prices in order to meet the act's property disposition goals. The act also established an additional way to determine the maximum amount that occupants of rent-restricted units have to pay toward rent. Occupants can be required to pay a percentage of the median income in the local area, instead of a percentage of their household income. This could increase the amount that some households with low incomes pay toward rent. HUD officials told us that while the previously used rent-restriction agreements may still be used under the 1994 act, they believe that the need to use them in future sales may be limited. Instead, HUD is likely to use rent-restriction agreements that base tenants' rent payments on a percentage of the area's median income. The officials also noted that the need for the previous agreements will be diminished at least through fiscal year 1995 because larger amounts of section 8 funding have been appropriated (approximately $550 million in fiscal year 1995 compared with $93 million in fiscal year 1993). As proposed in our draft report, HUD recently established a firm schedule for prompt issuance of instructions implementing the new rent-restriction options that it plans to use in carrying out the 1994 legislation. In its comments on our draft report, HUD said that new use agreement riders reflecting the 1994 legislation would be available for use in sales contracts by April 1, 1995, and that its revised monitoring instructions, scheduled for issuance by May 1, 1995, would include revisions to reflect the 1994 legislation. HUD has not (1) provided its field offices nor purchasers of HUD multifamily properties with clear instructions on the procedures owners must follow in managing properties subject to rent restrictions or (2) established long-term requirements specifying how field offices should oversee owners' compliance with agreed-upon use restrictions. As a result, HUD has placed inconsistent requirements on property owners and, until recently, had not required field offices to oversee owners' compliance. HUD has acknowledged that it did not provide field offices and property owners adequate instructions when the rent-restriction approach was implemented. Although HUD had planned to clarify property management requirements and issue instructions to field offices for the long-term monitoring of properties with rent-restriction agreements, it did not have a definite time frame for completing these actions. However, in response to our draft report, HUD said that it would have revised use agreement riders, which detail purchasers' obligations for meeting rent-restriction requirements, ready for field offices to use in sales contracts by April 1, 1995. HUD also said that it would issue revised monitoring procedures to its field offices by May 1, 1995. According to HUD officials, the agency will require owners to maintain waiting lists and to fill vacancies from the lists on a first-come, first-served basis. This requirement should increase the availability of future rent-restricted units to households that are not already receiving federal rent assistance by preventing owners from purposely filling vacancies exclusively with holders of section 8 vouchers and certificates. While it is unclear to what extent the previously used rent-restriction agreements will be used in the future, rent restrictions will be a key tool for HUD to use in meeting the requirements of new property disposition legislation enacted in April 1994. HUD plans to soon have available new use agreement riders and monitoring instructions that reflect the additional rent-restriction options it will use in implementing the 1994 act. As was the case with previous rent restrictions, the effectiveness of future restrictions will depend, in part, on how effectively the new riders communicate the procedures owners must follow in managing rent-restricted properties and on the adequacy of the new monitoring instructions. In its comments, HUD said that we correctly pointed out the problems it had experienced in developing procedures to implement the rent-restriction approach but noted that there have been relatively few properties and units sold with rent restrictions. Through its comments, HUD implemented the recommendations that we proposed by establishing a firm schedule for (1) clarifying procedures that owners must follow in managing rent-restricted units, (2) clarifying procedures field offices are to use in monitoring owners' compliance, and (3) establishing similar procedures for new rent-restriction options that the agency will use to carry out requirements of the Multifamily Housing Property Disposition Reform Act of 1994. Accordingly, this report makes no recommendations, and it has been revised to reflect HUD's additional actions. We plan to monitor HUD's issuance of the revised procedures and ensure that the revisions adequately address the problems that we found. (See app. I for the complete text of HUD's comments.) To evaluate HUD's instructions and compliance monitoring, we reviewed applicable laws, regulations, and procedures concerning the rent-restriction approach and analyzed information and data provided by HUD on properties sold with rent restrictions through December 31, 1994. We discussed the implementation of the rent-restriction approach with officials from the Office of Preservation and Disposition and the Office of General Counsel at HUD headquarters in Washington, D.C., and with corresponding officials at field offices in Denver, Colorado; Jacksonville, Florida; Atlanta, Georgia; Kansas City, Kansas; St. Louis, Missouri; Greensboro, North Carolina; and Fort Worth and Houston, Texas. Through June 30, 1994, these eight field offices were responsible for selling about 60 percent of the rent-restricted properties. We also visited three properties that were sold with rent restrictions, obtained and analyzed information on their rent-restriction procedures, and interviewed property owners and on-site staff. To determine the expected future use of rent restrictions, we (1) reviewed the provisions of the Multifamily Housing Property Disposition Reform Act of 1994, (2) determined what changes the act makes in HUD's authority for establishing rent restrictions, and (3) discussed with property disposition officials HUD's plans for implementing the act. We conducted our review from May through December 1994 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce it 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 Housing and Urban Development. We will also make copies available to others on request. Please contact me at (202) 512-7631 if you or your staff have any questions. Major contributors to this report are listed in appendix II. John T. McGrail 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 Department of Housing and Urban Development's (HUD) procedures for implementing a rent-restriction alternative for the disposition of multifamily properties, focusing on: (1) HUD instructions to its field offices and property purchasers on implementing the alternative; (2) HUD instructions to field offices on monitoring purchasers' compliance with rent-restriction agreements; and (3) the expected future use of the rent-restriction alternative. GAO found that: (1) HUD has not provided adequate instructions on how the rent-restriction alternative should be implemented; (2) HUD has inconsistently enforced its policy of filling vacant units on a first-come, first-served basis, which ensures that new property owners accept low-income households regardless of how much rental income the owners receive; (3) HUD did not require its field offices to monitor property owners' compliance with rent-restriction agreements until July 1994, since it placed a low priority on establishing monitoring requirements because few properties were sold with rent restrictions; (4) HUD plans to issue instructions clarifying program requirements by May 1, 1995; (5) changes authorized by new property disposition legislation are likely to diminish HUD use of the current rent-restriction alternative; and (6) many occupants of rent-restricted units may be required to pay rents computed as a percentage of the area median income rather than as 30 percent of their own adjusted household income.
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Created in 1961, Peace Corps is mandated by statute to help meet developing countries' needs for trained manpower while promoting mutual understanding between Americans and other peoples. Volunteers commit to 2-year assignments in host communities, where they work on projects such as teaching English, strengthening farmer cooperatives, or building sanitation systems. By developing relationships with members of the communities in which they live and work, volunteers contribute to greater intercultural understanding between Americans and host country nationals. Volunteers are expected to maintain a standard of living similar to that of their host community colleagues and co-workers. They are provided with stipends that are based on local living costs and housing similar to their hosts. Volunteers are not supplied with vehicles. Although the Peace Corps accepts older volunteers and has made a conscious effort to recruit minorities, the current volunteer population has a median age of 25 years and is 85 percent white. More than 60 percent of the volunteers are women. Volunteer health, safety, and security is Peace Corps' highest priority, according to the agency. To address this commitment, the agency has adopted policies for monitoring and disseminating information on the security environments in which the agency operates, training volunteers, developing safe and secure volunteer housing and work sites, monitoring volunteers, and planning for emergencies such as evacuations. Headquarters is responsible for providing guidance, supervision, and oversight to ensure that agency policies are implemented effectively. Peace Corps relies heavily on country directors--the heads of agency posts in foreign capitals--to develop and implement practices that are appropriate for specific countries. Country directors, in turn, rely on program managers to develop and oversee volunteer programs. Volunteers are expected to follow agency policies and exercise some responsibility for their own safety and security. Peace Corps emphasizes community acceptance as the key to maintaining volunteer safety and security. The agency has found that volunteer safety is best ensured when volunteers are well integrated into their host communities and treated as extended family and contributors to development. Reported incidence rates of crime against volunteers have remained essentially unchanged since we completed our report in 2002. Reported incidence rates for most types of assaults have increased since Peace Corps began collecting data in 1990, but have stabilized in recent years. The reported incidence rate for major physical assaults has nearly doubled, averaging about 9 assaults per 1,000 volunteer years in 1991-1993 and averaging about 17 assaults in 1998-2000. Reported incidence rates for major assaults remained unchanged over the next 2 years. Reported incidence rates of major sexual assaults have decreased slightly, averaging about 10 per 1,000 female volunteer years in 1991-1993 and about 8 per 1,000 female volunteer years in 1998-2000. Reported incidence rates for major sexual assaults averaged about 9 per 1,000 female volunteer years in 2001 -2002. Peace Corps' system for gathering and analyzing data on crime against volunteers has produced useful insights, but we reported in 2002 that steps could be taken to enhance the system. Peace Corps officials agreed that reported increases are difficult to interpret; the data could reflect actual increases in assaults, better efforts to ensure that agency staff report all assaults, and/or an increased willingness among volunteers to report incidents. The full extent of crime against volunteers, however, is unknown because of significant underreporting. Through its volunteer satisfaction surveys, Peace Corps is aware that a significant number of volunteers do not report incidents, thus reducing the agency's ability to state crime rates with certainty. For example, according to the agency's 1998 survey, volunteers did not report 60 percent of rapes and 20 percent of nonrape sexual assaults. Reasons cited for not reporting include embarrassment, fear of repercussions, confidentiality concerns, and a belief that Peace Corps could not help. In 2002, we observed that opportunities for additional analyses existed that could help Peace Corps develop better-informed intervention and prevention strategies. For example, our analysis showed that about a third of reported assaults after 1993 occurred from the fourth to the eighth month of service--shortly after volunteers completed training, arrived at sites, and began their jobs. We observed that this finding could be explored further and used to develop additional training. Since we issued our report, Peace Corps has taken steps to strengthen its efforts for gathering and analyzing crime data. The agency has hired an analyst responsible for maintaining the agency's crime data collection system, analyzing the information collected, and publishing the results for the purpose of influencing volunteer safety and security policies. Since joining the agency a year ago, the analyst has focused on redesigning the agency's incident reporting form to provide better information on victims, assailants, and incidents and preparing a new data management system that will ease access to and analysis of crime information. However, these new systems have not yet been put into operation. The analyst stated that the reporting protocol and data management system are to be introduced this summer, and responsibility for crime data collection and analysis will be transferred from the medical office to the safety and security office. According to the analyst, she has not yet performed any new data analyses because her focus to date has been on upgrading the system. We reported that Peace Corps' headquarters had developed a safety and security framework but that the field's implementation of this framework was uneven. The agency has taken steps to improve the field's compliance with the framework, but recent Inspector General reports indicate that this has not been uniformly achieved. We previously reported that volunteers were generally satisfied with the agency's training programs. However, some volunteers had housing that did not meet the agency's standards, there was great variation in the frequency of staff contact with volunteers, and posts had emergency action plans with shortcomings. To increase the field's compliance with the framework, in 2002, the agency hired a compliance officer at headquarters, increased the number of field- based safety and security officer positions, and created a safety and security position at each post. However, recent Inspector General reports continued to find significant shortcomings at some posts, including difficulties in developing safe and secure sites and preparing adequate emergency action plans. In 2002, we found that volunteers were generally satisfied with the safety training that the agency provided, but we found a number of instances of uneven performance in developing safe and secure housing. Posts have considerable latitude in the design of their safety training programs, but all provide volunteers with 3 months of preservice training that includes information on safety and security. Posts also provide periodic in-service training sessions that cover technical issues. Many of the volunteers we interviewed said that the safety training they received before they began service was useful and cited testimonials by current volunteers as one of the more valuable instructional methods. In both the 1998 and 1999 volunteer satisfaction surveys, over 90 percent of volunteers rated safety and security training as adequate or better; only about 5 percent said that the training was not effective. Some regional safety and security officer reports have found that improvements were needed in post training practices. The Inspector General has reported that volunteers at some posts said cross-cultural training and presentations by the U.S. embassy's security officer did not prepare them adequately for safety-related challenges they faced during service. Some volunteers stated that Peace Corps did not fully prepare them for the racial and sexual harassment they experienced during their service. Some female volunteers at posts we visited stated that they would like to receive self-protection training. Peace Corps' policies call for posts to ensure that housing is inspected and meets post safety and security criteria before the volunteers arrive to take up residence. Nonetheless, at each of the five posts we visited, we found instances of volunteers who began their service in housing that had not been inspected and had various shortcomings. For example, one volunteer spent her first 3 weeks at her site living in her counterpart's office. She later found her own house; however, post staff had not inspected this house, even though she had lived in it for several months. Poorly defined work assignments and unsupportive counterparts may also increase volunteers' risk by limiting their ability to build a support network in their host communities. At the posts we visited, we met volunteers whose counterparts had no plans for the volunteers when they arrived at their sites, and only after several months and much frustration did the volunteers find productive activities. We found variations in the frequency of staff contact with volunteers, although many of the volunteers at the posts we visited said they were satisfied with the frequency of staff visits to their sites, and a 1998 volunteer satisfaction survey reported that about two-thirds of volunteers said the frequency of visits was adequate or better. However, volunteers had mixed views about Peace Corps' responsiveness to safety and security concerns and criminal incidents. The few volunteers we spoke with who said they were victims of assault expressed satisfaction with staff response when they reported the incidents. However, at four of the five posts we visited, some volunteers described instances in which staff were unsupportive when the volunteers reported safety concerns. For example, one volunteer said she informed Peace Corps several times that she needed a new housing arrangement because her doorman repeatedly locked her in or out of her dormitory. The volunteer said staff were unresponsive, and she had to find new housing without the Peace Corps' assistance. In 2002, we reported that, while all posts had tested their emergency action plan, many of the plans had shortcomings, and tests of the plans varied in quality and comprehensiveness. Posts must be well prepared in case an evacuation becomes necessary. In fact, evacuating volunteers from posts is not an uncommon event. In the last two years Peace Corps has conducted six country evacuations involving nearly 600 volunteers. We also reported that many posts did not include all expected elements of a plan, such as maps demarcating volunteer assembly points and alternate transportation plans. In fact, none of the plans contained all of the dimensions listed in the agency's Emergency Action Plan checklist, and many lacked key information. In addition, we found that in 2002 Peace Corps had not defined the criteria for a successful test of a post plan. Peace Corps has initiated a number of efforts to improve the field's implementation of its safety and security framework, but Inspector General reports continued to find significant shortcomings at some posts. However, there has been improvement in post communications with volunteers during emergency action plan tests. We reviewed 10 Inspector General reports conducted during 2002 and 2003. Some of these reports were generally positive--one congratulated a post for operating an "excellent" program and maintaining high volunteer morale. However, a variety of weaknesses were also identified. For example, the Inspector General found multiple safety and security weaknesses at one post, including incoherent project plans and a failure to regularly monitor volunteer housing. The Inspector General also reported that several posts employed inadequate site development procedures; some volunteers did not have meaningful work assignments, and their counterparts were not prepared for their arrival at site. In response to a recommendation from a prior Inspector General report, one post had prepared a plan to provide staff with rape response training and identify a local lawyer to advise the post of legal procedures in case a volunteer was raped. However, the post had not implemented these plans and was unprepared when a rape actually occurred. Our review of recent Inspector General reports identified emergency action planning weaknesses at some posts. For example, the Inspector General found that at one post over half of first year volunteers did not know the location of their emergency assembly points. However, we analyzed the results of the most recent tests of post emergency action plans and found improvement since our last report. About 40 percent of posts reported contacting almost all volunteers within 24 hours, compared with 33 percent in 2001. Also, our analysis showed improvement in the quality of information forwarded to headquarters. Less than 10 percent of the emergency action plans did not contain information on the time it took to contact volunteers, compared with 40 percent in 2001. In our 2002 report, we identified a number of factors that hampered Peace Corps efforts to ensure that this framework produced high-quality performance for the agency as a whole. These included high staff turnover, uneven application of supervision and oversight mechanisms, and unclear guidance. We also noted that Peace Corps had identified a number of initiatives that could, if effectively implemented, help to address these factors. The agency has made some progress but has not completed implementation of these initiatives. High staff turnover hindered high quality performance for the agency. According to a June 2001 Peace Corps workforce analysis, turnover among U.S. direct hires was extremely high, ranging from 25 percent to 37 percent in recent years. This report found that the average tenure of these employees was 2 years, that the agency spent an inordinate amount of time selecting and orienting new employees, and that frequent turnover produced a situation in which agency staff are continually "reinventing the wheel." Much of the problem was attributed to the 5-year employment rule, which statutorily restricts the tenure of U.S. direct hires, including regional directors, country desk officers, country directors and assistant country directors, and Inspector General and safety and security staff. Several Peace Corps officials stated that turnover affected the agency's ability to maintain continuity in oversight of post operations. In 2002, we also found that informal supervisory mechanisms and a limited number of staff hampered Peace Corps efforts to ensure even application of supervision and oversight. The agency had some formal mechanisms for documenting and assessing post practices, including the annual evaluation and testing of post emergency action plans and regional safety and security officer reports on post practices. Nonetheless, regional directors and country directors relied primarily on informal supervisory mechanisms, such as staff meetings, conversations with volunteers, and e-mail to ensure that staff were doing an adequate job of implementing the safety and security framework. One country director observed that it was difficult to oversee program managers' site development or monitoring activities because the post did not have a formal system for performing these tasks. We also reported that Peace Corps' capacity to monitor and provide feedback to posts on their safety and security performance was limited by the small number of staff available to perform relevant tasks. We noted that the agency had hired three field-based security and safety specialists to examine and help improve post practices, and that the Inspector General also played an important role in helping posts implement the agency's safety and security framework. However, we reported that between October 2000 and May 2002 the safety and security specialists had been able to provide input to only about one-third of Peace Corps' posts while the Inspector General had issued findings on safety and security practices at only 12 posts over 2 years. In addition, we noted that Peace Corps had no system for tracking post compliance with Inspector General recommendations. We reported that the agency's guidance was not always clear. The agency's safety and security framework outlines requirements that posts are expected to comply with but did not often specify required activities, documentation, or criteria for judging actual practices--making it difficult for staff to understand what was expected of them. Many posts had not developed clear reporting and response procedures for incidents such as responding to sexual harassment. The agency's coordinator for volunteer safety and security stated that unclear procedures made it difficult for senior staff, including regional directors, to establish a basis for judging the quality of post practices. The coordinator also observed that, at some posts, field-based safety and security officers had found that staff members did not understand what had to be done to ensure compliance with agency policies. The agency has taken steps to reduce staff turnover, improve supervision and oversight mechanisms, and clarify its guidance. In February 2003, Congress passed a law to allow U.S. direct hires whose assignments involve the safety of Peace Corps volunteers to serve for more than 5 years. The Peace Corps Director has employed his authority under this law to designate 23 positions as exempt from the 5-year rule. These positions include nine field-based safety and security officers, the three regional safety and security desk officers working at agency headquarters, as well as the crime data analyst and other staff in the headquarters office of safety and security. They do not include the associate director for safety and security, the compliance officer, or staff from the office of the Inspector General. Peace Corps officials stated that they are about to hire a consultant who will conduct a study to provide recommendations about adding additional positions to the current list. To strengthen supervision and oversight, Peace Corps has increased the number of staff tasked with safety and security responsibilities and created the office of safety and security that centralizes all security- related activities under the direction of a newly created associate directorate for safety and security. The agency's new crime data analyst is a part of this directorate. In addition, Peace Corps has appointed six additional field-based safety and security officers, bringing the number of such individuals on duty to nine (with three more positions to be added by the end of 2004); authorized each post to appoint a safety and security coordinator to provide a point of contact for the field-based safety and security officers and to assist country directors in ensuring their post's compliance with agency policies, including policies pertaining to monitoring volunteers and responding to their safety and security concerns (all but one post have filled this position); appointed safety and security desk officers in each of Peace Corps' three regional directorates in Washington, D.C., to monitor post compliance in conjunction with each region's country desk officers; and appointed a compliance officer, reporting to the Peace Corps Director, to independently examine post practices and to follow up on Inspector General recommendations on safety and security. In response to our recommendation that Peace Corps' Director develop indicators to assess the effectiveness of the new initiatives and include these in the agency's annual Government Performance and Results Act reports, Peace Corps has expanded its reports to include 10 quantifiable indicators of safety and security performance. To clarify agency guidance, Peace Corps has created a "compliance tool" or checklist that provides a fairly detailed and explicit framework for headquarters staff to employ in monitoring post efforts to put Peace Corps' safety and security guidance into practice in their countries, strengthened guidance on volunteer site selection and development, developed standard operating procedures for post emergency action plans, concluded a protocol clarifying that the Inspector General's staff has responsibility for coordinating the agency's response to crimes against volunteers. These efforts have enhanced Peace Corps' ability to improve safety and security practices in the field. The threefold expansion in the field-based safety and security officer staff has increased the agency's capacity to support posts in developing and applying effective safety and security policies. Regional safety and security officers at headquarters and the agency's compliance officer monitor the quality of post practices. All posts were required to certify that they were in compliance with agency expectations by the end of June 2003. Since that time, a quarterly reporting system has gone into effect wherein posts communicate with regional headquarters regarding the status of their safety and security systems and practices. The country desks and the regional safety and security officers, along with the compliance officer, have been reviewing the emergency action plans of the posts and providing them with feedback and suggestions for improvement. The compliance officer has created and is applying a matrix to track post performance in addressing issues deriving from a variety of sources, including application of the agency's safety and security compliance tool and Inspector General reports. The compliance officer and staff from one regional office described their efforts, along with field- based safety and security staff and program experts from headquarters, to ensure an adequate response from one post where the Inspector General had found multiple safety and security weaknesses. However, efforts to put the new system in place are incomplete. As already noted, the agency has developed, but not yet introduced, an improved system for collecting and analyzing crime data. The new associate director of safety and security observes that the agency's field-based safety and security officers come from diverse backgrounds and that some have been in their positions for only a few months. All have received training via the State Department's bureau of diplomatic security. However, they are still employing different approaches to their work. Peace Corps is preparing guidance for these officers that would provide them with a uniform approach to conducting their work and reporting the results of their analyses, but the guidance is still in draft form. The Compliance Officer has completed detailed guidance for crafting emergency action plans, but this guidance was distributed to the field only at the beginning of this month. Moreover, following up on our 2002 recommendation, the agency's Deputy Director is heading up an initiative to revise and strengthen the indicators that the agency uses to judge the quality of all aspects of its operations, including ensuring volunteer safety and security, under the Government Performance and Results Act. 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 further information regarding this statement, please contact Phyllis Anderson, Assistant Director, International Affairs and Trade, at (202) 512-7364 or [email protected]. Individuals making key contributions to this statement were Michael McAtee, Suzanne Dove, Christina Werth, Richard Riskie, Bruce Kutnick, Lynn Cothern, and Martin de Alteriis. 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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About 7,500 Peace Corps volunteers currently serve in 70 countries. The administration intends to increase this number to about 14,000. Volunteers often live in areas with limited access to reliable communications, police, or medical services. As Americans, they may be viewed as relatively wealthy and, hence, good targets for crime. In this testimony, GAO summarizes findings from its 2002 report Peace Corps: Initiatives for Addressing Safety and Security Challenges Hold Promise, but Progress Should be Assessed, GAO- 02-818, on (1) trends in crime against volunteers and Peace Corps' system for generating information, (2) the agency's field implementation of its safety and security framework, and (3) the underlying factors contributing to the quality of these practices. The full extent of crime against Peace Corps volunteers is unclear due to significant under-reporting. However, Peace Corps' reported rates for most types of assaults have increased since the agency began collecting data in 1990. The agency's data analysis has produced useful insights, but additional analyses could help improve anti-crime strategies. Peace Corps has hired an analyst to enhance data collection and analysis to help the agency develop better-informed intervention and prevention strategies. In 2002, we reported that Peace Corps had developed safety and security policies but that efforts to implement these policies in the field had produced varying results. Some posts complied, but others fell short. Volunteers were generally satisfied with training. However, some housing did not meet standards and, while all posts had prepared and tested emergency action plans, many plans had shortcomings. Evidence suggests that agency initiatives have not yet eliminated this unevenness. The inspector general continues to find shortcomings at some posts. However, recent emergency action plan tests show an improved ability to contact volunteers in a timely manner. In 2002, we found that uneven supervision and oversight, staff turnover, and unclear guidance hindered efforts to ensure quality practices. The agency has taken action to address these problems. To strengthen supervision and oversight, it established an office of safety and security, supported by three senior staff at headquarters, nine field-based safety and security officers, and a compliance officer. In response to our recommendations, Peace Corps was granted authority to exempt 23 safety and security positions from the "5- year rule"--a statutory restriction on tenure. It also adopted a framework for monitoring post compliance and quantifiable performance indicators. However, the agency is still clarifying guidance, revising indicators, and establishing a performance baseline.
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The Schedules of Federal Debt including the accompanying notes present fairly, in all material respects, in conformity with U.S. generally accepted accounting principles, the balances as of September 30, 2007, 2006, and 2005 for Federal Debt Managed by BPD; the related Accrued Interest Payables and Net Unamortized Premiums and Discounts; and the related increases and decreases for the fiscal years ended September 30, 2007 and 2006. BPD maintained, in all material respects, effective internal control relevant to the Schedule of Federal Debt related to financial reporting and compliance with applicable laws and regulations as of September 30, 2007, that provided reasonable assurance that misstatements, losses, or noncompliance material in relation to the Schedule of Federal Debt would be prevented or detected on a timely basis. Our opinion is based on criteria established under 31 U.S.C. SS 3512 (c), (d), the Federal Managers' Financial Integrity Act, and the Office of Management and Budget (OMB) Circular A- 123, Management's Responsibility for Internal Control. We found matters involving information security controls that we do not consider to be significant deficiencies. We will communicate these matters to BPD's management, along with our recommendations for improvement, in a separate letter to be issued at a later date. Our tests for compliance in fiscal year 2007 with the statutory debt limit disclosed no instances of noncompliance that would be reportable under U.S. generally accepted government auditing standards or applicable OMB audit guidance. However, the objective of our audit of the Schedule of Federal Debt for the fiscal year ended September 30, 2007, was not to provide an opinion on overall compliance with laws and regulations. Accordingly, we do not express such an opinion. BPD's Overview on Federal Debt Managed by the Bureau of the Public Debt contains information, some of which is not directly related to the Schedules of Federal Debt. We do not express an opinion on this information. However, we compared this information for consistency with the schedules and discussed the methods of measurement and presentation with BPD officials. Based on this limited work, we found no material inconsistencies with the schedules or U.S. generally accepted accounting principles. Management is responsible for (1) preparing the Schedules of Federal Debt in conformity with U.S. generally accepted accounting principles; (2) establishing, maintaining, and assessing internal control to provide reasonable assurance that the broad control objectives of the Federal Managers' Financial Integrity Act are met; and (3) complying with applicable laws and regulations. We are responsible for obtaining reasonable assurance about whether (1) the Schedules of Federal Debt are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles and (2) management maintained effective relevant internal control as of September 30, 2007, the objectives of which are the following: Financial reporting: Transactions are properly recorded, processed, and summarized to permit the preparation of the Schedule of Federal Debt for the fiscal year ended September 30, 2007, in conformity with U.S. generally accepted accounting principles. Compliance with laws and regulations: Transactions related to the Schedule of Federal Debt for the fiscal year ended September 30, 2007, are executed in accordance with laws governing the use of budget authority and with other laws and regulations that could have a direct and material effect on the Schedule of Federal Debt. We are also responsible for (1) testing compliance with selected provisions of laws and regulations that have a direct and material effect on the Schedule of Federal Debt and (2) performing limited procedures with respect to certain other information appearing with the Schedules of Federal Debt. In order to fulfill these responsibilities, we examined, on a test basis, evidence supporting the amounts and disclosures in the Schedules of Federal Debt; assessed the accounting principles used and any significant estimates evaluated the overall presentation of the Schedules of Federal Debt; obtained an understanding of the entity and its operations, including its internal control relevant to the Schedule of Federal Debt as of September 30, 2007, related to financial reporting and compliance with laws and regulations (including execution of transactions in accordance with budget authority); tested relevant internal controls over financial reporting and compliance, and evaluated the design and operating effectiveness of internal control relevant to the Schedule of Federal Debt as of September 30, 2007; considered the process for evaluating and reporting on internal control and financial management systems under the Federal Managers' Financial Integrity Act; and tested compliance in fiscal year 2007 with the statutory debt limit (31 U.S.C. SS 3101(b) (Supp IV 2005), as amended by Pub. L. No. 109-182, 120 Stat. 289 (2006), and Pub L. No. 110-91, 121 Stat. 988 (2007)). We did not evaluate all internal controls relevant to operating objectives as broadly defined by the Federal Managers' Financial Integrity Act, such as those controls relevant to preparing statistical reports and ensuring efficient operations. We limited our internal control testing to controls over financial reporting and compliance. Because of inherent limitations in internal control, misstatements due to error or fraud, losses, or noncompliance may nevertheless occur and not be detected. We also caution that projecting our evaluation to future periods is subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with controls may deteriorate. We did not test compliance with all laws and regulations applicable to BPD. We limited our tests of compliance to a selected provision of law that has a direct and material effect on the Schedule of Federal Debt for the fiscal year ended September 30, 2007. We caution that noncompliance may occur and not be detected by these tests and that such testing may not be sufficient for other purposes. We performed our work in accordance with U.S. generally accepted government auditing standards and applicable OMB audit guidance. In commenting on a draft of this report, BPD concurred with the conclusions in our report. The comments are reprinted in appendix I. Federal debt managed by the Bureau of the Public Debt (BPD) comprises debt held by the public and debt held by certain federal government accounts, the latter of which is referred to as intragovernmental debt holdings. As of September 30, 2007 and 2006, outstanding gross federal debt managed by the bureau totaled $8,993 and $8,493 billion, respectively. The increase in gross federal debt of $500 billion during fiscal year 2007 was due to an increase in gross intragovernmental debt holdings of $294 billion and an increase in gross debt held by the public of $206 billion. As Figure 1 illustrates, both intragovernmental debt holdings and debt held by the public have steadily increased since fiscal year 2003. The primary reason for the increases in intragovernmental debt holdings is the annual surpluses in the Federal Old-Age and Survivors Insurance Trust Fund, Civil Service Retirement and Disability Fund, Federal Hospital Insurance Trust Fund, Federal Disability Insurance Trust Fund, and Military Retirement Fund. The increases in debt held by the public are due primarily to total federal spending exceeding total federal revenues. As of September 30, 2007, gross debt held by the public totaled $5,049 billion and gross intragovernmental debt holdings totaled $3,944 billion. Total Gross Federal Debt Outstanding (in billions) Interest expense incurred during fiscal year 2007 consists of (1) interest accrued and paid on debt held by the public or credited to accounts holding intragovernmental debt during the fiscal year, (2) interest accrued during the fiscal year, but not yet paid on debt held by the public or credited to accounts holding intragovernmental debt, and (3) net amortization of premiums and discounts. The primary components of interest expense are interest paid on the debt held by the public and interest credited to federal government trust funds and other federal government accounts that hold Treasury securities. The interest paid on the debt held by the public affects the current spending of the federal government and represents the burden in servicing its debt (i.e., payments to outside creditors). Interest credited to federal government trust funds and other federal government accounts, on the other hand, does not result in an immediate outlay of the federal government because one part of the government pays the interest and another part receives it. However, this interest represents a claim on future budgetary resources and hence an obligation on future taxpayers. This interest, when reinvested by the trust funds and other federal government accounts, is included in the programs' excess funds not currently needed in operations, which are invested in federal securities. During fiscal year 2007, interest expense incurred totaled $433 billion, interest expense on debt held by the public was $239 billion, and $194 billion was interest incurred for intragovernmental debt holdings. As Figure 2 illustrates, total interest expense has increased in fiscal years 2003 through 2007. (in billions) Debt held by the public reflects how much of the nation's wealth has been absorbed by the federal government to finance prior federal spending in excess of total federal revenues. As of September 30, 2007 and 2006, gross debt held by the public totaled $5,049 billion and $4,843 billion, respectively (see Figure 1), an increase of $206 billion. The borrowings and repayments of debt held by the public increased from fiscal year 2006 to 2007. After Treasury took into account the increased issuances of State and Local Government Series securities, Treasury decided to finance the remaining current operations using more short-term securities. Callable securities mature between fiscal years 2013 and 2015, but are reported by their call date. Debt Held by the Public, cont. The government also issues to the public, state and local governments, and foreign governments and central banks nonmarketable securities, which cannot be resold, and have maturity dates from on demand to more than 10 years. As of September 30, 2007, nonmarketable securities totaled $621 billion, or 12 percent of debt held by the public. As of that date, nonmarketable securities primarily consisted of savings securities totaling $197 billion and special securities for state and local governments totaling $297 billion. The Federal Reserve Banks (FRBs) act as fiscal agents for Treasury, as permitted by the Federal Reserve Act. As fiscal agents for Treasury, the FRBs play a significant role in the processing of marketable book-entry securities and paper U.S. savings bonds. For marketable book-entry securities, selected FRBs receive bids, issue book-entry securities to awarded bidders and collect payment on behalf of Treasury, and make interest and redemption payments from Treasury's account to the accounts of security holders. For paper U.S. savings bonds, selected FRBs sell, print, and deliver savings bonds; redeem savings bonds; and handle the related transfers of cash. Callable securities mature between fiscal years 2012 and 2015, but are reported by their call date. Intragovernmental debt holdings represent balances of Treasury securities held by over 230 individual federal government accounts with either the authority or the requirement to invest excess receipts in special U.S. Treasury securities that are guaranteed for principal and interest by the full faith and credit of the U.S. Government. Intragovernmental debt holdings primarily consist of balances in the Social Security, Medicare, Military Retirement, and Civil Service Retirement and Disability trust funds. As of September 30, 2007, such funds accounted for $3,419 billion, or 87 percent, of the $3,944 billion intragovernmental debt holdings balances (see Figure 4). As of September 30, 2007 and 2006, gross intragovernmental debt holdings totaled $3,944 billion and $3,650 billion, respectively (see Figure 1), an increase of $294 The majority of intragovernmental debt holdings are Government Account Series (GAS) securities. GAS securities consist of par value securities and market-based securities, with terms ranging from on demand out to 30 years. Par value securities are issued and redeemed at par (100 percent of the face value), regardless of current market conditions. Market-based securities, however, can be issued at a premium or discount and are redeemed at par value on the maturity date or at market value if redeemed before the maturity date. Com ponents of Intragovernm ental Debt Holdings as of Septem ber 30, 2007 The Social Security trust funds consist of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund. In addition, the Medicare trust funds are made up of the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund. On May 17, 2007, a house bill was introduced and approved to increase the debt limit from $8,965 billion to $9,815 billion. The bill was then referred to the Senate Committee on Finance on May 21, 2007, where it gained approval on September 12, 2007. Projections determined that the United States would hit the statutory debt limit on October 1, 2007, and consequently, the full senate passed this measure to raise the debt limit by $850 billion on September 27, 2007. On September 29, 2007, Public Law 110-91 was enacted, which raised the statutory debt ceiling to $9,815 billion. Thirty-Year Bond Issuance/Discontinuation of 3-Year Note The thirty-year bond was re-introduced in February 2006 with semi-annual issuance planned. In August 2006, Treasury announced that the 30-year bond would be issued on a quarterly basis beginning in February 2007. The February issue was reopened in May 2007, followed by an original issue in August 2007 that will be reopened in November 2007. This quarterly issuance pattern has benefited the Separate Trading of Registered Interest and Principal of Securities (STRIPS) market by creating interest payments for February, May, August and November. Beginning in February 2006, the auction and issuance of the monthly 5-year note was shifted to month end to accommodate the re-introduction of the 30-year bond. Additionally, Treasury's ongoing monitoring of the fiscal year's economic outlook has resulted in the discontinuance of the 3- year note. Discontinuance of the 3-year note will allow Treasury to ensure large liquid benchmark issuances, better balance its portfolio, and manage the fiscal outlook. The final scheduled auction of the 3-year note was held on May 7, 2007. Discontinuance of Long-Term Securities in Legacy Treasury Direct On January 18, 2007, a final amendment to the Uniform Offering Circular (UOC) was published in the Federal Register clarifying that the Treasury Department may announce certain marketable Treasury securities as not eligible for purchase or holding in Legacy Treasury Direct. Legacy Treasury Direct, which was implemented in 1986, will be phased out and replaced by the newer, online TreasuryDirect system. To assist with this phasing out, the offering of longer-term securities in Legacy Treasury Direct was discontinued. Since January 2007, 30-year bonds and 20-year TIPS are no longer available in Legacy Treasury Direct. This amendment also clarified that the announcement for each auction, in conjunction with the UOC, provides the terms and conditions for the sale and issuance of marketable Treasury bills, notes, bonds, and TIPS. TreasuryDirect is an Internet-accessed system that enables investors to purchase the full range of Treasury securities and manage their holdings in a single account. Sensitive online transactions such as bank account changes and securities sales and transfers could become vulnerable to fraud. In July 2007, BPD initiated certified paper requests to process these sensitive transactions. This third-party investor identification helps mitigate risk and assure individual investors of the security of their Treasury Direct investments by providing additional verification and a written record of transaction requests. Significant Events in FY 2007, cont. Postal Retiree Health Benefits Fund On December 20, 2006, the President signed H.R. 6407, which enacted Public Law 109-435, the "Postal Accountability and Enhancement Act." This Act created a new Government Account Series Trust Fund, the Postal Retiree Health Benefits Fund. This fund is administered by the Office of Personnel Management and receives transfers from the United States Postal Service (USPS). The initial transfer in the amount of $3 billion was received and invested in par value securities on April 6, 2007. Additional amounts of $17.1 billion and $5.4 billion were transferred and invested on June 30, 2007 and September 28, 2007, respectively. The fund is not expected to make payouts until 2017. Beginning with the accounting date of June 1, 2007, BPD is publishing key daily debt-related financial data on our website, http://www.treasurydirect.gov/govt/reports/pd/feddebt/feddebt_daily.htm. Similar financial information is currently published monthly. During the past fiscal year, BPD strengthened internet communications with customers by redesigning the government section of the Treasurydirect.gov website. Additional on-line resources are now available and the overall functionality and accessibility features are greatly improved. The Schedules of Federal Debt daily reporting was implemented to support the Treasury strategic objective to "make accurate, timely financial information on U.S. Government programs readily available." The enhanced financial reporting is geared toward providing our customers more timely information and is one of BPD's strategic goals for FY 2007. Federal debt outstanding is one of the largest legally binding obligations of the federal government. Nearly all the federal debt has been issued by the Treasury with a small portion being issued by other federal government agencies. Treasury issues debt securities for two principal reasons, (1) to borrow needed funds to finance the current operations of the federal government and (2) to provide an investment and accounting mechanism for certain federal government accounts' excess receipts, primarily trust funds. Total gross federal debt outstanding has dramatically increased over the past 25 years from $1,142 billion as of September 30, 1982, to $8,993 billion as of September 30, 2007 (see Figure 5). Large budget deficits emerged during the 1980's due to tax policy decisions and increased outlays for defense and domestic programs. Through fiscal year 1997, annual federal deficits continued to be large and debt continued to grow at a rapid pace. As a result, total federal debt increased almost five fold between 1982 and 1997. By fiscal year 1998, federal debt held by the public was beginning to decline. In fiscal years 1998 through 2001, the amount of debt held by the public fell by $476 billion, from $3,815 billion to $3,339 billion. However, higher Federal outlays and tax policy decisions have resulted in an increase in debt held by the public from $3,339 billion in 2001 to $5,049 billion in 2007. Historical Perspective, cont. Even in those years where debt held by the public declined, total federal debt increased because of increases in intragovernmental debt holdings. Over the past 4 fiscal years, intragovernmental debt holdings increased by $1,085 billion, from $2,859 billion as of September 30, 2003, to $3,944 billion as of September 30, 2007. By law, trust funds have the authority or are required to invest surpluses in federal securities. As a result, the intragovernmental debt holdings balances primarily represent the cumulative surplus of funds due to the trust funds' cumulative annual excess of tax receipts, interest credited, and other collections compared to spending. As shown in Figure 6, interest rates have fluctuated over the past 25 years. The average interest rates reflected here represent the original issue weighted effective yield on securities outstanding at the end of the fiscal year. Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2007 and 2006 (Dollars in Millions) (Note 2) (Note 3) (Discounts) (Discounts) ($35,531) (48,568) (12,630) Accrued Interest (Note 4) (48,568) (12,630) Net Amortization (Note 4) (43,934) (43,934) (40,165) (1,159) (48,776) Accrued Interest (Note 4) (48,776) Net Amortization (Note 4) (49,500) (49,500) ($39,441) The accompanying notes are an integral part of these schedules. Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2007 and 2006 (Dollars in Millions) Note 1. Significant Accounting Policies The Schedules of Federal Debt Managed by the Bureau of the Public Debt (BPD) have been prepared to report fiscal year 2007 and 2006 balances and activity relating to monies borrowed from the public and certain federal government accounts to fund the U.S. government's operations. Permanent, indefinite appropriations are available for the payment of interest on the federal debt and the redemption of Treasury securities. The Constitution empowers the Congress to borrow money on the credit of the United States. The Congress has authorized the Secretary of the Treasury to borrow monies to operate the federal government within a statutory debt limit. Title 31 U.S.C. authorizes Treasury to prescribe the debt instruments and otherwise limit and restrict the amount and composition of the debt. BPD, an organizational entity within the Fiscal Service of the Department of the Treasury, is responsible for issuing Treasury securities in accordance with such authority and to account for the resulting debt. In addition, BPD has been given the responsibility to issue Treasury securities to trust funds for trust fund receipts not needed for current benefits and expenses. BPD issues and redeems Treasury securities for the trust funds based on data provided by program agencies and other Treasury entities. The schedules were prepared in conformity with U.S. generally accepted accounting principles and from BPD's automated accounting system, Public Debt Accounting and Reporting System. Interest costs are recorded as expenses when incurred, instead of when paid. Certain Treasury securities are issued at a discount or premium. These discounts and premiums are amortized over the term of the security using an interest method for all long term securities and the straight line method for short term securities. The Department of the Treasury also issues Treasury Inflation-Protected Securities (TIPS). The principal for TIPS is adjusted daily over the life of the security based on the Consumer Price Index for all Urban Consumers. Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2007 and 2006 (Dollars in Millions) Note 2. Federal Debt Held by the Public As of September 30, 2007 and 2006, Federal Debt Held by the Public consisted of the following: Total Federal Debt Held by the Public Treasury issues marketable bills at a discount and pays the par amount of the security upon maturity. The average interest rate on Treasury bills represents the original issue effective yield on securities outstanding as of September 30, 2007 and 2006, respectively. Treasury bills are issued with a term of one year or less. Treasury issues marketable notes and bonds as long-term securities that pay semi-annual interest based on the securities' stated interest rate. These securities are issued at either par value or at an amount that reflects a discount or a premium. The average interest rate on marketable notes and bonds represents the stated interest rate adjusted by any discount or premium on securities outstanding as of September 30, 2007 and 2006. Treasury notes are issued with a term of 2 - 10 years and Treasury bonds are issued with a term of more than 10 years. Treasury also issues TIPS that have interest and redemption payments, which are tied to the Consumer Price Index, a widely used measure of inflation. TIPS are issued with a term of 5 years or more. At maturity, TIPS are redeemed at the inflation-adjusted principal amount, or the original par value, whichever is greater. TIPS pay a semi-annual fixed rate of interest applied to the inflation-adjusted principal. The TIPS Federal Debt Held by the Public inflation-adjusted principal balance includes inflation of $50,517 million and $43,927 million as of September 30, 2007 and 2006, respectively. Federal Debt Held by the Public includes federal debt held outside of the U. S. government by individuals, corporations, Federal Reserve Banks (FRB), state and local governments, and foreign governments and central banks. The FRB owned $775 billion and $765 billion of Federal Debt Held by the Public as of September 30, 2007 and 2006, respectively. These securities are held in the FRB System Open Market Account (SOMA) for the purpose of conducting monetary policy. Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2007 and 2006 (Dollars in Millions) Note 2. Federal Debt Held by the Public (continued) Treasury issues nonmarketable securities at either par value or at an amount that reflects a discount or a premium. The average interest rate on the nonmarketable securities represents the original issue weighted effective yield on securities outstanding as of September 30, 2007 and 2006. Nonmarketable securities are issued with a term of on demand to more than 10 years. As of September 30, 2007 and 2006, nonmarketable securities consisted of the following: State and Local Government Series Government Account Series (GAS) securities are nonmarketable securities issued to federal government accounts. Federal Debt Held by the Public includes GAS securities issued to certain federal government accounts. One example is the GAS securities held by the Government Securities Investment Fund (G-Fund) of the federal employees' Thrift Savings Plan. Federal employees and retirees who have individual accounts own the GAS securities held by the fund. For this reason, these securities are considered part of the Federal Debt Held by the Public rather than Intragovernmental Debt Holdings. The GAS securities held by the G-Fund consist of overnight investments redeemed one business day after their issue. The net increase in amounts borrowed from the fund during fiscal years 2007 and 2006 are included in the respective Borrowings from the Public amounts reported on the Schedules of Federal Debt. Fiscal years-end September 30, 2007 and 2006, occurred on a Sunday and Saturday, respectively. As a result, $26,591 million and $31,656 million of marketable Treasury notes matured but not repaid is included in the balance of the total Federal Debt Held by the Public as of September 30, 2007 and 2006, respectively. Settlement of these debt repayments occurred on Monday, October 1, 2007, and Monday, October 2, 2006. Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2007 and 2006 (Dollars in Millions) Foreign Service Retirement and Disability Fund National Service Life Insurance Fund Social Security Administration (SSA); Office of Personnel Management (OPM); Department of Health and Human Services (HHS); Department of Defense (DOD); Department of Labor (DOL); Federal Deposit Insurance Corporation (FDIC); Department of Energy (DOE); Department of Housing and Urban Development (HUD); Department of the Treasury (Treasury); Department of State (DOS); Department of Transportation (DOT); Department of Veterans Affairs (VA). Intragovernmental Debt Holdings primarily consist of GAS securities. Treasury issues GAS securities at either par value or at an amount that reflects a discount or a premium. The average interest rates for fiscal years 2007 and 2006 were 5.1 and 5.2 percent, respectively. The average interest rate represents the original issue weighted effective yield on securities outstanding as of September 30, 2007 and 2006. GAS securities are issued with a term of on demand to 30 years. GAS securities include TIPS, which are reported at an inflation-adjusted principal balance using the Consumer Price Index. As of September 30, 2007 and 2006, the inflation-adjusted principal balance included inflation of $28,643 million and $19,576 million, respectively. Fiscal years-ended September 30, 2007 and 2006, occurred on a Sunday and Saturday, respectively. As a result, $53 million and $360 million of GAS securities held by Federal Agencies matured but not repaid is included in the balance of the Intragovernmental Debt Holdings as of September 30, 2007 and 2006, respectively. Settlement of these debt repayments occurred on Monday, October 1, 2007 and Monday, October 2, 2006. Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2007 and 2006 (Dollars in Millions) Note 4. Interest Expense Interest expense on Federal Debt Managed by BPD for fiscal years 2007 and 2006 consisted of the Federal Debt Held by the Public Net Amortization of Premiums and Discounts Total Interest Expense on Federal Debt Held by the Public Net Amortization of Premiums and Discounts (1,116) (3,269) Total Interest Expense on Intragovernmental Debt Total Interest Expense on Federal Debt Managed by BPD The valuation of TIPS is adjusted daily over the life of the security based on the Consumer Price Index for all Urban Consumers. This daily adjustment is an interest expense for the Bureau of the Public Debt. Accrued interest on Federal Debt Held by the Public includes inflation adjustments of $10,276 million and $14,512 million for fiscal years 2007 and 2006, respectively. Accrued interest on Intragovernmental Debt Holdings includes inflation adjustments of $378 million and $607 million for fiscal years 2007 and 2006, respectively. Notes to the Schedules of Federal Debt Managed by the Bureau of the Public Debt For the Fiscal Years Ended September 30, 2007 and 2006 (Dollars in Millions) Note 5. Fund Balance With Treasury The Fund Balance with Treasury, a non-entity, intragovernmental account, is not included on the Schedules of Federal Debt and is presented for informational purposes. In addition to the individual named above, Dawn B. Simpson, Assistant Director; Dean D. Carpenter; Emily M. Clancy; Dennis L. Clarke; Chau L. Dinh; Lisa M. Galvan-Trevino; Vivian M. Gutierrez; Erik S. Huff; Bret R. Kressin; Nicole M. McGuire; and Jay R. McTigue made key contributions to this report.
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GAO is required to audit the consolidated financial statements of the U.S. government. Due to the significance of the federal debt held by the public to the governmentwide financial statements, GAO has also been auditing the Bureau of the Public Debt's (BPD) Schedules of Federal Debt annually. The audit of these schedules is done to determine whether, in all material respects, (1) the schedules are reliable and (2) BPD management maintained effective internal control relevant to the Schedule of Federal Debt. Further, GAO tests compliance with a significant selected provision of law related to the Schedule of Federal Debt. Federal debt managed by BPD consists of Treasury securities held by the public and by certain federal government accounts, referred to as intragovernmental debt holdings. The level of debt held by the public reflects how much of the nation's wealth has been absorbed by the federal government to finance prior federal spending in excess of federal revenues. Intragovernmental debt holdings represent balances of Treasury securities held by federal government accounts, primarily federal trust funds such as Social Security, that typically have an obligation to invest their excess annual receipts over disbursements in federal securities. In GAO's opinion, BPD's Schedules of Federal Debt for fiscal years 2007 and 2006 were fairly presented in all material respects and BPD maintained effective internal control relevant to the Schedule of Federal Debt as of September 30, 2007. GAO also found no instances of noncompliance in fiscal year 2007 with the statutory debt limit. As of September 30, 2007 and 2006, federal debt managed by BPD totaled about $8,993 billion and $8,493 billion, respectively. Total federal debt increased over each of the last 4 fiscal years. Total federal spending has exceeded total federal revenues which have resulted in increases in debt held by the public. Further, certain trust funds (e.g., Social Security) continue to run cash surpluses, resulting in increased intragovernmental debt holdings since the federal government spends these surpluses on other operating costs and replaces them with federal debt instruments. These debt holdings are backed by the full faith and credit of the U.S. government and represent a priority call on future budgetary resources. As a result, total gross federal debt has increased about 33 percent between the end of fiscal years 2003 and 2007. On September 29, 2007, legislation was enacted to raise the statutory debt limit by $850 billion to $9,815 billion. This was the third occurrence since the end of fiscal year 2003 that the statutory debt limit had to be raised to avoid breaching the statutory debt limit. During that time, the debt limit has increased by over $2.4 trillion, or about 33 percent, from $7,384 billion on September 30, 2003, to the current limit of $9,815 billion.
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DOD operates a worldwide supply system to buy, store, and distribute inventory items. Through this system, DOD manages several million types of consumable items, most of which are managed by DLA. DLA is DOD's largest combat support agency, providing worldwide logistics support in both peacetime and wartime to the military services as well as civilian agencies and foreign countries. DLA supplies almost every consumable item the military services need to operate. To do this, DLA operates three supply centers, including the Defense Supply Center in Philadelphia, Pennsylvania which is responsible for procuring nearly all the food, clothing, and medical supplies used by the military. In addition, DLA has supply centers in Richmond, Virginia and Columbus, Ohio. The Defense Distribution Center operates a worldwide network of 25 distribution depots that receive, store, and issue supplies. In addition, DLA's Defense Energy Support Center has the mission of purchasing fuel for the military service and other defense agencies. DLA also helps dispose of excess or unusable materiel and equipment through its Defense Reutilization and Marketing Service. To meet its mission, DLA relies on contractors as suppliers of the commodities and as providers of services including the acquisition and distribution of certain commodities. Traditionally, DLA buys consumable items in large quantities, stores them in distribution depots until they are requested by the military services, and then ships them to a service facility where they are used. For example, DLA procures military uniforms through competitive contracts. Defense Supply Center-Philadelphia's Clothing and Textile Directorate procures commodities such as battle dress uniforms, footwear, and body armor directly from contractors and stores them until they are needed by the services. DLA also relies on service contractors to help with the acquisition, management, and distribution of commodities. For example, DLA has a prime vendor arrangement in which a distributor of a commercial product line provides those products and related services to all of DLA's customers in an assigned region within a specified period of time after order placement. Under the prime vendor process, a single vendor buys items from a variety of manufacturers and the inventory is stored in commercial warehouses. A customer orders the items from the prime vendor. Once the Defense Supply Center-Philadelphia approves the order, the prime vendor fills, ships, and tracks the order through final acceptance. The prime vendor then submits an invoice to Defense Supply Center-Philadelphia, which authorizes payment to the prime vendor and bills the customer. According to DLA, the benefits of prime vendor contracts include improved access to a wide range of high-quality products, rapid and predictable delivery, and reduced overhead charges. Other benefits of prime vendor contracts include significant reductions in the manpower needed to manage and warehouse these items at DLA and reduced transportation costs. In addition, prime vendor contracts provide for surge and broader mobilization capabilities, and worldwide customer support. DLA also uses service contractors to provide services other than the acquisition of commodities. For example, the Defense Reutilization and Marketing Service uses contractors to support the disposal of government equipment and supplies considered surplus or unnecessary to DOD's mission. Similarly, DLA uses service contractors to provide oversight, audit, and verification procedures for the destruction of DOD scrap property; operate Defense Reutilization and Marketing Office locations around the world including sites in Kuwait, Iraq, and Afghanistan; and run the Defense Distribution Center, Kuwait, Southwest Asia which provides distribution services and surge capability to all four service components to support the warfighters operating in the region. Current commodities distributed by the center are repair parts, barrier/construction materiel, clothing, textiles, and tents. The center also provides consolidated shipment and containerization services, as well as, routine logistic support to the military community in the U.S. Central Command's theater of operations. DLA determines what and how many items it buys based on requirements from its military service customers. Without a good understanding of customers' projected needs, DLA is not assured it is buying the right items in the right quantities at the right time. Properly defined requirements are therefore fundamental to obtaining good value for contracts administered through DLA. As with any contracting decision, a prerequisite to good outcomes is a match between well-defined requirements and available resources. Our previous testimonies before this committee on weapons system acquisition and service contracts have highlighted several cases where poorly defined and changing requirements have contributed to increased costs, as well as services that did not meet the department's needs. We also noted that the absence of well-defined requirements and clearly understood objectives complicates efforts to hold DOD and contractors accountable for poor acquisitions outcomes. In addition, requirements which are based on unrealistic assumptions make it impossible to execute programs that are within established cost, schedule, and performance targets. Our prior work has identified instances where problems in properly defining requirements can lead to ineffective or inefficient management of commodities. Inaccurate demand forecasting may result in inventory that does not match demand. The military services and DLA manage the acquisition and distribution of spare parts for defense weapon systems. Whereas the military services manage their own reparable spare parts, DLA provides the services with most of their consumable parts--that is, items of supply that are normally expended or intended to be used up beyond recovery. In prior work, we have reported that the Air Force, the Navy, and the Army had acquired billions of dollars of spare parts in excess to their current requirements. For example, for fiscal years 2004 to 2007, the Army had on average about $3.6 billion of spare parts inventory that exceeded current requirements, while also having inventory deficits that averaged about $3.5 billion. During that same time period, the Navy had secondary inventory that exceeded current requirements by an average of $7.5 billion dollars, or 40 percent of total inventory. Mismatches between inventory levels and current requirements were caused in part by inaccurate demand forecasting. In our Navy work, for example, we noted that requirements frequently changed after purchase decisions had been made and that the Navy had not adjusted certain inventory management practices to account for the unpredictability in demand. The military services' difficulty in forecasting demand for spare parts is among the reasons we have placed DOD's supply chain management on our high-risk series since 1990. In addition, we are currently reviewing DLA's management of consumable spare parts for its service customers. We are evaluating (1) the extent that DLA's spare parts inventory reflects the amounts needed to support current requirements and (2) the factors that have contributed to DLA having any excesses or deficits in secondary inventory. As part of our review, we expect to report on how demand forecasting may affect inventory levels compared with requirements and what actions DLA is taking to understand and mitigate problems with demand forecasting. Inaccurate requirements and supply forecasts can affect the availability of critical supplies and inventory for the military, which, in turn, can result in a diminished operational capability and increased risk to troops. For example, as we reported in 2005, the Army's failure to conduct an annual update of its war reserve requirements for spare parts since 1999, as well the Army's continued decisions to not fully fund war reserve spare parts, resulted in the inventory for some critical items being insufficient to meet initial wartime demand during Operation Iraqi Freedom. These items included lithium batteries, armored vehicle track shoes, and tires for 5-ton trucks, where demand exceeded supply by over 18 times the amount on hand. Similarly, while DLA had a model to forecast supply requirements for contingencies, this model did not produce an accurate demand forecast for all items, including Meals Ready-to-Eat. Therefore, Army officials had to manually develop forecasts for Operation Iraqi Freedom, but did not always have sufficient or timely information needed to forecast accurate supply requirements. As a result, they underestimated the demand for some items. For example, demand for Meals Ready-to-Eat exceeded supply in February, March, and April 2003, when monthly demand peaked at 1.8 million cases, while the inventory was only 500,000 cases. Some combat support units came within a day or two of exhausting their Meals Ready-to-Eat rations, putting Army and Marine Corps units at risk of running out of food if the supply distribution chain was interrupted. Unrealistic time frames for acquisition and delivery of commodities can also have negative impacts on obtaining value. We previously testified that the Army's decision to issue black berets to all of its forces in just 8 months placed enormous demands on DOD's procurement system. Due to the extremely short time frame for delivery of the berets to the Army, DLA contracting officials took a number of actions to expedite award of the contracts, including undertaking contract actions without providing for "full and open" competition as required by the Competition in Contracting Act of 1984. According to contract documents, the contract actions were not competed because of an "unusual and compelling urgency," one of the circumstances permitting other than full and open competition. Despite these actions, DLA was unable to meet its deadline due to quality and delivery problems and had to terminate several contracts because the contractors could not meet delivery requirements. When contracting for commodities or services, DLA has a number of choices regarding the contracting arrangements to use. Selecting the appropriate type is important because certain contracting arrangements may increase the government's cost risk whereas others transfer some of that cost risk to the contractor. We have previously testified before this committee that once the decision has been made to use contractors to support DOD's missions or operations, it is essential that DOD clearly defines its requirements and employs sound business practices, such as using appropriate contracting vehicles. For example, we testified that we had found numerous issues with DOD's use of time-and-materials contracts that increased the government's risks. These contracts are appropriate when specific circumstances justify the risks, but our findings indicate that they are often used as a default for a variety of reasons-- ease, speed, and flexibility when requirements or funding are uncertain. Time-and-materials contracts are considered high risk for the government because they provide no positive profit incentive to the contractor for cost control or labor efficiency and their use is supposed to be limited to cases where no other contract type is suitable. With regard to commodities, it is equally important that DLA use the appropriate contracting arrangements to result in the best value and lowest risk to the government. Our prior work over the past 10 years and the work of others has identified instances where using the wrong contracting arrangement led to the ineffective or inefficient acquisition of commodities. For example, as discussed above, when DLA was tasked to purchase black berets for the Army, the extremely short time frame placed DOD in a high-risk contracting situation. In their eagerness to serve the customer, DLA contracting officials shortcut normal contracting procedures to expedite awarding the contracts, allowing little time to plan for the purchase of the berets and little room to respond to production problems. In awarding a contract to one foreign firm, using other than full and open competition, the DLA contracting officer was confronted with a price that was 14 percent higher than the price of the domestic supplier. However, the contracting officer performed a price analysis and determined the price was fair and reasonable, explaining that given the deadline, there was no time to obtain detailed cost or pricing data, analyze those data, develop a negotiation position, negotiate with a firm, and then finally make the award. When competition was introduced into the process at a later date, prices declined. As another example of higher costs resulting from using a particular contract type to acquire commodities, we reported in July 2004 that the Air Force had used the Air Force Contract Augmentation Program contract to supply commodities for its heavy construction squadrons. While contractually permitted, the use of a cost- plus-award-fee contract as a supply contract may not be cost-effective. Under such contracts, the government reimburses the contractors' costs and pays an award fee that may be higher than warranted given the contractors' low level of risk when performing such tasks. Air Force officials recognized that the use of a cost-plus-award-fee contract to buy commodities may not be cost-effective and under the current contract commodities may be obtained using a variety of contracting arrangements. Similarly we noted in a 2007 report on the Army Corps of Engineers Restore Iraqi Oil Contract that DLA's Defense Energy Support Center was able to purchase fuel and supply products for the forces in Iraq more cheaply than the contractor because the Defense Energy Support Center was able to sign long-term contracts with the fuel suppliers, an acquisition strategy the contractor did not pursue because of the incremental funding provided by the Army. In addition, in 2008, the DOD Inspector General found that DLA was unable to effectively negotiate prices or obtain best value for noncompetitive spare parts when it contracted with an exclusive distributor--a company that represents parts suppliers to the U.S. government. Furthermore, the DOD Inspector General concluded that the exclusive distributor model was not a viable procurement alternative for DOD in part because of excessive pass-through charges, increased lead times to DOD, and an unnecessary layer of redundancy and cost. Our prior work reported that DLA has taken some steps to determine if the appropriate contracting arrangement is being used or if contractors should be used at all. As we reported in 2006, DLA has recognized that the prime vendor concept may not be suitable for all commodities and has begun adjusting acquisition strategies to reassign programs to a best procurement approach. For example, DLA evaluated the acquisition of food service equipment and determined not to continue acquiring food service equipment through a prime vendor. Instead, DLA decided to develop a new acquisition strategy that will require the development of a contractual relationship primarily with manufacturers or their representatives for equipment and incidental services. DLA has also initiated several actions aimed at strengthening oversight, such as modifying contracts to change the price verification process and establishing additional training for contracting officers and managers. In addition, DLA has taken some steps to determine whether contractors are the most efficient means to meet certain requirements. For example, in 2005, DLA conducted a public-private competition for warehousing functions at 68 sites used for disposing of surplus or unnecessary government equipment and supplies. DLA ultimately determined that it was more cost effective to retain the government employees at these sites than convert to contractor performance. In addition to ensuring requirements for contracts awarded through DLA have been properly defined and the appropriate type of contract has been put in place, proper contract oversight and management is essential to ensure DOD gets value for taxpayers' dollars and obtains quality commodities or services in a cost-efficient and effective manner. Failure to provide adequate oversight hinders the department's ability to address poor contractor performance and avoid negative financial and operational impacts. In previous testimony before this committee, we noted that we have reported on numerous occasions that DOD did not adequately manage and assess contractor performance to ensure that its business arrangements were properly executed. Managing and assessing post award performance entails various activities to ensure that the delivery of services meets the terms of the contract and requires adequate surveillance resources, proper incentives, and a capable workforce for overseeing contracting activities. If surveillance is not conducted, is insufficient, or not well documented, DOD is at risk of being unable to identify and correct poor contractor performance in a timely manner. As an agency responsible for billions of dollars of contracts for commodities and services, it is important that DLA ensure effective contract oversight and management and thereby obtain those commodities and services in an economic and efficient manner. However, we have identified several long-standing challenges that hinder DOD's effective management of contractors, including the need to ensure adequate personnel are in place to oversee and manage contractors, the importance of training, and the need to collect and share lessons learned. Our prior work has found while these challenges have affected DLA's ability to obtain value, in some cases DLA has also taken actions to address these challenges. First, having the right people with the right skills to oversee contractor performance is critical to ensuring the best value for the billions of dollars spent each year on contractor support. DOD's difficulty in ensuring appropriate oversight of contractors exists is among the reasons DOD contract management has been on GAO's high-risk series since 1992. While much of our work on contract management has been focused on weapons system acquisition and service contractors, we have found similar challenges with DOD's acquisition of commodities. In June 2006, we found that DLA officials were not conducting required price reviews for the prime vendor contracts for food service equipment and construction and equipment commodities. For example, the contracts for food service equipment required verification of price increases, but officials from the supply center were unable to provide documentation on why the price of an aircraft refrigerator increased from $13,825 in March 2002 to $32,642 in September 2004. Both logistics agency and supply center officials acknowledged that these problems occurred because management at the agency and supply center level were not providing adequate oversight to ensure that contracting personnel were monitoring prices. We also found poor contract management can cause lapses in contract support and can lead to operational challenges, safety hazards and waste. For example, in 2007 DLA was given the responsibility to contract for services to de-gas, store, and refill gas cylinders in Kuwait. Warfighters use gas cylinders for a variety of purposes including, but not limited to, caring for those who are hospitalized, equipment maintenance, and construction. However, as of July 2009, DLA has yet to compete and execute this contract. As a result, instead of receiving refilled cylinders from Kuwait, warfighters are continually buying full gas cylinders from local markets in the Middle East. This may lead to operational challenges and waste as warfighters must make efforts to purchase gases in Iraq while cylinders that could be refilled remain idle in Kuwait. A second long-term challenge for DOD's contract oversight and management is training. We have made multiple recommendations over the last decade that DOD improve the training of contract oversight personnel. We have found that DLA has recognized the need to improve training. As discussed above, our June 2006 report found that DLA officials were not conducting required price reviews for some prime vendor contracts. Senior DLA officials acknowledged that weaknesses in oversight led to pricing problems and stated that they were instituting corrective actions. Among the weaknesses were the lack of knowledge or skills of contracting personnel and a disregard for the contracting rules and regulations. To address this weakness, DLA has established additional training for contracting officers and managers. In addition, DOD concurred with our recommendation that the Director, DLA provide continual management oversight of the corrective actions taken to address pricing problems. DLA has also taken some actions to help ensure that contracting officer's representatives are properly trained. For example, DLA's Defense Reutilization and Marketing Service has recognized that performance-based contracts will only be effective if contracting officer's representatives accurately report contractor performance and contracting officers take appropriate actions. DLA has established contracting officer's representative training requirements to ensure these individuals are properly trained to carry out their responsibilities. These requirements increase for contracts that are more complex or present higher risks to the government. While we have not evaluated the performance of DLA contracting officer's representatives, our previous work shows that when contracting officer's representatives are properly trained, they can better ensure that contractors provide services and supplies more efficiently and effectively. In addition, a working group from DOD's panel on contracting integrity in September 2008 recognized the importance of more in-depth contracting officer's representative training for more complex contracts or contracts that pose a greater risk to DOD. In February 2009, we reported that businesses and individuals that had been excluded from receiving federal contracts for egregious offenses continued to be awarded contracts. Our work demonstrated that most of the improper contracts and payments identified can be attributed to ineffective management of the governmentwide database which tracks excluded contractor information or to control weaknesses at both the agency which excluded the contractor and the contracting agency. Specifically, our work showed that excluded businesses continued to receive federal contracts from a number of agencies, including DLA, because officials (including contracting officers) at some agencies failed to enter complete information in the database in a timely manner or failed to check the database prior to making contract awards. In addition, some agencies like DLA used automated purchasing systems which did not interface with the database. In commenting on our report agency officials stated that most of the issues we identified could be solved through improved training. A third long-term challenge for DOD's contract oversight and management is the need to collect and share institutional knowledge on the use of contractors, including lessons learned and best practices. Our prior work has found that DLA has taken some actions to improve the collection as well as the application of lessons learned. For example, in January 2000, we identified DLA's prime vendor program as an example of DLA adopting a best commercial practice for inventory management. Our work found that DLA was developing a policy to establish the basis for lessons learned from the reviews of prime vendor programs. Key points of the policy include specific requirements for management oversight such as pricing and compliance audits; requiring all prime vendor contracts to comply with an established prime vendor pricing model; annual procurement management reviews for all prime vendor contracts; and requiring advance approval by headquarters for all prime vendor contracts, regardless of dollar value. However, because this policy was still in draft form at the time of our review, we did not evaluate it. In closing, Mr. Chairman, DLA has a key role in supporting the warfighter by providing a vast array of logistics support. In providing this support, DLA depends on contractors and as such must ensure that it is obtaining good value for the billions of dollars it spends every year. Regardless of whether DLA is buying commodities or services, well-defined requirements, appropriate contract types, and proper contract oversight and management are critical to ensuring that DLA gets what it pays for. Mr. Chairman and members of the committee, this concludes my testimony. I would be happy to answer any questions you might have. For further information about this testimony, please contact William Solis, Director, Defense Capabilities and Management, on (202) 512-8365 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Other key contributors to this testimony include Carole Coffey, Lionel Cooper, Laurier Fish, Thomas Gosling, Melissa Hermes, James A. Reynolds, Cary Russell, Michael Shaughnessy, and Marilyn Wasleski. 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 ability to project and sustain military power depends on effective logistics. As the Department of Defense's (DOD) largest combat support agency, providing worldwide logistics support in both peacetime and wartime, the Defense Logistics Agency (DLA) supplies almost every consumable item the military services need to operate, from Meals Ready-to Eat to jet fuel. Given current budgetary pressures and the crucial role DLA plays in supporting the military service in the United States and overseas, it is vital that DOD ensure DLA is getting value for the commodities and services it acquires. The committee asked GAO to identify the challenges DOD faces in ensuring DLA gets value for the taxpayer's dollar and obtains quality commodities in a cost-efficient and effective manner. This testimony focuses on sound practices GAO has identified regarding obtaining value when contracting and how they can also apply to DLA's acquisition of commodities. GAO has made numerous recommendations aimed at improving DOD's management and oversight of contractors, and DOD has concurred with many of them. GAO is not making any new recommendations in this testimony. DOD faces challenges ensuring DLA gets value for the taxpayer's dollar and obtains quality commodities in a cost-efficient and effective manner. GAO's previous testimonies before this committee on weapons system acquisition and service contracts highlighted how essential it is that DOD employ sound practices when using contractors to support its missions or operations to ensure the department receives value regardless of the type of product or service involved. These practices include clearly defining its requirements, using the appropriate contract type, and effectively overseeing contractors. With regard to DLA, GAO's prior work has identified the following challenge areas: (1) Accurate Requirements Definition - Without a good understanding of customers' projected needs, DLA is not assured it is buying the right items in the right quantities at the right time. GAO's prior work has identified instances where problems in properly defining requirements can lead to ineffective or inefficient management of commodities. For example, GAO reported in 2005 that while DLA had a model to forecast supply requirements for contingencies, this model did not produce an accurate demand forecast for all items, including Meals Ready-to-Eat. As a result, the demand for these items was underestimated and some combat support units came within a day or two of exhausting their Meals Ready-to-Eat rations. (2) Sound Business Arrangements - Selecting the appropriate type is important because certain contracting arrangements may increase the government's cost risk where others transfer some of that cost risk to the contractor. For example, GAO noted in 2007 that DLA's Defense Energy Support Center was able to purchase fuel and supply products for the forces in Iraq more cheaply than an Army Corps of Engineers contractor because DLA was able to sign long-term contracts with the fuel suppliers. (3) Proper Contract Oversight and Management - Failure to provide adequate contract oversight and management hinders DOD's ability to address poor contractor performance and avoid negative financial and operation impacts. For example, in June 2006, GAO found that DLA officials were not conducting required price reviews for the prime vendor contracts for food service equipment and construction and equipment commodities. Agency officials acknowledged that these problems occurred because management at the agency and supply center level were not providing adequate oversight to ensure that contracting personnel were monitoring prices. DLA has taken some actions to address these challenges. For example, DLA has begun adjusting acquisition strategies to reassign programs to a best procurement approach. DLA has also established contracting officer's representative training requirements to ensure these individuals are properly trained to carry out their responsibilities.
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To determine whether DOD's logistics migration efforts will meet its objectives for dramatic improvements in operational efficiency and effectiveness, we reviewed DOD's policies and guidance for enterprise integration, corporate information management, and logistics migration system selection to ensure that information technologies are acquired, managed, and used in the most efficient and effective manner. Our assessment included analyzing DOD and prior GAO studies of the migration system strategy implementation and comparing DOD's logistics information resources management practices to those followed by public and private organizations. We conducted our review from August 1995 through August 1996 in accordance with generally accepted government auditing standards. Details of our scope and methodology are contained in appendix I. The Deputy Under Secretary of Defense for Logistics provided written comments on a draft of this report. These comments are discussed at the end of this report and reprinted in appendix II. DOD has said that it must either improve effectiveness and efficiency dramatically or face real losses in capability to meet its mission objectives. As characterized by the Under Secretary of Defense for Acquisition and Technology (USD(A&T)), "Every logistics dollar expended on outdated systems, inefficient or excess capability and unneeded inventory is a dollar not available to build, modernize or maintain warfighting capability." Defense logistics is the acquisition, management, distribution, and maintenance of the DOD materiel inventory used to provide replacement parts and other items for sustaining the readiness of ships, aircraft, tanks, and other weapon systems, as well as supporting military personnel. Logistics business operations include four major business activities--depot maintenance, distribution, materiel management, and transportation. DOD has reported that it spends over $44 billion annually maintaining, managing, distributing, and transporting a materiel inventory of $70 billion to support about $600 billion in mission assets. In October 1989, DOD established the CIM initiative to dramatically improve the way DOD conducts business, primarily by adopting best business practices used in the public and private sectors and building the automated information systems to support those improved practices. Originally, CIM focused on administrative areas such as civilian payroll, civilian personnel, and financial operations. DOD quickly broadened the initiative to encompass all DOD business areas, including the major logistics business activities. In January 1991, the Deputy Secretary of Defense endorsed a CIM implementation plan under which DOD would "reengineer," that is thoroughly study and redesign, its business processes before it standardized its information systems. The Deputy Secretary believed this implementation strategy would emphasize the importance of improving the way DOD did business rather than merely standardizing old, inefficient business processes. In 1992, DOD projected that by focusing on business improvement, it could save as much as $36 billion by fiscal year 1997. DOD expected that improvements to its logistics operations would provide most--$28 billion--of these CIM savings. By early 1992, DOD had identified a number of process improvement projects. However, later in the year, the Acting DOD Comptroller, concerned that the current CIM implementation approach would not produce the cost savings needed to help offset significant budget reductions, recommended that focus be shifted from reengineering projects to the selection and implementation of standard information systems that could be used departmentwide. In November 1992, the Assistant Secretary of Defense for Production and Logistics--now called the Deputy Under Secretary of Defense for Logistics (DUSD(L))--issued the Logistics CIM Migration Master Plan. This plan established the selection of migration systems as the CIM implementation strategy within the logistics business activities. This "migration systems strategy" called for identifying the best operational logistics information systems and deploying them across all the services and defense agencies. This, DUSD(L) believed, would not only make logistics operations more efficient (areas would mirror the best in DOD) but these standard systems would also eliminate the cost of developing and supporting redundant systems designed to perform the same basic business functions. The strategy was designed to gradually migrate the military services and defense agencies from their multiple and often redundant information systems by (1) selecting and deploying migration systems--either single information systems or groups of information systems--in each logistics activity departmentwide, (2) improving current business processes and adding new functions to fill voids, and (3) combining the improved and new business processes with the new information systems to form a corporate logistics process. For example, Defense had identified over 200 large and numerous smaller depot maintenance and materiel management logistics systems with the goal of first reducing the number of these separate systems to as few as 32 and then using these systems to migrate toward a single logistics standard information system. DOD's efforts to standardize and migrate information systems across the logistics areas of depot maintenance, materiel management, and transportation have not achieved expected results. Recently, DOD acknowledged that the deployment of standard information systems will not provide the dramatic improvements and cost reductions envisioned under the CIM initiative and is now emphasizing alternative ways for meeting these objectives. At the same time, however, it is continuing to deploy the information systems selected under the failed migration strategy. Our reviews of DOD migration system efforts for depot maintenance, materiel management, and transportation operations confirm that, to date, the strategy has failed to produce the dramatic gains in efficiency and effectiveness that DOD anticipated. More specifically: Our review of depot maintenance systems found that even if the migration effort was successfully implemented as envisioned, the planned depot maintenance standard system will not dramatically improve depot maintenance operations in DOD. First, under the CIM initiative, DOD planned to invest more than $1 billion to develop a depot maintenance standard system. However this would achieve less than 2.3 percent in reduced operational costs over a 10-year period. Such incremental improvement is significantly less than the order-of-magnitude improvements DOD has said could be achieved through the reengineering of business processes. Second, by postponing reengineering efforts until after developing the standard system, DOD may make it more difficult to reengineer in the future by increasing the risks of entrenching inefficient and ineffective work processes. Our review of DOD's materiel management systems effort showed that the Department itself abandoned the migration strategy for this logistics area after it realized that the original goal for achieving a standard suite of integrated systems would require significantly more time and money than originally anticipated. For example, it would take as long as 2 years and as much as $100 million more than originally estimated to develop and deploy the Stock Control System--an application that would assist in requisition, receipt, and inventory processing. After spending over $700 million to migrate materiel management standard systems, there were no dramatic improvements in materiel management business processes; there were numerous development, scheduling, and contracting problems; and only one application of the Stock Control System had been deployed. That application was delivered basically untested, did not meet user functional requirements, and required much rework, debugging, and testing on the user's part. Our review of Defense's transportation migration efforts found that the current migration strategy in the transportation area will not ensure improvements are made that Defense recognizes are critical to the transportation function. A number of studies since 1950 have found that Defense traffic management processes are fragmented and inefficient, reflecting the conflicts and duplication inherent in a traffic management organizational structure consisting of multiple transportation agencies, each with separate service and modal responsibilities. In a 1994 DOD report, Reengineering the Defense Transportation System: The "Ought To Be" Defense Transportation System of the Year 2010, Defense officials maintained that nothing less than fundamental change would be required to achieve the quantum gains in savings and productivity needed to improve transportation business processes. We recently reported that it will be difficult for Defense to realize the benefits of its current reengineering efforts because these efforts do not concurrently focus on how the transportation organization structure should be redesigned. Moreover, we have also recently reported that even though reengineering efforts for transportation are underway, in making its migration system selections, Defense did not assess the impact that these operational changes would have on its system selections. DOD's own studies have acknowledged that the implementation of the migration strategy has not worked. In May 1994, for example, DUSD(L) chartered a team with representatives from the services and Defense Logistics Agency to identify ways to improve the business practices of DOD inventory control points. The team, with industry assistance, found that the migration approach to standardizing and upgrading materiel management information systems was not workable and recommended that efforts to develop the Materiel Management Standard System be discontinued. Similarly, the Commission on Roles and Missions of the Armed Forces, in its logistics case studies, concluded that DOD's efforts to standardize its management information systems under its CIM initiative would merely result in more compact, standardized versions of DOD's traditional business operations. In late 1994, the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence (ASD(C3I)) acknowledged that DOD's logistics migration systems strategy was seriously flawed. The Assistant Secretary said that, as opposed to the private sector which uses a very different approach, "DOD has virtually no chance of making high impact/quantum changes using the current approach." In October 1995, the Under Secretary of Defense for Acquisition and Technology called for a revision to the standard migration systems strategy. Currently, for all business areas, DOD is trying alternative ways to achieve its CIM objectives of dramatic business improvement and cost reductions while, at the same time, continuing to deploy migration systems. To improve logistics operations, DOD is now emphasizing systems interoperability--the ability to exchange information between and among business activities--as a critical means for achieving dramatic improvements. To reduce operational costs, DOD is seeking to privatize and outsource certain functions--relying on the private sector to provide services that need not be performed by the Department. These three efforts make up a de facto DOD strategy for improving logistics systems. Each of the current efforts is discussed in more detail below. In calling for a revision to the migration strategy, the Under Secretary of Defense for Acquisition and Technology, in October 1995, stressed the importance of building interoperable systems and processes by relying on common operating environments and standard data exchange--elements which many migration systems do not have. DOD has directed business area managers to view their areas as part of the bigger DOD enterprise and develop information systems that are interoperable. Accordingly, business activities must be able to readily exchange information in order to provide senior managers with the comprehensive overview they need to make dramatic process improvements. In May 1995, the Commission on Roles and Missions of the Armed Services reported that more than 250,000 of DOD's employees engage in commercial-type activities. To significantly reduce the costs of Defense operations, the Commission recommended that DOD rely primarily on the private sector for services that need not be performed by the government and reengineer those retained by the Department. Specifically addressing depot maintenance and materiel management activities, the Commission concluded that private contractors could provide essentially all of the services now conducted in government maintenance and inventory facilities more efficiently and effectively. Consistent with the Commission's recommendations, the Deputy Secretary of Defense announced, in late 1995, that DOD would review opportunities to privatize a whole array of functions that, while important, do not directly contribute to the warfighter in the field. It has been reported that DOD spends about $125 billion each year performing commercial-type support functions, including those of depot maintenance, materiel management, and transportation. It has also been reported that, by privatizing only half of these support functions, DOD could save as much as of 20 percent, or $12 billion annually. We have, however, reported that under current conditions of excess depot capacity and limited private sector competition, these savings may not be realized. To achieve these savings, DOD established nine working groups, including one for depot maintenance and one for materiel management. According to materiel and distribution management working group officials, all business activities are actively being considered for privatization, including those the logistics migration systems are to support. They emphasized, however, that their reviews would not be complete until mid-1996 and resulting privatization actions would likely take a year or longer to accomplish at initial sites. They also stated that it could take longer than 5 years to fully implement any overall privatization strategy. Although DOD has acknowledged that its migration systems strategy has failed, it continues to deploy migration systems. Over the next several years, DOD plans to spend more than $7.7 billion to deploy these systems in addition to the $1.2 billion it reported having already spent. Table 1 identifies the costs to date and those expected to accrue that DOD reported in its fiscal year 1996-1997 biennial budget exhibits. We did not independently verify DOD's budget estimates. We asked DOD logistics officials why they continued deployment of the logistics migration systems. They told us that the costs associated with stopping deployment of these systems and then restarting them would be significant. However, they had not performed an analysis to support this view. Also, officials cautioned that stopping migration system deployments could result in a lengthy delay in providing these systems to the services and Defense agencies. However, they acknowledged that immediate assessments are needed to ensure that the Defense investments in these systems were justified. We encourage DOD to explore alternative ways for improving logistics operations. However, we have two major concerns with its current efforts to develop systems interoperability, privatize commercial-type logistics activities, and deploy migration systems. First, Defense still has not completed the analyses required to determine that its logistics system deployment effort will yield a positive return on investment. Without this decision-making tool, Defense has no assurance that any efforts it makes to improve logistics systems will support its operational improvement and cost reduction objectives. Second, Defense has not yet sufficiently tied its improvement efforts to its overall business objectives through the use of strategic planning--a necessary step to ensure that the billions of dollars being invested in logistics improvement efforts will result in significant improvements in operations. Had it strategically planned for its system migration efforts, it may well have avoided costly strategy failures. We are currently reviewing DOD's progress in its implementation of its overall logistics strategic plan. In continuing to deploy migration systems without addressing the fundamental problems associated with its selection and deployment of migration systems to date, DOD risks wasting a substantial amount of the additional $7.7 billion it plans to spend over the next few years. In developing systems for depot maintenance, materiel management, and transportation, Defense did not adequately ensure that the hundreds of millions of dollars it spent on development efforts would be cost-effective and beneficial. Defense requires that decisions to develop and deploy information systems be based on convincing, well-supported estimates of project costs, benefits, and risks. These directives establish a disciplined process for selecting the best projects based on comparisons of competing alternatives. Defense's principal means for making these comparisons is a functional economic analysis. For each alternative, a functional economic analysis identifies resource, schedule, and other critical project characteristics and presents estimates of the costs, benefits, and risks. Once an alternative is chosen, the analysis becomes the basis for project approval. Any significant change in expected project costs, benefits, or risks requires reevaluation of the selected alternative. In our reviews of DOD's efforts to implement the migration system strategy across its depot maintenance, materiel management, and transportation business activities, we found that DOD routinely selected and is deploying migration systems without (1) sufficiently analyzing their costs and benefits and (2) considering possible better commercial alternatives, such as reengineering, privatization, and outsourcing of business functions. Only recently has DOD began to consider such options. The following are the results of our previous reviews on DOD's cost, benefit, and risk analyses. Our review of depot maintenance migration found that Defense selected the Depot Maintenance Standard System without analyzing the systems' full development and deployment costs. Instead, it relied on a functional economic analysis of a previously proposed project--the Depot Maintenance Resource Planning system. This analysis understated Depot Maintenance Standard System project costs by at least $140 million by including costs for only some components, and it understated costs for the components it did include. Had Defense followed its own regulations and calculated investment returns on its transportation migration selections, it would have found--based on data available when the migration systems were selected--that two of the selected systems would lose money. The Air Loading Module (ALM) would lose $0.67 out of every dollar invested and the Cargo Movement Operations System (CMOS) would lose $0.04 out of every dollar invested. DOD's analyses also did not include all costs associated with its evaluation of in-house systems. At least $18 million in costs were excluded--$16 million for an analysis of candidate migration systems and $2 million for maintaining migration system hardware. We also found that had DOD included these costs in its systems selection analyses, it would have found that the overall return on investment would have decreased. Our review of materiel migration system efforts showed that a complete economic analysis was never made for the migration strategy until July of 1995--nearly 3 years after the strategy began. Further, when Defense dramatically changed the course of materiel management systems development--abandoning the concept of developing a standard system and instead moving to incremental and individual deployments--it again did not set out to first assess risks, costs, and benefits before proceeding with such a change in strategy. Our reviews also found that major changes to operations or potentially better business practices were not assessed during the system selection process. Without a comparison of alternatives, DOD has no assurance that it has selected the most efficient and effective solution. For example, Defense selected a migration system to support its transportation of personal property and plans to spend $63 million over the next 5 years to implement it. Recently, however, DOD began actively seeking to privatize major components of this function. As a result, further spending on the migration system may be questionable since the system may no longer be needed. Similarly, DOD is deploying migration systems to support its materiel management operations without sufficient assessment of recent DOD initiatives focusing on privatizing materiel management operations or consolidating inventory control points. As a result, Defense may end up spending millions of dollars on systems for functions that it no longer performs or on inventory control points that are later consolidated. Our previous reports made a number of recommendations to help ensure that DOD selected the systems that offered the most effective solutions at least cost. These recommendations included preparing documentation that described system efforts and validated that they were the best alternatives for improving their respective business areas. Although DOD partially agreed with some of our recommendations, it essentially has continued to deploy systems without adequate economic analysis and full comparisons of available alternatives needed to ensure that it is making the best investment of its resources. Nevertheless, DOD is required to manage its information technology as investments. The Clinger-Cohen Act of 1996 was passed to stop government spending on systems projects that were found to be far exceeding their expected costs and yielding questionable benefits to mission improvements. Specifically, under the Clinger-Cohen Act, DOD is required to design and implement a process for selecting IT investments using such criteria as risk-adjusted return-on-investment and specific criteria for comparing and prioritizing alternative information system projects. If implemented properly, this process should provide a means for senior management to obtain timely information regarding progress in terms of costs, capability of the system to meet performance requirements, timeliness, and quality. Many of the problems we found in our past reviews of logistics systems efforts may well have been prevented had Defense employed strategic information planning before embarking on its CIM improvement efforts. Studies of private sector organizations show that strategic information planning is fundamental for achieving any significant level of performance improvement. Through the Clinger-Cohen Act, the Government Performance and Results Act (GPRA), and the Paperwork Reduction Act(PRA), the Congress has underscored the importance of strategic planning for the efficient and effective use of information technology. The Clinger-Cohen Act also requires that the investment process for information technology be integrated with processes for making budget, financial, and program management decisions. For Defense, such planning would establish a direct link between its business objectives and information technology use. In turn, this would have helped Defense focus on meeting the objective of dramatic improvement in operations rather than incremental change. Private industry and our studies of public and private organizations have identified that cohesive plans resulting from strategic information management--managing information and information technology to maximize improvements in business performance--are crucial for developing information systems that support substantial business improvement. For example, in early 1993, the International Business Machines (IBM) Consulting Group reported on its extensive case study of 17 exemplary companies chosen from an initial list of 200 companies in a wide range of industries. The IBM study found that the best companies had well-structured and well-explained information management plans that closely integrated with their business planning processes. Also, these plans aligned the use of information technology with business objectives to improve performance and deal effectively with changes in the business environment. The study also found that these companies did not invest in an information system until they clearly understood how and to what extent the proposed information system would enhance their business environment. Our studies of how leading private and public organizations have applied information technology to improve their performance have also found that organizations achieving substantially higher levels of performance had a disciplined, outcome-oriented, and integrated strategic information management process. For example, one organization that lacked a business vision--a definition of how the organization would work in the future--and an integrated strategic information management process, spent the majority of its resources maintaining existing, aging information systems. By integrating its planning, budgeting, and evaluation processes, the organization was able to shift about a third of its information systems personnel to reengineering projects. These new improvements in turn increased productivity and the quality of customer service. With GPRA, the Congress has recently underscored the importance of strategic planning by clarifying and expanding the requirement for a strategic information resources management plan first called for under the Paperwork Reduction Act of 1980. GPRA requires that agencies submit to the Office of Management and Budget, by September 1997, a strategic plan for their activities, including a comprehensive mission statement as well as goals and objectives for the agency's functions and operations. The Clinger-Cohen Act supports the GPRA requirement of establishing goals for improving the efficiency and effectiveness of agency operations by improving the delivery of services to the public through more effective use of information technology. In late 1995, DOD proposed a new policy requiring the development of a DOD-wide strategic information resources management plan, with supplements for each DOD component, that would integrate the use of its information technology resources with its budgeting processes. While we support DOD's efforts to establish a strategic information resources management planning process, the new policy, as proposed, does not require the DOD-wide plan and component supplements to be anchored in the Department's business strategies. Without a direct link between its business objectives and information technology use, we believe that DOD risks developing a strategic information resources management (IRM) planning process that will become merely a reactive exercise to immediate priorities that are not adequately weighed against those of the future. We discussed our concern about DOD's current efforts to make dramatic logistics improvements without a cohesive strategic information plan with the DUSD(L) and the Assistant Deputy Under Secretary of Defense for Logistics Business Systems and Technology. They stated that they had begun developing a strategic IRM plan that integrates business and systems strategies. This plan, they said, is needed to move from the migration systems strategy to a new business-oriented strategy and they agreed that migration systems that do not fit under this new strategy should be halted. DOD has acknowledged that its logistics migration strategy for improving its automated logistics information systems is flawed and has embarked on other efforts to develop interoperable systems and privatize commercial-type functions where it can save money. However, as it embarks on these other efforts, Defense is still not addressing the critical weaknesses associated with its previous strategy. By not doing so, it will continue to encounter unmanaged risks, low-value information technology projects, and too little emphasis on redesigning outmoded work processes. In essence, the new strategy will be just as risky as the previous strategy until Defense adopts the key ingredients needed to ensure successful information technology investments: (1) conducting thorough economic and risks analyses so that senior managers can begin examining trade-offs among competing proposals and prioritizing projects based on risk and return and (2) developing a strategic IRM plan defining how information technology activities will help accomplish agency missions. By adopting the framework for strategic planning mandated by the Government Performance and Results Act and managing its information technology projects as investments as called for in the Clinger-Cohen Act, DOD can begin delivering, at an acceptable cost, high-value information technology solutions for logistics operations. To ensure that DOD optimizes its use of information technology to achieve its logistics CIM goals of dramatic business process improvement and operational cost reduction, we recommend that the Secretary of Defense: Direct that immediate cost-benefit analyses of each logistics migration system be undertaken and halt deployment of those that (1) cannot be shown to have significant return-on-investment, (2) will not facilitate ongoing efforts to privatize logistics business functions, or (3) do not support efforts to achieve interoperability between and among business activities. Expedite development of a strategic information resources management plan that anchors DOD's use of logistics information resources to its highest priority business objectives. The plan should conform with requirements established by the Government Performance and Results Act of 1993, the Paperwork Reduction Act of 1995, and the Clinger-Cohen Act of 1996. The Department of Defense provided written comments on a draft of this report. These comments are summarized below and reprinted in appendix II. The Deputy Under Secretary of Defense for Logistics generally agreed with our findings and conclusions. Defense also agreed with our recommendation that the Department develop a strategic information resources management plan for logistics and is currently developing such a plan. Defense disagreed with our recommendation to conduct cost-benefit analyses of current logistics development activities to ensure that those systems now being deployed will provide significant returns on investment. It contended that the strategic information resources plan being developed for the logistics area will create an environment that effectively controls the development and modernization of information systems. As part of this plan, Defense stated that overall DOD business objectives, mission requirements, and economic efficiency will be considered in making decisions to halt, proceed, or change the direction of the development/deployment process. We support DOD's stated efforts to establish a more effective investment process for logistics information systems. However, we believe that as it develops its strategic plan, Defense should conduct cost-benefit analyses for its ongoing development efforts. As noted in our report, Defense still plans to spend more than $7.7 billion in the next few years developing and deploying migration systems. If it does not take steps to determine whether this significant investment is worthwhile, it will continue to risk wasting it as has been the case in the past. In the past, had cost-benefit analyses been correctly done for transportation, Defense would have found that some of its migration investments would have produced negative returns. Had a cost-benefit analysis been correctly done for depot maintenance, Defense would have found benefits to be far less than the dramatic improvements originally envisioned. Had Defense conducted cost-benefit analyses before it embarked on its materiel management efforts, it would have likely concluded that it should abandon the concept of developing standard systems before spending hundreds of millions of dollars on the effort. For the future, if Defense does not follow our recommendation to conduct cost-benefit analyses of its current projects, it will miss out on opportunities to identify more projects showing little promise for return and to redirect its investment to development efforts that more effectively support military missions. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate and House Committees on Appropriations, Senate Committee on Armed Services, the House Committee on Government Reform and Oversight, and the House Committee on National Security; the Chairman of the Senate Committee on Governmental Affairs; the Ranking Minority Member of the Subcommittee on Military Readiness of the House Committee on National Security; the Secretaries of Defense, Army, Navy, and Air Force; the Commandant Marine Corps; the Director of the Defense Logistics Agency; the Deputy Under Secretary of Defense for Logistics; and the Director of the Office of Management and Budget. Copies will be made available to others on request. If you have any questions about this report, please call me at (202) 512-6240, or Carl M. Urie, Assistant Director, at (202) 512-6231. Major contributors to this report are listed in appendix III. To determine whether DOD's efforts to standardize its logistics migration systems will allow Defense to meet its business objectives of dramatically improving the efficiency and effectiveness of its logistics operations, we identified problems DOD has had implementing information systems selected under its migration strategy by analyzing prior GAO reports on DOD's CIM efforts related to logistics business activities. Also, other ongoing GAO reviews provided the results of cost and benefit analyses, risk assessments, and interviews with program and technical officials responsible for implementing migration systems in the materiel management and transportation business areas. We evaluated the strategies, policies, and memoranda establishing DOD's Enterprise Model, CIM initiative, and logistics migration information systems strategy to determine whether DOD's migration systems strategy is consistent with DOD's corporate business vision for balancing investments across the Department and optimizing its operational effectiveness. Also, we reviewed the findings of studies conducted by the Commission of Roles and Missions of the Armed Services and DOD for achieving dramatic increases in operational efficiency. To identify private and public organizations that have successfully managed information technology use to obtain superior business performance, we researched technical and business databases, reviewed literature by technology vendors, and reviewed prior GAO work and compared the private sector approach to DOD's strategy in using information technology. Focusing on DOD's new efforts to develop interoperable information systems emphasized in the enterprise model and to privatize and outsource commercial-type activities as recommended by the Commission on Roles and Missions, we compared DOD's actions and plans for implementing depot maintenance, materiel management, and transportation migration systems with its business vision. Also, we compared the business activities DOD is considering privatizing with those the migration systems are to support. We compared the "best practices" of private and public organizations with DOD's logistics migration strategy to identify actions that could increase the probability of achieving logistics business objectives and maximizing the return on technology investments. We interviewed senior Defense officials responsible for managing the CIM initiative, implementing the logistics migration strategy, and developing privatization plans. We also met with program and functional officials, including DOD managers responsible for deploying the depot maintenance and materiel management migration systems. Our work was performed from August 1995 through August 1996 in accordance with generally accepted government auditing standards. We performed our work primarily at the offices of the Deputy Under Secretary of Defense for Logistics in Washington, D.C.; the Joint Logistics Systems Center, Wright-Patterson Air Force Base, Ohio; and the Automated Systems Demonstration, Warner Robins Air Logistics Center, Georgia. James E. Hatcher, Core Group Manager Sanford F. Reigle, Evaluator-In-Charge Thomas C. Hewlett, Staff Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) efforts over the last 4 years to improve its information systems in the depot maintenance, materiel management, and transportation business areas, focusing on whether selected standard information systems will allow DOD to meet its business objective to dramatically improve the efficiency and effectiveness of its logistics operations. GAO found that: (1) DOD's continued deployment of information systems using a migration strategy for the depot maintenance, materiel management, and transportation business areas will not likely produce the significant improvements originally envisioned; (2) for the most part, these efforts, which were intended to lay the groundwork for future dramatic change by first standardizing information systems and the related processes throughout DOD, are merely increasing the risk that the new systems that are deployed will not be significantly better or less costly to operate than the hundreds of logistics information systems already in place; (3) DOD itself has acknowledged that its migration systems strategy will not provide necessary dramatic improvements and cost reductions and is now emphasizing alternative ways of improving logistics business operations, such as turning to the private sector to carry out major logistics functions; (4) at the same time, however, it is continuing to deploy information systems selected under the migration strategy that are linked to the very same business functions it wishes to make more efficient and economical through outsourcing and/or privatization; (5) while GAO is encouraged that DOD is exploring alternative ways to improve its logistics operations, it is concerned that the current path needlessly risks wasting a substantial amount of the more than $7.7 billion DOD plans to invest in improving automated logistics systems; (6) DOD still has not taken the fundamental steps necessary to ensure that the automated systems it continues to deploy will yield a positive return on investment; (7) even as DOD embarks on its new improvement efforts, it has not yet sufficiently tied these new efforts to its overall business objectives through the use of a strategic investment strategy to ensure that the billions of dollars will be wisely spent; (8) such planning would be in keeping with best private- and government-sector practices as well as with new legislation which underscores the importance of strategic information planning for the efficient and effective use of information technology; and (9) without addressing these concerns, DOD's new improvement efforts, like the failed standard migration strategy, will proceed with little chance of achieving the objectives originally envisioned for substantial operational improvements and reduction in costs.
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Access to behavioral health treatment--services and prescription drugs to address behavioral health conditions--is important because of the harmful consequences of untreated conditions, which may result in worsening health, increased medical costs, negative effects on employment and workplace performance, strain on personal and social relationships, and possible incarceration. Behavioral health treatment can help individuals reduce their symptoms and improve their ability to function. However, research suggests that a substantial number of individuals with behavioral health conditions may not receive any treatment or less than the recommended treatment, even among those with serious conditions. For example, in 2013, SAMHSA estimated that there were 3.9 million adults aged 18 or older with a serious mental illness who perceived an unmet need for mental health care within the last 12 months. This number includes an estimated 1.3 million adults with a serious mental illness who did not receive any mental health services. One potential barrier to accessing treatment is shortages of qualified behavioral health professionals, particularly in rural areas. SAMHSA noted that more than three-quarters of counties in the United States have a serious shortage of mental health professionals. Behavioral health treatment includes an array of options ranging from less to more intensive, and may include prevention services, screening and assessment, outpatient treatment, inpatient treatment, and emergency services for mental health and substance use conditions. Prescription drugs may also be included as part of treatment for either substance use or mental health conditions. See table 1 for information on select behavioral health treatments. In addition to these treatments, other supportive services exist for behavioral health conditions that are designed to help individuals manage mental health or substance use conditions and maximize their potential to live independently in the community. These supportive services are multidimensional--intended to address not only health conditions, but also employment, housing, and other issues. For example, they include recovery housing--supervised, short-term housing for individuals with substance use conditions or co-occurring mental and substance use conditions that can be used after inpatient or residential treatment. The Centers for Medicare & Medicaid Services (CMS)--a federal agency within the Department of Health and Human Services (HHS)--and states jointly administer the Medicaid program, which finances health care, including behavioral health care, for low-income individuals and families. States have flexibility within broad federal parameters for designing and implementing their Medicaid programs. States may use Medicaid waivers--which allow states to set aside certain, otherwise applicable federal Medicaid requirements--to provide health care, including behavioral health treatment, to individuals who would not otherwise be eligible for those benefits under the state's Medicaid program. For example, states may use waiver programs to target residents in a geographic region or to target individuals with particular needs, such as those with serious mental illness. States may also choose different delivery systems to provide benefits including behavioral health treatment to Medicaid enrollees, such as FFS or managed care. Some states with managed care delivery systems may elect to "carve out" behavioral health benefits, i.e., contract for them separately from physical health care benefits. For example, some states contract with limited benefit plans, which are managed care arrangements designed to provide a narrowly defined set of services. Similarly, states with FFS delivery systems may choose to contract with separate companies to administer behavioral health benefits than those administering physical health care benefits.Our previous work has noted that while using a separate plan to provide mental health services may control costs, it can also increase the risk that treatment for physical and mental health conditions will not be coordinated. A variety of sources provide funding for behavioral health treatment in public programs. Medicaid is the largest source of funding for behavioral health treatment, with spending projected to be about $60 billion in 2014. Another significant source of revenue for state BHAs is state general revenues. In contrast to Medicaid, for which payment of benefits to eligible persons is required by law, state general funding for the treatment of uninsured and underinsured residents is discretionary. The extent to which state-funded treatment is provided may depend on the availability of funding. States may also use SAMHSA mental health and substance use block grants to design and support a variety of treatments for individuals with behavioral health conditions. See figure 1 for information on sources of state BHA revenues for mental health in 2013. (Similar figures for substance use were not available.) The number of states that have expanded Medicaid includes the District of Columbia, which we refer to as a state of for the purposes of this report. State BHAs are the agencies responsible for planning and operating state behavioral health systems, and they play a significant role in administering, funding, and providing behavioral health treatment. State BHAs manage behavioral-health-related federal grants and may work with other state agencies--such as state Medicaid agencies--to identify and treat mental health and substance use conditions. State BHAs may contract directly with providers to deliver behavioral health treatments or may contract with county or city governments, which are then responsible for the delivery of treatments within their local areas. State BHAs may also play a role in providing Medicaid enrollees with wraparound services--that is, services that state Medicaid programs do not cover, but that may aid in recovery, such as supportive housing. Nationwide, estimates using data from 2008 to 2013 indicated that of 17.8 million low-income, uninsured adults, approximately 3 million (17 percent) had a behavioral health condition prior to the Medicaid expansion in 2014. Specifically, about 1 million low-income, uninsured adults (5.8 percent) were estimated to have a serious mental illness, while nearly 2.3 million low-income, uninsured adults (12.8 percent) were estimated to have a substance use condition. Underlying these national estimates was considerable variation at the state level. In particular, the percentage of low-income, uninsured adults with a behavioral health condition ranged from 6.9 percent to 27.5 percent. Similarly, the percentage of low-income uninsured adults with serious mental illness ranged from 1.3 percent to 13 percent, while the percentage with a substance use condition ranged from 5.9 percent to 23.5 percent. See figure 3 for the states with the highest and lowest estimated percentages of low-income, uninsured adults with a serious mental illness or substance use condition. See appendix I for state-by-state estimates. Of the 3 million low-income, uninsured adults estimated to have a behavioral health condition, nearly half--approximately 1.4 million people, or about 49 percent--lived in the 22 states that had not expanded Medicaid as of February 2015, compared with the approximately 1.5 million people in the remaining 29 states that had expanded Medicaid. The estimated prevalence of behavioral health conditions overall among low-income, uninsured adults was about 17 percent, on average, in both expansion and non-expansion states. State BHAs in the non-expansion states we examined offered a variety of behavioral health treatments for low-income, uninsured adults. These states identified priority populations to focus care on adults with the most serious conditions and used waiting lists for those with more modest behavioral health needs. The non-expansion states we examined--Missouri, Montana, Texas, and Wisconsin--offered a range of behavioral health treatments-- inpatient and outpatient services and prescription drugs--for low-income, uninsured adults. These states used community mental health centers, state institutions, and contracts with providers to deliver treatments, and used a variety of sources, such as state general funds, federal block grants, and Medicaid to fund them. For mental health and substance use conditions, outpatient services that these states offered included evaluation and assessment, visits with medical providers, and individual, family, and group counseling. Treatments also included emergency care, and in most of these states, partial hospitalizations and inpatient psychiatric care for mental health conditions. For substance use conditions, these states also offered detoxification and residential treatment. These states generally made prescription drugs available to uninsured adults as part of the treatment for behavioral health conditions. For example, Missouri, Texas, and Wisconsin included medication- assisted treatment for substance use conditions, and all four of the selected non-expansion states offered prescription drugs for mental health conditions. In addition to treatment, the non-expansion states also offered some supportive services, such as peer support or housing services, for uninsured adults. For two of the states we examined--Wisconsin and Texas--the availability of specific services for behavioral health may vary throughout the state. In particular, the responsibility for administering and providing treatment was divided between the state BHA and local entities, which receive both state and local funding to provide behavioral health treatment. funding for behavioral health, which they can use to fund services of their choosing. The Wisconsin BHA identified a core list of 30 services for behavioral health that it promotes and encourages counties to provide, but the official noted that it may be difficult for a single county to provide all of the services on the list. For example, the Wisconsin BHA reported that about a quarter of counties provided medication-assisted treatment for individuals with substance use conditions in 2013. As another example, Texas offers opportunities for local mental health authorities to compete for funding for specific types of services, such as housing. Local entities are counties for Wisconsin and local mental health authorities in Texas. In contrast, the state BHA is solely responsible for administering behavioral health treatment in Missouri and Montana. coverage. In addition, Wisconsin obtained a Medicaid waiver effective January 2014 that made certain childless adults up to 100 percent of the FPL eligible for Medicaid, which gave them access to Medicaid-covered services and prescription drugs, including behavioral health treatments. Officials from the non-expansion states we examined noted initiatives relevant to low-income, uninsured adults, such as improving crisis response and coordinating care for individuals involved with law enforcement. Texas officials noted that 24 of the 33 local mental health authorities have a facility-based crisis option to treat individuals experiencing a crisis and that they would like to provide the remaining local mental health authorities with similar facilities, which are intended to avoid inpatient care. In Wisconsin, behavioral health treatment includes mobile crisis services to respond to individuals in the community experiencing a crisis. A Wisconsin official told us that there were legislative efforts underway to expand these services, particularly in rural areas. Missouri has hired community mental health liaisons to facilitate access to behavioral health services for individuals who are in frequent contact with law enforcement. The selected non-expansion states established priority populations for providing behavioral health treatment to those with the most severe behavioral health needs. For the states we examined, priority populations for mental health treatment included individuals with serious mental illness and those presenting in crisis. Similarly, all the non-expansion states we examined identified priority populations for receiving treatment for substance use conditions. Specifically, pregnant women and individuals abusing drugs intravenously were among the priority groups that the states identified to receive treatment. As part of setting priorities for those with the most serious behavioral health needs, the non-expansion states included specific eligibility requirements based on diagnosis or impairment, in addition to financial status, for behavioral health treatment for the uninsured. In Montana, individuals aged 18 to 64 diagnosed with a severe, disabling mental illness, and incomes up to 150 percent of the FPL may qualify for the state-funded Mental Health Services Plan. Montana officials told us that their Mental Health Services Plan does not provide treatment to individuals with more moderate behavioral health needs, but that these individuals may get some treatment through community-based "drop-in" centers. In Texas, local mental health authorities are required to provide services to adults with diagnoses of schizophrenia, bipolar disorder, or clinically severe depression, and may, to the extent feasible, provide services to adults experiencing significant functional impairment due to other diagnoses. Individuals who are not members of the identified priority groups are generally not eligible to receive treatment. Three of the states we examined maintained waiting lists for individuals with more modest needs for behavioral health treatment. Texas officials said that they triage individuals eligible for behavioral health treatment, and those with less urgent needs may have to wait. In some cases, individuals may receive a lower level of care than recommended while waiting for treatment due to resource limitations. For example, an individual might receive medication-related services and crisis services as needed, but not recommended rehabilitation services. Texas officials told us that there were over 5,000 individuals waiting for behavioral health treatment as of February 2013, although they were able to move most individuals off waiting lists when they received additional state funding for fiscal years 2014 and 2015. They described this additional funding as "historic," and they reduced the number of individuals waiting to fewer than 300 as of May 2014. In addition to reducing the waiting list, Texas moved 1,435 adults from lower levels of care to more appropriate levels in 2014. A Wisconsin official told us if county agencies run out of funding, they are permitted to establish waiting lists or may only serve clients with Medicaid coverage. The official said there were 1,656 individuals waiting for substance use treatment and 242 individuals waiting for a specific mental health service in 2013, prior to Wisconsin extending Medicaid coverage to certain low-income adults through a Medicaid waiver.all services if they run out of funding, but must always provide emergency care. The official said that county agencies do not have to provide Missouri officials said there were 3,723 individuals on the waiting list for substance use treatment as of January 2015. Missouri state BHA officials noted that Missouri does not maintain a waiting list for mental health services. Selected states generally managed behavioral health benefits for newly eligible Medicaid enrollees separately from physical benefits through carve-outs or separate contracts. Health plans for these enrollees were generally aligned with Medicaid state plans, resulting in comparable behavioral health benefits for newly eligible and existing Medicaid enrollees. According to state officials, expanding Medicaid has increased the availability of behavioral health treatment, although some access concerns continue. The expansion states we examined generally managed behavioral health benefits separately from other benefits through carve-outs or separate contracts. Four of the six states included in our study--Connecticut, Maryland, Michigan, and West Virginia--explicitly carved out or contracted for the administration of behavioral health services or prescription drugs separately from other services and drugs. For example, in Maryland, specialty mental health services have been carved out of its contracts with managed care organizations (MCO) since 1997 and are paid for on an FFS basis. Michigan carved behavioral health services out of its MCO contracts and moved them to a limited benefit plan in 1998. Connecticut, which has an FFS delivery system for newly eligible enrollees, contracted with a behavioral health benefits manager to administer behavioral health services. The other two states contracted with MCOs to provide both physical and behavioral health coverage, but several of these MCOs chose to subcontract with behavioral health benefits managers. See table 2 for information on the expansion states' coverage designs for behavioral health services and prescription drugs. State officials cited various reasons for separately managing behavioral health benefits, including concerns about access, ensuring appropriate expertise, and state law. Maryland officials told us they chose to carve out mental health services and pay for them on an FFS basis through a behavioral health benefits manager due to concerns about beneficiary access under managed care, particularly for more intensive services generally not covered by commercial insurance plans. Maryland also separately carved out mental health prescription drugs on an FFS basis, which officials said was so that the state could align policies for these drugs with the behavioral health benefits manager administering the mental health services carve-out. In Kentucky, three of the five Medicaid MCOs subcontracted behavioral health benefits to a behavioral health benefits manager. Kentucky officials told us that one of the MCOs decided to subcontract these benefits due to a lack of expertise in managing behavioral health prescription drugs. Michigan and Connecticut officials told us that state laws prohibit their Medicaid programs from using certain utilization management techniques for some types of behavioral health prescription drugs. Michigan officials told us that given the lack of utilization management tools available, they decided to pay for behavioral health prescription drugs on an FFS basis rather than to include these drugs in the state's limited benefit plan contracts. Providers have raised concerns about managing behavioral health benefits separately from medical benefits, and some states reported making efforts to make sure care is coordinated. Behavioral health physician groups we spoke with told us that paying for physical and behavioral health care separately makes it difficult to assess the total cost of care for individuals with behavioral health conditions, and does not provide adequate incentives to make investments in one type of care that may reduce costs for another type of care. For example, provider groups said that lack of investment in substance use services could lead to additional costs for emergency medical care. In addition, one physician group raised concerns about managing behavioral health services separately from prescription drugs because of the potential for conflicting utilization management policies to create barriers to care. For example, a pharmacy benefits manager may require outpatient counseling as a condition for receiving medication-assisted treatment for substance use, but such counseling may not be covered by the managed care company that authorizes behavioral health services. The four states we spoke with that explicitly manage behavioral health care separately--Connecticut, Michigan, Maryland, and West Virginia--noted that they were engaged in care coordination efforts. Connecticut officials said that although they have multiple contracts for benefits administration, all claims are processed through a single vendor and the state uses these data to help identify individuals in need of care management. Michigan officials said that the state has implemented claims sharing between the MCOs managing physical health care and the limited benefit plans that manage behavioral health benefits. Michigan is currently working on a demonstration program with CMS that would allow for real-time sharing of clinical information for individuals dually eligible for Medicare and Medicaid. Maryland included financial incentives related to physical health, such as the number of patients who have an annual primary care visit, in the contract with its behavioral health benefits manager. West Virginia officials said that they were working on creating a comprehensive managed care plan for newly eligible Medicaid enrollees that would offer both physical and behavioral benefits, including prescription drugs, under the same plan in order to better coordinate care. In addition, Michigan, Maryland, and West Virginia have established Medicaid health homes to coordinate care for individuals with chronic As of January 2015, conditions, including behavioral health conditions.Connecticut was in the process of developing Medicaid health homes for individuals with behavioral health conditions. Five of the six expansion states included in our study chose to align their alternative benefit plans with their Medicaid state plans--providing at least the same benefits for newly eligible enrollees as existing enrollees received under the state plan--and some states made alignment-related coverage changes. Connecticut, Kentucky, Maryland, Michigan, and Nevada aligned their alternative benefit plans with their Medicaid state plans, which required these states to add to their alternative benefit plans any state plan benefits that were not already included. For example, Michigan officials said they added additional recovery-oriented substance use services, such as peer support services, to the alternative benefit plan to match existing state plan benefits. Although not required, states may also choose to add benefits to their Medicaid state plans to match their alternative benefit plans. As part of the alignment process, Kentucky chose to extend substance use treatment--previously limited to children under 21 and pregnant and postpartum women--to all Medicaid enrollees under its state plan to match the substance use coverage in its alternative benefit plan. West Virginia did not align its alternative benefit plan with its Medicaid state plan, but there were no differences in coverage for behavioral health services and associated prescription drugs. Officials we interviewed from the six expansion states generally reported that Medicaid expansion had resulted in greater availability of behavioral health treatment, and changes were greater in states without previous coverage options for low-income adults. Kentucky, Nevada, and West Virginia did not have any coverage available for low-income childless adults prior to expansion and primarily relied on their states' BHAs to provide behavioral health treatment for the uninsured. Kentucky officials reported a substantial increase in the availability of behavioral health treatment for individuals when they enrolled in Medicaid, as individuals were no longer limited to what state-funded community mental health centers could provide, and could access additional services, such as peer support services. Nevada officials stated that while the state BHA and the state's Medicaid program provide the same array of behavioral health treatments, some uninsured individuals experienced long delays in receiving care prior to enrolling in Medicaid coverage under the expansion. West Virginia officials cited the increased availability of prescription drugs. West Virginia's BHA did not pay for prescription drugs for uninsured individuals except in limited circumstances, whereas newly eligible Medicaid enrollees gained access to the full array of covered drugs under the state's Medicaid program. In contrast, Connecticut, Maryland, and Michigan all had limited coverage available for certain low-income adults prior to expanding Medicaid that paid for some behavioral health services and prescription drugs. For example, Maryland's Primary Adult Care program paid for outpatient mental health and substance use services and prescription drugs for adults up to 116 percent of the FPL. Officials from these three states reported that while the availability of treatment increased when individuals enrolled in Medicaid, the changes were small; for example, officials from two states reported that Medicaid beneficiaries had a greater choice of providers.experienced larger changes; for example, Michigan officials reported that enrollment in Medicaid had resulted in improved access to substance use services, including access to case management, which officials said could help individuals live more successfully in the community. Individuals not enrolled in these coverage programs Officials from the expansion states in our study did report some access concerns for new Medicaid enrollees due to behavioral health professional shortages, which they attempted to address in a variety of ways. Officials from all six states cited behavioral health workforce shortages as a challenge to providing behavioral health treatment for low- income adults in their states. The state officials specifically highlighted shortages of Medicaid-participating psychiatrists and psychiatric drug prescribers. Nevada officials reported conducting a secret shopper study of psychiatrists in the state's Medicaid program in 2014 that found only 22 percent of Medicaid-enrolled psychiatrists were accepting new Medicaid patients. Maryland and Connecticut officials reported difficulties providing Medicaid enrollees with access to certain prescription drugs used for medication-assisted treatment for substance use conditions due to a lack of physicians willing to prescribe these drugs for Medicaid enrollees. States reported taking several steps to address workforce shortages, such as providing reimbursement for telehealth services, expanding the types of providers who can receive reimbursement for providing services in Medicaid, and using peers and other non-licensed providers to deliver some services under the supervision of licensed providers. Michigan chose to address behavioral health needs of its new Medicaid enrollees by leveraging its primary care workforce. The state used a health assessment tool as part of the enrollment process for its alternative benefit plan that included questions about potential behavioral health conditions. Health assessment information was conveyed to each enrollee's primary care provider, who could then address any behavioral health needs or refer for specialty care if needed. State officials reported additional concerns regarding access to behavioral health treatment due to expansion-related budget reductions for state BHAs, which fund treatment for uninsured individuals, as well as non-Medicaid covered treatments for Medicaid enrollees. Officials from four of the six expansion states we spoke with--Connecticut, Kentucky, Michigan, and Nevada--reported that their state's BHA budget had been reduced based on the expectation that uninsured individuals would enroll in Medicaid. For example, Michigan officials reported that the state reduced its state general fund contribution for its BHA by about 10 percent ($116 million) from fiscal year 2013 to fiscal year 2015, and Nevada reported a $33 million reduction to its BHA budget over fiscal years 2014 and 2015 related to the expansion. Some state officials raised concerns about having enough state BHA funding for individuals who would remain uninsured or underinsured following expansion, including individuals who are eligible but do not enroll or re-enroll in Medicaid, immigrants, and certain individuals under 65 who are enrolled in Medicare because of a disability. Officials from two states also expressed concerns about the adequacy of funding for wraparound services--services that are not covered by their states' Medicaid programs, such as supportive housing--for Medicaid enrollees. Officials from the four states that reported BHA budget reductions noted that there were subsequent adjustments to their budgets to lessen the impact of the reductions based on these concerns. For example, Michigan's BHA received an additional $25 million for fiscal year 2015 to address behavioral health needs in certain populations that remain ineligible for Medicaid. (See appendix II for more information on expansion-related changes in state BHA budgets.) Despite concerns about budget reductions, officials from two states noted that when additional Medicaid funds from the expansion were considered as part of the behavioral health budget, much more funding was available overall. Other continuing access problems mentioned by state officials related to inpatient behavioral health treatment. Nevada officials said that lack of psychiatric inpatient capacity has led to patients who were considered a risk to themselves or others being kept in emergency rooms for up to several days before they could secure a bed in a psychiatric hospital. Officials said that an average of 90 to 110 patients per day, predominately Medicaid enrollees, were waiting in emergency rooms. Nevada has made efforts to address the problem, for example, by sending teams of psychiatrists to emergency rooms to assess psychiatric patients to determine whether they could be discharged and treated on an outpatient basis. However, officials noted that discharging such patients carries risks and has led to poor outcomes in the past. Kentucky officials said that they were working to expand capacity for residential treatment programs for substance use. Officials said that given Medicaid's exclusion of payment for treatment for adults at "institutions for mental disease" with 16 or more beds, they were encouraging providers to design any new residential substance use programs to be under that limit. However, they noted that doing so can prevent providers from taking advantage of economies of scale and may make it more difficult to operate some residential treatment programs shown to be effective for substance use conditions. Officials said that the state was working to develop alternatives to inpatient care for Medicaid enrollees, such as transitional housing combined with an intensive outpatient program. We provided a draft of this report to the Department of Health and Human Services for review. HHS provided technical comments, which we incorporated as appropriate. As arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after its issuance date. At that time, we will send copies of this report to the Secretary of Health and Human Services and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix III. Estimated number of low-income, uninsured adults Percent (standard error) Number Total 20.3 (2.6) 68,495 337,414 24.9 (4.6) 20.9 (2.7) 19.4 (2.2) 12.5 (1.2) 12.0 (2.0) 13.0 (3.6) 15.7 (1.2) 12.2 (1.8) 21.1 (4.5) 23.7 (3.6) 16.5 (1.4) 27.5 (3.1) 19.2 (3.1) 15.9 (3.3) 15.8 (2.3) 20.3 (2.4) 19.9 (3.8) 21.2 (1.6) 19.5 (4.4) 16.4 (1.7) 17.2 (2.4) 21.0 (3.2) 20.6 (3.3) 21.5 (3.3) 20.4 (4.2) 6.9 (2.3) 13.2 (2.5) Estimated number of low-income, uninsured adults Percent (standard error) Number Total 12.6 (1.6) 85,555 679,004 14.4 (2.1) 27.5 (4.1) 27.4 (2.1) 18.1 (2.7) 20.7 (3.3) 18.9 (2.0) 24.9 (4.0) 22.3 (2.7) 17.5 (3.4) 22.0 (2.5) 13.7 (1.0) 16.6 (3.2) 23.4 (4.6) 23.4 (3.8) 18.1 (2.3) 21.4 (3.8) 19.6 (3.4) 16.7 (0.4) 16.9 (0.5) 16.6 (0.5) State expanded Medicaid as of February 2015 error) 9.8 (2.3) error) 11.7 (1.9) Percent (standard error) 1.2 (0.5) 3,251 10.1 (3.5) 21.9 (4.5) 6.3 (1.7) 17.0 (2.3) 2.4 (1.1) 9.8 (1.8) 13.1 (1.9) 3.5 (1.4) 4.0 (0.6) 9.7 (1.0) 1.2 (0.3) 2.8 (1.0) 9.7 (1.9) 0.5 (0.3) 7.4 (2.8) 7.2 (2.4) 6.0 (0.8) 11.9 (1.1) 2.2 (0.5) 3.6 (1.2) 9.4 (1.8) 0.8 (0.5) 6.4 (2.1) 18.1 (4.3) 3.3 (1.7) 11,231 11.3 (2.1) 15.8 (3.3) 3.4 (1.4) 3.9 (0.7) 13.9 (1.3) 1.3 (0.3) 50,730 13.0 (2.7) 19.9 (2.8) 5.4 (1.5) 6.4 (2.3) 13.4 (2.5) 0.7 (0.3) 3.3 (1.3) 12.8 (2.8) 0.2 (0.2) 6.1 (1.5) 13.4 (2.0) 3.7 (1.2) 6.2 (1.5) 16.3 (2.2) 2.2 (0.9) 8.8 (3.0) 6.1 (2.9) 16.0 (3.6) 4.9 (2.2) 1.6 (1.2) 16.0 (1.3) 2.0 (0.5) 11.7 (2.6) 2.1 (1.0) 7.3 (1.0) 7.2 (1.5) 11.1 (1.6) 1.9 (0.7) 6.1 (1.6) 12.9 (2.2) 1.8 (0.7) 6.5 (1.9) 16.3 (2.9) 1.9 (0.8) 5.5 (1.6) 15.8 (3.2) 0.6 (0.3) State expanded Medicaid as of February 2015 error) 6.9 (2.8) error) 16.1 (2.8) Percent (standard error) 1.5 (0.6) 5.2 (1.8) 17.9 (4.0) 2.7 (1.5) 1.3 (0.8) 5.9 (2.1) 0.4 (0.3) 6.1 (1.7) 10.7 (2.1) 3.6 (1.2) 3.1 (0.9) 10.4 (1.5) 0.9 (0.4) 3.1 (1.1) 13.1 (1.9) 1.8 (0.6) 2,688 10.5 (3.1) 19.7 (3.8) 57,470 11.1 (1.5) 20.5 (1.7) 4.2 (0.9) 7.5 (1.7) 12.4 (2.2) 1.7 (0.8) 6.8 (1.9) 15.9 (2.9) 2.0 (0.9) 6.2 (1.3) 15.4 (1.9) 2.7 (0.9) 6.9 (2.5) 23.5 (3.8) 5.5 (2.3) 33,594 10.4 (2.4) 16.0 (2.5) 4.1 (2.0) 5.6 (1.9) 14.5 (3.1) 2.6 (1.3) 8.5 (1.8) 15.9 (2.5) 2.4 (1.0) 4.2 (0.6) 10.5 (0.8) 1.0 (0.3) 7.4 (2.0) 10.6 (2.3) 1.4 (0.7) 1,041 10.2 (3.2) 15.7 (3.9) 2.5 (1.2) 7.3 (2.4) 16.9 (4.2) 0.8 (0.4) 36,787 10.1 (3.0) 18.0 (3.2) 4.7 (1.8) 9.1 (2.1) 12.7 (1.9) 3.6 (1.4) 22,092 11.3 (3.8) 15.4 (3.7) 7.9 (2.4) 12.4 (2.3) 0.7 (0.3) 17,750,507 1,029,529 523,286 9,022,176 506,243 8,728,331 5.8 (0.2) 2,272,065 5.8 (0.3) 1,190,927 5.8 (0.3) 1,082,313 12.8 (0.3) 13.2 (0.5) 12.4 (0.5) 1.9 (0.1) 2.0 (0.2) 1.7 (0.2) Not reported because percentage was estimated with low precision. However, totals include data for states that are not reported in this table. For the purposes of this report, we refer to the District of Columbia as a state. Totals include data for states that are not reported in this table. Numbers of low-income uninsured adults in expansion and non-expansion states with a given type of behavioral health condition may not sum to the total because the percentages used to calculate these numbers were rounded. Connecticut officials reported that the budget for its state behavioral health agency (BHA) was reduced in fiscal years 2014 and 2015. However, amid concerns about the effects on providers, the BHA absorbed some of these reductions. In fiscal year 2014, the BHA's budget was reduced by $15.2 million, but the agency absorbed this reduction rather than decreasing the amount of grant funding for providers for the treatment of uninsured and underinsured individuals. In fiscal year 2015, there was a $25.5 million reduction in the BHA's budget. The BHA used a one-time $10 million appropriation from the Connecticut legislature plus other sources to limit the reduction in grant funding for providers to $5.4 million. Kentucky officials reported that the BHA's budget was reduced by $9 million in fiscal year 2014. However, one-time funds allowed the BHA to avoid reducing funding for its contracts with community mental health centers. In fiscal year 2015, there was a $21 million decrease in the BHA's budget, which was taken from contracts with community mental health centers. Maryland officials reported that the state has not reduced state general fund support for its BHA due to the expansion of Medicaid. Michigan officials reported that the state reduced the budget for its state BHA due to the Medicaid expansion, but then added some funds based on concerns about certain populations that remain ineligible for Medicaid. Michigan officials reported that state general revenue contributions to its BHA were reduced by $116 million from fiscal year 2013 to fiscal year 2015 (from $1.153 billion in fiscal year 2013 to $1.037 billion for fiscal year 2015). Michigan officials reported that their legislature had appropriated an additional $25 million for fiscal year 2015 to address the needs of individuals ineligible for Medicaid, such as individuals younger than 64 enrolled in Medicare based on a disability and commercially insured children. Nevada officials reported that the state reduced the budget for its BHA, but used one-time funds to ease the transition from state funding to Medicaid reimbursement for substance use providers in fiscal year 2014. Nevada officials reported a reduction of $33 million in the BHA's budget in fiscal years 2014 and 2015. Nevada officials said one-time funds totaling about $690,000 were used in fiscal year 2014 for substance use service providers to maintain services during the transition from state funding to Medicaid reimbursement. West Virginia officials reported that its charity care fund, which reimburses its network of comprehensive community behavioral health centers for the care of the uninsured, was funded at about $15.4 million per year in fiscal years 2013, 2014, and 2015. Officials said that the governor's fiscal year 2016 budget had recommended a $3 million reduction in the charity care fund due to Medicaid expansion. In addition to the contact named above, William Black, Assistant Director; Manuel Buentello; Hannah Locke; Drew Long; Hannah Marston Minter; and Emily Wilson made key contributions to this report.
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Research has shown that low-income individuals disproportionately experience behavioral health conditions and may have difficulty accessing care. Expansions of Medicaid under PPACA raise questions about states' capacity to manage the increased demand for treatment. Additional questions arise about treatment options for low-income adults in non-expansion states. GAO was asked to provide information about access to behavioral health treatment for low-income, uninsured, and Medicaid-enrolled adults. This report examines (1) how many low-income, uninsured adults may have a behavioral health condition; (2) options for low-income, uninsured adults to receive behavioral health treatment in selected non-expansion states; and (3) how selected Medicaid expansion states provide behavioral health coverage for newly eligible enrollees, and how enrollment in coverage affects treatment availability. GAO obtained estimates of low-income adults who may have a behavioral health condition from the Substance Abuse and Mental Health Services Administration. GAO also selected four non-expansion and six expansion states based on, among other criteria, geographic region and adult Medicaid enrollment. GAO reviewed documents from all selected states, and interviewed state Medicaid and BHA officials to understand how uninsured and Medicaid-enrolled adults receive behavioral health treatment. The Department of Health and Human Services provided technical comments on a draft of this report, which GAO incorporated as appropriate. Nationwide, estimates using 2008-2013 data indicated that approximately 17 percent of low-income, uninsured adults (3 million) had a behavioral health condition, defined as a serious mental illness, a substance use condition, or both. Underlying these national estimates is considerable variation at the state level. The estimated number of low-income, uninsured adults with behavioral health conditions was divided evenly between states that did and did not subsequently expand Medicaid under the Patient Protection and Affordable Care Act (PPACA). Behavioral health agencies (BHA) in four selected non-expansion states offered various treatment options for low-income, uninsured adults, focusing care primarily on those with the most serious behavioral health needs. To do so, BHAs in all four selected states established priority populations of those with the most serious behavioral health needs. Also, BHAs in three of the four states maintained waiting lists for adults with less serious behavioral health needs. Six selected states that expanded Medicaid generally managed behavioral health and physical health benefits separately for newly eligible enrollees, and state officials reported increased availability of behavioral health treatment, although some access concerns continue. Four of the six selected states explicitly chose separate contractual arrangements for behavioral health and physical benefits. Officials from all six selected states said that enrollment in Medicaid increased the availability of behavioral health treatment for newly eligible enrollees. Officials also reported some ongoing access concerns, such as workforce shortages.
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The military and political changes occurring after the Cold War era have resulted in the need for change in U.S. military forces and the acquisition system that supports them. DOD's acquisition reform program was established to reduce acquisition costs while maintaining technological superiority. The goal is to move away from buying items made to comply with unique DOD specifications, terms, and conditions and toward buying commercial products or products made using commercial practices. The intent is to further integrate the U.S. defense and commercial industrial bases. DOD's use of military-unique specifications and standards has been cited in several reports as a major barrier to this acquisition reform goal. In general, "military specifications" describe the physical and or operational characteristics of a product and "military standards" detail the processes and materials to be used to make the product. The standards can also describe how to manage the manufacturing and testing of a part. For example, a specification might describe the kind of wire to be used in an electrical circuit and a standard might describe how the wire is to be fastened in a circuit and what tests should be conducted on the circuit. Military specifications and standards, collectively referred to as "milspecs," are a major part of DOD's Standardization Program, which seeks to limit variety in purchased items by stipulating certain design details. Some principal purposes for milspecs have been to (1) ensure interoperability between products, (2) provide products that can perform in extreme conditions, (3) protect against contractor fraud, and (4) promote greater opportunities for competition among contractors. Many studies over the past 20 years have attempted to redirect the milspec system. In general, these studies have recognized that although milspecs are required, DOD's milspec process was complex, and often rigid, and blocked the use of commercial products and processes. These studies have repeatedly presented a number of the same issues and recommendations. Although DOD has made some progress in decreasing reliance on milspecs, in August 1993, the Deputy Under Secretary of Defense for Acquisition Reform directed that a process action team (PAT) be established to revisit milspec reform. The PAT was to develop (1) a comprehensive plan to ensure that DOD describes its needs in ways that permit maximum reliance on existing commercial items, practices, processes, and capabilities, and (2) an assessment of the impact of the recommended actions on the acquisition process. The April 1994 PAT report entitled Blueprint for Change: Report of the Process Action Team on Military Specifications and Standards is the foundation for DOD's current milspec reform program. Appendix I lists the 24 recommendations from the report and highlights the 13 recommendations identified as principal ones. On June 23, 1994, DOD published an implementation plan for the reform program. In a June 29, 1994, memorandum, the Secretary of Defense officially accepted the PAT report and directed the services and DOD agencies to take immediate action to implement the recommendations. These three documents--the report, the plan, and the memorandum--are the basis of DOD's current efforts to reform milspecs. DOD's current milspec reform program is directed toward reducing government involvement in the detailed management of acquisitions so that appropriate opportunities will be taken to use commercial products and processes. Examples of the program's direction can be seen by such recommendations as streamlining government oversight and inspection, encouraging contractors to offer alternatives to milspecs, expecting the use of performance-based milspecs, and requiring waivers to use milspecs when no alternative is available. This program is based on essentially the same recommendations contained in earlier reports addressing milspec reform. However, the PAT report goes further than previous efforts, as it includes more details for implementation, and additional steps were taken in June 1994, when DOD issued its implementation plan. The fact that most recommendations in the current program to reform milspecs are not new is not surprising because the PAT primarily relied on prior reports for its analysis. Also, as noted in an earlier study, the milspec area has been analyzed many times and "there is literally nothing new under the sun." In our review of eight prior milspec and acquisition reform reports issued since 1977 (listed in app. II), we identified similar recommendations for 17 of the 24 recommendations in the PAT report, including 10 of the 13 principal ones. For example, at least six of the prior reports contained recommendations similar to the PAT recommendations for training, developing nongovernment standards, and automating the development of milspecs. Of the seven new recommendations, four were milspec recommendations related to oversight, contractor test and inspection, pollution prevention, and corporate information management for acquisition. The remaining three were not recognized by DOD as milspec issues and were not addressed by the implementation plan or the Secretary's memorandum. Not only are most of the recommendations not new, but some of the recommended tasks are already stated in DOD or service policy. For example, one major PAT recommendation is to use performance specifications; however, according to DOD and service officials, the preference for performance specifications has existed for several years. In regard to another recommendation, DOD policy already directs adoption of all nongovernment standards currently used in DOD. Furthermore, the DOD Inspector General's Office, in comments on the PAT draft report, indicated that the services' or defense agencies' policies have either encouraged or required actions similar to five of the recommended tasks to eliminate excessive contract requirements. Additionally, some DOD locations had undertaken actions that are comparable to tasks recommended in the PAT report. For example, the Army's Armament, Munitions, and Chemical Command and its Test and Evaluation Command reported that in a 10-month period, they saved $42 million in test and inspection costs, with most savings resulting from the use of process controls. Process controls were recommended in the PAT report. DOD's current milspec program addresses many aspects of developing and applying milspecs and identifies tasks that need to be accomplished. This can be attributed, in part, to the fact that the PAT report developed more detailed plans for implementation than most of the prior reports. In addition to identifying tasks for each recommendation, the report identified risks, barriers, possible benefits and disadvantages, resources, timeframes, responsible organizations, and progress indicators associated with the recommendations. For example, one principal recommendation is to establish Standards Improvement Executives that have the authority and resources to implement an improvement program in each service and defense agency. For this recommendation, the report identifies six tasks for implementation, such as appointing the Executives by a specified date and developing a separate budget line item for the funding they control; a risk to successful implementation, the concern that adequate resources might be unavailable; a barrier, the failure of past DOD leadership to demonstrate long-term commitment to the milspecs improvement program; benefits, such as helping foster cultural change, and disadvantages, such as creating another DOD power base; estimated costs of about $269 million for the entire milspecs improvement program over 6 fiscal years starting in 1994; and time frames for the tasks. In June 1994, a Report Implementation Group--consisting of representatives from OSD, the services, and the Defense Logistics Agency--met and developed DOD's implementation plan. The plan addresses an approach for ensuring that the infrastructure and resources required for reform are in place. A key feature of the plan is that each major buying command and center is required to provide a draft of its own implementation plan to its service/agency by the end of October 1994, with final submittal by the end of November 1994. Additionally, to help ensure stable milspecs improvement funding and provide management oversight, the plan envisions that the Assistant Secretary of Defense (Economic Security) work with the DOD Comptroller to create a common program element for each service's budget. Some PAT report recommendations were not viewed as directly related to milspec reform and were not addressed by the implementation group. Also, the group did not address some other implementing tasks. For example, the task to establish memorandums of understanding with industry was set aside because the PAT had provided no data on the benefits of this task and the implementation group questioned the value. In another case, a recommended task--canceling or inactivating standards identified by industry as problems--was temporarily suspended by the group pending the completion of an additional analysis. According to OSD officials, the implementation plan is simply the first step in a long-range, iterative process. We were told that the implementation plan reflects current thinking and that the plan is to be updated periodically to reflect progress, issues, and new directions. Officials said that in 6 months the group will revisit the plan and update it. The major focus of the current milspec reform program is on changing DOD's acquisition culture. Specifically, the PAT's recommendations and implementing tasks, the subsequent implementation plan, and the Secretary of Defense's memorandum all address the need to change DOD's acquisition culture. We previously reported that the inability to change the culture has thwarted reform. The PAT report goes beyond identifying the need for cultural changes and addresses several elements in a cultural change program, including (1) leadership, (2) training, (3) resources, and (4) incentives for desired behavior. In a February 1992 report, we stated that such elements, especially top management commitment and training, have been successfully used in the private sector to change organizational culture. However, we also noted that experts believe that a culture change is a long-term effort that takes at least 5 to 10 years to complete. DOD officials and prior studies have stated that past milspec reform initiatives were not fully successful because top management did not participate personally in the process and provide the required leadership. For example, in an overview of prior milspec initiatives, a 1993 report stated that personal involvement of DOD management has worked, and hands-off, directive-type management has not. The Secretary of Defense, in signing the memorandum to implement the reform program, stated that the current senior leadership is committed to ensuring that acquisition reform changes will be accepted and institutionalized. DOD officials said that this is the first time that such support has existed prior to beginning a milspec reform effort. The PAT report and the Secretary's memorandum stipulate that OSD management and other acquisition leaders must take an ongoing and proactive role in reinforcing the acquisition reform message of which milspecs is only one component. According to the PAT report, senior DOD management has a major role in establishing the environment essential for cultural change by, among other things, participating in the implementation process. Leadership is also required to ensure that top-level officials designated to carry out the reforms have the authority and resources to implement the program. For example, some of the prior reports have noted that the problem is not in assigning reform responsibilities to designated officials, but in ensuring that these officials have the required authority and resources. The most likely candidate to carry forward a reform agenda--the Standards Improvement Executive--has often been removed from the acquisition decision-making process. As described earlier, the PAT recommends giving these Executives the authority needed to effect desired reform. As required in the implementation plan and the Secretary's memorandum, Standards Improvement Executives were appointed in July 1994 to participate in the Defense Standards Improvement Council. The Council is to oversee the implementation of, provide direction to, and resolve issues in the milspec reform program. Among other things, the Secretary's memorandum required the Council to report directly to the Assistant Secretary for Economic Security and directed that actions be taken to budget funds for the program. However, whether such changes will give these officials the authority and resources needed for milspec reform is yet to be determined. The PAT report cites training as "the linchpin of cultural change, providing new skills and knowledge to implement a new acquisition paradigm." The majority of the report's recommendations either included tasks to provide training or cited the need for training to overcome cultural barriers. While training has been recommended in most prior milspec reform reports, the current emphasis on training appears more extensive and is intended to include more personnel in training programs. Past training recommendations primarily addressed classroom training. The current recommendations require continuous, rather than one-time training, for all levels and includes many delivery systems in addition to classroom training to reach the personnel responsible for implementation. Examples include such media as video tapes of speeches and interviews by top OSD and service leaders, video conferences, correspondence courses, computer-based instruction, and road shows (in which senior acquisition personnel go on-site to the workforce to sell the need for changes and answer questions). While some of the training is focused on demonstrating the need for change, other training is to provide instruction on specific skills and capabilities such as developing and applying performance specifications, conducting market research, or obtaining quality assurance with reduced government oversight. The PAT report estimated training costs at about $13 million over 6 years, starting in 1994. This was to be in addition to training already funded within existing budgets for the Defense Acquisition University. We were told that (1) the amounts in the report are estimates and are not based on detailed analysis and (2) the services are developing details for budget submissions. The implementation plan does not add substantive details on training to the PAT report. However, one possibly significant difference between the two is that the implementation plan does not require that training related to milspec reform be a mandatory part of career progression for all appropriate acquisition personnel as the PAT recommended. This could serve to decrease some of the importance of new training. The PAT and prior efforts have stated that personnel and funding are crucial resources to the success of the recommended actions. The PAT reports that one way of ensuring reform is to develop a joint milspec budget with individual service/agency line items to control funds needed for implementing initiatives. Four of the eight prior reports we analyzed also recognized the need for separate funding to accomplish milspec recommendations. Currently, the funding and personnel responsible for developing and maintaining milspecs used by DOD are decentralized with OSD providing overall policy and guidance. As a result, local commanders where standardization activities are located control the resources and can reduce standardization efforts to free funds and personnel for other tasks considered more important. In our field visits we noted examples of reductions in resources for milspec functions because of other work priorities. We were told that the personnel situation could intensify as the DOD acquisition workforce continues to shrink. Reportedly, the workforce has been reduced by 23 percent, or 134,000 jobs, since 1988. The PAT report estimated that total additional funding required to implement the recommendations would be as shown in table 1. PAT officials told us that the implementation estimates were very rough, and they could not provide support for them. The Secretary of Defense's implementing memorandum does not address the amount of funds that might be required. It requires the Under Secretary of Defense (Acquisition and Technology) to arrange for funds needed in fiscal years 1994 and 1995 to efficiently implement the PAT report and directs the services to program funding for fiscal year 1996 and beyond. DOD and service officials told us that providing funds to carry out recommendations or ensuring that funds will be available for milspec functions will be difficult. As noted in earlier reports, lack of adequate funding was a problem in other milspec reform efforts. Furthermore, because of reductions in the DOD acquisition workforce, personnel authorizations could become as critical, if not more critical to milspec reform as funding. For example, the implementation plan pointed out that the Air Force, even with adequate funds, might have difficulty implementing the recommendations due to personnel ceilings. All DOD organizations might experience such difficulty because DOD is implementing the Federal Workforce Restructuring Act of 1994 by establishing work year ceilings on civilian personnel levels. One way the program recommends achieving cultural change is to provide incentives for industry and program officials to effectively introduce alternatives in the proposal process as revisions or substitutes for milspecs. Our previously discussed December 1992 report noted that one reason reforms do not occur is that the basic incentives or pressures that drive the participants' behavior in the process are not changed. Accordingly, changing incentives and pressures is important for cultural change as opposed to coercive and procedural solutions that attempt to make things happen without necessarily affecting why they did not happen in the first place. The PAT recommends that all new high-dollar value solicitations and ongoing contracts include a statement encouraging contractors to submit alternative solutions to milspecs. Tasks proposed to implement the recommendation include policy changes to allow contractors offering alternatives to milspecs the possibility of additional profit or fees for new contracts and the negotiation of a no-cost settlement for certain existing contracts. A similar recommendation was in the 1977 Defense Science Board report; however, a 1993 Defense Science Board report pointed out that currently "Government profit 'guidelines' do not encourage contractors to reduce costs since profit is a percentage of cost." Also, some DOD officials have questioned whether this recommendation provides more incentives than the current program. Accordingly, questions remain as to whether this recommended action will adequately incentivize contractors. In addition to providing incentives to contractors, DOD's program envisions providing incentives to program managers. One of the recommended tasks is to issue a change in policy that encourages program managers to select alternative solutions to milspecs by allowing the program to retain a portion of any resulting savings. This was recommended in a 1987 study, but was not implemented. Our review identified program areas that have not been fully developed in this early stage of implementation. Specifically, we observed that (1) data on the benefits of implementing the recommended actions were generally not available, (2) opportunities for advancing acquisition reform goals had not been prioritized, and (3) indicators were not adequate to measure progress toward intended goals. DOD officials acknowledged the need for further work in these areas as implementation proceeds. The PAT report and other reports assert that milspec reform will result in dollar savings and other benefits that will more than offset the additional funds required for reforms. However, neither the PAT report, the implementation plan, nor the Secretary's memorandum provide much supporting data on dollar savings or other benefits to be achieved. The PAT's charter specifically required the team to quantify the benefits of recommendations. Although 14 of the 24 recommendations refer to expected savings or cost avoidances, the report provided specific dollar benefits for only 2, and these were the savings realized from limited implementation by a service or defense agency. OSD and service officials acknowledged that the PAT did not do much to quantify benefits. These officials stated that it was difficult to identify costs and savings of the various actions involved in each recommendation but conceded that this information should be developed. DOD officials said that because many interrelated actions are being implemented in addition to milspec recommendations, it is not possible to identify the results of specific changes. The July 1993 Defense Science Board report on Defense Acquisition Reform also supports this view. It cites case studies to show potential savings by eliminating five elements that impose inefficiencies in the current acquisition systems--unique government specifications, processes, and practices being one element. However, the examples indicated that the five elements combined to cause the additional costs of government items, and the savings from each recommended change were not subject to precise calculation. During his press conference on milspec reform, the Secretary of Defense stated that milspec reform was expected to increase DOD's costs in the first year but to produce billions of dollars in savings thereafter. He cited the electronics area as having the potential to produce savings of about $700 million. DOD officials have not identified any reliable data on costs and savings that support these statements. Identifying monetary savings could be critical to achieving acceptance of the reform program by officials throughout the acquisition community. Prior efforts, such as the Defense Management Review Working Group Initiative, reportedly failed because, among other things, the services and defense agencies never concurred with the initiative. A DOD official, in commenting on the draft PAT report, said that it would be helpful if the report included some form of cost benefit analysis. More details of monetary benefits might be required if milspec reform is to be successful because officials could be reluctant to commit scarce resources if they are not convinced that the effort will produce identifiable benefits. Under its current milspec reform program, DOD has not prioritized actions by identifying where the greatest needs and opportunities for milspec reform exist. Neither has it clearly differentiated the types of acquisitions, classes of equipment, or sectors of the industrial base to which each recommendation has the greatest applicability. The PAT charter tasked the team to evaluate the impact of implementing its recommendations on major systems, less-than-major systems, systems support equipment, spare and repair parts, base support equipment, and supplies and consumables. Although the team addressed some of these areas, an overall evaluation of the impact of the PAT recommendations on different types of acquisitions, buys, or industrial sectors was not done. A more detailed evaluation would have been instrumental in identifying where the greatest needs and opportunities for milspec reform exist. Comments received on a draft of the PAT report indicate concern about the global nature of some of the recommendations. For example, one official noted that the report proposes to apply a "grab bag" of practices to each and every program without considering the specific needs of each program. The official said that this approach would harm the general acquisition process. The PAT response did not directly address these concerns but stated that, among other things, the PAT recognized that the defense acquisition process was very complex and that simple solutions broadly applied are not the answer. If all needed resources do not become available, focusing on areas of high payoff might be needed. The limited examples of identified benefits appear to indicate that the recommendations could meet varying levels of needs or provide different benefits, depending on the industrial sector involved. For example, Defense Science Board reports issued in January 1987 and July 1993 identify key industrial sectors, such as electronics, jet engines, semiconductors, and transportation, as offering opportunities for DOD to buy commercial products without using milspecs. The Secretary of Defense stated that in the electronics area industry was so far ahead of DOD technologically that using performance or commercial specifications for these items would produce great benefits. DOD's implementation plan does not target this or other areas for priority attention. Identifying areas where the greatest opportunities are and establishing the details on how DOD could apply recommendations to different types of buys could be important in ensuring that implementing officials clearly understand what is required and what benefits are expected. DOD officials told us that they are developing tools for the services to use in identifying the greatest opportunities. They said that these tools include a questionnaire to help users prioritize the areas of greatest opportunities for milspec reform within the various DOD activities. Also, they said that DOD is establishing priorities for eliminating management and process standards that have been tentatively identified by industries as significant integration barriers or cost drivers. DOD's milspec program calls for establishing indicators that monitor the program's success in translating the reform policy into actions and reducing costs and integrating the defense and commercial bases. DOD's implementation plan identifies 12 indicators, a reduction from the approximately 50 individual ones listed in the PAT report. In addition, the plan states that an existing database will be expanded to have automated data reporting for some indicators. However, DOD officials said that the expanded data was not viewed as cost effective, and currently, they plan to expand data in only one limited area. An earlier milspec reform report noted that the current DOD computer systems are not able to track some critical data elements such as the volume of commercial items being bought, or the number of items bought to milspecs as opposed to some other type of specification. The majority of the indicators in the PAT report and the implementation plan consist of determining whether an event has occurred or counting the number or percent of selected documents, such as milspecs or commercial standards, that are used. For example, on the recommendation regarding leadership, the PAT report indicators include ascertaining if (1) the policy memorandum is issued, (2) video conferences occur, and (3) progress reports are submitted. Indicators for other recommendations include the number of (1) milspecs and commercial type documents used, (2) commercial acquisitions, and (3) alternatives to milspecs proposed and accepted. These do not appear to measure whether DOD is progressing toward its overall goals of reducing acquisition cost and time and integrating the industrial bases. OSD officials recognize that the indicators are weak and are currently working on developing better ones. Although the PAT report recommended that the Defense Standards Improvement Council monitor progress, no other organization has yet been assigned specific responsibility for developing improved indicators. We reviewed the April 1994 PAT report; the DOD's June 23, 1994, implementation plan; and the June 29, 1994, Secretary of Defense memorandum directing implementation of the PAT report. We analyzed the 24 recommendations in the PAT report, focusing on the 13 principal ones. To see whether these recommendations were cited in past studies, and whether resources, time frames, and progress indicators were more fully addressed in the current program, we compared the program with selected prior reports on milspecs and acquisition reform. To obtain more data about milspec issues and changes that could occur under the reform program, we (1) visited standardization activities and program offices at the Air Force Material Command and Aeronautical Systems Center, the Army Materiel Command and Aviation and Troop Command, and the Defense General Supply Center and (2) interviewed officials from the services, standards writing organizations, and industries. We conducted our work between November 1993 and August 1994 in accordance with generally accepted government auditing standards. We did not obtain written DOD comments on a draft of this report; however, we discussed our results with agency officials. In general, they concurred with our results and made some suggestions that have been considered in preparing this report. We are sending copies of this report to the Secretary of Defense, the Deputy Under Secretary of Defense for Acquisition Reform, and interested congressional committees. Please contact me at (202) 512-4587 if you have any questions concerning this report. Major contributors to this report are listed in appendix III. The following are the recommendations in the report entitled Blueprint for Change: Report of the Process Action Team on Military Specifications and Standards, dated April 1994. We identify the 13 principal recommendations with an asterisk (*). 1.* All ACAT Programs for new systems, major modifications, technology generation changes, nondevelopmental items, and commercial items shall state needs in terms of performance specifications. 2.* Direct that manufacturing and management standards be canceled or converted to performance or nongovernment standards. 3.* Direct that all new high value solicitations and ongoing contracts will have a statement encouraging contractors to submit alternative solutions to military specifications and standards. 4.* Prohibit the use of military specifications and standards for all ACAT programs except when authorized by the Service Acquisition Executives or designees. 5. Change current processes and procedures to ensure that specifications and standards only list references essential to establishing technical requirements. 6. Eliminate the current process of contractually imposing hidden requirements through references listed in equipment/product specifications or noted on engineering drawings. 7. Mandate cancellation or inactivation of new design obsolete specifications and standards that have had no procurement history for the past 5 years. Cancel all unnecessary data item descriptions. 8.* Form partnerships with industry associations to develop nongovernment standards for the replacement of military standards where practical. 9. Establish a process to include industry and government users upfront in the specifications and standards development and validation processes. 10. Assign specifications and standards preparation responsibility to the Defense Logistics Agency for Federal Supply Classes that are primarily commercial. 11.* Direct government oversight be reduced by substituting process control and nongovernment standards in place of development/production testing and inspection and military unique quality assurance systems. 12.* Direct a goal of reducing the cost of contractor-conducted development and production test and inspection by using simulation, environmental testing, dual-use test facilities, process controls, metrics, and continuous process improvement. 13.* Assign Corporate Information Management offices for specifications and standards preparation and use. 14.* Direct use of automation to improve the processes associated with the development and application of specifications and standards and Data Item Descriptions. 15.* Direct the application of automated aids in acquisition. 16. Use Distributed Interactive Simulations, Design to Cost and Cooperative Research and Development Agreements to achieve aggressive cost/performance trade-offs and dual-use capabilities. 17. Direct the establishment and execution of an aggressive program to eliminate or reduce and identify the quantities of toxic pollutants procured or generated through the use of specifications and standards. 18.* Direct revision of the training and education programs to incorporate specifications and standards reform. Contractor participation in this training effort shall be invited and encouraged. 19.* Senior DOD management take a major role in establishing the environment essential for acquisition reform cultural change. 20.* Formalize the responsibility and authority of the Standards Improvement Executives, provide the authority and resources necessary to implement the standards improvement program within their service/agency, and assign a senior official with specifications and standards oversight and policy authority. 21. Use innovative approaches in the acquisition of weapon systems, components, and replenishment items by using commercial practices. 22. Increase the use of "partnering" in contracts and program management to improve relationships and communication between government and industry. 23. Continue to encourage and assist contractors to use activity-based costing in circumstances where the method could improve cost allocations, bidding, and cost reimbursements. 24. Integrated Product Development will be the preferred risk mitigation tool for all developmental acquisitions. Road Map for Milspec Reform: Integrating Commercial and Military Manufacturing, Report of the Working Group on Military Specifications and Standards, Center for Strategic and International Studies, 1993. Acquisition Streamlining: Specifications and Standards, DOD Inspector General, Report 92-INS-12, September 21, 1992. Report of the Process Action Team on Procedures for Working Group 9 on Specifications and Standards Under the Regulatory Relief Task Force of the Defense Management Review, August 1990. Report of the Process Action Team on User Feedback for Working Group 9 on Specifications and Standards Under the Regulatory Relief Task Force of the Defense Management Review, October 1990. Enhancing Defense Standardization-Specifications and Standards: Cornerstones of Quality, Report to the Secretary of Defense by the Under Secretary of Defense (Acquisition), (the Costello report), November 1988. Use of Commercial Components in Military Equipment: Final Report of the Defense Science Board, 1986 Summer Study, January 1987. A Quest for Excellence: Report to the President by the President's Blue Ribbon Commission on Defense Management (the Packard Commission report), June 1986. Report of the Task Force on Specifications and Standards, Defense Science Board (the Shea Report), April 1977. Lillian I. Slodkowski The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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GAO reviewed the Department of Defense's (DOD) efforts to implement acquisition reforms, focusing on whether its current program: (1) advances military specifications and standards reform; and (2) gives adequate attention to key issues and concerns. GAO noted that: (1) DOD's current milspec reform program builds on previous studies; (2) although many of the recommendations are essentially the same as those in earlier reports, the current program goes further than previous efforts because it includes more details for implementation; (3) while the implementation strategy is still being refined, officials in the Office of the Secretary of Defense stated that the June 1994 implementation plan is the first step in a long-range, iterative process; (4) major buying commands and centers are to present plans by November 1994 that should provide further implementation details; (5) the current milspec reform effort focuses on changing the acquisition culture and contains several actions intended to accomplish this change, including: (a) ensuring long-term, top-management support; (b) providing training to the affected workforce; (c) securing adequate funding and personnel resources; and (d) establishing incentives for desired behavior; (6) these actions have been used successfully by some commercial companies to promote cultural change; (7) to achieve the major cultural change desired, DOD will need acceptance and support of the milspec reform program throughout the military acquisition community, including both DOD's and contractors' offices; (8) achieving this acceptance and support could become more difficult without: (a) improved data on the benefits of implementing the recommended actions; (b) better focus on areas with the greatest opportunities for benefits; and (c) adequate indicators, referred to by DOD as metrics, to measure progress toward intended goals; and (9) DOD officials have acknowledged difficulties in these areas and indicated that actions would be taken to address these shortcomings as program implementation continues.
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DOD contingency operations, such as those in support of GWOT, can involve a wide variety of activities such as combating insurgents, training the military forces of other nations, and conducting small-scale reconstruction and humanitarian relief projects. Volume 12, chapter 23 of the DOD Financial Management Regulation, 7000.14-R establishes financial policies and procedures for contingency operations and generally guides the DOD components' spending by defining what constitutes incremental costs and by providing examples of eligible incremental costs. The costs incurred for contingency operations include the pay of mobilized reservists, as well as the special pays and allowances for deployed personnel, such as imminent danger pay and foreign duty pay; the cost of transporting personnel and materiel to the theater of operation and supporting them upon arrival; and the operational cost of equipment such as vehicles and aircraft, among many other costs. Costs that are incurred regardless of whether there is a contingency operation, such as the base pay of active duty military personnel, are not considered incremental and therefore are funded in DOD's base budget. DOD reports its GWOT-related costs in terms of obligations, which are incurred through actions such as orders placed, contracts awarded, services received, or similar transactions. When obligations are incurred, the DOD components enter them into their individual accounting systems. An obligation entry may include a number of different identifiers, including information such as funding source and the contingency operation, and the category of cost as determined by the individual component. Volume 12, chapter 23 of the DOD Financial Management Regulation directs components to capture contingency costs within their existing accounting systems and at the lowest possible level of organization. Individual obligation data that are coded as being in support of GWOT are recorded and sent through the component's chain of command where they are aggregated at successively higher command levels. In a series of reports, we have identified numerous problems in DOD's processes for recording and reporting obligations, raising significant concerns about the overall reliability of DOD's reported obligations. In addition, DOD's financial management has been on GAO's list of high-risk areas requiring urgent attention and transformation since 1995. Factors affecting the reliability of DOD's reported obligations include long- standing deficiencies in hundreds of nonintegrated financial management systems requiring manual entry of some data in multiple systems, and the lack of a systematic process to ensure that data are correctly entered into those systems. On its own initiative and in response to our recommendations, DOD has placed greater management focus on weaknesses in GWOT cost reporting, such as establishing additional procedures for analyzing variances in reported obligations and disclosing underlying reasons for significant changes. In addition, DOD established a Senior Steering Group in February 2007, including representatives from DOD, DFAS, and the military services, in an effort to standardize and improve the GWOT cost-reporting process and to increase management attention to the process. In conjunction with the Senior Steering Group, a GWOT Cost-of-War Project Management Office was established to monitor work performed by auditing agencies and to report possible solutions and improvements to the Senior Steering Group. It is tasked with leading initiatives in improving the credibility, transparency, and timeliness of GWOT cost reporting. DOD's efforts are ongoing and we have continued to monitor its progress as GWOT cost reporting has evolved. DOD and the military services continue to take steps to improve some aspects of the accuracy and reliability of GWOT cost reporting. Some examples are discussed below. Because efforts to implement some of these initiatives are still in the early stages, their effect on the reliability of GWOT cost reporting is uncertain. DOD has undertaken several initiatives to improve the accuracy and reliability of its GWOT cost data. First, to promote the goal of continually improving its cost-of-war processes and reports, in February 2008, DOD required its components to statistically sample and validate their fiscal year 2008 GWOT obligation transactions on a quarterly basis beginning with the first quarter of fiscal year 2008. DOD also required its components to review randomly sampled non-GWOT obligations to determine whether the transactions were properly classified as non-GWOT versus GWOT. According to DFAS officials, the new requirement has improved the reliability of reported GWOT obligations because DOD components are taking actions to improve their GWOT cost reporting procedures and are making corrections when errors such as missing or illegible supporting documentation, missing codes, and miscoded transactions are found. DFAS plans to include a requirement to review and validate GWOT obligation data in an update to volume 3, chapter 8 of the DOD Financial Management Regulation. Second, DOD is initiating a new contingency cost-reporting system in fiscal year 2009 called the Contingency Operations Reporting and Analysis System. DOD's goals are to automate the collection of GWOT cost data from DOD components and improve the timeliness of cost-of-war reporting. This system pulls elements of GWOT transaction data directly from DOD components' accounting systems into its data store. Limited features of the system became available for use in October 2008 and it should be fully operational by September 2009. Upon completion of the project, this system should allow DOD and external users to have a consolidated location to view and analyze data for the cost of war, disaster relief, and all other contingencies. Users will have access through a Web browser and should be able to filter data and perform various analyses. Previously, the DOD components individually gathered and manually entered their GWOT cost data monthly into a template provided by DFAS for cost-of-war reporting. According to DFAS officials, the new system is designed to ensure better reliability and eliminate the possibility of manual errors. Third, DFAS is issuing a redesigned monthly cost-of-war report through the Contingency Operations Reporting and Analysis System, starting in fiscal year 2009, to replace DOD's monthly Supplemental and Cost of War Execution Report, which was provided to external customers, including Congress, the Office of Management and Budget, and GAO. The first new cost-of-war report, commonly referred to as the Contingency Operations Status of Funds Report, was issued in December 2008 and covered costs for October 2008. According to DOD, this redesigned report should improve transparency over GWOT costs by comparing appropriated GWOT supplemental and annual funding to reported obligations and disbursements. The previous cost-of-war report displayed obligations (both monthly and cumulative by fiscal year) by appropriation, contingency operation, and DOD component, but did not compare obligations to appropriated funding. The military services have also taken actions to correct weaknesses in the reliability of their GWOT cost data. Examples for each of the services are discussed below. Since these actions have only recently been implemented, their effect on the reliability of GWOT cost reporting is uncertain. We found that the Marine Corps was not reporting obligations in descriptive cost categories in the DOD Supplemental and Cost of War Execution Report as required in volume 12, chapter 23 of the DOD Financial Management Regulation, which DOD established to provide better transparency over reported costs. Specifically, the Marine Corps was reporting obligations in the miscellaneous category of "other supplies and equipment" rather than the more descriptive cost categories. We brought this issue to the attention of both DFAS and the Marine Corps office responsible for submitting monthly cost data to DFAS. Marine Corps officials acknowledged the absence of the data and indicated that they would attempt to provide further breakdown of the Marine Corps' reported obligations in future reports. In June 2008, the Marine Corps revised its cost-reporting procedures to provide further breakdown of reported obligations for "other supplies and equipment" in DOD's cost-of- war reports. In addition, Marine Corps officials told us that in May 2008 they streamlined their cost-of-war reporting by centralizing their GWOT cost data-gathering and reporting procedures. Prior to this time, commands would individually submit their monthly GWOT cost data to Marine Corps headquarters. According to Marine Corps officials, the new procedures have improved the visibility and reliability of reported costs across the service, especially at the command level. We found that the Air Force was reporting some operation and maintenance obligations in the miscellaneous cost categories for "other supplies and equipment" and "other services and miscellaneous contracts" rather than reporting these obligations in the more descriptive cost categories that DOD had established. We brought this issue to the attention of both DFAS and the Air Force office responsible for submitting monthly cost-of-war data to DFAS. In response, the Air Force and DFAS revised the Air Force's cost-reporting procedures so that costs could only be reported in the more descriptive cost categories. Our analysis of the fiscal year 2008 Army obligation data showed that the Army was misusing certain accounting codes to capture costs for GWOT contingency operations. Army officials told us that commands were incorrectly using these codes to record costs for activities that were not adequately funded in the base budget such as contracts for security guards and other anti-terrorism force-protection measures for facilities and installations located outside of the continental United States. Consequently, almost $2 billion in obligations for operation and maintenance was included in DOD's cost-of-war report for costs that may not be directly attributable to GWOT contingency operations. In addition, the Army reported about $220 million in GWOT obligations for operation and maintenance costs associated with its modular restructuring initiative. Army officials told us that the Army modular restructuring initiative is not an incremental cost and therefore should not have been included in the cost-of-war report. The Army has addressed these issues for fiscal year 2009 by revising its cost code structure and eliminating cost codes that commands have misused in the past. During the course of our work, we found that the Navy lacked a centralized and documented process for its GWOT cost reporting. For example, Navy headquarters had little visibility over how lower-level commands record and report their GWOT costs. Moreover, the Navy's cost-reporting process relied on the use of several computer-operated spreadsheets that required manual data input. The Navy also did not have formal guidance for GWOT cost reporting. In addition, our prior work had revealed that the Navy's Atlantic Fleet and Pacific Fleet used different approaches for allocating a ship's normal operating costs and GWOT costs. In September 2008, the Navy issued formal guidance for GWOT cost reporting in response to weaknesses in internal controls for contingency cost reporting that were identified as a result of its quarterly validations of GWOT obligation transactions. According to the Navy, the new guidance will increase the visibility of its costs, standardize its cost- reporting process for contingency operations, and increase the ability to audit its financial systems. Further, beginning in fiscal year 2008, the Atlantic Fleet and Pacific Fleet began using the same cost model for calculating how much of a ship's total operating costs should be allocated to GWOT. This cost model estimates a ship's GWOT operating costs by the number of days that it is deployed in support of a military operation. According to the Navy, this cost model is part of a broader initiative to improve and coordinate financial management processes at both the Atlantic Fleet and Pacific Fleet. Although DOD has taken steps to improve certain aspects of its GWOT cost reporting, its approach to identifying the costs of specific operations has, in some cases, resulted in the overstatement of costs, particularly for Operation Iraqi Freedom, and in other cases, for both contingencies. Since 2001, DOD has reported significant costs in support of Operation Iraqi Freedom and Operation Enduring Freedom. However, we found that reported costs for Operation Iraqi Freedom may be overstated due to weaknesses in DOD's methodology for reporting its GWOT costs by contingency operation. Furthermore, the military services have reported some costs that are not directly attributable to the support of either Operation Iraqi Freedom or Operation Enduring Freedom. As of September 2008, DOD had reported total obligations of about $654.7 billion for GWOT, including about $508.4 billion, or 78 percent, for Operation Iraqi Freedom, about $118.2 billion, or 18 percent, for Operation Enduring Freedom, and about $28.1 billion, or 4 percent, for Operation Noble Eagle. As figure 1 shows, since fiscal year 2001, Operation Iraqi Freedom has accounted for the largest amount of total reported obligations among these three operations. However, DOD's reporting of costs for GWOT does not reliably represent the costs of contingency operations, for reasons discussed below. We found that reported costs for Operation Iraqi Freedom may be overstated due to weaknesses in DOD's methodology for reporting its GWOT costs by contingency operation. Volume 12, chapter 23 of the DOD Financial Management Regulation emphasizes the importance of cost reporting and requires DOD components to make every effort possible to capture and accurately report the cost of contingency operations. Furthermore, this regulation states that actual costs should be reported, but when actual costs are not available, DOD components are required to establish and document an auditable methodology for capturing costs. While the Army and Marine Corps are capturing totals for procurement and certain operation and maintenance costs, they do not have a methodology for determining what portion of these GWOT costs is attributable to Operation Iraqi Freedom versus Operation Enduring Freedom. For example, both military services reported their GWOT costs for procurement and certain operation and maintenance activities as costs exclusively attributable to Operation Iraqi Freedom, although a portion of these costs are attributable to Operation Enduring Freedom. In fiscal year 2008: The Army reported about $30.2 billion in GWOT procurement obligations as costs tied to Operation Iraqi Freedom and none as part of Operation Enduring Freedom, even though, according to Army officials, some of these costs were incurred in support of Operation Enduring Freedom. These reported obligations include both non-reset- related and reset-related procurement for items such as aircraft, munitions, vehicles, communication and electronic equipment, combat support, up-armored High Mobility Multipurpose Wheeled Vehicles, and countermeasures for improvised explosive devices. The Army reported obligations of about $8 billion for operation and maintenance associated with reset for Army prepositioned stocks, depot maintenance, recapitalization, aviation special technical inspection and repair, and field maintenance as part of Operation Iraqi Freedom but none for Operation Enduring Freedom, even though, according to Army officials, some of these costs were incurred in support of Operation Enduring Freedom. The Marine Corps reported $3.9 billion in procurement obligations as costs tied to Operation Iraqi Freedom but none as part of Operation Enduring Freedom, even though, according to Marine Corps officials, some of these costs were incurred in support of Operation Enduring Freedom. As in the case of the Army, these reported obligations include non-reset-related and reset-related procurement for various items. The Marine Corps reported obligations of about $1.1 billion for operation and maintenance for "reconstitution/resetting the force" as part of Operation Iraqi Freedom but none for Operation Enduring Freedom, even though, according to Marine Corps officials, some of these costs were incurred in support of Operation Enduring Freedom. The reason military service officials gave for not separating equipment- related costs between the two operations was that it was difficult to do so. Army officials told us that when actual costs cannot be clearly attributed to Operation Iraqi Freedom or Operation Enduring Freedom, they report all of these costs as part of Operation Iraqi Freedom since it is viewed as the larger of the two operations in terms of costs and funding. Marine Corps officials stated that they did not always know where GWOT equipment purchased with procurement appropriations ultimately went. These officials told us that they believed that the vast majority of the equipment was delivered to Iraq since, prior to April 2008, the bulk of Marine Corps forces had been deployed to Iraq in support of Operation Iraqi Freedom. While this assumption could be generally correct, without data on where equipment was delivered it is unclear what costs were incurred to support each operation. We observed that the command responsible for the acquisition and sustainment of war-fighting equipment for the Marine Corps did not have a cost code for Operation Enduring Freedom. As a result, all of the Marine Corps' reported obligations for procurement and equipment-related operation and maintenance expenses were being coded in support of Operation Iraqi Freedom. Without a methodology for determining what portion of total GWOT obligations is attributable to Operation Iraqi Freedom or Operation Enduring Freedom, reported costs for Operating Iraqi Freedom may be overstated and cost information for both operations will remain unreliable. The Marine Corps reported about $1.4 billion in obligations for procurement and operation and maintenance in fiscal year 2008 in support of Grow the Force--a long-term force-structure initiative--as part of Operation Iraqi Freedom. Grow the Force is an initiative that was announced by the President in January 2007 to increase the active duty end-strength of the Army and Marine Corps. According to Marine Corps strategic guidance, this increase in force structure will provide the Marine Corps with additional resources needed to fight what the Marine Corps refers to as the "long war." The guidance outlines the Marine Corps' strategic plan for force employment to meet the need for counterinsurgency and building partnership capacity in support of the National Defense Strategy and multinational efforts in the "Global War on Terrorism/Long War." The Marine Corps established a cost code for capturing Grow the Force costs. A Marine Corps official told us that they reported all obligations in support of Grow the Force as part of Operation Iraqi Freedom because, prior to April 2008, the majority of Marines deployed overseas were stationed in Iraq. Marine Corps officials at commands we visited told us that examples of their commands' reported obligations for operation and maintenance in support of Grow the Force included civilian labor and infrastructure costs for bases and facilities located inside the United States. These officials further stated that these costs were necessary to accommodate the increased size of the force. Similarly, at one Marine Corps command, we found reported GWOT costs for the repair and renovation of sites and facilities located within the United States for the purpose of improving security against terrorism. Marine Corps officials at this command said that these security initiatives included costs for such items as barbed wired fences, automatic vehicle gates, automobile barricades, and security cameras. These officials further stated that Marine Corps headquarters instructed them to code these costs as part of Operation Iraqi Freedom. The Marine Corps reported about $42.4 million in obligations for operation and maintenance for these security costs in fiscal year 2008. The Air Force established a code for capturing "long war/reconstitution" operation and maintenance costs based on changes in DOD's funding guidance for GWOT requests in fiscal year 2007. Air Force guidance defines "long war" costs as all incremental costs related to the war on terror beyond costs strictly limited to Operation Iraqi Freedom and Operation Enduring Freedom. These costs include reconstitution/reset costs for combat losses, accelerated wear and necessary repairs to damaged equipment or replacement to newer models when existing equipment is no longer available or economically feasible, and costs to accelerate specific force capabilities to carry out GWOT. Among the costs included in this code are forward-presence deployments or what the Air Force calls Theater Security Packages, which is a forward-basing concept involving both bombers and select fighter aircraft that is conducted in the Pacific Command area of responsibility. Air Force officials told us that because there is no category to report recurring or longer-term costs separately from established GWOT contingency operations, they report long war costs, including costs related to Theater Security Packages, as part of Operation Iraqi Freedom since it is the largest operation. The Air Force reported about $464 million in long-war costs for fiscal year 2008. The Navy reported costs for forward-presence missions as part of GWOT contingency operations even though the Navy routinely deploys its forces around the globe in peacetime as well as wartime. As these GWOT contingency operations have evolved over time, it has become increasingly difficult to determine what costs can be deemed as incremental expenses in support of these operations from costs that would have been incurred whether or not these contingency operations took place, such as ship operating costs for the Navy. For example, the Atlantic and Pacific surface commands, which are responsible for managing the Navy's surface ships, reported obligations for costs associated with ship operations and port visits for ships deployed on forward-presence missions in the Western Pacific. Navy officials told us that some of these ships are stationed out of Hawaii, Japan, and Guam and operate near Malaysia, the Philippines, and Thailand. According to Navy officials, these ships are spending more time at sea and visiting more foreign ports in an effort to provide additional presence in support of GWOT. In 2008, Navy officials stated that Navy guidance expanded the definition of incremental costs in support of Operation Enduring Freedom to include those costs associated with forces operating in the Southern Command area of responsibility. We found that the Atlantic and Pacific surface commands reported obligations for ship operating costs and port visit costs for ships deployed on humanitarian missions in Central and South America. Navy officials said that ships deployed on humanitarian missions have visited countries such as El Salvador and Peru. These officials told us that the Navy considers the humanitarian missions to be GWOT-related because they benefit the security of the United States by spreading goodwill and reducing the expansion of terrorism in foreign nations. Costs for these missions are included within the Atlantic and Pacific surface commands' ship operating costs for GWOT, which according to our analysis represented about 21 percent (about $875 million) of the Atlantic Fleet and Pacific Fleet's total GWOT reported obligations for operation and maintenance (about $4.2 billion) in fiscal year 2008. Until DOD reconsiders whether expenses not directly attributable to specific GWOT contingency operations are incremental costs, the military services may continue to include these expenses as part of Operation Iraqi Freedom and Operation Enduring Freedom. Furthermore, reported costs for both operations may be overstated and costs not directly attributable to either operation may continue to be included in DOD's GWOT funding requests rather than the base budget. In light of the nation's long-term fiscal challenge and the current financial crisis, DOD will need a more disciplined approach to budgeting and evaluating trade-offs as it continues to support ongoing operations and prepares for future threats. As the department prepares additional GWOT funding requests for military operations in support of Operation Iraqi Freedom and Operation Enduring Freedom, reliable and transparent cost information will be of critical importance in determining the future funding needs for each operation. However, DOD's approach to cost reporting does not reliably represent the costs of these contingency operations. Although DOD has reported significant costs for Operation Iraqi Freedom and Operation Enduring Freedom, the cost for Operation Iraqi Freedom may be overstated, since DOD does not have a methodology to determine what portion of its total reported GWOT obligations for procurement and certain operation and maintenance costs is attributable to each operation. Furthermore, it is difficult to determine whether some expenses not directly attributable to Operation Iraqi Freedom and Operation Enduring Freedom are actually incremental costs and incurred to support those operations. Expenses beyond those directly attributable to either operation may be more reflective of the enduring nature of GWOT and the United States' changed security environment since 9/11 and thus should be part of what DOD would request and account for as part of its base budget. Due to the enduring nature of GWOT, its cost implications should be part of the annual base budget debate, especially in light of the competing priorities for an increasingly strained federal budget. In order to improve the transparency and reliability of DOD's reported obligations for GWOT by contingency operation, we recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) to (1) ensure DOD components establish an auditable and documented methodology for determining what portion of GWOT costs is attributable to Operation Iraqi Freedom versus Operation Enduring Freedom when actual costs are not available, and (2) develop a plan and timetable for evaluating whether expenses not directly attributable to specific GWOT contingency operations are incremental costs and should continue to be funded outside of DOD's base budget. In written comments on a draft of this report, DOD agreed with our first recommendation and partially agreed with our second recommendation. The department's comments are discussed below and are reprinted in appendix II. DOD agreed with our recommendation that it ensure its components establish an auditable and documented methodology for determining what portion of GWOT costs is attributable to Operation Iraqi Freedom versus Operation Enduring Freedom when actual costs are not available. In its comments, DOD noted that it believes its components, for the most part, have established formal guidance to strengthen internal controls and capture all costs associated with Operation Iraqi Freedom and Operation Enduring Freedom from within their accounting systems. However, DOD noted that the DOD Financial Management Regulation does include guidance for DOD components to develop auditable methodologies, and when actual cost by operation is not available, its components are required to internally document the methodology used to develop a derived estimate of the cost. DOD stated that it intends to strengthen the guidance in its Financial Management Regulation to require an annual review of the methodologies used to allocate these costs. DOD believes this action will help promote reasonable cost allocations and consistent cost-of-war reporting throughout the department. DOD partially agreed with our second recommendation that it develop a plan and timetable for evaluating whether expenses not directly attributable to specific GWOT contingency operations are incremental costs and should continue to be funded outside of DOD's base budget. DOD noted that it has been reporting contingency costs for several years and its objective is to include all incremental costs attributable to the war effort. DOD also stated that, as part of its continuing efforts to improve both budgeting and reporting of war costs, it collaborated with the Office of Management and Budget to refine the criteria used for determining where costs will be budgeted, either in the base or contingency budgets, and ultimately reported. DOD noted that it will use the refined criteria to inform the development of portions of the fiscal year 2009 Overseas Contingency Operations Supplemental Request and the full fiscal year 2010 Overseas Contingency Operations Request, which has not yet been submitted to Congress. As a result, we have not yet been able to evaluate DOD's actions to assess whether they meet the intent of our recommendation, but will review these actions when the budget requests are finalized and submitted to Congress. We are sending copies of this report to interested congressional committees; the Secretary of Defense; the Under Secretary of Defense (Comptroller); and the Director, Office of Management and Budget. In addition, the report is also available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-9619 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. To accomplish this review, we obtained and reviewed copies of the October 2007 through September 2008 monthly Department of Defense (DOD) Supplemental and Cost of War Execution Reports from the Office of the Undersecretary of Defense (Comptroller) to identify reported Global War on Terrorism (GWOT) obligations by contingency operation and appropriation account for the military services. We focused our review on the obligations reported for military personnel, operation and maintenance, and procurement, for the Army, Navy, Marine Corps and Air Force, both active and reserve forces, as these data represent the largest amount of GWOT costs. As we have previously reported, we have found the data in DOD's Supplemental and Cost of War Execution Reports to be of questionable reliability. Consequently, we are unable to ensure that DOD's reported obligations for GWOT are complete, reliable, and accurate, and they should therefore be considered approximations. In addition, DOD has acknowledged that systemic weaknesses with its financial management systems and business operations continue to impair its financial information. Despite the uncertainty about DOD's obligation data, we are using this information because it is the only way to approach an estimate of the costs of the war. Also, despite the uncertainty surrounding the true dollar figure for obligations, these data are used to advise Congress on the cost of the war. To assess DOD's progress in improving the accuracy and reliability of its GWOT cost reporting, we analyzed GWOT obligation data in DOD's monthly Supplemental and Cost of War Execution Reports as well as the military services' individual accounting systems. These systems included the Army's Standard Financial System, the Navy's Standard Accounting and Reporting System, the Marine Corps' Standard Accounting, Budgeting and Reporting System, and the Air Force's Commanders Resource Information System. We analyzed GWOT obligation data from these accounting systems to better understand the military services' GWOT cost- reporting procedures and how they used these data to report costs in DOD's monthly Supplemental and Cost of War Execution Reports. We then obtained and reviewed guidance issued by DOD and the military services regarding data analysis and methods for reporting obligations for GWOT. We also interviewed key officials from the Office of the Under Secretary of Defense (Comptroller), the Defense Finance and Accounting Service, the Army, Navy, Marine Corps, and Air Force to obtain information about specific processes and procedures DOD and the military services have undertaken to improve the accuracy and reliability of reported GWOT cost information. To assess DOD's methodology for reporting GWOT costs by contingency operation, including the types of costs reported for those operations, we analyzed GWOT obligation data in DOD's monthly Supplemental and Cost of War Execution Reports, including the source data for those reports in the military services' individual accounting systems. As previously discussed, these systems included the Army's Standard Financial System, the Navy's Standard Accounting and Reporting System, the Marine Corps' Standard Accounting, Budgeting and Reporting System, and the Air Force's Commanders Resource Information System. We analyzed GWOT obligation data from these accounting systems to determine how the military services captured costs for specific contingency operations, including the types of costs they included as part of these contingency operations. We then obtained and reviewed guidance issued by DOD and the military services for identifying and reporting GWOT obligations by contingency operation. We also interviewed key officials from the Office of the Under Secretary of Defense (Comptroller), the Army, Navy, Marine Corps, and Air Force to determine how they interpreted and implemented this guidance. Headquarters, Department of the Army, Washington, D.C. U.S. Army Installation Management Command Headquarters, Army Materiel Command, Ft. Belvoir, Virginia Headquarters, U.S. Army Forces Command, Ft. McPherson, Georgia U.S. Army Central Command, Ft. McPherson, Georgia U.S. Army Installation Management Command, Southeast Region, Ft. Department of the Navy, Headquarters, Washington, D.C. Commander, Navy Installations Command Headquarters, Washington, D.C. Office of the Under Secretary of Defense (Comptroller) Washington, D.C. Office of Management and Budget, Washington, D.C. We performed our work from January 2008 through March 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Ann Borseth, Assistant Director; Richard Geiger; Susan Ditto; Linda Keefer; Ron La Due Lake; Deanna Laufer; Lonnie McAllister; Eric Petersen; and Joseph Rutecki made key contributions to this report.
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Since September 11, 2001, Congress has provided about $808 billion to the Department of Defense (DOD) for the Global War on Terrorism (GWOT) in addition to funding in DOD's base budget. Prior GAO reports have found DOD's reported GWOT cost data unreliable and found problems with transparency over certain costs. In response, DOD has made several changes to its cost-reporting procedures. Congress has shown interest in increasing the transparency of DOD's cost reporting and funding requests for GWOT. Under the Comptroller General's authority to conduct evaluations on his own initiative, GAO assessed (1) DOD's progress in improving the accuracy and reliability of its GWOT cost reporting, and (2) DOD's methodology for reporting GWOT costs by contingency operation. For this engagement, GAO analyzed GWOT cost data and applicable guidance, as well as DOD's corrective actions. While DOD and the military services continue to take steps to improve the accuracy and reliability of some aspects of GWOT cost reporting, DOD lacks a sound approach for identifying costs of specific contingency operations, raising concerns about the reliability of reported information, especially on the cost of Operation Iraqi Freedom. Specifically, the department has undertaken initiatives such as requiring components to sample and validate their GWOT cost transactions and launching a new contingency cost-reporting system that will automate the collection of GWOT cost data from components' accounting systems and produce a new report comparing reported obligations and disbursements to GWOT appropriations data. Also, the military services have taken several steps to correct weaknesses in the reliability of their cost data. Limitations in DOD's approach to identifying the costs of Operation Iraqi Freedom and Operation Enduring Freedom may, in some cases, result in the overstatement of costs, and could lead to these costs being included in DOD's GWOT funding requests rather than the base budget. DOD guidance emphasizes the importance of accurately reporting the cost of contingency operations. However, while the Army and Marine Corps are capturing totals for procurement and certain operation and maintenance costs, they do not have a methodology for determining what portion of these GWOT costs are attributable to Operation Iraqi Freedom versus Operation Enduring Freedom and have reported all these costs as attributable to Operation Iraqi Freedom. In addition, the military services have reported some costs, such as those for Navy forward-presence missions, as part of Operation Iraqi Freedom or Operation Enduring Freedom, even though they are not directly attributable to either operation. In September 2005, DOD expanded the definition of incremental costs for large-scale contingencies, such as those for GWOT, to include expenses beyond direct incremental costs. This expanded definition provides no guidance on what costs beyond those attributable to the operation can be considered incremental and reported. Consequently, the military services have made their own interpretations as to whether and how to include costs not directly attributable to GWOT contingency operations. Without a methodology for determining what portion of GWOT costs is attributable to Operation Iraqi Freedom or Operation Enduring Freedom, reported costs for Operation Iraqi Freedom may be overstated. Furthermore, unless DOD reconsiders whether expenses not directly attributable to specific GWOT operations should be included as incremental costs, the military services may continue to include these expenses as part of Operation Iraqi Freedom and Operation Enduring Freedom, reported costs for both operations may be overstated, and DOD may continue to request funding for these expenses in GWOT funding requests instead of including them as part of the base budget. Expenses beyond those directly attributable to either operation may be more reflective of the enduring nature of GWOT and its cost implications should be part of the annual budget debate.
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Various child nutrition programs have been established to provide nutritionally balanced, low-cost or free meals and snacks to children throughout the United States. The school lunch and school breakfast programs are among the largest of these programs. The National School Lunch Program was established in 1946; a 1998 expansion added snacks served in after-school and enrichment programs. In fiscal year 2000, more than 27 million children at over 97,000 public and nonprofit private schools and residential child care institutions received lunches through this program. The School Breakfast Program began as a pilot project in 1966 and was made permanent in 1975. The program had an average daily participation of more than 7.5 million children in about 74,000 public and private schools and residential child care institutions in fiscal year 2000. According to program regulations, states can designate schools as severe need schools if 40 percent or more of lunches are served free or at a reduced price, and if reimbursement rates do not cover the costs of the school's breakfast program. Severe need schools were generally reimbursed 21 cents more for free and reduced-price breakfasts in school year 2000-01. The National School Lunch and School Breakfast Programs provide federally subsidized meals for all children; with the size of the subsidy dependent on the income level of participating households. Any child at a participating school may purchase a meal through the school meals programs. However, children from households with incomes at or below 130 percent of the federal poverty level are eligible for free meals, and those from households with incomes between 130 percent and 185 percent of the poverty level are eligible for reduced-price meals. Similarly, children from households that participate in three federal programs-- Food Stamps, Temporary Assistant for Needy Families, or Food Distribution Program on Indian Reservations--are eligible to receive free or reduced-price meals. School districts participating in the programs receive cash assistance and commodity foods from USDA for all reimbursable meals they serve. Meals are required to meet specific nutrition standards. For example, school lunches must provide one-third of the recommended dietary allowances of protein, vitamins A and C, iron, calcium, and calories. Schools have a great deal of flexibility in deciding which menu planning approach will enable them to comply with these standards. Schools receive different cash reimbursement amounts depending on the category of meals served. For example, a free lunch receives a higher cash reimbursement amount than a reduced-price lunch, and a lunch for which a child pays full price receives the smallest reimbursement. (See table 2.) Children can be charged no more than 40 cents for reduced-price meals, but there are no restrictions on the prices that schools can charge for full-price meals. Various agencies and entities at the federal, state, and local levels have administrative responsibilities under these programs. FNS administers the school meal programs at the federal level. In general, FNS headquarters staff carry out policy decisions, such as updating regulations, providing guidance and monitoring, and reporting program review results. Regional staff interact with state and school food authorities, and provide technical assistance and oversight. State agencies, usually departments of education, are responsible for the statewide administration of the program, including disbursing federal funds and monitoring the program. At the local level, two entities are involved--the individual school and organizations called school food authorities, which manage school food services for one or more schools. School food authorities have flexibility in how they carry out their administrative responsibilities and can decide whether to delegate some tasks to the schools. To receive program reimbursement, schools and school food authorities must follow federal guidelines for processing applications for free and reduced-price meals, verifying eligibility for free or reduced-price meals, and counting and reporting all reimbursable meals served, whether full- price, reduced-price, or free. This means processing an application for most participants in the free and reduced-price programs, verifying eligibility for at least a sample of approved applications, and keeping daily track of meals provided. These processes comprise only a small part of the federal school meal programs' administrative requirements. According to a USDA report, school food authorities spend the majority of their time on other administrative processes, including daily meal production records and maintaining records documenting that the program is nonprofit as required by regulations. The data we were asked to obtain focus on the participant eligibility and meal counting and reimbursement processes and do not include estimates for other administrative tasks, which are outside the scope of the request. The federal budget provides funds separate from program dollars to pay for administrative processes at the federal and state level. In contrast, officials at the local level pay for administrative costs from program dollars that include federal and state funding and student meal payments. Districts and schools that participate in the school meal programs vary in terms of locale, size of enrollment, percent of children approved for free and reduced-price meals, and types of meal counting systems used. We selected 10 districts and 20 schools located in rural areas, small towns, mid-size central cities, urban fringe areas of mid-size and large cities, and large central cities. At the districts, enrollment ranged from 1,265 to 158,150 children, while at the 20 schools, it ranged from 291 to 2,661 children. The rate of children approved for free and reduced-price meals ranged from 16.7 to 74.5 percent at the districts and from 10.5 to 96.5 percent at the schools. Nine of these schools used electronic meal counting systems. Table 3 summarizes the characteristics of selected districts and schools. For school year 2000-01, the estimated application process costs at the federal and state levels were much less than 1 cent per program dollar, and the median cost at the local level was 1 cent per program dollar. (See table 4.) At the federal and state levels, costs related to the application process were primarily for tasks associated with providing oversight, issuing guidance, and training throughout the year. At the local level, the costs varied, the tasks were primarily done at the beginning of the school year by the school food authorities, and different staff performed the tasks. Our limited number of selected schools differed in many aspects, making it difficult to determine reasons for most cost differences, except in a few instances. The estimated federal costs for performing the duties associated with the application process were small in relation to the program dollars. FNS headquarters estimated its costs were about $358,000. When compared with the almost $8 billion in program dollars that FNS administered throughout the 2000-01 school year, these costs were much less than 1 cent per program dollar. However, these costs did not include costs for FNS's seven regional offices. At the one region we reviewed, which administered about $881 million program dollars, estimated costs were about $72,000 for this time period. FNS's costs were related to its overall program management and oversight duties. FNS officials said that they performed duties and tasks related to the application process throughout the year. The primary tasks and duties performed by FNS headquarters and/or regional staff included the following: Updating and implementing regulations related to the application process. Revising eligibility criteria. Reviewing state application materials and eligibility data. Providing training to states. Responding to questions from states. Conducting or assisting in reviews of the application process at the state and school food authority levels, and monitoring and reporting review results. Estimated costs incurred by the five selected states ranged from $53,000 to $798,000 for performing tasks related to the application process, while the total program dollars administered ranged from $122 million to $1.1 billion. For four of the five states we reviewed, total application costs were generally in proportion to the program dollars administered. However, the estimated application costs for one state were higher than for other selected states with significantly larger programs. Officials from this state attributed these higher costs to the large number of districts in that state compared with most other states. At the state level, costs were incurred primarily for providing guidance and training to school food authority staff and for monitoring the process. Just as at the federal level, state level officials said that they performed their application process duties throughout the year. These tasks included updating agreements with school food authorities to operate school meal programs, preparing prototype application forms and letters of instruction to households and providing these documents to the school food authorities, and training managers from the school food authorities. State officials also reviewed the application process as part of required reviews performed at each school food authority every 5 years. For the sites we reviewed, the estimated median cost at the local level to perform application process tasks was 1 cent per program dollar and ranged from less than half a cent to about 3 cents. The school food authorities incurred most of the application process costs--from about $3,000 to nearly $160,000, and administered program dollars ranging from about $315,000 to nearly $18 million. Not all schools incurred application process costs, but for those that did, these costs ranged from over $100 to as much as $3,735. The schools reviewed were responsible for $65,000 to $545,000 in program dollars. Table 5 lists the estimated application process costs, program dollars, and cost per program dollar for each of the school food authorities and schools included in our review. At the local level, the costs associated with conducting the application process for free and reduced-price meals were primarily related to the following tasks: Downloading the prototype application and household instruction letter from the state's Web site and making copies of it before the school year begins. Sending the applications and household instruction letters home with children at the beginning of the school year or mailing them to the children's homes. Collecting completed applications that were either returned to school or mailed to the district office. Reviewing applications and returning those with unclear or missing information, or calling applicants for the information. Making eligibility determinations for free or reduced-price meals. Sending letters to applicants with the results of eligibility determinations for free or reduced-price meals. Preparing rosters of eligible children. Most of the application process tasks were performed at the beginning of the school year because parents must complete a new application each year in order for their children to receive free or reduced-price meals.Some applications are submitted throughout the school year for newly enrolled or transferred children or children whose families have changes to their household financial status. Program regulations direct parents to notify school officials when there is a decrease in household size or an increase in household income of more than $50 per month or $600 per year. Staff at 8 of the 10 school food authorities performed most of the application tasks for all schools that they managed. For the 2 other school food authorities, the schools reviewed performed most of the application tasks. Sixteen of 20 schools distributed and collected the applications. However, 4 schools did not distribute applications because their school food authorities mailed applications to households instead. Various staff supported the application process at the school food authorities and the schools. Two school food authorities hired temporary workers to help process the applications at the start of the school year, and the costs at these locations were below the median. Several schools involved various nonfood service staff in the process. At one school guidance counselors and teachers helped distribute and collect applications. At another school, a bilingual community resource staff person made telephone calls to families to help them apply for free and reduced-price meals. Clerical workers copied and pre-approved applications at two schools, and at another school, the school secretary collected the applications and made eligibility determinations. While the variation in the staff assigned to perform application duties may account for some cost differences, the limited number of selected schools and their related school food authorities differed in many aspects, making it difficult to determine reasons for most cost differences, except in a few instances. In one case, we were able to compare two schools and their related school food authorities because the two schools had some similar characteristics, including size of school enrollment, grade span, and percentage of children approved for free and reduced-price school meals. However, the school food authorities differed in size and locale. At these two schools, the combined costs--costs for the school and its share of the related school food authority's costs for processing applications--differed. The combined costs at one school were almost 3 cents per program dollar, while the combined costs at the other school were less than 1 cent per program dollar. The school with the higher costs enlisted teachers and guidance counselors to help hand out and collect applications and was part of a smaller school food authority that used a manual process to prepare a roster of eligible children. The other school did not perform any application process tasks, since these tasks were done centrally at the school food authority. This school was part of a district that had a much higher enrollment and an electronic system to prepare a roster of eligible children. For the remaining 18 schools, we were generally not able to identify reasons for cost differences. For the 2000-01 school year, the estimated costs per program dollar for the verification process were much less than 1 cent at the federal, state, and local levels. (See table 6.) At the federal and state levels, the costs of verifying eligibility for free and reduced-price meals were primarily related to oversight tasks performed throughout the year. At the local level, duties associated with the verification process were done in the fall of the school year. Only one school food authority significantly involved its schools in the verification process. At the 10 selected school food authorities, the verification process resulted in some children being moved to other meal categories, because households did not confirm the information on the application or did not respond to the request for verification documentation. FNS has implemented several pilot projects for improving the application and verification processes and plans to complete these projects in 2003. For school year 2000-01, the estimated costs at the federal and state levels for performing duties associated with the verification process were much less than 1 cent per program dollar. The estimated costs at FNS headquarters of about $301,000 and the estimated costs at the selected FNS region of about $28,000 were small in relation to the program dollars administered--about $8 billion and $881 million, respectively. FNS performed a number of tasks to support the verification process. FNS officials said that during the year the primary tasks that staff at headquarters and/or regions performed included the following: Updating regulations and guidance related to the verification process. Holding training sessions. Responding to questions from states and parents. Clarifying verification issues. Reviewing state verification materials and data. Conducting or assisting in reviews of the process at the state and school food authority levels. Monitoring and reporting review results. Costs incurred by the selected states ranged from about $5,000 to $783,000 for performing tasks related to the verification process. During this period, these states administered $122 million to $1.1 billion program dollars. States incurred costs associated with overseeing and monitoring the verification process and performed many tasks throughout the year. The primary state task involved reviews of the verification process, where states determined whether the school food authorities appropriately selected and verified a sample of their approved free and reduced-price applications by the deadline, confirmed that the verification process was completed, and ensured that verification records were maintained. In addition to the review tasks, state officials provided guidance and training to school food authority staff. The selected school food authorities' costs ranged from $429 to $14,950 for the verification process tasks, while costs at selected schools, if any, ranged from $23 to as much as $967. Schools reported few, if any, costs because they had little or no involvement in the verification process. During school year 2000-01, the school food authorities administered program dollars ranging from about $315,000 to over $28 million, and the schools were responsible for program dollars ranging from about $65,000 to $545,000. The estimated median cost at the local level--school food authorities and schools combined--was much less than 1 cent per program dollar. Table 7 lists the estimated verification process costs, program dollars, and cost per program dollar for each of the school food authorities and schools included in our review. At the local level, costs associated with verifying approved applications for free and reduced-price school meals were for duties performed primarily in the fall of the school year. Each year school food authority staff must select a sample from the approved applications on file as of October 31 and complete the verification process by December 15. According to USDA regulations, the sample may be either a random sample or a focused sample. Additionally, the school food authority has an obligation to verify all questionable applications, referred to as verification "for cause." However, any verification that is done for cause is in addition to the required sample. Furthermore, instead of verifying a sample of applications, school food authorities may choose to verify all approved applications. Also, school food authorities can require households to provide information to verify eligibility for free and reduced-price meals at the time of application. This information is to be used to verify applications only after eligibility has been determined based on the completed application alone. In this way, eligible children can receive free or reduced-price school meals without being delayed by the verification process. Of the 10 selected school food authorities, 7 used a random sample method and 3 used a focused sample method. At the local level, the costs associated with verifying approved applications for free and reduced-price meals were primarily related to the following tasks: Selecting a sample from the approved applications on file as of October 31. Providing the selected households with written notice that their applications have been selected for verification and that they are required to submit written evidence of eligibility within a specified period of time. Sending follow-up letters to households that do not respond. Comparing documentation provided by the household, such as pay stubs, with information on the application to determine whether the school food authority's original eligibility determination is correct. Locating the files of all the siblings of a child whose eligibility status has changed if a school district uses individual applications instead of family applications. Notifying the households of any changes in eligibility status. Generally, the selected school food authorities performed most of the verification tasks, while the schools had little or no involvement in the process. However, the schools in one school food authority did most of the verification tasks, and the tasks performed by the school food authority were limited to selecting the applications to be verified and sending copies of parent notification letters and verification forms to the schools for the schools to distribute. The costs at these two schools were less than 1 cent per program dollar. The verification process is intended to help ensure that only eligible children receive the benefit of free or reduced-price meals, and at the locations we visited, the verification process resulted in changes to the eligibility status for a number of children. During the verification process, generally, household income information on the application is compared with related documents, such as pay stubs or social security payment information. When the income information in the application cannot be confirmed or when households do not respond to the request for verification documentation, the eligibility status of children in the program is changed. That is, children are switched to other meal categories, such as from free to full price. Children can also be determined to be eligible for higher benefits, such as for free meals, rather than reduced-price meals. At the locations we visited, the verification process resulted in changes to the eligibility status for a number of children. For example, at one school food authority in a small town with about half of its children approved for free and reduced-price school meals, 65 of 2,728 approved applications were selected for verification, and 24 children were moved from the free meals category to either the reduced-price or full-priced meals categories, while 1 child was moved to the free category. At another school food authority in the urban fringe of a large city, with about 40 percent of its children approved for free and reduced-price school meals, 40 of about 1,100 approved applications were selected for verification and 8 children were moved to higher-priced meal categories. According to program officials, some children initially determined to be ineligible for free or reduced-price meals are later found to be eligible when they reapply and provide the needed documents. We did not determine whether any of the children were subsequently reinstated to their pre-verification status. The accuracy of the numbers of children who are approved for free and reduced-price meals affects not only the school meals program but also other federal and state programs. A USDA report, based on the agency's data on the number of children approved for free meals and data from the U. S. Bureau of Census, indicates that about 27 percent more children are approved for free meals than are income-eligible. As such, the federal reimbursements for the school meals program may not be proper. Furthermore, some other programs that serve children in poverty distribute funds or resources based on the number of children approved to receive free or reduced-price meals. For example, in school year 1999-2000 nine states used free and reduced-price meals data to distribute Title I funds to their small districts (those serving areas with fewer than 20,000 total residents). In addition, districts typically use free and reduced- price meals data to distribute Title I funds among schools. At the state level, some state programs also rely on free and reduced-price lunch data. For example, Minnesota distributed about $7 million in 2002 for a first grade preparedness program based on these data. As of July 2002, FNS had three pilot projects underway for improving the application and verification processes. These projects are designed to assess the value of (1) requesting income documentation and performing verification at the time of application, (2) verifying additional sampled applications if a specified rate of ineligible children are identified in the original verification sample, and (3) verifying the eligibility of children who were approved for free school meals based on information provided by program officials on household participation in the Food Stamp, Temporary Assistance for Needy Families, or Food Distribution on Indian Reservations programs, a process known as direct certification. FNS plans to report on these projects in 2003. According to officials from three organizations that track food and nutrition issues, the American School Food Service Association, the Center on Budget and Policy Priorities, and the Food Research and Action Center, requesting income documentation at the time of application would likely add to application process costs and may create a barrier for eligible households. Having to provide such additional information can complicate the school meals application process and may cause some eligible households not to apply. In 1986, we reported this method as an option for reducing participation of ineligible children in free and reduced-price meal programs, but recognized that it could increase schools' administrative costs, place an administrative burden on some applicants, or pose a barrier to potential applicants. For the 2000-01 school year, costs for meal counting and claiming reimbursement at the federal and state levels were much less than 1 cent per program dollar. The median cost was nearly 7 cents at the local level and was the highest cost. (See table 8.) The federal and state level costs were incurred for providing oversight and administering funds for reimbursement throughout the school year. Similarly, costs at the local level were incurred throughout the school year because the related duties, which apply to all reimbursable meals, were performed regularly. A number of factors come into play at the local level that could affect costs; however, except in a few instances, we could not identify any clear pattern as to how these factors affected meal counting and reimbursement claiming costs. At the federal and state levels, the costs associated with the meal counting and reimbursement claiming processes were much less than 1 cent per program dollar. FNS headquarters estimated that the costs associated with its meal counting and reimbursement claiming tasks were $254,000, and the costs of one FNS region were estimated at $93,000 in school year 2000-01. In comparison, FNS administered $8 billion and the region administered $881 million in the school meals program. FNS's costs for meal counting and claiming reimbursement were less than their costs for application processing and verification tasks. FNS's meal counting and reimbursement costs were primarily incurred for providing technical assistance, guidance, monitoring, and distributing federal funds to state agencies that administer school food programs. FNS distributes these funds through the regional offices, with the regions overseeing state and local agencies and providing guidance and training. Prior to the beginning of the fiscal year, FNS reviewed meal reimbursement requests from the prior year to project funding needs for each state. FNS awarded grants and provided letters of credit to states. Each month, states obtained reimbursement payments via the letters-of- credit, and FNS reviewed reports from states showing the claims submitted. At the end of the year, FNS closed out the grants and reconciled claims submitted with letter-of-credit payments. In addition to these tasks, FNS issued guidance, provided training, and responded to inquiries. Also, FNS regional staff conducted financial reviews of state agencies, such as reviews of reimbursement claim management, and assisted state agencies during reviews of school food authorities. For the five states, the cost per program dollar was also considerably less than 1 cent for the 2000-01 school year. The state agencies' cost estimates ranged from $51,000 to $1 million, with the size of their programs ranging from $122 million to $1.1 billion. In all five states, the costs for meal counting and reimbursement tasks exceeded the costs for verification activities. In four of the five states, these costs were less than the costs for application activities. State agencies are responsible for operating a system to reimburse school food authorities for the meals served to children. Of the five state agencies in our sample, four had systems that allowed school food authorities to submit their monthly claims electronically, although one state agency's system began operating in the middle of the 2000-01 school year. The other state agency received claims from its school food authorities through conventional mail services. The state agencies reviewed claims and approved payments as appropriate and conducted periodic reviews of school food authority meal counting and reimbursement activities. The median cost for meal counting and reimbursement claiming at the local level--school food authorities and schools--was about 7 cents per program dollar and ranged from 2 cents to 14 cents. The estimated meal counting and reimbursement claiming costs at the 10 selected school food authorities ranged from $2,461 to $318,436, and ranged from $1,892 to $36,986 for the 20 schools. Schools usually had a higher share of the cost per program dollar than their respective school food authorities; 18 of the 20 schools reviewed incurred more than half the cost per program dollar, with 14 schools incurring more than 75 percent. For example, one school's costs were $19,000--about 90 percent of the combined school and school food authority costs. Table 9 lists the estimated costs for meal counting and obtaining reimbursement, program dollars, and cost per program dollar for each of the school food authorities and schools included in our review. The local level costs were much higher than the costs for application processing and verification because the duties were performed frequently throughout the school year, and costs were incurred for all reimbursable meals served under the program. As such, these costs do not reflect separate costs by type of meal served. At the schools, each meal was counted when served, the number of meals served were tallied each day, and a summary of the meals served was sent periodically to the school food authority. The school food authorities received and reviewed reports from its schools at regular intervals, including ensuring that meal counts were within limits based on enrollment, attendance, and the number of children eligible for free, reduced price and paid lunches. On the basis of these data, the school food authorities submitted claims for reimbursement to the state agency each month of the school year. Program officials noted that even without the federal requirement for meal counting by reimbursement category, schools would still incur some meal counting costs in order to account for the meals served. Most of the costs at the local level were for the labor to complete meal counting and claiming tasks. Those school food authorities with electronic meal counting systems reported substantial costs related to purchasing, maintaining, and operating meal counting computer systems and software. In addition to the frequency, another reason for the higher cost is that, unlike application and verification, meal counting and claiming reimbursement pertains to all reimbursable meals served--free, reduced- price and full price. For example, during school year 2000-01, FNS provided reimbursement for over 2 billion free lunches, about 400 million reduced-price lunches and about 2 billion full-price lunches. Costs for meal counting and reimbursement claiming varied considerably at the local level--school food authorities and schools combined. The costs per program dollar ranged from 2 cents to 14 cents, compared with the costs per program dollar for the other processes, which were much more consistent--from about half a cent to 3 cents for the application process and from less than 1 cent to 1 cent for the verification process. Various factors may contribute to this range of costs at the local level. For example, larger enrollments may allow economies of scale that lower the cost of food service operations. Use of an electronic meal counting system, as opposed to a manual system, has the potential to affect meal counting costs, since electronic systems require the purchase of equipment, software, and ongoing maintenance. Food service procedures may also have a bearing on costs, such as the number and pay levels of cashiers and other staff performing meal counting and reimbursement claiming tasks. The interaction of these factors and our limited number of selected sites prevents a clear explanation for the differences in estimated costs per program dollar incurred at the selected locations reviewed, except in a few instances. For example, at the local level, the school with the highest combined meal counting cost per program dollar for the school and its share of the school food authority costs (14 cents) had an enrollment of 636 children, relatively few of its children approved for free and reduced- price meals (14 percent), and a manual meal counting system. The school with the lowest combined meal counting cost (2 cents per program dollar) had about twice the enrollment, 96 percent of its children approved for free and reduced-price meals, and an electronic meal counting system. Both schools were elementary schools in mid-size city locales. For the remaining 18 schools in the sample, we saw no distinct relationship between cost and these factors. We provided a draft of this report to USDA's Food and Nutrition Service for review and comment. We met with agency officials to discuss the report. These officials stated that written comments would not be provided. However, they provided technical comments that we incorporated where appropriate. We are sending copies of this report to the Secretary of Agriculture, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have questions concerning this report, please call me on (202) 512-7215. Key contacts and staff acknowledgments are listed in appendix III. This appendix discusses cost estimates for the application, verification, and meal counting and reimbursement claiming processes. The scope of our review included the National School Lunch Program and the School Breakfast Program as they relate to public schools. To the extent that we could, we excluded from our analyses other federal child nutrition programs and nonprofit private schools and residential child care institutions, which also participate in the school meals programs. Our review included the paper application process and did not include the direct certification of children for free and reduced-price school meals. Our focus was school year 2000-01, the most recent year for which data were available. The data we collected relate to that year. National data on the costs of the application, verification, and meal counting and reimbursement claiming processes are not available for the federal, state, or local levels, since these costs are not tracked separately. Therefore, we developed estimates of these costs on the basis of cost information provided by program managers and staff. To obtain data on the costs related to applying for free and reduced-price school meals, verifying approved applications, and counting meals and claiming reimbursements, we visited selected locations, including 5 state agencies, 10 school food authorities in public school districts, and 2 schools at each district. We chose sites that would provide a range of characteristics, such as geographical location, the size of student enrollment, the rate of children approved for free and reduced-price meals, and the type of meal counting system. We selected districts with schools that were located in rural areas, small towns, mid-size central cities, urban fringe areas of mid-size and large cities, and large central cities based on locale categories assigned to their respective districts by the National Center for Education Statistics. To include districts of various sizes in our study, we selected 2 districts in each selected state--1 with enrollment over 10,000 and 1 with enrollment under 10,000, except in Ohio. In Ohio, we selected 2 districts with enrollments of less than 5,000, since almost 90 percent of the public school districts nationwide have enrollments under that amount. We also selected districts with rates of children approved for free and reduced-price meals that ranged from 16.7 to 74.5 percent and schools with rates that ranged from 10.5 to 96.5 percent. We worked with state and school food authority officials at our selected districts to select a mix of schools that had either manual or electronic meal counting systems. Electronic meal counting systems were used at 9 selected schools. We also obtained information from officials at the Food and Nutrition Service's (FNS) headquarters and one regional office. We selected one regional office that, according to FNS officials, had the best data available to develop estimates for the application, verification, and meal counting processes. We developed interview guides to use at selected sites. We also met with FNS and professional association officials to obtain their comments on these interview guides, and we revised them where appropriate. Using these guides, we interviewed program managers and staff at the selected locations to obtain information on tasks associated with the application, verification, and meal counting and reimbursement claiming processes for the 2000-01 school year. We obtained estimated labor and benefit costs associated with these tasks. We also obtained other estimated nonlabor costs such as those for translating, copying, printing, mailing, data processing, travel, hardware, software, and automated systems development costs. On the basis of this information, we calculated estimated costs associated with each process, that is, application, verification, and meal counting and reimbursement claiming. Using our cost estimates, we calculated costs relative to program dollars. Program dollars at the federal level for both FNS headquarters and the one region included the value of reimbursements for school meals and commodities, both entitlement and bonus, for public and nonprofit private schools and residential child care institutions because FNS was not able to provide program dollars specific to public schools. However, according to FNS officials, reimbursements and commodities provided to public schools make up the vast majority of these dollars. Program dollars at the state level included this federal funding specific to public school districts for school meals and state school meal funding. Information specific to public school districts is available at the state level because claims are made separately by each school food authority. At the local level, program dollars included the amounts children paid for the meals as well as federal and state funding. Since some school food authorities could not provide the dollar value of commodities used at selected schools, we assigned a dollar value of commodities to each of these schools based on their proportion of federal reimbursements. We included federal and state program funding and the amounts children paid for the meals because these are the revenues related to the sale of reimbursable meals. Because the definition of program dollars differed by level, we were unable to total the costs for the three levels--federal, state, and local. However, since the definition of program dollars was the same for school food authorities and schools, we were able to calculate the cost per program dollar at the local level for each school. To calculate these costs we: (1) divided the school program dollars by the school food authority program dollars; (2) multiplied the resulting amount by the total school food authority costs for each process--application, verification, and meal counting and reimbursement claiming--to determine the portion of the costs for each process at the school food authority that was attributable to each selected school; (3) added these costs to the total costs for each of the schools; and (4) divided the resulting total amount by the program dollars for each selected school to arrive at the cost per program dollar at the local level for each school. We calculated a median cost per program dollar for school food authorities and schools separately for each process--application, verification, and meal counting and reimbursement claiming. We also calculated a median cost for each process for school food authorities and schools combined to arrive at local level medians for each process. The cost estimates do not include indirect costs. For 2 of the 10 school food authorities, indirect rates were not available and in other cases, the rates varied significantly due to differing financial management and accounting policies. Also, for 2 of the 10 school food authorities, including indirect rate calculations could have resulted in some costs being double counted because during our interviews with staff, they provided estimates for many of the tasks that would have been included in the indirect rates. Depreciation costs for equipment, such as computer hardware and software, were generally not calculated nor maintained by states and school food authorities. Therefore, we obtained the costs for equipment purchased in the year under review. We did not obtain costs for equipment at the federal level because these costs could not be reasonably estimated, since equipment was used for purposes beyond the processes under review. We obtained information on the verification pilot projects from FNS officials. We also obtained information from the American School Food Service Association, the Center on Budget and Policy Priorities, and the Food Research and Action Center on several options related to the program, one of which was the same as one of the pilot projects. We did not verify the information collected for this study. However, we made follow-up calls in cases where data were missing or appeared unusual. The results of our study cannot be generalized to schools, school food authorities, or states nationwide. Program dollars include cash reimbursements and commodities (bonus and entitlement) at the federal level, the amounts provided to school food authorities for these programs at the state level, and the amounts students paid for their meals at the local level. In addition to the individuals named above, Peter M. Bramble, Robert Miller, Sheila Nicholson, Thomas E. Slomba, Luann Moy, and Stanley G. Stenersen made key contributions to this report.
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Each school day, millions of children receive meals and snacks provided through the National School Lunch and National School Breakfast Programs. Any child at a participating school may purchase a meal through these school meal programs, and children from households that apply and meet established income guidelines can receive these meals free or at a reduced price. The federal government reimburses the states, which in turn reimburse school food authorities for each meal served. During fiscal year 2001, the federal government spent $8 billion in reimbursements for school meals. The Department of Agriculture's Food and Nutrition Service, state agencies, and school food authorities all play a role in these school meal programs. GAO reported that costs for the application, verification, and meal counting and reimbursement processes for the school meal programs were incurred mainly at the local level. Estimated federal and state-level costs during school year 2000-2001 for these three processes were generally much less than 1 cent per program dollar administered. At the local level--selected schools and the related school food authorities--the median estimated cost for these processes was 8 cents per program dollar and ranged from 3 cents to 16 cents per program dollar. The largest costs at the local level were for counting meals and submitting claims for reimbursement. Estimated costs related to the application process were the next largest, and estimated verification process costs were the lowest of the three.
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TSA inspects airports, air carriers, and other regulated entities to ensure that they are in compliance with federal aviation security regulations, TSA-approved airport security programs, and other requirements, including requirements related to controlling airport employee access to secure areas of an airport. Airport operators have direct responsibility for implementing security requirements in accordance with their TSA- approved airport security programs. In general, secure areas of an airport are specified in the airport operator's security programs and include the sterile area, which is the area of an airport that provides passengers access to boarding aircraft and to which access is generally controlled by TSA or a private screening entity under TSA oversight, and the security identification display area (SIDA), which is a portion of an airport in which security measures are carried out and where appropriate identification must be worn by aviation workers. For example, aviation workers that require access to the aircraft movement and parking areas for the purposes of their employment duties must display appropriate identification to access these areas. Airport operators are to perform background checks on individuals prior to granting them unescorted access to secure areas of an airport and TSA relies on airport operators to collect and verify applicant data, such as name, place of birth, and country of citizenship, for individuals seeking credentials. Background checks for individuals applying for credentials to allow unescorted access to secure areas of commercial airports include (1) a security threat assessment from TSA, including a terrorism check; (2) a fingerprint-based criminal history records check; and (3) evidence that the applicant is authorized to work in the United States. The criminal history records check also determines whether the applicant has committed a disqualifying criminal offense in the previous ten years. TSA and airport operators have oversight responsibilities for the identification badges that are issued. For example, airport operators must account for all badges through control procedures, such as audits, specified in TSA's security directives and in an airport's security program. TSA assesses airports' compliance with its security directives and federal regulations through inspections conducted in alternating years of, among other things, the airport operator's documents related to issuing and controlling identification badges and by randomly screening aviation workers. The Transportation Security Administration (TSA) has generally made progress addressing the 69 applicable requirements within the Aviation Security Act of 2016 (2016 ASA). As of June 2017, TSA officials stated it had implemented 48 of the requirements; it plans no further action on these. For 18 requirements, TSA officials took initial actions and plans further action. TSA officials stated they have yet to take action on 2 requirements and plan to address them in the near future. TSA officials took no action on 1 requirement regarding access control rules because it plans to address this through mechanisms other than formal rulemaking, such as drafting a national amendment to airport operator security programs. Appendix I presents the details of each requirement, the progress made by TSA, and the status of TSA's plans for further actions. A summary of TSA's progress in implementing the requirements in each section of the Act is presented below. Conduct a Threat Assessment (Section 3402) TSA made progress on the 11 requirements in Section 3402 of the 2016 ASA. TSA plans no further action for 9 requirements and plans further action for 2 requirements, as shown in appendix I. For example, section 3402(a) requires TSA to conduct a threat assessment that considers the seven factors stated in the law and 3402(b) requires TSA to submit a report to the appropriate congressional committees on the results of the assessment. Consistent with these sections, TSA conducted a threat assessment on the level of risk individuals with unescorted access to the secure area of an airport pose to the domestic air transportation system and submitted a report on it to the appropriate congressional committees in May 2017. In conducting the threat assessment, TSA also considered all seven required factors. For example, TSA considered recent security breaches at domestic and foreign airports by analyzing access-control related incidents from December 2013 through February 2017. TSA also considered the vulnerabilities associated with unescorted access authority granted to foreign airport operators and air carriers, and their workers, by reviewing the vulnerability of incoming flights to the United States for four international regions. The threat assessment noted several recommendations under consideration, such as enhancing relationships with the FBI and U.S. Drug Enforcement Administration, among other law enforcement entities, to ensure TSA is more fully aware of insider threats within the domestic transportation system. TSA officials stated they plan to use the threat assessment to, among other things, expand the use of vulnerability assessments and insider threat-related inspections at all commercial airports. Thus, TSA plans no further action for the 9 requirements related to the threat assessment. Enhance Oversight Activities (Section 3403) TSA generally made progress in addressing the 10 requirements in Section 3403 of the 2016 ASA. Of the 10 requirements, TSA plans no further action for 4 requirements. TSA plans further action for 5 requirements, but has yet to begin implementing 1 of these 5 requirements. In addition, TSA took no action on one requirement because they plan to address this requirement through other means, as shown in appendix I. Section 3403(a) requires TSA to update rules on access controls, and as part of this update, to consider, among other things best practices for airport operators that report missing more than three percent of credentials for unescorted access to the SIDA of any airport. In accordance with this requirement, TSA developed a list of measures for airport operators to perform--such as an airport rebadging if the percent of unaccounted for badges exceeds a certain threshold-- and published them on DHS's Homeland Security Information Network (HSIN) for airport operators to access. In addition, TSA officials stated they developed a fine structure for non-category X airport operators that have more than five percent and for category X airports that have more than three percent of credentials missing for unescorted access to the SIDA of an airport. TSA plans to take additional action to address this and other requirements related to updating the rules on access controls. For example, it plans to propose a national amendment to airport operator security programs for airport operators to report to TSA when an airport exceeds a specified threshold for unaccounted identification badges. TSA plans no further action under section 3403(a)(2)(F) to consider a method of termination by the employer of any airport worker who fails to report in a timely manner missing credentials for unescorted access to any SIDA of an airport. TSA officials stated they considered developing such a method; however, they plan no further action because TSA does not have authority over employment determinations made by airport operators or other employers. Further, section 3403(b) stated that TSA may encourage the issuance of temporary credentials by airports and aircraft operators of free one-time, 24-hour temporary credentials for aviation workers who report their credentials as missing but not permanently lost. Officials stated they plan no further action on this requirement because temporary credentials conflict with a current federal regulation that requires airport operators to ensure that only one identification badge is issued to an individual at one time. TSA has yet to take action on one requirement and took no action on another requirement in section 3403(a) of the 2016 ASA. First, TSA stated they plan to consider section 3403(a)(2)(E) to increase fines and direct enforcement action for airport workers and their employers who fail to timely report missing credentials, but have yet to do so. In addition, TSA took no action to update the rules on access controls. TSA officials stated that that they are taking other actions, such as drafting a proposed national amendment to airport security programs, to address this requirement. Update Airport Employee Credential Guidance (Section 3404) TSA generally made progress in addressing the 4 requirements in Section 3404 of the 2016 ASA. Of the 4 requirements, TSA took action and plans no further action for 2 requirements, plans further actions for 1 requirement, and has yet to take action on 1 requirement. For example, section 3404(a) requires TSA to issue guidance to airport operators regarding the placement of an expiration date on airport identification badges issued to non-U.S. citizens that is not longer than the period of time during which such non-U.S. citizens are lawfully authorized to work in the United States. In accordance with this requirement, TSA issued guidance that states that airport operators should match an identification badge's expiration date to an individual's immigration status, published this guidance to airport operators in fiscal year 2016 on the HSIN, and plans to issue a security directive to further address this requirement. TSA has no plans for further action to address section 3404(b)(1), which requires TSA to issue guidance for its inspectors to annually review the procedures of airport operators and carriers for individuals seeking unescorted access to the SIDA and to make information on identifying suspicious or fraudulent identification materials available to airport operators and air carriers. For example, TSA officials stated that Transportation Security Inspector guidance is updated yearly to incorporate additional inspection guidelines, as is TSA's Compliance Manual, which includes updated methods for inspections and additional airport access control measures to be tested. The update for fiscal year 2017 changed the number of required tests related to insider threats and has new inspection techniques related to individuals seeking unescorted access to the SIDA. Additionally, officials stated that TSA made information available on the HSIN on identifying fraudulent documentation. TSA officials have yet to take action on section 3404(b)(2), which requires that the guidance to airport operators regarding the placement of an expiration date on airport identification badges issued to non-U.S. citizens include a comprehensive review background checks and employment authorization documents issues by the United States Citizenship and Immigration Services. Officials stated that it plans to request clarification from the appropriate congressional committees to determine the actions needed to implement this requirement. Vet Airport Employees (Section 3405) TSA made progress on the 12 requirements in Section 3405 of the 2016 ASA. TSA plans no further action for 5 requirements, and plans further action for 7 requirements, as shown in appendix I. For example, section 3405(a) requires TSA to revise certain regulations related to the eligibility requirements and disqualifying criminal offenses for individuals seeking unescorted access to any SIDA of an airport. In accordance with this requirement, TSA is drafting a Notice of Proposed Rulemaking to update rules related to vetting of employees seeking unescorted access to the SIDA of an airport; however, TSA officials reported two challenges in implementation. First, TSA officials stated they cannot update the employee eligibility requirements and disqualifying criminal offense regulations within the required 180 days specified in the statute because the required process for promulgating regulations generally takes longer than 180 days. Second, per Executive Order 13771, federal agencies must identify two existing regulations to be repealed for every new regulation issued during fiscal year 2017, and the order further provides that for each new regulation, the head of the agency is required to identify offsetting regulations and provide the agency's best approximation of the total costs or savings associated with each new regulation or repealed regulation. Despite these challenges, TSA officials stated they plan further actions to update rules related to employee vetting in accordance with this section; however, officials could not provide a timeframe for completing this requirement. In addition, TSA officials stated they plan no further action with respect to section 3405(b)(1), which requires TSA and the FBI to implement the Rap Back Service for recurrent vetting of aviation workers. In response to this requirement, TSA coordinated with the FBI to implement the FBI's Rap Back Service, which uses the FBI fingerprint-based criminal records repository to provide recurrent fingerprint-based criminal history record checks for aviation workers who have been initially vetted and already received airport-issued identification badge credentials. TSA officials stated the Rap Back program is available to all commercial airport operators; however, for airport operators to participate in the Rap Back program, the airport operator must, among other things, sign a memorandum of understanding with TSA that documents its participation in the program. As of June 2017, TSA had executed over 100 memoranda of understanding with airport operators, including 17 category X airports and plans to enroll additional airports in fiscal year 2017. Develop and Implement Access Control Metrics (Section 3406) TSA made progress by taking action on the 6 requirements in Section 3406 of the 2016 ASA. Of the 6 requirements, TSA officials stated they plan no further action to implement the requirements of this section, as shown in appendix I. For example, section 3406 requires TSA to develop and implement performance metrics to measure the effectiveness of security for the SIDAs of airports and, in developing these metrics, TSA may consider 5 factors stated in the Act. In accordance with this requirement, TSA developed and implemented a metric that determines the percentage of TSA SIDA inspections that were found to be in compliance with the airport security program. TSA officials stated they plan to use the metric to inform decision makers on the SIDA compliance for individual airports and nationwide. For example, if TSA determines an individual airport has a low compliance rate, TSA leadership may conduct additional special emphasis inspections to address the issue, according to TSA officials. Develop a Tool for Unescorted Access Security (Section 3407) TSA made progress on the 18 requirements in Section 3407 of the 2016 ASA. Of the 18 requirements, TSA plans no further action on 17 requirements, and further action for 1 requirement, as shown in appendix I. For example, section 3407(a) requires TSA to develop a model and best practices for unescorted access security that includes 5 requirements as stated in the Act. In accordance with this requirement, TSA officials stated they utilized a tool for unescorted access security called the Advanced Threat Local Allocation Strategy (ATLAS) tool, which was developed in 2015 and is designed to randomly screen aviation workers who have unescorted access to restricted areas of an airport. The tool incorporates the required elements listed in section 3407(a) such as using intelligence, scientific algorithms and other risk-based factors, according to TSA officials. For example, TSA officials stated the algorithm in the tool provides a scientific way to randomize the locations, times, and types of screening an aviation worker might receive. It allows TSA to limit an individual's ability to circumvent screening by deploying resources in a way that an individual who enters an access point will not know if, or what type of screening will take place, according to officials. While officials stated they plan no further actions to implement the requirements in section 3407(a) to develop a model, officials stated they had conducted pilot assessments of the ATLAS tool in fiscal year 2015 at three airports, at one airport in fiscal year 2016, and plan to pilot the tool in additional airports before expanding its use in phases to all airports by fiscal year 2018, according to TSA officials. Increase Covert Testing (Section 3408) TSA made progress on the 2 requirements in Section 3408 of the 2016 ASA. Of the 2 requirements, TSA plans no further action for 1 requirement, and plans to take further action for 1 requirement, as shown in appendix I. For example, TSA plans further actions to increase the use of covert testing in fiscal year 2017 in accordance with section 3408(a), which requires TSA to increase the use of red-team, covert testing of access controls to any secure areas. Specifically, TSA conducted one access control covert project in fiscal year 2016 and plans to increase the number of projects to three in fiscal year 2017. Additionally, TSA submitted a report on access control covert testing to the appropriate congressional committees as required by section 3408(c)(1) of the 2016 ASA, describing the steps TSA plans to take to expand the use of access control covert testing, and TSA plans no further action to address this reporting requirement. Review Security Directives (Section 3409) TSA made progress on the 6 requirements in Section 3409 of the 2016 ASA. Of the 6 requirements, TSA plans no further action on 4 requirements, and plans further action on 2 requirements, as shown in appendix I. Section 3409(a) requires TSA to conduct a comprehensive review of every current security directive addressed to any regulated entity. Section 3409(b) requires TSA to submit notice to the appropriate congressional committees for each new security directive TSA issues. TSA officials stated they have a process in place to review current security directives. For example, officials stated that they review all current security directives on at least an annual basis, through working groups of TSA and industry association officials. TSA stated these working groups consider, among other things, security directives within airport security programs and the need for revocation or revision of current security directives and TSA plans no further action to address this requirement. With respect to the issuance of new security directives, TSA officials stated they provide briefings for relevant congressional committees as requested regarding the issuance of a new security directive and the rationale for issuing it. According to officials, further action is planned to address these requirements for new security directives. While TSA officials stated that it is too early to measure the effectiveness of the applicable requirements of the 2016 ASA, they stated that implementing these requirements would broadly have an effect on improving aviation security and identified two requirements that, when implemented, may specifically reduce access control vulnerabilities. First, in accordance with section 3404(a) of the Act, TSA plans to issue a security directive to require airport operators to match the expiration date of an identification badge of an aviation worker that possesses a temporary immigration status with the individual's U.S. work authorization expiration date. TSA officials stated that this measure may help prevent workers who are no longer authorized to work in the United States from inappropriately gaining access to airport SIDAs because an expired identification badge will prevent entry into the SIDA. Second, in accordance with section 3405(b) of the Act, TSA coordinated with the FBI to implement the Rap Back Service for airport operators to recurrently vet aviation workers in October 2016. The Rap Back service uses the FBI fingerprint-based criminal records repository to provide recurrent fingerprint-based criminal history record checks for aviation workers who have been initially vetted and already received airport- issued identification badge credentials. As of June 2017, TSA executed memorandums of understanding with 105 airport operators, including 17 category X airports, and 1 airline, to complete the Rap Back enrollment process. TSA officials stated that implementing the requirement to recurrently vet aviation workers may also reduce vulnerabilities associated with the insider threat. For example, they stated that continuous vetting would increase the potential for TSA and airport operators to be aware of aviation workers who had engaged in potentially disqualifying criminal activity yet continued to hold active identification badges granting access to airport SIDAs. We provided a draft of this product to the Secretary of Homeland Security for comment. In its formal comments, which are reproduced in full in Appendix II, DHS stated that TSA continues to implement the 2016 ASA requirements. TSA provided technical comments on a draft of this report which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Homeland Security, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact 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 report. Key contributors to this report are found in Appendix III. Subtitle D of the Aviation Security Act of 2016 (ASA), enacted on July 15, 2016, requires the Transportation Security Administration (TSA) to take actions in eight categories that have a total of 69 applicable requirements. The Transportation Security Administration (TSA) has generally made progress addressing the 69 applicable requirements within the 2016 ASA. As of June 2017, TSA officials stated it had implemented 48 of the requirements and plans no further action on these. For 18 requirements, TSA officials took initial actions and plans further action. TSA officials stated they have yet to take action on 2 requirements and plan to address them in the near future. TSA officials took no action on 1 requirement regarding access control rules because it plans to address this through mechanisms other than formal rulemaking, such as drafting a national amendment to airport operator security programs. Because many of TSA's actions taken in response to the 2016 ASA were recently implemented or are still ongoing and not fully implemented, we did not assess the effectiveness of the actions taken by TSA. The tables below present the details of each requirement, the progress made by TSA, and the status of TSA's plans for further action. Section 3402 of the 2016 ASA requires TSA to, among other things, conduct a threat assessment and submit a report regarding the threat assessment to the appropriate congressional committees. TSA made progress in implementing these requirements and has plans for further action, as shown in table 1. Section 3403 of the 2016 ASA required TSA to take actions related to enhancing its oversight activities of aviation workers. TSA made progress in implementing the requirements and has further actions planned, as shown in table 2. Section 3404 of the 2016 ASA requires TSA to take action on actions related to updating employee credential guidance. TSA made progress in implementing the requirements in this section and plans further actions, as shown in table 3. Section 3405 of the 2016 ASA required TSA to take action on requirements related to vetting aviation workers. TSA made progress in implementing these requirements and plans further action on certain requirements, as shown in table 4. Section 3406 of the 2016 ASA required TSA to, among other things, develop and implement performance metrics to measure the effectiveness of security for Security Identification Display Areas of airports. TSA made progress in implementing these requirements and plans no further action on all requirements, as shown in table 5. Section 3407 of the 2016 ASA requires TSA to, among other things, develop a model and best practices for unescorted access security. TSA made progress in implementing these requirements and plans further action on certain requirements, as shown in table 6. Section 3408 of the 2016 ASA requires TSA to, among other things, increase the use of red-team covert testing of access controls to any secure areas of an airport. TSA made progress in implementing these requirements and plans further action on certain requirements, as shown in table 7. Section 3409 of the 2016 ASA requires TSA to, among other things, review all security directives to determine if they remain relevant, and report to Congress on security directives. TSA made progress in implementing these requirements and plans further action on certain requirements, as shown in table 8. In addition to the contact named above, Kevin Heinz (Assistant Director), Brandon Jones (Analyst-in-Charge), Michele Fejfar, Tyler Kent, Thomas Lombardi, Heidi Nielson, and Claire Peachey made significant contributions to the report.
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Recent incidents involving aviation workers conducting criminal activity in the nation's commercial airports have led to interest in the measures TSA and airport operators use to control access to secure areas of airports. The 2016 ASA required TSA to take several actions related to oversight of access control security at airports. The Act also contains a provision for GAO to report on progress made by TSA. This report examines, among other issues, progress TSA has made in addressing the applicable requirements of the 2016 ASA. GAO compared information obtained from TSA policies, reports, and interviews with TSA officials to the requirements in the 2016 ASA. GAO also visited three airports to observe their use of access controls and interviewed TSA personnel. The non-generalizable group of airports was selected to reflect different types of access control measures and airport categories. GAO is not making any recommendations. In its formal response, DHS stated that it continues to implement the 2016 ASA requirements. The Transportation Security Administration (TSA) has generally made progress addressing the 69 applicable requirements within the Aviation Security Act of 2016 (2016 ASA). As of June 2017, TSA had implemented 48 of the requirements; it plans no further action on these. For 18 requirements, TSA officials took initial actions and plans further action. TSA officials stated they have yet to take action on 2 requirements and plan to address them in the near future. TSA officials took no action on 1 requirement regarding access control rules because it plans to address this through mechanisms other than formal rulemaking, such as drafting a national amendment to airport operator security programs. Key examples of TSA's progress in implementing the requirements in the eight relevant sections of the Act are shown below: Conduct a Threat Assessment : TSA conducted a threat assessment that analyzed vulnerabilities related to the insider threat--that is, the threat posed by aviation workers who exploit their access privileges to secure areas of an airport for personal gain or to inflict damage. Enhance Oversight Activities : Among other things, TSA developed a list of measures for airport operators to perform, such as an airport rebadging if the percent of badges unaccounted for exceeds a certain threshold. Update Airport Employee Credential Guidance : TSA issued guidance to airport operators to match the expiration date of a non-U.S. citizen aviation worker's identification badge to the individual's U.S. work authorization status. Vet Airport Employees : In addition to making progress on updating employee vetting rules, TSA coordinated with the Federal Bureau of Investigation (FBI) to implement the FBI's Rap Back service for providing recurrent fingerprint-based criminal history record checks for aviation workers. Develop and Implement Access Control Metrics: TSA developed and implemented a metric that determines the percentage of TSA secure area inspections found to be in compliance with the airport security program. Develop a Tool for Unescorted Access Security: According to TSA officials , they developed a tool designed to ensure that aviation workers with unescorted access are randomly screened for prohibited items, such as firearms and explosives, and to check for proper identification. Increase Covert Testing : TSA plans to increase the number of covert tests of access controls it will perform in 2017. Review Security Directives : Security directives are issued by TSA when, for example, additional measures are required to respond to a threat. TSA officials stated they review all security directives annually to consider the need for revocation or revision, and brief Congress when new directives are to be issued.
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The Congress passed initial legislation in October 1988 to bring DOD's base structure into line with its smaller post-Cold War force structure. Generally, the process, as modified by subsequent legislation, called for (1) establishing independent commissions to recommend installations for realignment or closure and (2) implementing the commissions' recommendations within 6 years of the date the President sends the commissions' recommendations to the Congress. The realignment of underutilized bases and closure of unnecessary bases were expected to result in significant savings, primarily from reduced base support costs. The February 1992 DOD Base Structure Report defined base support costs as the overhead cost of providing, operating, and maintaining the defense base structure, including real property maintenance and repair costs, base operations costs, and family housing costs. According to historical information in DOD's Future Years Defense Program (FYDP) database, in fiscal year 1988 base support costs totaled $41 billion. During that year, most base support costs were paid from the operations and maintenance account (54 percent); the military personnel account (23 percent); and the family housing account (10 percent). The Congress recognized that an up-front investment was necessary to achieve the savings and established two accounts to fund certain implementation costs. These costs included (1) constructing new facilities at gaining bases to accommodate organizations transferred from closing bases, (2) remedying environmental problems on closing bases, and (3) moving personnel and equipment from closing to gaining bases. In addition, revenue generated when land at closing bases is sold is deposited in the BRAC accounts and used to offset one-time implementation costs. Moreover, the legislation required that DOD submit annual budgets estimating the cost and savings of each closure or realignment, as well as the period in which savings were to be achieved. According to its February 1995 budget submission, DOD estimated that, for the first three BRAC rounds, one-time implementation costs will total $16.3 billion and savings will total $16.1 billion, for a net cost of $189.6 million over the period. According to DOD, the $16.1 billion in estimated savings have been or will be reflected as reductions in DOD component appropriation accounts. Once the implementation of the three BRAC rounds is completed in fiscal year 1999, DOD estimates that annual net savings will be $4.1 billion. Our analysis of the FYDP indicates that DOD plans to substantially reduce spending for base support programs. Furthermore, our analysis of operations and maintenance costs at nine closing installations indicates that actual base support costs have been reduced at those installations and therefore savings should be substantial. However, the DOD FYDP and service accounting systems are not configured to provide information concerning actual BRAC savings, and failure to achieve them would affect the quality of base support services or DOD's ability to fund other programs. Table 1 shows that by fiscal year 1997 DOD expects to reduce annual base support costs by about $11.5 billion from a fiscal year 1988 baseline. The cumulative reduction over the period is about $59 billion. DOD's information system does not indicate how much of the reduction is due to BRAC versus force structure or other changes. In addition, an Office of the Deputy Assistant Secretary of Defense (Installations) official stated that DOD is reviewing the classification of base support programs in the FYDP, which could affect future analyses. Our analysis of the FYDP shows that, within reduced overall base support spending levels, DOD plans to increase average spending on family housing from $1,880 to $2,730 for each active duty military person between fiscal years 1988 and 1997. Average spending for the remaining base support activities is expected to remain relatively stable over the 10-year period. However, table 2 shows that, over the period, DOD's force structure is expected to be reduced by 680,000 military personnel and average base operations and real property support costs are expected to fall slightly to about $16,600 per person. Key requirements for calculating actual BRAC savings include information on decreased support costs at closing bases and the offsetting increases at gaining bases. DOD cannot provide accurate information on actual savings because (1) information on base support costs was not retained for some closing bases and (2) the services' accounting systems cannot isolate the effect on support costs at gaining bases. DOD officials stated that designing and implementing a system for collecting actual BRAC savings information would be difficult and extremely expensive, and they questioned the value of such a system. According to DOD officials, the accounting systems were not designed to isolate the impact of specific initiatives, such as BRAC, on base support costs. With the disestablishment of the 509th Bombardment Wing and closure of Pease Air Force Base, for example, the Wing's FB-111 bombers were placed in storage as part of a force structure change, while its KC-135 refueling aircraft were transferred to five gaining bases along with their crews, support personnel, and equipment. The largest group of aircraft, six KC-135s, was transferred to Fairchild Air Force Base. According to Air Force officials, their systems would not allow them to determine how much of the reduction in Pease Air Force Base support costs was due to the changing strategic bomber force structure as opposed to the closure of Pease Air Force Base and how much of any increase in Fairchild Air Force Base support costs was due to the arrival of Pease aircraft. Officials stated that, since the arrival of the 6 KC-135 aircraft from Pease, Fairchild has received over 50 KC-135 tankers from other bases. The Army Audit Agency had similar difficulties in determining the actual savings from the closure of 10 Army BRAC I installations. According to the Agency's November 1995 report, the Army's system of management controls did not ensure that adequate documentation was retained to determine actual savings or reliable estimates of savings. The report stated, for example, that auditors were unable to locate the accounting records necessary to determine base support cost savings at one site. In addition, they could not determine incremental base support cost increases at gaining installations because the Army's accounting system did not contain all the necessary information. We analyzed base support costs paid from the operations and maintenance account for the eight installations for which data were available. The analysis shows that the closures will have a combined net cost of $7.6 million for the implementation period, and an annual recurring savings of $212.8 million thereafter. As table 3 shows, four bases (Chase Field, the Long Beach Naval Hospital, Pease, and Williams) are expected to have a net savings at the end of the implementation period, indicating a payback period of less than 6 years. The longest payback period is Fort Devens at about 11 years. Our estimates reflect force structure savings at closing bases and do not reflect incremental base support cost increases at gaining bases unless they were readily identifiable. Additionally, estimated implementation costs do not include economic assistance costs to the area affected by the closure or other costs not reported in DOD's budget submission. Including these factors would reduce the net savings. However, our estimates also do not reflect savings due to reduced base support costs paid from the military personnel and military construction accounts or reduced family housing costs, which would increase savings. For example, at the three Air Force bases we reviewed, the Air Force estimated military personnel savings at $669.6 million over the implementation period and $156.6 million annually thereafter. DOD expects BRAC savings to provide much of the funding necessary for quality-of-life initiatives and defense modernization efforts. In November 1994, for example, the Secretary of Defense stated that the fiscal year 1996 DOD budget will increase funding by $94 million for community and family support projects, including increasing eligibility for child care support by up to 38,000 families and strengthening programs aimed at preventing family violence. Additionally, in January 1996, the Secretary stated that DOD will need to increase modernization programs to ensure the long-term readiness of defense forces. According to the Secretary, failure to achieve savings from earlier initiatives required DOD to restructure the budget. DOD stated that estimated savings from BRAC are taken out of the services' budgets up front. This is the same process that was followed in implementing budget reductions under the defense management review initiatives. To the extent BRAC savings are not realized at the levels that were anticipated, it could have similar effects on DOD's FYDP. DOD's savings estimates are inconsistent because the services used different estimating methodologies, and are unreliable because the services excluded some savings and did not update some estimates to reflect revised closure schedules. In addition, DOD's cost estimates are incomplete because the services did not include many BRAC-related nondefense costs. The methodologies used for developing the savings estimates differed among the services. The Air Force used savings estimates that were developed through the Cost of Base Realignment Actions (COBRA) model,with adjustments for inflation and recurring cost increases at gaining bases, as the basis for its estimates. The adjustments accounted for differences in the way inflation and recurring costs were treated in the COBRA and budget estimates. According to an Air Force official, however, major commands and installations were not requested to provide budget-quality data to revise the COBRA savings estimates for their bases. The Navy, on the other hand, used its Comptroller's analyses of expected increases and decreases in each base's costs, but no documentation was available to show how specific estimates were calculated. For example, the Navy's estimate for the Long Beach Naval Hospital savings assumed, among other things, that the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS) costs at gaining bases would be reduced by about $143 million over the 6-year implementation period and about $38 million for each year thereafter. The Navy Comptroller was unable to provide documentation to show how that estimate was calculated. The Army based its estimates on detailed implementation plans prepared by major commands after the BRAC Commissions announced their decisions. Unlike the Navy, however, the Army eliminated CHAMPUS savings from its estimates. Also, unlike the other services, the Army excluded savings from military personnel reductions from its BRAC II and III savings estimates. The Air Force, the Navy, and DOD agencies estimated that BRACs II and III would eliminate the need for about 28,000 military personnel and save about $3.9 billion during the 6-year implementation periods. An Army official stated that military personnel savings were excluded because the reductions had already been recognized in previous initiatives. Closure implementation plans for the three Army bases we examined stated that the installations were authorized 475 military personnel for base support functions. Further, a Navy official stated that Navy estimates were reviewed annually and revised during the budget review process. According to Army and Air Force officials, their savings estimates are not routinely updated, even though some bases close faster than initial estimates, thereby resulting in increased savings. For example, the 1995 Fort Benjamin Harrison savings estimate, which has not changed since it was initially submitted in 1992, does not reflect significant operation and maintenance savings until fiscal year 1995. Our analysis indicates that savings started in fiscal year 1992 and totaled over $92 million by fiscal year 1995. According to a DOD Comptroller official, the Office of the Secretary of Defense provided no additional guidance to the services on developing savings estimates other than the guidance on preparing COBRA estimates. He said that DOD headquarters and the services focused most of their attention on monitoring and managing BRAC costs rather than savings. In March 1996, we reported that DOD's cost estimates for closing maintenance depots excluded some BRAC-related costs that have been or will be paid from DBOF or the operation and maintenance account. For example, the Navy estimates that, through fiscal year 1995, closing naval aviation depots and shipyards would have an accumulated operating loss of about $882 million that would be recouped from its operation and maintenance account ($695 million) or written off within DBOF ($187 million). Some of this loss was directly related to depot closures. We also reported that closing Army depots had closure-related costs and losses that were financed by DBOF. In fiscal year 1993, for example, the Sacramento Army Depot charged about $12 million in closure-related costs, including employees' voluntary separation incentive pay, to DBOF instead of the BRAC account. The Navy and other organizations charge separation incentive pay to their BRAC account. In addition to depot-related closure costs, DOD estimates do not include $781 million for the following BRAC-related economic assistance costs, much of which is non-DOD: The Economic Development Administration began providing funds for BRAC-related activities in fiscal year 1992, and has obligated about $371 million for them between fiscal years 1992 and 1995. The Federal Aviation Administration provided about $182 million to BRAC bases through fiscal year 1995. The Department of Labor said it could not readily tell how much it spent on BRAC-related activities between 1988 and 1990. It spent about $103 million on BRAC-related activities from fiscal years 1991 through 1995. This does not include funds distributed to states under block grants or funds spent on DOD demonstration projects, such as projects at Philadelphia and Charleston, because these funds are administered by the states. DOD's Office of Economic Adjustment provided $125 million to BRAC bases from fiscal years 1988 to 1995. In addition, DOD paid about $500 million in unemployment compensation to civilian employees who lost their jobs from fiscal years 1990 through 1995. According to DOD, the BRAC process resulted in the elimination of about 31,000 civilian positions during that period, which indicates that some unemployment costs could be categorized as BRAC related. Because much of the information necessary to prepare comprehensive and reliable savings estimates for all the installations is no longer available, we are not recommending the revision of these estimates. However, should there be future BRACs, we believe the Secretary of Defense should provide and the services should implement guidance to ensure estimates are comprehensive, consistent, and well-documented. We recommend that the Secretary of Defense, at a minimum, explain the methodology used to estimate savings in future BRAC budget submissions. Also, the submissions should note that all BRAC-related costs are not included. In commenting on a draft of this report, DOD indicated that the inconsistencies in its budget savings estimates we cited were the result of an attempt to give the services reporting flexibility. DOD acknowledged that cost estimates in BRAC budget submissions do not include some costs that were paid from other DOD accounts or from non-DOD appropriations. DOD agreed that the BRAC budget submissions should include an advisory statement that economic assistance and non-DOD costs are not included. DOD also indicated that it was willing to consider including a brief statement that the BRAC budget submissions are based on the initial cost and savings estimates, which are subsequently refined through the use of site surveys. However, DOD did not believe that using different methodologies was a weakness that needed to be reported. To clarify the inconsistencies we found among the services, we have expanded the report to show the differences in (1) the extent to which COBRA estimates were updated and (2) the treatment of military personnel and CHAMPUS savings in the services' budget estimates. We believe that eliminating the inconsistencies in the preparation of savings estimates for future BRACs would enhance the usefulness of the budget submissions. However, we deleted the term weakness in describing the differences in the various methodologies. With regards to non-DOD costs, the information on many excluded costs is readily available. For example, information on $781 million in BRAC-related economic assistance costs incurred through fiscal year 1995 was readily available from various agencies. We also believe that including information from the other agencies would give the Congress a more comprehensive overview to use in evaluating the success of BRAC implementation. DOD comments are presented in their entirety in appendix I. We reviewed reports, documents, and legislation relevant to BRAC cost and savings estimates. We also interviewed BRAC and Comptroller officials from the Office of the Secretary of Defense and the military services. From officials of the Departments of Labor and Commerce and the Federal Aviation Administration, we obtained data on their BRAC-related costs. Our examination of cost and savings estimates focused on BRACs I through III because DOD had not yet developed BRAC IV estimates at the time we initiated our review. In addition, we focused our analysis of actual costs and savings on BRACs I and II because many BRAC III installations were still being closed. For our analysis of actual savings, we analyzed trend data from DOD's historical and current FYDP databases, which were updated through June 1995. We identified base support costs by examining program element titles and discussing the costs with officials in DOD's Office of Program Analysis and Evaluation and from the military services. We did not assess the reliability of the FYDP database. We also attempted to obtain information on actual base support costs for nine closures. We selected the closures from a listing of BRACs I and II to obtain three closing installations from each of the military services, and to ensure each closing installation was from a different major command. For one of the nine installations selected, base support cost data was not available. Where possible, we obtained actual base support cost data for the operation and maintenance account from the responsible major command. Our estimates of base support cost reductions at closing installations and incremental increases at gaining bases were based on major command estimates or our analysis of trends in the closing and gaining bases' actual support costs. We estimated fiscal years 1995 and 1996 costs on the basis of fiscal year 1994 costs. Our analysis of the nine bases cannot be projected to all BRAC bases. While overall trends indicate substantial savings, it is possible that net savings may not be achieved at an individual location. We conducted our work from March 1995 to February 1996 in accordance with generally accepted government auditing standards. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days after its issue date. At that time, we will send copies to the Secretaries of Defense, the Army, the Navy, and the Air Force; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others upon request. If you have any questions concerning this report, please call me on (202) 512-8412. Major contributors to this report are listed in appendix II. John Schaefer Eddie Uyekawa The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) cost and savings estimates for past base realignment and closure (BRAC) actions, focusing on the: (1) extent to which DOD is achieving actual savings from BRAC; and (2) adequacy of the DOD process for developing the cost and savings estimates reported in its annual budget submissions. GAO found that: (1) its analysis of base support costs in the Future Years Defense Plan and at nine closing installations indicates that BRAC savings should be substantial; (2) however, DOD's systems do not provide information on actual BRAC savings; (3) therefore, the total amount of BRAC savings is uncertain; (4) if DOD does not fully achieve estimated BRAC savings, it will affect DOD's ability to fund future programs at planned levels; (5) DOD has complied with the legislative requirement for submitting annual cost and savings estimates, but there are limitations to the submissions' usefulness; (6) for example, the Air Force's savings estimates were not based on budget-quality data, and the Army's estimates excluded reduced military personnel costs that the Navy and the Air Force included in their estimates; (7) further, BRAC cost estimates excluded more than $781 million in economic assistance to local communities as well as other costs; and (8) consequently, the Congress does not have an accurate picture of the savings achieved by the BRAC process.
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IRS has 10 submission processing centers located throughout the country that are responsible for processing paper returns, 5 of which also process electronic returns. Electronic returns are relatively easy to process, while the processing of paper returns involves several additional steps, as shown in figure 1. The fewer steps involved in processing electronic returns rather than paper returns relate to a cost avoidance experienced by the IRS. In response to a question raised by the House Appropriations Committee in 2001, IRS estimated that 50 million individual income tax returns would be filed electronically in fiscal year 2002. IRS estimated that it would need 3,150 more full-time equivalent staff years if none of those returns were filed electronically. At IRS' estimate of $36,300 per staff year, that would be a cost avoidance of $114.3 million. Therefore, if no returns were filed electronically and using IRS' estimates, which we did not verify, IRS' fiscal year 2002 budget request of $615 million for submission processing would have increased to about $729 million. The major focus of our review was on factors that worked against an even greater reduction in submission processing costs. To address our objectives, we interviewed IRS National Office officials and officials at 2 of the 10 submission processing centers--Atlanta and Cincinnati--to obtain their opinions about any factors that limited the impact of electronic filing on the amount of resources devoted to processing returns from fiscal years 1997 through 2000. We reviewed IRS documents and GAO reports that contained information related to these factors. We analyzed a report prepared for IRS by the consulting firm of Booz-Allen & Hamilton about future prospects for cost reductions in submission processing and obtained IRS officials' opinions on that subject. We performed our work between January and October 2001 in accordance with generally accepted government auditing standards. We discuss our scope and methodology in greater detail in appendix I. Several factors limited the impact of electronic filing on the resources devoted to processing returns from fiscal years 1997 through 2000. These factors fell into two broad categories--filing trends that partially offset the potential savings from increases in electronic filing and expanded demands on paper processing staff. Even though the number of electronic returns filed from 1997 though 2000 increased, the potential savings from that increase were partially offset by the following filing trends: The increase in electronically filed returns was partially offset by an increase in total returns filed. The number of the most complex individual income tax returns filed on paper--standard Form 1040s--essentially stayed the same. The number of paper individual income tax returns received by IRS during the peak filing period stayed relatively the same from 1997 through 2000, and peak processing needs drive the resources needed to process individual paper returns. About 17.9 million more individual and business tax returns were filed electronically in 2000 than in 1997. However, as shown in table 1, because of an overall increase in the total number of returns filed from 1997 through 2000, the net decline in paper returns over that period was much less than the 17.9 million net increase in electronic filings. Thus, the increase in electronic returns had less of an impact on processing costs than might have been expected because any savings from that increase would be partially offset by the costs to process the overall increase in returns filed. From 1997 through 2000, the number of complex individual returns filed on paper essentially remained the same. The complexity of a return varies according to the form on which it is filed. Complexity is determined by the number of lines of data that need to be entered on a form. According to IRS submission processing officials, the standard Form 1040 is the most complex. Complexity then decreases from the Form 1040 to the Form 1040A, and finally to the Form 1040EZ. The more complex a return, the longer it takes to process and the greater the processing costs. For example, according to data developed for IRS by a consulting firm for fiscal year 1999, the average direct labor cost to process a Form 1040 filed on paper was $1.93 compared to $1.50 to process a paper 1040A and $1.01 to process a paper 1040EZ. As shown in table 2, the number of Form 1040s filed on paper only decreased by about 1 percent from 1997 through 2000, with the only decrease occurring between 1999 and 2000. The reductions in paper 1040As and 1040EZs were much larger during the years covered by our study--15 and 23 percent, respectively. Any reductions in processing costs that IRS may have been able to realize as more taxpayers filed electronically depended, in great part, on the cost of processing those same returns filed on paper. IRS would have been able to reduce costs more if a greater number of taxpayers who were filing the more complex (and thus more costly to process) returns on paper had started filing electronically. Another filing trend that limited the impact of electronic filing on processing costs was the increase in the number of paper returns filed by individuals during the peak filing period--the 2 weeks of the year when the most individual income tax returns are filed. The peak filing period for paper returns filed by individuals is mid-April. Business returns do not experience the same peak phenomenon. Businesses have various fiscal years, which affect their filing period. In addition, many business returns must be filed quarterly. As shown in table 3, while the overall number of individual returns filed on paper decreased from 1997 through 2000, the number of paper returnsfiled during the peak period stayed relatively the same. The number of paper individual returns received during the peak filing period drives the amount of resources needed to process individual paper returns. According to the Director of Submission Processing, when Submission Processing determines its resource needs, the first priority is the resources (including staff, equipment, and space) needed during the peak period. The Director added that, all things considered, if the number of individual paper returns received during the peak period increases while the total number of paper returns received during the entire year decreases, the increase during the peak period would have more of an impact on submission processing resources than would the overall decrease in paper receipts. IRS' goal of improving business results also directly affects the resources needed during the peak filing period. To help achieve this goal, in 2000, 85 percent of refund checks for paper returns were to be processed within 40 days. Doing so also contributes to IRS' goal of improving taxpayer satisfaction. Thus, to meet these goals, IRS has to ensure that there are enough resources to process the increased number of peak period returns within this time frame. Another factor that limited the impact of electronic filing on the resources devoted to paper processing was the increase in demands placed on paper processing staff from 1997 through 2000. These increased demands included the following: Numerous processing changes increased the workload for units responsible for (a) reviewing returns for completeness and coding them for data entry, (b) transcribing data, and (c) correcting errors. Because most electronic filers submitted a paper signature document, the work done by paper processing staff was not totally eliminated when taxpayers filed electronically and the volume of that work increased as electronic filing increased. Front-line employees spent increasing amounts of time on activities, including training, not specifically related to processing returns. Numerous changes were made in the processing of returns from 1997 through 2000, which according to IRS officials, resulted in an increased workload. For paper processing staff, these changes generally increased the amount of time spent reviewing returns and coding them for data entry, number of keystrokes entered, and number of IRS and taxpayer errors to be corrected. Table 4 illustrates the estimated effects of some of these changes according to IRS' data. Some processing changes, such as the validation of secondary Social Security numbers, were made to help ensure compliance with the tax law. Other changes stemmed from changes in the tax law that established new credits and deductions for which IRS had to enter data into its computer system. Although the numbers of additional seconds and keystrokes cited in table 4 for any one change are small, the overall effect of these processing changes, considering the number of returns involved, is to increase the number of staff years needed to process returns. For example, the additional second needed to review and code 41.6 million returns for secondary Social Security number validation equates to about 11,556 hours or (on the basis of 2,088 hours per staff year) 5.5 staff years. Similarly, a total of about 584.5 million additional keystrokes would have had to be made to process the four changes in table 4, which, we roughly estimated using IRS data on average keystrokes per hour, would consume at least 78,000 additional hours or 37.4 staff years at a cost of almost $1.4 million.Although these changes in workload may not be of great magnitude, they required additional resources that offset some of the potential savings from electronic filing. The workload of error correction staff can also be affected by changes in the accuracy of work done by other processing staff. In that regard, the accuracy of staff who reviewed and coded tax returns for transcription increased from 95 percent in 1997 to 96.6 percent in 2000, while the accuracy of data transcribers decreased from 94.7 percent to 93.9 percent. We do not know how much, if at all, the volume of error correction work actually changed as a net result of these increases and decreases in accuracy. The increase in responsibilities can also affect the staff's productivity. Using IRS information on average keystrokes per hour for various tax forms as a measure of data transcribers' productivity, table 5 shows that there was a general decline in productivity in 1999, which is when transcribers began using a new computer system, and a general improvement in productivity in 2000. For example, IRS data for Other- Than-Full-Paid Form 1040s showed that the average keystrokes per hour went from 7,503 in 1997 to 7,250 in 1998 and 6,802 in 1999 before rising to 7,108 in 2000. Submission Processing officials said that many factors affected accuracy and productivity and that it would be difficult to determine specifically what caused them to decrease. However, they believed that the learning curve associated with using a new computer system in 1999 was probably the major contributing factor to the decrease in data transcribers' productivity. They added that there has been high turnover in the Submission Processing Centers for the past few years due to the availability of higher paying jobs elsewhere within IRS or in the private sector. As a result, they have less experienced staff, which may have contributed to lower accuracy and productivity rates. During the years covered by our study, electronic filing was not entirely paperless. Most electronic filers continued to submit a paper signature document, even though in 1999, IRS began testing electronic options to replace the document. Thus, any savings IRS realized when taxpayers switched to electronic filing were partially offset by the costs incurred in processing the increase in the volume of paper signature documents that resulted from the increase in electronic filing. Before 1999, individual taxpayers who filed electronically had to submit a paper signature document that was processed by the staff who processed paper returns. Beginning in 1999, IRS provided two options that could be used in place of submitting a paper signature document. In 2000, about 6.8 million (or about 19 percent) of the 35.4 million taxpayers who filed their individual income tax returns electronically used one of those options. However, that meant that IRS still had to process about 28.6 million paper signature documents. According to a March 2000 study prepared for IRS by a consulting firm, it cost IRS $0.26 in direct labor costs to process each paper signature document in 1999. Assuming that same rate in 2000, it would have cost IRS about $7.4 million in labor costs to process the 28.6 million signature documents. Front-line paper processing employees spent greater amounts of their time on activities not specifically related to processing returns in fiscal year 2000 than they did in 1997. The Submission Processing Director and the Processing Division Branch Chiefs at the Atlanta and Cincinnati Submission Processing Centers said that personnel were spending more time (1) in required training not related to processing returns and (2) on required activities related to the Employee Satisfaction Survey. Some of the required training, such as training about the circumstances under which IRS employees can be charged with misconduct and terminated, was provided in order to apprise staff of new statutory requirements. IRS plans to use results from the Employee Satisfaction Survey to improve operations. According to the Branch Chiefs, these activities, while important, reduced the amount of time that employees were able to devote to processing returns. According to data in IRS' Work, Planning, and Control System, the amount of time paper processing staff spent on all training, including training related to processing returns, and on actions related to the Employee Satisfaction Survey increased from fiscal years 1997 through 2000. The percentage of time spent on these activities grew from 7.8 percent to 9.9 percent. Because IRS records did not separately identify all training related to processing and nonprocessing activities, it was not possible to determine the change in the amount of time spent in nonprocessing related training. Data in the Work, Planning, and Control System also showed that the number of hours submission processing staff spent on activities related to the Employee Satisfaction Survey increased from about 12,000 in fiscal year 1997 to almost 96,000 in fiscal year 2000. According to the Submission Processing Director, finding the time to spend on nonprocessing related training and the Employee Satisfaction Survey, both of which were required, was more difficult for Submission Processing than other units in IRS. This was because some units could absorb these activities by doing less direct work, such as opening fewer collection cases. Submission Processing, on the other hand, could not process fewer returns, so any additional required activities meant working more overtime, keeping seasonal employees longer, or hiring more employees than originally planned, resulting in an increase in costs. The Director added that the Employee Satisfaction Survey was completed during the peak filing period to help ensure that IRS obtained the views of seasonal staff. According to a report prepared for IRS by a national consulting firm, future reductions in processing costs are possible, with the amount of any reduction dependent on the nature and extent of future increases in the number of returns filed electronically and changes in submission processing's operations. Whether these reductions are realized will depend not only on the actual number of returns filed electronically and the extent to which different operational changes are implemented, but also on the extent of any changes in the workload of paper processing staff due to tax law changes or increased IRS compliance efforts. In a March 2000 report prepared for IRS, the national consulting firm of Booz-Allen & Hamilton analyzed how various scenarios might affect IRS' processing costs starting in 2007. The firm developed eight scenarios that involved a growth in volume of returns and a growth in electronic filing of individual, business, and other types of forms, as well as several operational changes, such as making additional business forms available for electronic filing and consolidating submission processing centers. The firm also developed four cost-reduction estimates for each scenario based on differing percentages of electronic filing for individual, business, and other returns. Those cost-reduction estimates ranged from $27 million to $243 million. Figure 2 shows that the firm's estimates when using the highest electronic filing projections--80 percent for individual returns, 45 percent for business returns, and 30 percent for other returns--ranged from $104 million to $243 million. 80 percent of individual returns filed electronically. 45 percent of business returns filed electronically. 30 percent of supplemental and information returns filed electronically. Eliminate scanning and filing by telephone. The estimates in figure 2 assume that IRS will meet its goal of having 80 percent of all individual income tax returns filed electronically by 2007. However, our assessment of IRS' 2001 tax filing season in response to another request from this Subcommittee showed that (1) about 31 percent of individual income tax returns were filed electronically in 2001 (through October 26, 2001) and (2) fewer individuals filed electronically in 2001 than IRS had projected (40 million filed vs. 42 million projected). With 2001 as a starting point and assuming that the total number of individual income tax returns filed and the number of such returns filed electronically each continue to grow at the same annual rate as achieved between 2000 and 2001 (1.85 percent and 13.7 percent, respectively), we projected that only about 60 percent of individual income tax returns would be filed electronically in 2007. Using the estimates in the consultant's March 2000 report for a 65-percent level of individual electronic filing, the cost reductions would range from $74 million to $170 million annually in 2007, or about 30 percent less than at the 80- percent electronic filing level for individuals. The consultant's report focused on reductions that could be realized by making specific changes related to processing returns and not on potential increases in the type and amount of data on paper returns that IRS would need to process due to tax law changes or enhanced compliance efforts.Consequently, any reductions in overall processing costs would depend on the level of any such increases. In that regard, IRS made at least one significant change in submission processing's workload in 2001 that increased costs. IRS' 2001 budget included 378 additional full-time equivalent staff years in submission processing for transcribing Schedule K-1s (Beneficiary's, Partner's, or Shareholder's Share of Income, Deductions, Credits, etc.). IRS plans to compare the transcribed K-1 information to that reported on the tax returns filed by beneficiaries, partners, and shareholders to determine if income was accurately reported. The Director of Submission Processing told us that the cost reductions in the consultant's study may also be overstated because the study did not consider the resources needed to process returns during the peak filing period. The consulting firm official responsible for developing the data in the study said that the maximum cost reductions included in the study would not be affected by peak filing period resource needs, because the reductions were based on the assumption that 80 percent of individual taxpayers would file electronically. To achieve that level of electronic filing, the number of returns filed on paper would have to decrease significantly from the fiscal year 2000 levels previously described in this report. Once this happens, fewer resources would be needed to process paper returns during the peak filing period. The official added that at some lower percentage of electronic filing, peak period filing needs would affect possible cost reductions, but he did not know what that level would be. The Commissioner of Internal Revenue provided written comments on a draft of this report in a December 17, 2001, letter which is reprinted in appendix II. The Commissioner said that our report provided useful explanations for the continued increase in submission processing costs, despite the increase in the number of electronically filed returns. At his suggestion, we revised the report to clarify the objective of the March 2000 consultant's study. The Commissioner also suggested that we revise the report to acknowledge the steps IRS has taken to reduce the processing costs associated with electronic filing, specifically with respect to the paper signature document. Our report recognizes the steps IRS has taken to enable electronic filers to sign their returns electronically. However, most electronic returns were still filed with paper signature documents. Of the about 40 million returns filed electronically in 2001, about 9 million were filed using an electronic signature. The other about 31 million returns were filed using a paper signature document--an increase of about 2.4 million returns compared to 2000. Using the direct labor cost included in the March 2000 consultant's study for processing paper signature documents--$0.26 per document--it cost IRS about $624,000 more in 2001 than in 2000 to process these documents. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this report. At that time, we will send copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Finance and the House Committee on Ways and Means and to the Ranking Minority Member of this Subcommittee. We are also sending copies to the Secretary of the Treasury; the Commissioner of Internal Revenue; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others on request. This report was prepared under the direction of David J. Attianese, Assistant Director. If you have any questions about this report, please contact me or Mr. Attianese on (202) 512-9110. Key contributors to this report were Julie Schneiberg, Margaret Skiba, and Shellee Soliday. Our first objective was to determine what factors, if any, limited the impact of electronic filing on the resources devoted to processing paper returns. To address this objective, we interviewed several Internal Revenue Service (IRS) officials responsible for submission processing and electronic tax administration. We also visited 2 of IRS' 10 submission processing centers, including 1 that had an electronic filing unit-- Cincinnati--and 1 that did not have an electronic filing unit--Atlanta. At both centers, we interviewed the Center Directors and several Processing and Post Processing Division officials. These divisions have primary responsibility for processing returns. At Cincinnati, we also interviewed the Lead Tax Examiner in the Electronic Filing Unit to obtain details about the Unit's role in electronic return processing. We selected Cincinnati from among the five centers that had an electronic filing unit because Submission Processing's Monitoring Section was located there and officials would be able to provide information related to processing both paper and electronic returns. We selected Atlanta from among the five centers that did not have an electronic filing unit because it was convenient to our audit staff. Because these two centers were judgmentally selected, our results cannot be projected to all 10 centers. However, the Director of Submission Processing said that the opinions provided by officials at these two centers would be representative of the opinions that would be provided by officials at the other eight centers. To further address the first objective, we analyzed several studies prepared either by or for IRS, including a consulting firm's study of the costs to process electronic returns. We analyzed available IRS statistics related to several topics, including training, filings by type of return, the number of keystrokes associated with new data to be entered into the computer by data transcribers, and average keystrokes per hour. We also reviewed our past reports to obtain information about the accuracy of work done by paper processing staff. Our work on the first objective focused on fiscal years 1997 through 2000. We selected this 4-year period because (1) at the time we began our review, fiscal year 2000 was the last complete year for which data were available and (2) we wanted data for enough years before 2000 to be able to analyze trends. We decided that a total of 4 years would provide sufficient trend data. We included fiscal year 2001 data about the peak filing period and the number of individual returns filed electronically because it was readily available. Our second objective was to determine the prospects for future reductions in submission processing costs. We interviewed the Director of Submission Processing, reviewed the previously referred to report on costs to process electronic returns, and interviewed the consulting firm official who had responsibility for developing the data in the report. This report presented eight scenarios involving a growth in the volume of returns filed and a growth in electronic filing and included estimates of the cost reductions that IRS would realize under each scenario. The scenarios included different combinations of several variables, including increases in electronic filing by individual or business taxpayers, elimination of the paper signature document, and increases in the number of business forms that can be filed electronically. We also reviewed information that IRS provided to the House Appropriations Committee in June 2001 on the number of additional full-time equivalent staff years IRS would need to process returns if all returns were filed on paper. We performed our work between January and October 2001 in accordance with generally accepted government auditing standards. We obtained written comments from the Commissioner of Internal Revenue on a draft of this report. The comments are discussed near the end of this report and are reprinted in appendix II.
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From fiscal years 1997 through 2000, the number of individual and business tax returns filed electronically increased from 23 million to 41 million. During the same period, the Internal Revenue Service's (IRS) expenditures for submission processing grew from $795 million to $924 million, an increase of 16 percent. Because it costs less to process an electronic return than a paper return, a growth in processing costs seemed improbable. Interviews with IRS officials and an analysis of relevant documentation identified several factors that limited the impact of electronic filing. Specifically, (1) the overall number of individual and business tax returns filed increased, and the resources needed to process that increase partially offset the resources saved by processing more electronic returns; (2) the number of the most costly to process individual income tax returns filed on paper essentially stayed the same; and (3) the number of individual income tax returns filed on paper and received during the peak filing period stayed relatively the same, and peak processing needs drive the resources needed to process individual paper returns. Although electronic filing increased, so did the demands placed on paper processing staff. In particular, (1) processing changes increased the workload for units responsible for reviewing returns for completeness and coding them for entry data, and correcting errors; (2) because most electronic filers still sent a paper signature document to IRS, the work done by paper processing staff was not entirely eliminated when taxpayers filed electronically; and (3) front-line paper processing staff spent increasing amounts of time on activities, including training, not specifically related to processing returns. Future reductions in processing costs as a result of electronic filing are possible.
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The Recovery Act was enacted to help preserve and create jobs and promote economic recovery, invest in technology to spur technological advances, and invest in infrastructure to provide long-term economic benefits, among other things. The act was a response to significant weakness in the economy; in February 2011, the Congressional Budget Office (CBO) estimated the net cost as $821 billion. Congress and the administration built into the Recovery Act numerous provisions to increase transparency and accountability, including requiring recipients of some funds to report quarterly on a number of measures. To implement these requirements, the Office of Management and Budget (OMB) worked with the newly established Recovery Board to deploy a nationwide system at www.federalreporting.gov (FederalReporting.gov) for collecting data submitted by the recipients of funds. OMB set the specific time line for recipients to submit reports and for agencies to review the data. Recipients are required to submit the reports in the month after the close of a quarter, and, by the end of the month, the data are to be reviewed by federal agencies for material omissions or significant reporting errors before being posted to the publicly accessible Recovery.gov. The Recovery Board's goals for this Web site were to promote accountability by providing a platform to analyze Recovery Act data and serving as a means of tracking fraud, waste, and abuse allegations by providing the public with accurate, user-friendly information. The reporting requirements apply only to nonfederal recipients of funding, including all entities receiving Recovery Act funds directly from the federal government such as state and local governments, private companies, educational institutions, nonprofits, and other private organizations. OMB guidance, consistent with the statutory language in the Recovery Act, states that these reporting requirements apply to recipients who receive funding through the Recovery Act's discretionary appropriations, not recipients receiving funds through entitlement programs, such as Medicaid, or tax programs. Individuals are also not required to report. Federal law does not prohibit a contractor with unpaid federal taxes from receiving contracts from the federal government. Currently, regulations calling for federal agencies to do business only with responsible contractors do not require contracting officers to consider a contractor's tax delinquency unless the contractor was specifically debarred or suspended by a debarring official for specific actions, such as conviction for tax evasion. According to the Federal Acquisition Regulation (FAR), a responsible prospective contractor is a contractor that meets certain specific criteria, including having adequate financial resources and a satisfactory record of integrity and business ethics. However, the FAR does not currently require contracting officers to take into account a contractor's tax debt when assessing whether a prospective contractor is responsible and does not currently require contracting officers to determine if federal contractors have unpaid federal taxes at the time a contract is awarded. Further, federal law generally prohibits the disclosure of taxpayer data to contracting officers. Thus, contracting officers do not have access to tax data directly from IRS unless the contractor provides consent. On May 22, 2008, the Civil Agency Acquisition Council and the Defense Acquisition Regulations Council amended the FAR by adding conditions regarding delinquent federal taxes and the violation of federal criminal tax laws. The FAR rule requires offerors on federal contracts to certify whether or not they have, within a 3-year period preceding the offer, been convicted of or had a civil judgment rendered against them for, among other things, violating federal criminal tax law, or been notified of any delinquent federal taxes greater than $3,000 for which the liability remains unsatisfied. This certification is made through the Online Representations and Certifications Application (ORCA) Web site, orca.bpn.gov. Neither federal law nor current governmentwide policies for administering federal grants or direct assistance prohibit applicants with unpaid federal taxes from receiving grants and direct assistance from the federal government. OMB Circulars provide only general guidance with regard to considering existing federal debt in awarding grants. Specifically, the Circulars state that if an applicant has a history of financial instability, or other special conditions, the federal agency may impose additional award requirements to protect the government's interests. The Circulars require grant applicants to self-certify in their standard government application (SF 424) whether they are currently delinquent on any federal debt, including federal taxes. There is no requirement for federal agencies to take into account an applicant's delinquent federal debt, including federal tax debt, when assessing applications. No assessment of tax debt is required by OMB on a sampling or risk-based assessment. To improve the collection of unpaid taxes, Congress, in the Taxpayer Relief Act of 1997, authorized IRS to collect delinquent tax debt by continuously levying (offsetting) up to 15 percent of certain federal payments made to tax debtors. The payments include federal employee retirement payments, certain Social Security payments, selected federal salaries, contractor, and other vendor payments. Subsequent legislation increased the maximum allowable levy amount to 100 percent for payments to federal contractors and other vendors for goods or services sold or leased to the federal government. The continuous levy program, now referred to as the Federal Payment Levy Program (FPLP), was implemented in 2000. Under the FPLP, each week IRS sends the Department of the Treasury's Financial Management Service (FMS) an extract of its tax debt files. These files are uploaded into the Treasury Offset Program. FMS sends payment data to this offset program to be matched against unpaid federal taxes. If there is a match and IRS has updated the weekly data sent to the offset program to reflect that it has completed all statutory notifications, the federal payment owed to the debtor is reduced (levied) to help satisfy the unpaid federal taxes. In creating the weekly extracts of tax debt to forward to FMS for inclusion in the offset program, IRS uses the status and transaction codes in the master file database to determine which tax debts are to be included in or excluded from the FPLP. Cases may be excluded from the FPLP for statutory or policy reasons. Cases excluded from the FPLP for statutory reasons include tax debt that had not completed IRS's notification process, or tax debtors who filed for bankruptcy protection or other litigation, who agreed to pay their tax debt through monthly installment payments, or who requested to pay less than the full amount owed through an offer in compromise. Cases excluded from the FPLP for policy reasons include those tax debtors whom IRS has determined to be in financial hardship, those filing an amended return, certain cases under criminal investigation, and those cases in which IRS has determined that the specific circumstances of the cases warrant excluding it from the FPLP. At least 3,700 recipients of Recovery Act contracts and grants are estimated to owe $757 million in known unpaid federal taxes as of September 30, 2009, though this amount is likely understated for reasons discussed below. This represented nearly 5 percent of the approximate 80,000 contract and grant recipients in the Recovery.gov data as of July ly 2010 that we reviewed. These approximately 3,700 recipients received over $24 billion through Recovery Act contracts and grants. As indicated in figure 1, corporate income taxes comprised $417 million, or about 55 percent, of the estimated $757 million of known unpaid federal taxes. Payroll taxes comprised $207 million, or about 27 percent, of the taxes owed by Recovery Act contract and grant recipients we reviewed. Unpaid payroll taxes included amounts that were withheld from employees' wages for federal income taxes, Social Security, and Medicare but not remitted to IRS, as well as the matching employer contributions for Social Security and Medicare. The remaining $133 million was from other unpaid taxes, including excise and unemployment taxes. Employers are subject to civil and criminal penalties if they do not remit payroll taxes to the federal government. When an employer withholds taxes from an employee's wages, the employer is deemed to have a responsibility to hold these amounts "in trust" for the federal government until the employer makes a federal tax deposit in that amount. When these withheld amounts are not forwarded to the federal government, the employer is liable for these amounts as well as the employer's matching Federal Insurance Contribution Act contributions for Social Security and Medicare. Individuals within the business (e.g., corporate officers) m held personally liable for the withheld amounts not forwarded assessed a civil monetary penalty known as a trust fund recovery penalty (TFRP). Failure to remit payroll taxes can also be a criminal felony offense punishable by imprisonment of not more than 5 years, while the failure t o properly segregate payroll taxes can be a crim punishable by imprisonment of up to a year. A substantial amount of the estimated unpaid federal taxes shown in IR records owed by Recovery Act contract and grant recipients had been outstanding from several tax years. As reflected in figure 2, about 65 percent of the estimated $757 million in unpaid taxes were for tax periods from tax years 2003 through 2008, and about 35 percent of the estimated unpaid taxes were for tax periods prior to that. 26 U.S.C. SS 6672. For the 15 cases of Recovery Act recipients with outstanding tax debt that we selected for a detailed audit and investigation, we found abusive or potential criminal activity related to the federal tax system. Specifically, the 15 recipients we investigated owed delinquent payroll taxes. As discussed previously, businesses and organizations with employees are required by law to collect, account for, and transfer income and employment taxes withheld from employees' wages to IRS; failure to do so may result in civil or criminal penalties. These 15 recipients--8 contract and 7 grant recipients--received about $35 million in Recovery Act funds. The 15 case study recipients typically operate in industries, such as construction, engineering, security, and technical services. The amount of known unpaid taxes associated with these case studies is about $40 million, ranging from approximately $400,000 to over $9 million. IRS has taken collection or enforcement activities (e.g., filing of federal tax liens, assessment of a TFRP) against all 15 of these recipients. In addition, IRS records indicate that at least one of the entities is under criminal investigation. Table 1 highlights the 15 recipients with known unpaid taxes. We have referred all 15 recipients to IRS for criminal investigation, if warranted. Our analysis and investigation found that only 1 of these 15 Recovery Act recipients was subject to the new FAR requirement for certification of tax debts in relation to their Recovery Act awards. Because that contractor was current on its repayment agreement, the contractor was not required to disclose its tax debts. The other 14 recipients were grant recipients or contract subrecipients. However, 1 of the 14 companies that recently filed an Online Representations and Certifications Application (ORCA) improperly stated that the company had not been notified of any delinquent federal taxes (greater than $3,000) within the preceding 3 years. We did not identify any circumstances (e.g., current repayment agreement) that would allow the company to make such certification. We provided a draft of our report to FMS, IRS, and the Recovery Accountability and Transparency Board (Recovery Board) for review and comment. FMS and IRS provided technical comments which were incorporated into this report. IRS further noted that it had taken enforcement and collection actions in all of the 15 cases we investigated. This included filing federal tax liens to protect the government's interest in 13 of the 15 cases, and investigating and asserting the TFRP in 12 of the 15 cases. Of the 15 cases, 6 have established installment agreements to pay their outstanding tax liabilities. Except in cases of bankruptcy or where it has been determined that there is currently no meaningful collection potential, IRS is actively investigating and pursuing collection in the remaining cases. We received written comments on a draft of this report from the RATB Director, Accountability (see app. II). The Director stated that, as we acknowledged in our report, federal law places considerable restrictions on the disclosure of taxpayer information by IRS to other federal entities, including the Recovery Board. He further stated that should such access to such taxpayer information be made available to the Recovery Board, they could more proactively work to prevent fraud, waste, and abuse of government funds. As far back as 1992, we have said that Congress should consider whether tax compliance should be a prerequisite for receiving a federal contract. In 2004, we recommended that the Director of OMB develop and pursue policy options (in accordance with restrictions on the disclosure of taxpayer information) for prohibiting federal contract awards to contractors in cases in which abuse to the federal tax system has occurred and the tax owed is not contested. Options could include designating such tax abuse as a cause for governmentwide debarment and suspension or, if allowed by statute, authorizing IRS to declare such businesses and individuals ineligible for government contracts. We continue to support efforts to implement this recommendation. As agreed with your offices, unless you publicly release its contents earlier we plan no further distribution of this report until 30 days from its date. At that time, we will send copies of this report to the Secretary of the Treasury, the Commissioner of the Financial Management Service, the Commissioner of Internal Revenue, the Chairman of the Recovery Accountability and Transparency Board and other interested parties. The report is also available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions concerning this report, please contact Gregory D. Kutz at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Our objectives were to: (1) determine, to the extent possible, the magnitude of known tax debt which is owed by Recovery Act contract and grant recipients; and (2) provide examples of Recovery Act contract and grant recipients who have known unpaid federal taxes. To determine, to the extent possible, the magnitude of known tax debt owed by Recovery Act contract and grant recipients, we obtained and analyzed quarterly recipient reports submitted by contractors and grantees, as available through www.recovery.gov (Recovery.gov) through July 2010. Specifically, we obtained all contract and grant recipient reports from the fourth quarterly submission, and all reports from prior quarterly submissions that were marked as "final" by the recipients. Since Recovery.gov data do not contain taxpayer identification numbers (TINs) required for comparisons against IRS tax debt data, we obtained the Central Contractor Registry (CCR) database in order to obtain the TINs for Recovery Act contract and grant recipients. We matched the Data Universal Numbering System (DUNS) number available in the quarterly recipient reports with CCR to obtain the TINs for the Recovery Act contract and grant recipients. We were not able to match about 17,000 recipients in Recovery.gov to the CCR database. As such, those 17,000 recipients were not included in our analysis. We obtained and analyzed known tax debt data from the Internal Revenue Service (IRS) as of September 30, 2009. Using the TIN we electronically matched IRS's tax debt data to the population of Recovery Act contract and grant recipient TINs. To avoid overestimating the amount owed by Recovery Act contract and grant recipients with known unpaid tax debts and to capture only significant tax debts, we excluded from our analysis tax debts meeting specific criteria to establish a minimum threshold in the amount of tax debt to be considered when determining whether a tax debt is significant. The criteria we used to exclude tax debts are as follows: tax debts IRS classified as compliance assessments or memo accounts for financial reporting, known tax debts from calendar year 2009 tax periods, and, recipients with total known unpaid taxes of $100 or less. The criteria above were used to exclude known tax debts that might be under dispute or generally duplicative or invalid, and known tax debts that are recently incurred. Specifically, compliance assessments or memo accounts were excluded because these taxes have neither been agreed to by the taxpayers nor affirmed by the court, or these taxes could be invalid or duplicative of other taxes already reported. We excluded known tax debts from calendar year 2009 tax periods to eliminate tax debt that may involve matters that are routinely resolved between the taxpayers and IRS, with the taxes paid or abated within a short time. We excluded tax debts of $100 or less because they are insignificant for the purpose of determining the extent of known taxes owed by Recovery Act recipients. Using these criteria, we identified at least 3,700 Recovery Act recipients with federal tax debt. To provide examples of Recovery Act recipients who have known unpaid federal taxes, we selected 15 of the approximately 3,700 Recovery Act recipients for a detailed audit and investigation. The 15 recipients were chosen using a nonrepresentative selection approach based on data mining. Specifically, we narrowed the 3,700 recipients with known unpaid taxes to 30 cases based on (1) the amount of known unpaid taxes (including income, payroll, and other taxes); (2) the number of delinquent tax periods; (3) location; and (4) potential disclosure issues. Because we considered the number of delinquent tax periods in selecting these 15 recipients, we were more likely to select recipients who owed primarily payroll taxes; our prior work has shown delinquent payroll taxes to be an indicator of potential abusive or criminal activity. For these 30 cases, we obtained and reviewed copies of automated tax transcripts and other tax records (for example, revenue officer's notes) from IRS as of October 2010, and reviewed these records to exclude contractors or grantees that had recently paid off their unpaid tax balances and considered other factors before reducing the number of Recovery Act recipients to 15 case studies. We did not evaluate the status of collections activities related to penalties assessed against recipient organization officers, only those assessed against the recipient organization itself. Our investigators also contacted several of the recipients and conducted interviews. These case studies serve to illustrate the sizeable amounts of taxes owed by some organizations that received Recovery Act funding and cannot be generalized beyond the cases presented. We conducted this forensic audit and related investigation from July 2010 through April 2011. We performed this forensic audit 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 audit findings and conclusions based on our audit objectives. We performed our related investigative work in accordance with standards prescribed by the Council of the Inspectors General on Integrity and Efficiency. For the IRS unpaid assessments data, we relied on the work we performed during our annual audit of IRS's financial statements. While our financial statement audits have identified some data reliability problems associated with tracing IRS's tax records to source records and including errors and delays in recording taxpayer information and payments, we determined that the data were sufficiently reliable to address this report's objectives. In previous GAO reports, we have reported that fieldwork and initial review and analysis of recipient data from www.recovery.gov indicated that there were a range of reporting and quality issues, such as erroneous or questionable data entries. However, the problems identified in our previous reviews have been associated with job data fields that are not relevant to this review. In addition, for the purposes of this review, we limited the population of recipient data we reviewed to records showing continuity in reporting as demonstrated by consistency in reporting over multiple periods and by excluding certain records containing known data inconsistencies. Therefore, we determined that the data were sufficiently reliable to address our engagement objectives. Medicare: Thousands of Medicare Providers Abuse the Federal Tax System. GAO-08-618. Washington, D.C.: June 13, 2008. Tax Compliance: Federal Grant and Direct Assistance Recipients Who Abuse the Federal Tax System. GAO-08-31. Washington, D.C.: November 16, 2007. Tax Compliance: Thousands of Organizations Exempt from Federal Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes. GAO-07-1090T. Washington, D.C.: July 24, 2007. Tax Compliance: Thousands of Organizations Exempt from Federal Income Tax Owe Nearly $1 Billion in Payroll and Other Taxes. GAO-07-563. Washington, D.C.: June 29, 2007. Tax Compliance: Thousands of Federal Contractors Abuse the Federal Tax System. GAO-07-742T. Washington, D.C.: April 19, 2007. Medicare: Thousands of Medicare Part B Providers Abuse the Federal Tax System. GAO-07-587T. Washington, D.C.: March 20, 2007. Internal Revenue Service: Procedural Changes Could Enhance Tax Collections. GAO-07-26. Washington, D.C.: November 15, 2006. Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and Other Federal Taxes. GAO-06-887. Washington, D.C.: July 28, 2006. Tax Debt: Some Combined Federal Campaign Charities Owe Payroll and Other Federal Taxes. GAO-06-755T. Washington, D.C.: May 25, 2006. Financial Management: Thousands of GSA Contractors Abuse the Federal Tax System. GAO-06-492T. Washington, D.C.: March 14, 2006. Financial Management: Thousands of Civilian Agency Contractors Abuse the Federal Tax System with Little Consequence. GAO-05-683T. Washington, D.C.: June 16, 2005. Financial Management: Thousands of Civilian Agency Contractors Abuse the Federal Tax System with Little Consequence. GAO-05-637. Washington, D.C.: June 16, 2005. Financial Management: Some DOD Contractors Abuse the Federal Tax System with Little Consequence. GAO-04-414T. Washington, D.C.: February 12, 2004. Financial Management: Some DOD Contractors Abuse the Federal Tax System with Little Consequence. GAO-04-95. Washington, D.C.: February 12, 2004. Debt Collection: Barring Delinquent Taxpayers From Receiving Federal Contracts and Loan Assistance, GAO/T-GGD/AIMD-00-167, Washington, D.C.: May 9, 2000. Unpaid Payroll Taxes: Billions in Delinquent Taxes and Penalty Assessments Are Owed. GAO/AIMD/GGD-99-211. Washington, D.C.: August 2, 1999. Tax Administration: Federal Contractor Tax Delinquencies and Status of the 1992 Tax Return Filing Season. GAO/T-GGD-92-23. Washington, D.C.: March 17, 1992.
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The American Recovery and Reinvestment Act (Recovery Act), enacted on February 17, 2009, appropriated $275 billion to be distributed for federal contracts, grants, and loans. As of March 25, 2011, $191 billion of this $275 billion had been paid out. GAO was asked to determine if Recovery Act contract and grant recipients have unpaid federal taxes and, if so, to (1) determine, to the extent possible, the magnitude of known federal tax debt which is owed by Recovery Act contract and grant recipients; and, (2) provide examples of Recovery Act contract and grant recipients who have known unpaid federal taxes. To determine, to the extent possible, the magnitude of known tax debt owed by Recovery Act contract and grant recipients, GAO identified contract and grant recipients from www.recovery.gov and compared them to known tax debts as of September 30, 2009, from the Internal Revenue Service (IRS). To provide examples of Recovery Act recipients with known unpaid federal taxes, GAO chose a nonrepresentative selection of 30 Recovery Act contract and grant recipients, which were then narrowed to 15 based on a number of factors, including the amount of taxes owed and the number of delinquent tax periods. These case studies serve to illustrate the sizable amounts of taxes owed by some organizations that received Recovery Act funding and cannot be generalized beyond the cases presented. This report contains no recommendations. At least 3,700 Recovery Act contract and grant recipients--including prime recipients, subrecipients, and vendors--are estimated to owe more than $750 million in known unpaid federal taxes as of September 30, 2009, and received over $24 billion in Recovery Act funds. This represented nearly 5 percent of the approximately 80,000 contractors and grant recipients in the data from www.Recovery.gov as of July 2010 that GAO reviewed. Federal law does not prohibit the awarding of contracts or grants to entities because they owe federal taxes and does not permit IRS to disclose taxpayer information, including unpaid federal taxes, to federal agencies unless the taxpayer consents. The estimated amount of known unpaid federal taxes is likely understated because IRS databases do not include amounts owed by recipients who have not filed tax returns or understated their taxable income and for which IRS has not assessed tax amounts due. In addition, GAO's analysis does not include Recovery Act contract and grant recipients who are noncompliant with or not subject to Recovery Act reporting requirements. GAO selected 15 Recovery Act recipients for further investigation. For the 15 cases, GAO found abusive or potentially criminal activity, i.e., recipients had failed to remit payroll taxes to IRS. Federal law requires employers to hold payroll tax money "in trust" before remitting it to IRS. Failure to remit payroll taxes can result in civil or criminal penalties under U.S. law. The amount of unpaid taxes associated with these case studies were about $40 million, ranging from approximately $400,000 to over $9 million. IRS has taken collection or enforcement activities (e.g., filing of federal tax liens) against all 15 of these recipients. GAO has referred all 15 recipients to IRS for further investigation, if warranted.
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DOD has been trying to successfully implement the working capital fund concept for over 50 years. However, Congress has repeatedly noted weaknesses in DOD's ability to use this mechanism to effectively control costs and operate in a business-like fashion. The Secretary of Defense is authorized by 10 U.S.C. 2208 to establish working capital funds. The funds are to recover the full costs of goods and services provided, including applicable administrative expenses. The funds generally rely on sales revenue rather than direct appropriations or other funding sources to finance their operations. This revenue is then used to procure new inventory or provide services to customers. Therefore, in order to continue operations, the fund should (1) generate sufficient revenue to cover the full costs of its operations and (2) operate on a break- even basis over time-that is, not have a gain or incur a loss. In fiscal year 2001, the Defense Working Capital Fund--which consisted of the Army, Navy, Air Force, Defense-wide, and Defense Commissary Agency working capital funds--was the financial vehicle used to buy about $70 billion in defense commodities including fuel. The Defense Energy Support Center, as a subordinate command of DLA, buys fuel from oil companies for its customers. Military customers primarily use operation and maintenance appropriations to finance these purchases. In fiscal year 2001, reported fuel sales totaled about $4.7 billion, with the Air Force being the largest customer, purchasing about $2.7 billion. Each year the Office of the Under Secretary of Defense (Comptroller) faces the challenge of estimating and establishing a per barrel price for its fuel and other fuel-related commodities that will closely approximate the actual per barrel price during budget execution, almost a year later. The Office of the Under Secretary of Defense (Comptroller) establishes the stabilized annual price based largely upon the market price of crude oil as estimated by the Office of Management and Budget, plus a calculated estimate of the cost to refine. To this price is added other adjustments directed by Congress or DOD and a surcharge for DLA overhead and the operational costs of the Defense Energy Support Center. The services annually use these stabilized prices and their estimated fuel requirements based on activity levels (such as flying hours, steaming days, tank miles, and base operations) in developing their fuel budget requests. Figure 2 generally illustrates the process and the main organizations involved in budgeting for fuels. The stabilized annual fuel prices computed by DOD have varied over the years, largely due to volatility in the price of crude oil. For example, the stabilized annual fuel price and the Office of Management and Budget's estimated crude oil price, on which the stabilized price was based for fiscal years 1993 through fiscal year 2003, are shown in figure 3. The stabilized fuel price for each budget year remains unchanged until the next budget year, to provide price stability during budget execution. According to DOD's Financial Management Regulation, differences between the budget year price and actual prices occurring during the execution year should increase or decrease the next budget year's price. However, according to DOD's Financial Management Regulation, fund losses can occasionally be covered by obtaining an appropriation from Congress or by transferring funds from another DOD account. DOD is also authorized to move money out of the fund by annual appropriation acts. These acts limit the amount of funds that can be moved and the purposes for which the funds can be used. Specifically, money can only be removed from the fund for higher priority items, based on unforeseen military requirements, than those for which originally appropriated and cannot be used for items previously denied by Congress. These acts also require the Secretary of Defense to notify Congress of transfers made under this authority. The stabilized annual fuel prices used in the services' budget requests to Congress do not reflect the full cost of fuel because of cash movements (adjustments) and inaccurate surcharges. Therefore, the services' budgets for fuel may be greater or less than needed and funds for other readiness needs may be adversely affected. Based on our review of Office of Management and Budget and Defense Energy Support Center methodologies, the crude and refined oil price components appeared reasonable (see app. I for details). However, in fiscal years 1993-2002, cash movements into and out of the fund (adjustments) amounting to over $4 billion, while disclosed to Congress in DOD budget documents, were used for other purposes rather than to lower or raise prices. Some of the cash was moved at the direction of Congress and some at the direction of DOD. Congress makes such decisions as part of its budget deliberations. While authorized to move funds, DOD did not provide Congress with any rationale for the movements based on the limitations in the applicable appropriations acts. Identifying the rationale for moving these funds would be helpful to DOD and congressional decisionmakers as part of the budget review process. Removing money from the fund, which could be used to reduce future fuel prices, causes future service appropriations to be higher than they otherwise would be. In addition, the estimated surcharge component of the price used in budgeting was consistently higher than actual; it did not contain all costs; and in some cases, the costs were not adequately supported. Substantial cash movements (adjustments) into and out of the fund, while disclosed to Congress in budget documents, have kept prices from reflecting the full cost of fuel and affected the development of future years' stabilized annual fuel prices. As a result, the fuel-related portion of the services' operation and maintenance budgets totaled about $2.5 billion too high in 5 fiscal years and about $1.5 billion too low in another. The cash taken out of the fund went for the services' operation and maintenance and other nonfuel-related expenses. Further, Congress provided a $1.56 billion emergency supplemental appropriation in fiscal year 2000 to help offset a loss due to a worldwide increase in crude oil prices. This was necessary because DOD had established a stabilized price of $26.04 per barrel but the actual cost that year was $48.58 per barrel. This appropriation allowed DOD to avoid recovering the loss through a price increase. Figure 4 shows the various fuel-related cash movements during fiscal years 1993 through 2002. Table 1 shows the various cash movements out of the working capital fund from fiscal years 1993 through 2002. In total, about $2.5 billion of fuel-generated funds was removed from the fund. Of this amount, $0.5 billion was used to pay for specific nonfuel-related expenses such as the Counter Drug Effort. The remaining $2.0 billion was used to meet the services' other operation and maintenance needs. In reviewing these cash movements, we noted that DOD had notified Congress. However, when doing so, DOD did not provide rationale for the cash movements based on the law, which stipulates that the authority for such movements may not be used, unless for higher priority items, based on unforeseen military requirements, and where the item for which the funds are requested has not been previously denied by Congress. As a good management practice, such rationale, along with other information, such as the impact on future prices, would serve to provide more visibility to cash movements. In fact, in one instance, the Senate Appropriations Committee disallowed the $125-million request created when DOD moved these funds from the Defense-wide Working Capital Fund to cover Air Force Working Capital Fund losses. The Senate Appropriations Committee Report on the Department of Defense Appropriation Bill, 2002 and Supplemental Appropriations, 2002, stated that it could not support such a cash movement because it was inconsistent with DOD's existing policies for recovering working capital fund losses. As a result, the committee reduced the appropriation to DOD's working capital fund by that amount. Table 2 shows the effect of these cash movements on the stabilized annual fuel price if they had been used to lower or raise future year prices. Cash removed in 5 years caused the services' fuel budgets to be about $2.5 billion higher than necessary because the prices could have been lowered. For example, $800 million removed in fiscal year 2001 caused the stabilized price in fiscal year 2003 to be $7.27 per barrel higher than necessary. As a result, the services' fiscal year 2003 fuel budgets were overstated by $800 million. However, in fiscal year 2000, a $1.43 billion net cash movement into the fund caused the fiscal year 2002 stabilized price to be $12.99 per barrel lower than necessary to recover the full cost. As a result, the services' fiscal year 2002 budgets were understated by $1.43 billion. While military service comptroller officials responsible for managing fuel costs for each service stated that they were aware that DOD sets the stabilized annual fuel price that they must use in the budget process, they believed any gains in 1 year were being used to lower future fuel prices. These officials were not aware that funds generated from fuel sales in 1 year were being used to pay for nonfuel-related DOD needs. In their view, lower prices would have allowed them to use more of their operation and maintenance funds for other priorities. The estimated surcharge portion of the price supporting budget requests has not accurately accounted for fuel-related costs consistent with DOD's Financial Management Regulation. The surcharges were consistently higher than actual but did not include all costs. Furthermore, some costs were not adequately supported. These problems were due to deficient methodologies and record-keeping. As a result the stabilized annual prices and resulting services' budgets were inaccurate. Consistent surcharge overstatements caused the stabilized annual price of fuel to be higher than necessary and cost customers on average about $99 million annually from fiscal years 1993 through 2001. Our analysis of the surcharge costs shows that the estimated obligations exceeded actual obligations for every year from fiscal years 1993 through 2001 except for fiscal year 1999 as shown in table 3 below. We recognize that variances will occur between estimated and actual surcharge obligations. Differences, however, should be assessed annually and appropriate adjustments made to the next year's surcharge. We found that no adjustments for these overcharges, as required by DOD's Financial Management Regulation, were made in fiscal years 1994 through 2001. After we brought this to DOD's attention, adjustments were made when computing the fuel price for fiscal years 2002 and 2003. The surcharges, however, did not include all required costs. Inventory losses were not included in the surcharge as required by DOD's Financial Management Regulation. For fiscal years 1993 through 2000, these losses ranged from $12.0 million to $27.5 million a year. Adding these losses would have increased surcharges by about 9 to 23 cents per barrel. While officials stated that inventory losses were a factor in determining the number of barrels to be purchased, this practice does not comply with DOD's regulation, which stipulates that inventory losses should be included in the surcharge. Our analysis of the estimated surcharge components disclosed that support for some costs was inadequate. We found that DLA had inadequate support for its $40-million annual headquarters overhead charge that is passed on to the Defense Energy Support Center. This amount equated to over 5 percent of the fiscal year 2002 and 7 percent of the fiscal year 2003 surcharges. While DLA has a methodology for allocating its overhead costs to the affected business activities, we could not verify/validate the portion that was assessed to the center. As a result, we could not determine whether the Defense Energy Support Center was charged the appropriate amount. This is of particular concern because in the most recent budget submission for fiscal year 2003, DLA requested a $16.9 million increase in its overhead charges to the center. The Office of the Under Secretary of Defense (Comptroller) refused to grant the increase because it did not believe the increase was merited. Furthermore, the Defense Energy Support Center could not provide support for the $342 million terminal operations component cost for fiscal years 1997 and 1998. There was also about a $2 million difference between supporting documentation and the budgeted amount for depreciation in fiscal year 2001. The Defense Energy Support Center could not support any of the component costs prior to fiscal year 1997. According to officials, this documentation was not maintained during the move to their current location. Fuel prices have not reflected full costs. Fund cash balances have been used by Congress, and to a lesser extent DOD, to meet other budget priorities. Given the volatility in crude oil prices, these cash balances are DOD's primary means of annually dealing with drastic increases and decreases in fuel costs. Furthermore, DOD has removed cash from the fund without providing Congress with a rationale based on appropriation act language. In one recent instance, Congress reversed one of DOD's cash movement decisions. DOD also has not calculated surcharges consistent with the governing financial management regulation. To improve the overall accuracy of DOD's fuel pricing practices, we recommend that the Secretary of Defense direct DOD's comptroller to: Provide a rationale to Congress, consistent with language in the applicable appropriations act, to support the movement of funds from the working capital fund and to identify the effect on future prices. Require DLA and the Defense Energy Support Center to develop and maintain sound methodologies that fully account for the surcharge costs consistent with DOD's Financial Management Regulation and maintain adequate records to support the basis for all surcharge costs included in the stabilized annual fuel price. DOD generally concurred with the recommendations, but provided explanatory comments on each one. With regard to our recommendation that it provide Congress the rationale for cash movements, DOD stated that information is already being provided through formal and informal means that it believes are sufficient to report why cash was moved. We recognize this may be occurring; however, we believe that to improve visibility of fund operations, it is reasonable to provide a formal record of the rationale to fully disclose and account for each cash movement. Such a formal record does not exist; therefore, we continue to believe our recommendation is appropriate. In concurring with the recommendation to maintain adequate records, DOD expressed concern about how long to retain them and proposed 5 years. We believe DOD's proposal represents a reasonable timeframe consistent with our recommendation. In its cover letter conveying the recommendations, DOD stated our report overlooks the fact that while covering gains or losses to the fund by either decreasing or increasing fuel prices the next year is a basic principle, it is not often practical to rely exclusively on this principle when establishing such prices because of transfers into and out of the fund. We disagree. While our report points out that under the working capital fund concept fuel prices should cover gains and loses, it also acknowledges that there have been numerous transfers. Our point is that to ensure fund accountability when such transfers occur, DOD's fuel pricing practices should include providing Congress a full disclosure of the rationale for the transfer and its impact on the price. Otherwise, the ability of the working fund to effectively control and account for costs of goods and services is compromised. DOD's comments are printed in appendix II. DOD also provided technical comments, which we have incorporated as appropriate. We performed our review in accordance with generally accepted government auditing standards. Further details on our scope and methodology can be found in appendix I. We are sending copies of this report to the Senate Committee on Governmental Affairs; House Committee on Government Reform; Senate and House Committees on the Budget; and other interested congressional committees; the Secretary of Defense; and the Director, Defense Logistics Agency. Copies will also be made available to others upon request. In addition, the report will be available at no cost on the GAO Web site at http://www.gao.gov. If you or your staff have questions concerning this report, please contact us on (202) 512-8412. Staff acknowledgements are listed in appendix III. In assessing the accuracy of DOD's stabilized annual fuel prices from fiscal years 1993-2003, we reviewed each of the four components--crude oil cost estimates, cost to refine, adjustments, and surcharges--and identified the major offices, DOD organizations, and other components involved in pricing. For the crude oil cost estimate component, we reviewed the Office of Management and Budget's methodology for estimating crude oil prices. We discussed the Office of Management and Budget's methodology with the analyst that prepares the forecasted crude oil prices. We also reviewed the Office of Management and Budget's use of West Texas Intermediate crude oil futures prices and the historical relationships between those prices and domestic, imported, and composite crude oil prices in making crude oil price forecasts. We concluded that this approach was reasonable. For the cost to refine component, we reviewed the Defense Energy Support Center's methodology for calculating refined costs. In assessing the Defense Energy Support Center's methodology, we relied on our previous analysis of its regression equation and a suggested change that was adopted. This same methodology was being used as of May 2002 and remains reasonable. For the third component of fuel pricing--adjustments--we discussed and examined Office of the Under Secretary of Defense (Comptroller) documents related to stabilized annual fuel prices and applicable Program Budget Decisions to determine what costs were included in the component. To determine criteria, we reviewed the applicable portions of DOD's Financial Management Regulation and the legislative history pertaining to the creation of revolving funds since 1949. To identify any fuel-related cash movements into or out of the working capital fund that occurred and might have affected adjustments, we interviewed various DOD officials and obtained and reviewed the applicable appropriations acts and the committee and conference reports on those acts. We analyzed the results, developed a methodology for determining the effect, and discussed our conclusions with various DOD program and budget officials. Finally, for the fourth component of fuel pricing--surcharges--we obtained, reviewed and discussed DLA and Defense Energy Support Center methodologies and documentation used in computing the estimated and actual surcharge costs. To identify criteria for what surcharge costs should include, we obtained and reviewed DOD's Financial Management Regulation and any other policies and procedures governing or affecting fuel pricing. To determine whether the support for the surcharge costs was adequate, we requested, reviewed, and analyzed pertinent documentation and records supporting budgeted and actual obligations for each surcharge element for fiscal years 1993-2003. However, officials were unable to provide support for estimated surcharge costs from fiscal years 1993-1996 and were unable to provide support for several actual costs for fiscal years 1993 and 1994. We met with and/or contacted various program and budget officials within the Office of the Secretary of Defense; Office of Management and Budget; DLA Headquarters; Defense Energy Support Center; and the various military services. We performed our work from June 2001 to April 2002 in accordance with generally accepted government auditing standards. As part of our review, we examined DOD's Financial Management Regulation to ensure that it incorporated the Statement of Federal Financial Accounting Standards (SFFAS) No. 4 "Managerial Cost Accounting Standards" (Feb. 28, 1997). We did not independently verify DOD's financial information used in this report. Prior GAO and Department of Defense Inspector General audit reports and Federal Manager's Financial Integrity Act reports have identified inadequacies in the fund's accounting and reporting. As discussed in our report on the results of our review of the fiscal year 2001 Financial Report of the U.S. Government, DOD's financial management deficiencies, taken together, continue to represent the single largest obstacle to achieving an unqualified opinion on the U.S. government's consolidated financial statements. In addition to those named above, Bob Coleman, Jane Hunt, Patricia Lentini, Charles Perdue, Greg Pugnetti, Chris Rice, Gina Ruidera, Malvern Saavedra, and John Van Schaik made key contributions to this report.
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The Department of Defense (DOD) Defense Working Capital Fund was used to buy $70 billion in commodities in fiscal year 2001. This amount is estimated to grow to $75 billion for fiscal year 2003. The department's financial management regulation states that fund activities will operate in a business-like fashion and incorporate full costs in determining the pricing of their products. The National Defense Authorization Act for Fiscal year 2001 requires that GAO review the working capital fund activities to identify any potential changes in current management processes or policies that would result in a more efficient and economical operation. The act also requires that GAO review the Defense Logistics Agency's (DLA) efficiency, effectiveness, and flexibility of operational practices and identify ways to improve services. One such DLA activity, the Defense Energy Support Center, sold $4.7 billion of various petroleum-related products to the military services in fiscal year 2001. DOD's fuel prices have not reflected the full cost of fuel as envisioned in the working capital fund concept because cash movements to the fund balance and surcharge inaccuracies have affected the stabilized annual fuel prices. Over $4 billion was moved into and out of the working capital fund from fiscal year 1993 to 2002. These adjustments affected the extent to which subsequent years' prices reflected the full cost of fuel. In addition, the surcharges did not accurately account for fuel-related costs as required by DOD's Financial Management Regulation.
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To examine variation in MA disenrollment by contract, we examined CMS enrollment and disenrollment data for 2014--the most recent year of data available at the time of our analysis--for 252 contracts. We selected these 252 contracts as they had at least 100 disenrollees in poor health and 100 disenrollees in better health as well as had at least 50 percent of the individual measures in the 2016 MA Five-Star Rating System--which largely reflected performance in 2014. These contracts accounted for 80 percent of the 17.5 million beneficiaries enrolled in an MA contract that year. We calculated the disenrollment rate for each of these contracts and designated the 126 contracts above the median rate of 10.6 percent as having relatively high disenrollment rates and the 126 contracts below the median rate as having relatively low disenrollment rates. (See appendix I for more details on the selection of the contracts included in our study.) To determine the extent of health-biased disenrollment, if any, among MA contracts, we focused our analysis on the 126 MA contracts with higher disenrollment rates. We used CMS risk score data to identify beneficiaries in poor health and beneficiaries in better health. Specifically, beneficiaries whose projected spending was at least twice as much as that for the average Medicare beneficiary were characterized as being in poor health, while the remaining beneficiaries with projected spending less than that amount were considered to be in better health. Using this information for each of the 126 contracts, we then calculated disenrollment odds ratios to determine the likelihood that beneficiaries in poor health disenrolled from the contract compared to beneficiaries in better health. For example, an odds ratio of 1.50 signifies that those in poor health were 50 percent more likely to disenroll than those in better health. We deemed contracts with an odds ratio over 1.25--where the likelihood that poor health beneficiaries disenrolled was more than 25 percent greater than that of beneficiaries in better health--as having health-biased disenrollment. We deemed those contracts with an odds ratio of 1.25 or less as lacking health-biased disenrollment. To examine the characteristics of contracts with and without health- biased disenrollment, we focused our analysis on the 126 MA contracts with higher disenrollment rates in 2014. We analyzed CMS data for 2014 on a number of contract variables, including enrollment size and the number of years of experience in the MA program. In addition, we compared the quality ratings of contracts in each group based on data from the MA Five-Star Rating System. These data comprise an overall star rating for each MA contract as well as each contract's performance scores on up to 47 individual measures--such as controlling blood pressure--grouped within 9 domains--such as managing chronic conditions. We determined the median score for individual performance measures for all contracts in the rating system. For both the contracts with and without health-biased disenrollment, we then determined the percentage of measures within each domain that had better than median scores; we characterized these contracts as having relatively high quality. To examine the reasons beneficiaries chose to disenroll from contracts with and without health-biased disenrollment, we analyzed CMS's Disenrollment Reasons Survey reports. The reports are compiled for MA contracts based on surveys sent to a representative sample of disenrollees to learn about why they elected to leave their plan. CMS combined survey responses into one of five composite reasons for disenrollment: problems with costs, problems with drug coverage, problems getting information on drugs, problems getting needed care, and preferred providers not in network. For each of the 126 MA contracts with higher disenrollment rates, we compared the average percentage of respondents who identified each composite reason, for contracts with and without health-biased disenrollment. To examine how, if at all, CMS identifies contracts with health-biased disenrollment as part of its routine oversight of MA contracts, we reviewed the agency guidance and data provided to its regional offices and interviewed CMS officials. In addition, we compared the set of contracts identified by CMS as having potential problems in 2014 with the contracts we identified as having health-biased disenrollment. We examined CMS's oversight in the context of relevant standards for internal control in the federal government. We assessed the reliability of the data from CMS that we analyzed by reviewing relevant documentation and examining the data for obvious errors. We determined that the data were sufficiently reliable for the purposes of our reporting objectives. We conducted this performance audit from November 2015 to April 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The MA program--also known as Medicare Part C--is the private plan alternative to the traditional Medicare program. Instead of paying providers' claims directly, CMS contracts with MAOs to assume the risk of providing health benefits to beneficiaries in exchange for fixed monthly payments. The payment amounts vary, in part, depending on the relative health status of the MAO's beneficiaries as compared to the health status of an average Medicare beneficiary. CMS paid almost $170 billion to MAOs in 2015. MAOs must provide coverage for all traditional Medicare services and include a yearly limit on out-of-pocket costs. Most plans also include prescription drug coverage offered under Medicare Part D. Plans may offer more generous benefits, such as less cost sharing and additional covered services, such as vision or dental care. To control utilization, plans may impose referral requirements and implement care coordination programs. MA beneficiaries' access to providers is generally limited to a network of physicians, hospitals, and others that contract with their MAO. If a given physician or hospital is not in the MA plan's network, the beneficiary's out-of-pocket cost to use that physician or hospital may be considerably higher than the cost associated with using providers in the plan's network. Beneficiaries may choose from the plans available in their county, which may be provided by multiple contacts. The contracts represent various types of plans, including HMOs, PPOs, and private fee-for-service (PFFS) plans. HMOs, which according to CMS, accounted for nearly three-fourths of MA enrollment in 2016, generally restrict beneficiary access to providers in their network. PPOs, which according to CMS, accounted for nearly one-fourth of 2016 MA enrollment, also have networks, but allow beneficiaries access to non-network providers by paying higher cost sharing amounts. In contrast, PFFS plans, which accounted for 1 percent of MA enrollment in 2016, generally offer a wider choice of providers. A subset of HMOs and PPOs are special needs plans (SNP) which provide care for beneficiaries in one of three classes of special needs. Medicare beneficiaries can enroll in a SNP if they are dually eligible for Medicare and Medicaid, require an institutional level of care, or have a severe or chronic condition. While beneficiaries are generally locked into their MA plan for a year (January through December), they may voluntarily leave their plan at certain times in the year or if they meet certain criteria. During the annual open enrollment period, from October 15 to December 7, MA beneficiaries may change their MA plan selection or join traditional Medicare. This is followed by the MA disenrollment period, from January 1 to February 14, when MA beneficiaries may join traditional Medicare and are allowed to select a drug plan to go with their new coverage. In addition, CMS has special enrollment periods where MA beneficiaries may change their enrollment under certain circumstances. For example, Medicare beneficiaries can switch to a contract with an overall Five-Star rating of 5 from December 8 to the following November 30. In addition, dual-eligible beneficiaries may change their MA enrollment on the first day of any month. In 2014, disenrollment rates varied widely among the 252 contracts in our analysis, ranging from 1 to 39 percent. (See fig. 1.) The 126 contracts with high disenrollment rates--those with rates above the median rate of 10.6 percent--accounted for 38 percent of the MA population in our study. Moreover, these contracts accounted for over two-thirds of total disenrollment in our population. Nineteen percent of this group of contracts--24 contracts--had disenrollment rates of 20 percent or greater. In contrast, contracts with relatively low disenrollment rates accounted for 62 percent of the MA population in our study. Nearly half of these contracts had disenrollment rates at or below 5 percent. Among the 126 contracts with higher disenrollment rates, we found that 35 contracts had health-biased disenrollment--meaning that beneficiaries in poor health were substantially more likely to leave their contracts than those in better health. These contracts accounted for 15 percent of beneficiaries in higher disenrollment contracts, or approximately 810,000 beneficiaries. For these 35 contracts, on average, beneficiaries in poor health were 47 percent more likely to disenroll relative to beneficiaries in better health. For individual contracts, this percentage ranged from 27 to 126 percent. Among the remaining 91 contracts with higher disenrollment rates, we did not find evidence of health-biased disenrollment--meaning that in these contracts, beneficiaries in poor health had, on average, odds of disenrollment similar to beneficiaries in better health. Specifically, both disenrollees in poor health and disenrollees in better health had a 1 in 5 chance of disenrolling from their contract. In total, the 91 contracts accounted for 4.5 million beneficiaries, or 85 percent of the enrollment in the MA contracts with higher rates of disenrollment in our review. We found several notable differences when comparing the characteristics of the 35 contracts with health-biased disenrollment with the 91 contracts without health-biased disenrollment. Specifically, the 35 health-biased disenrollment contracts were more likely to have the following: Lower enrollment. Sixty-nine percent of health-biased disenrollment contracts had fewer than 15,000 enrollees. This percentage was lower for contracts without health-biased disenrollment--25 percent. In addition, a smaller percentage of health-biased disenrollment contracts--11 percent--had enrollment that exceed 50,000 beneficiaries. In contrast, 29 percent of contracts without health- biased disenrollment had enrollments that large. Higher proportion of HMOs. Ninety-one percent of health-biased disenrollment contracts were HMOs--which feature closed provider networks--while only 9 percent were PPOs. In contrast, for contracts without health-biased disenrollment, 70 percent were HMOs and 25 percent were PPOs. Larger share of SNP enrollees. Contracts with health-biased disenrollment tended to have a higher proportion of beneficiaries in SNPs--which provide targeted care for special needs individuals, such as those with chronic conditions. On average, 37 percent of these contracts had a majority of their beneficiaries in SNPs compared with 21 percent, on average, for the contracts without health-biased disenrollment. Less time in MA program. The contracts with health-biased disenrollment had, on average, fewer years in the MA program compared to the contracts without health-biased disenrollment--an average of 8 years compared to 12 years, respectively. (See table 1 for a comparison of the characteristics of contracts with and without health-biased disenrollment.) Our analysis of data from CMS's MA Five-Star Rating System showed that the contracts with health-biased disenrollment generally had lower overall quality ratings than contracts without health-biased disenrollment. (See fig. 2.) Among the 126 contracts with higher disenrollment rates, nearly two-thirds of the health-biased contracts had three or fewer stars compared to about one-fourth of the contracts without health-biased disenrollment. Furthermore, only 11 percent of contracts with health-biased disenrollment had four or more stars compared to 32 percent of the contracts without health-biased disenrollment. In addition, the contracts with health-biased disenrollment scored lower than the contracts without health-biased disenrollment across each of the nine performance domains in the MA Five-Star Rating System. We found a smaller share of the 35 contracts with health-biased disenrollment had better than median quality scores when compared to the 91 contracts without health-biased disenrollment. For example, only 36 percent of the contracts with health-biased disenrollment had better than median scores on managing chronic (long-term) conditions, which include measures on blood pressure and diabetes care. In contrast, 52 percent of the contracts without health-biased disenrollment performed above the median on this performance domain. (See table 2.) Our review of CMS's Disenrollment Reasons Survey reports showed that beneficiaries who disenrolled from the 35 contracts with health-biased disenrollment tended to report that they did so for reasons related to provider coverage. In contrast, beneficiaries who disenrolled from the 91 contracts without health-biased disenrollment tended to report that they left their contracts for reasons related to the cost of care. (See fig. 3.) Specifically, we found the following: Beneficiaries who left the 35 contracts with health-biased disenrollment commonly reported disenrolling because their preferred doctor or hospital was not covered by their MA contract. This reason was cited by 41 percent of surveyed disenrollees, on average, across the contracts with health-biased disenrollment. In contrast, the same reason was cited by 25 percent of surveyed disenrollees, on average, across the contracts without health-biased disenrollment. Beneficiaries in contracts with health-biased disenrollment were more likely to report problems obtaining needed care, obtaining information on drugs, and with drug coverage. For example, on average, 27 percent of surveyed disenrollees from contracts with health-biased disenrollment reported difficulty getting needed care. In contrast, 16 percent of surveyed disenrollees from contracts without health-biased disenrollment cited these reasons. Beneficiaries who left the 91 contracts without health-biased disenrollment were more likely to report financial reasons for disenrolling. On average, 28 percent of disenrollees from these contracts identified problems with costs, compared with 18 percent of disenrollees from contracts with health-biased disenrollment. For example, when asked whether the presence of another plan that costs less was a reason for disenrolling, 45 percent of disenrollees from the contracts without health-biased disenrollment cited this reason, compared with 27 percent of beneficiaries who left contracts with health-biased disenrollment. CMS does not identify patterns of disenrollment by beneficiary health status in its routine oversight of MA contracts. Account managers in the 10 regional offices are the CMS officials responsible for overseeing these contracts. To do so, CMS officials told us they follow a standard performance monitoring protocol designed to determine whether the contracts adhere to all program requirements and need additional scrutiny. As part of their review, the account managers examine a variety of contract performance data, including MA Five-Star ratings, beneficiary complaint rates, and data on significant changes in drug coverage. Overall contract disenrollment rates are included in the MA Five-Star Rating System provided to account managers to identify contracts that may need closer scrutiny. However, CMS officials told us these rates do not include information on beneficiary health status. In addition, CMS's account managers do not use the information CMS collects in the Disenrollment Reasons Survey in their oversight of MA contracts. The survey asks beneficiaries about the reasons they have disenrolled from their MA plan, and CMS officials told us that that CMS develops the survey reports and distributes them to MAOs annually to help them facilitate quality improvement efforts. The survey results are also made available to the public on CMS's Medicare Plan Finder website so that beneficiaries considering enrollment in an MA plan can learn why beneficiaries have chosen to leave a particular plan. Given the data account managers use in their oversight of MA contracts, CMS is unlikely to consistently identify contracts with health-biased disenrollment as needing extra scrutiny. As part of its ongoing analysis of contract performance data, CMS identified 63 contracts as potentially requiring additional scrutiny in 2014. However, this list included only 9 of the 35 contracts we identified as having health-biased disenrollment. CMS classified 2 of the 9 contracts as potentially requiring what the agency describes as "intensive monitoring," which may include dedicated monthly meetings between the account managers and MAO representatives to discuss problem areas. CMS identified the other 7 contracts as requiring some additional monitoring, which may include at least one meeting between the account manager and MAO representatives. CMS has available data that its account managers could use to monitor contract disenrollment rates by beneficiary health status. Disenrollment rates are one of the measures used in the MA Five-Star Rating System; we used CMS's beneficiary risk scores, which are based on demographic and diagnosis information, to identify beneficiaries in poor and better health; and the Disenrollment Reasons Survey provides information on why beneficiaries disenroll from their plans. As we have shown, contracts with health-biased disenrollment had lower quality scores, and beneficiaries who disenrolled from these contracts more commonly cited problems with coverage of preferred doctors and hospitals as well as problems getting access to care as leading reasons for disenrolling. As a result, the survey data could be used in conjunction with the other available data to reveal unique information about contract performance that other data do not show. By not analyzing disenrollment rates for signs of potential health-biased disenrollment, CMS account managers may fail to identify problems in MA contract performance. This poses a risk to beneficiaries, given that MA contracts are prohibited from limiting or conditioning their coverage or provision of benefits based on health status and must ensure adequate access to covered services for all beneficiaries. CMS's oversight is also inconsistent with federal internal control standards, which call for agencies to identify, analyze, and respond to risks. CMS is responsible for ensuring that all MA contracts offer care that meets applicable standards, regardless of beneficiary health status. However, as part of its routine oversight, CMS does not examine disenrollment rates by health status. Our analysis identified 35 contracts in 2014 where MA beneficiaries in poor health were more likely to disenroll than those in better health. These contracts with health-biased disenrollment had quality scores that were consistently and substantially below the scores of contracts without health-biased disenrollment. In addition, survey data indicate that beneficiaries who left these contracts reported problems with coverage of preferred doctors and hospitals as well as problems getting access to care as leading reasons they chose to leave their contracts. This type of information on disenrollment and beneficiary health status is available to CMS; however, by not leveraging it as part of its routine oversight of MA contracts, CMS is missing an opportunity to better target its oversight activities toward MA contracts that may not be adequately meeting the health care needs of all beneficiaries, particularly those in poor health. To strengthen CMS's oversight of MA contracts, the Administrator of CMS should review data on disenrollment by health status and the reasons beneficiaries disenroll as part of the agency's routine monitoring efforts. We provided a draft of this report to HHS for comment. In its written comments, which are reprinted in appendix II, HHS concurred with our recommendation. HHS noted that it currently uses disenrollment data in its review of MA plan quality and performance and will continue to consider ways of incorporating disenrollment data in its oversight. HHS also provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees and the Secretary of Health and Human Services. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Using data from the Centers for Medicare & Medicaid Services (CMS), we examined enrollment and disenrollment in 2014--the most recent year of data available at the time of our analysis. Of the 732 Medicare Advantage (MA) contracts in 2014, we excluded 480 contracts, with 3.6 million beneficiaries, from our analysis. These were contracts with fewer than 100 beneficiaries in poor health who disenrolled from the contract in 2014, fewer than 100 beneficiaries in better health who disenrolled from the contract in 2014, and contracts for which CMS reported fewer than 50 percent of the individual measures in the 2016 MA Five-Star Rating System--which largely reflected performance in 2014. These contracts were excluded because they did not have a sufficient number of Five-Star ratings, or had low contract enrollment. The remaining 252 contracts accounted for 79.7 percent of the 17.5 million beneficiaries enrolled in an MA contract in 2014. We then ranked the 252 contracts in terms of their total disenrollment rate, identifying the 126 contracts with disenrollment rates higher than the median of 10.6 percent as having relatively high disenrollment. In our analysis we focused on these 126 contracts because they had relatively high disenrollment as contracts with below median disenrollment may not warrant the same level of oversight scrutiny as those with higher rates. (See fig. 4.) In addition to the contact named above, GAO staff who made key contributions to this report include Rosamond Katz (Assistant Director), Richard Lipinski (Assistant Director), Will Crafton (Analyst-in-Charge), and Betsy Conklin. Also contributing were Krister Friday and George Bogart.
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In 2016, over 30 percent of Medicare beneficiaries were enrolled in the MA program. Each year beneficiaries have an opportunity to join or leave their MA plan. GAO was asked to review MA disenrollment by health status and CMS oversight. This report examines, among other issues, (1) the extent of any health-biased disenrollment, (2) beneficiaries' reasons for leaving contracts with and without health biased disenrollment, and (3) how, if at all, CMS identifies contracts with health-biased disenrollment, for routine oversight purposes. GAO analyzed 2014 disenrollment rates for the 252 MA contracts that had a sufficient number of disenrollees and met other criteria. For the 126 contracts with disenrollment rates above the median rate, GAO used beneficiaries' projected health care costs to identify those in poor health and better health. GAO examined data from CMS's Disenrollment Reasons Survey to learn why beneficiaries reported leaving the 126 contracts with relatively high disenrollment rates. GAO also interviewed CMS officials and compared their oversight to federal standards for internal control. Under the Medicare Advantage (MA) program, the Centers for Medicare & Medicaid Services (CMS) contracts with private entities to offer coverage for Medicare beneficiaries. GAO examined 126 contracts with higher disenrollment rates--above the median rate of 10.6 percent in 2014--and found 35 contracts with health-biased disenrollment. In these contracts, beneficiaries in poor health were substantially more likely (on average, 47 percent more likely) to disenroll relative to beneficiaries in better health. Such disparities in contract disenrollment by health status may indicate that the needs of beneficiaries, particularly those in poor health, may not be adequately met. GAO found that beneficiaries who left the 35 contracts with health-biased disenrollment tended to report leaving for reasons related to preferred providers and access to care. In contrast, beneficiaries who left the 91 contracts without health-biased disenrollment tended to report that they left their contracts for reasons related to the cost of care. CMS does not use available data to examine data on disenrollment by health status as part of its ongoing oversight; thus, CMS may fail to identify problems in MA contract performance, which poses a risk as contracts are prohibited from limiting coverage based on health status. CMS's oversight is inconsistent with internal control standards. To strengthen its oversight of MA contracts, CMS should examine data on disenrollment by health status and the reasons beneficiaries disenroll. HHS concurred with GAO's recommendation.
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Despite many successes in the exploration of space, such as landing the Pathfinder and Exploration Rovers on Mars, NASA has had difficulty bringing a number of projects to completion, including several efforts to build a second generation reusable human spaceflight vehicle to replace the space shuttle. NASA has attempted several costly endeavors, such as the National Aero-Space Plane, the X-33 and X-34, and the Space Launch Initiative. While these endeavors have helped to advance scientific and technical knowledge, none have completed their objective of fielding a new reusable space vehicle. We estimate that these unsuccessful development efforts have cost approximately $4.8 billion since the 1980s. The high cost of these unsuccessful efforts and the potential costs of implementing the Vision make it important that NASA achieve success in its new exploration program beginning with the CEV project. Our past work has shown that developing a sound business case, based on matching requirements to available and reasonably expected resources before committing to a new product development effort, reduces risk and increases the likelihood of success. High levels of knowledge should be demonstrated before managers make significant program commitments, specifically: (1) At program start, the customer's needs should match the developer's available resources in terms of availability of mature technologies, time, human capital, and funding; (2) Midway through development, the product's design should be stable and demonstrate that it is capable of meeting performance requirements; (3) By the time of the production decision, the product must be shown to be producible within cost, schedule, and quality targets, and have demonstrated its reliability. Our work has shown that programs that have not attained the level of knowledge needed to support a sound business case have been plagued by cost overruns, schedule delays, decreased capability, and overall poor performance. With regard to NASA, we have reported that in some cases the agency's failure to define requirements adequately and develop realistic cost estimates--two key elements of a business case--resulted in projects costing more, taking longer, and achieving less than originally planned. Although NASA is continuing to refine its exploration architecture cost estimates, the agency cannot at this time provide a firm estimate of what it will take to implement the architecture. The absence of firm cost estimates is mainly due to the fact that the program is in the early stages of its life cycle. NASA conducted a cost risk analysis of its preliminary estimates through fiscal year 2011. On the basis of this analysis and through the addition of programmatic reserves (20 percent on all development and 10 percent on all production costs), NASA is 65 percent confident that the actual cost of the program will either meet or be less than its estimate of $31.2 billion through fiscal year 2011. For cost estimates beyond 2011, when most of the cost risk for implementing the architecture will be realized, NASA has not applied a confidence level distinction. Since NASA released its preliminary estimates, the agency has continued to make architecture changes and refine its estimates in an effort to establish a program that will be sustainable within projected resources. While changes to the program are appropriate at this stage when concepts are still being developed, they leave the agency in the position of being unable to firmly identify program requirements and needed resources. NASA plans to commit to a firm cost estimate for the Constellation program at the preliminary design review in 2008, when requirements, design, and schedule will all be baselined. It is at this point where we advocate program commitments should be made on the basis of the knowledge secured. NASA will be challenged to implement the ESAS recommended architecture within its projected budget, particularly in the longer-term. As we reported in July 2006, there are years when NASA has projected insufficient funding to implement the architecture with some yearly shortfalls exceeding $1 billion; while in other years the funding available exceeds needed resources. Per NASA's approach, it plans to use almost $1 billion in appropriated funds from fiscal years 2006 and 2007 in order to address the short-term funding shortfalls. NASA, using a "go as you can afford to pay" approach, maintains that in the short-term the architecture could be implemented within the projected available budgets through fiscal year 2011 when funding is considered cumulatively. However, despite initial surpluses, the long-term sustainability of the program is questionable given the long-term funding outlook for the program. NASA's preliminary projections show multibillion-dollar shortfalls for its Exploration Systems Mission Directorate in all fiscal years from 2014 to 2020, with an overall deficit through 2025 in excess of $18 billion. According to NASA officials, the agency will have to keep the program compelling for both Congress and potential international partners, in terms of the activities that will be conducted as part of the lunar program, in order for the program to be sustainable over the long run. NASA is attempting to address funding shortfalls within the Constellation program by redirecting funds to that program from other Exploration Systems Mission Directorate activities to provide a significant surplus in fiscal years 2006 and 2007 to cover projected shortfalls beginning in fiscal year 2009. Several Research and Technology programs and missions were discontinued, descoped, or deferred and that funding was shifted to the Constellation Program to accelerate development of the CEV and CLV. In addition, the Constellation program has requested more funds than required for its projects in several early years to cover shortfalls in later years. NASA officials stated the identified budget phasing problem could worsen given the changes that were made to the exploration architecture following issuance of the study. For example, while life cycle costs may be lower in the long run, acceleration of development for the five segment Reusable Solid Rocket Booster and J-2x engine will likely add to the near- term development costs, where the funding is already constrained. NASA has yet to provide cost estimates associated with program changes. NASA must also contend with competing budgetary demands within the agency as implementation of the exploration program continues. NASA's estimates beyond 2010 are based upon a surplus of well over $1 billion in fiscal year 2011 due to the retirement of the space shuttle fleet in 2010. However, NASA officials said the costs for retiring the space shuttle and transitioning to the new program are not fully understood; thus, the expected surplus could be less than anticipated. This year, NASA plans to spend over 39 percent of its annual budget for space shuttle and International Space Station (ISS) operations--dollars that will continue to be obligated each year as NASA completes construction of the ISS by the end of fiscal year 2010. This does not include the resources necessary to develop ISS crew rotation or logistics servicing support capabilities for the ISS during the period between when the space shuttle program retires and the CEV makes its first mission to the ISS. While, generally, the budget for the space shuttle is scheduled to decrease as the program moves closer to retirement, a question mark remains concerning the dollars required to retire the space shuttle fleet as well as transition portions of the infrastructure and workforce to support implementation of the exploration architecture. In addition, there is support within Congress and the scientific community to restore money to the Science Mission Directorate that was transferred to the space shuttle program to ensure its viability through its planned retirement in 2010. Such a change could have an impact on future exploration funding. In July 2006, we reported that NASA's acquisition strategy for the CEV placed the project at risk of significant cost overruns, schedule delays, and performance shortfalls because it committed the government to a long- term contract before establishing a sound business case. We found that the CEV contract, as structured, committed the government to pay for design, development, production and sustainment upon contract award--with a period of performance through at least 2014 with the possibility of extending through 2019. Our report highlighted that NASA had yet to develop key elements of a sound business case, including well-defined requirements, mature technology, a preliminary design, and firm cost estimates that would support such a long-term commitment. Without such knowledge, NASA cannot predict with any confidence how much the program will cost, what technologies will or will not be available to meet performance expectations, and when the vehicle will be ready for use. NASA has acknowledged that it will not have these elements in place until the project's preliminary design review scheduled for fiscal year 2008. As a result, we recommended that the NASA Administrator modify the current CEV acquisition strategy to ensure that the agency does not commit itself, and in turn the federal government, to a long-term contractual obligation prior to establishing a sound business case at the project's preliminary design review. In response to our recommendation, NASA disagreed and stated that it had the appropriate level of knowledge to proceed with its current acquisition strategy. NASA also indicated that knowledge from the contractor is required in order to develop a validated set of requirements and, therefore, it was important to get the contractor on to the project as soon as possible. In addition, according to NASA officials, selection of a contractor for the CEV would enable the agency to work with the contractor to attain knowledge about the project's required resources and, therefore, be better able to produce firm estimates of project cost. In our report, we highlighted that this is the type of information that should be obtained prior to committing to a long-term contract. To our knowledge, NASA did not explore the possibility of utilizing the contractor, through a shorter-term contract, to conduct work needed to develop valid requirements and establish higher-fidelity cost estimates--a far less risky and costly strategy. Subsequent to our report, NASA did, however, take steps to address some of the concerns we raised. Specifically, NASA modified its acquisition strategy for the CEV and made the production and sustainment schedules of the contract--known as Schedules B and C--contract options that the agency will decide whether to exercise after project's critical design review in 2009. Therefore, NASA will only be liable for the minimum quantities under Schedules B and C when and if it chooses to exercise those options. These changes to the acquisition strategy lessen the government's financial obligation at this early stage. Table 1 outlines the information related to the CEV acquisition strategy found in the request for proposal and changes that were made to that strategy prior to contract award. While we view these changes as in line with our recommendation and as a positive step to address some of the risks we raised in our report, NASA still has no assurance that the project will have the elements of a sound business case in place at the preliminary design review. Therefore, NASA's commitment to efforts beyond the project's preliminary design review--even when this commitment is limited to design, development, test and evaluation activities (DDT&E)--is a risky approach. It is at this point that NASA should (a) have the increased knowledge necessary to develop a sound business case that includes high-fidelity, engineering- based estimates of life cycle cost for the CEV project, (b) be in a better position to commit the government to a long-term effort, and (c) have more certainty in advising Congress on required resources. Sound project management and oversight will be key to addressing risks that remain for the CEV project as it proceeds with its acquisition approach. To help mitigate these risks, NASA should have in place the markers necessary to help decision makers monitor the CEV project and ensure that is following a knowledge based approach to its development. However, in our 2005 report that assessed NASA's acquisition policies, we found that NASA's policies lacked major decision reviews beyond the initial project approval gate and a standard set of criteria with which to measure projects at crucial phases in the development life cycle--key markers for monitoring such progress. In our review of the individual center policies, we found that the Johnson Space Center project management policy, which is the policy that the CEV project will be required to follow, also lacked such key criteria. We concluded that without such requirements in place, decision makers have little knowledge about the progress of the agency's projects and, therefore, cannot be assured that they are making informed decisions about whether continued investment in a program or project is warranted. We recommended that NASA incorporate requirements in its new systems engineering policy to capture specific product knowledge at key junctures in project development. The demonstration of such knowledge could then be used as exit criteria for decision making at the following key junctures: Before projects are approved to transition in to implementation, we suggested that projects be required to demonstrate that key technologies have reached a high maturity level. Before projects are approved to transition from final design to fabrication, assembly, and test, we suggested that projects be required to demonstrate that the design is stable. Before projects are approved to transition to production, we suggested that projects be required to demonstrate that the design can be manufactured within cost, schedule, and quality targets. In addition, we recommended that NASA institute additional major decision reviews that are tied to these key junctures to allow decision makers to reassess the project based upon demonstrated knowledge. While NASA concurred with our recommendations, the agency has yet to take significant actions to implement them. With regard to our first recommendation, NASA stated that the agency would establish requirements for success at the key junctures mentioned above. NASA planned to include these requirements in the systems engineering policy it issued in March 2006. Unfortunately, NASA did not include these criteria as requirements in the new policy, but included them in an appendix to the policy as recommended best practices criteria. In response to our second recommendation, NASA stated it would revise its program and project management policy for flight systems and ground support projects, due to be completed in fall 2006. In the revised policy, NASA indicated that it would require the results of the critical design review and, for projects that enter a large-scale production phase, the results of the production readiness review to be reported to the appropriate decision authority in a timely manner so that a decision about whether to proceed with the project can be made. NASA has yet to issue its revised policy; therefore, it remains to be seen as to whether the CEV project decision authorities will have the opportunity to reassess and make decisions about the project using the markers recommended above after the project has initially been approved. Briefings that we have recently received indicate that NASA plans to implement our recommendation in the revised policy. The risks that NASA has accepted by moving ahead with awarding the contract for DDT&E for CEV could be mitigated by implementing our recommendations as it earlier agreed. Doing so would provide both NASA and Congress with markers of the project's progress at key points. For example, at the preliminary design review, decision makers would be able to assess the status of the project by using the marker of technology maturity. In addition, at the critical design review, the agency could assess the status of the project using design stability (i.e., a high percentage of engineering drawings completed). If NASA has not demonstrated technology maturity at the preliminary design review or design stability at the critical design review, decision makers would have an indication that the project will likely be headed for trouble. Without such knowledge, NASA cannot be confident that its decisions about continued investments in projects are based upon the appropriate knowledge. Furthermore, NASA's oversight committees could also use the information when debating the agency's yearly budget and authorizing funds not only for the CEV project, but also for making choices among NASA's many competing programs. If provided this type of information from NASA about its key projects, Congress will be in a better position to make informed decisions about how to invest the nation's limited discretionary funds. NASA's ability to address a number of long-standing financial management challenges could also impact management of NASA's key projects. The lack of reliable, day-to-day information continues to threaten NASA's ability to manage its programs, oversee its contractors, and effectively allocate its budget across numerous projects and programs. To its credit, NASA has recognized the need to enhance the capabilities and improve the functioning of its core financial management system, however, progress has been slow. NASA contract management has been on GAO's high-risk list since 1990 because of such concerns. In conclusion, implementing the Vision over the coming decades will require hundreds of billions of dollars and a sustained commitment from multiple administrations and Congresses. The realistic identification of the resources needed to achieve the agency's short-term goals would provide support for such a sustained commitment over the long term. With a range of federal commitments binding the fiscal future of the United States, competition for resources within the federal government will only increase over the next several decades. Consequently, it is incumbent upon NASA to ensure that it is wisely investing its existing resources. As NASA proceeds with its acquisition strategy for the CEV project and other key projects, it will be essential that the agency ensure that the investment decisions it is making are sound and based upon high levels of knowledge. NASA should require that the progress of its projects are evaluated and reevaluated using knowledge based criteria, thereby improving the quality of decisions that will be made about which program warrant further investment. Furthermore, it will be critical that NASA's financial management organization delivers the kind of analysis and forward- looking information needed to effectively manage its programs and projects. Clear, strong executive leadership will be needed to ensure that these actions are carried out. Given the nation's fiscal challenges and those that exist within NASA, the availability of significant additional resources is unlikely. NASA has the opportunity to establish a firm foundation for its entire exploration program by ensuring that the level of knowledge necessary to allow decision makers to make informed decisions about where continued investment is justified. Doing so will enhance confidence in the agency's ability to finally deliver a replacement vehicle for future human space flight. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Committee may have. For further information regarding this testimony, please contact Allen Li 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. GAO staff who made key contributions to this testimony include Greg Campbell, Richard Cederholm, Hillary Loeffler, James L. Morrison, Jeffrey M. Niblack, and Shelby S. Oakley. 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 Aeronautics and Space Administration (NASA) plans to spend nearly $230 billion over the next two decades implementing the President's Vision for Space Exploration (Vision) plans. In July 2006, GAO issued a report that questioned the program's affordability, and particularly, NASA's acquisition approach for one of the program's major projects--the Crew Exploration Vehicle (CEV). This testimony, which is based upon that report and another recent GAO report evaluating NASA's acquisition policies, highlights GAO's continuing concerns with (1) the affordability of the exploration program; (2) the acquisition approach for the CEV, and; (3) NASA's acquisition policies that lack requirements for projects to proceed with adequate knowledge. NASA's proposals for implementing the space exploration Vision raise a number of concerns. NASA cannot develop a firm cost estimate for the exploration program at this time because the program is in its early stages. The changes that have occurred to the program over the past year and the resulting refinement of its cost estimates are indicative of the evolving nature of the program. While changes are appropriate at this stage of the program, they leave the agency unable to firmly identify program requirements and needed resources and, therefore, not in the position to make a long term commitment to the program. NASA will likely be challenged to implement the program, as laid out in its Exploration Systems Architecture study (ESAS), due to the high costs associated with the program in some years and its long-term sustainability relative to anticipated funding. As we reported in July 2006, there are years when NASA, with some yearly shortfalls exceeding $1 billion, does not have sufficient funding to implement the architecture; while in other years the funding available exceeds needed resources. Despite initial surpluses, the long-term sustainability of the program is questionable, given its long-term funding outlook. NASA's preliminary projections show multibillion-dollar shortfalls for its exploration directorate in all fiscal years from 2014 to 2020, with an overall deficit through 2025 in excess of $18 billion. NASA's acquisition strategy for the CEV was not based upon obtaining an adequate level of knowledge when making key resources decisions, placing the program at risk for cost overruns, schedule delays, and performance shortfalls. These risks were evident in NASA's plan to commit to a long-term product development effort before establishing a sound business case for the project that includes well-defined requirements, mature technology, a preliminary design, and firm cost estimates. NASA adjusted its acquisition approach and the agency included the production and sustainment portions of the contract as options--a move that is consistent with the recommendation in our report because it lessens the government's financial obligation at this early stage. However, risks persist with NASA's approach. As we reported in 2005, NASA's acquisition policies lacked major decision reviews beyond the initial project approval gate and lacked a standard set of criteria with which to measure projects at crucial phases in the development life cycle. These decision reviews and development measures are key markers needed to ensure that projects are proceeding with and decisions are being based upon the appropriate level of knowledge and can help to lessen identified project risks. The CEV project would benefit from the application of such markers.
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The Advisers Act generally defines an investment adviser, with certain exceptions, as any individual or firm that receives compensation for giving advice, making recommendations, issuing reports, or furnishing analyses on securities either directly to investors or through publications. As of July 21, 2011, individuals or firms that meet this definition and that have over $100 million in assets under management generally must register with SEC and are subject to SEC regulation. Advisers with less than $100 million in assets under management may be required to register with and be subject to oversight by one or more state securities regulators. The Advisers Act requires investment advisers to adhere to the high standards of honesty and loyalty expected of a fiduciary and to disclose their background and business practices. Traditionally, private funds (such as hedge and private equity funds) have been structured and operated in a manner that enabled the funds to qualify for an exclusion from some federal statutory restrictions and most SEC regulations that apply to registered investment pools, such as mutual funds. For example, in 2008, we found that private equity and hedge funds typically claimed an exclusion from registration as an investment company. By relying on one of two exclusions under the Investment Company Act of 1940, such funds are not required to register as an investment company. The first exclusion is available to private funds whose securities are owned by 100 or fewer investors. The second exclusion applies to private funds that sell their securities only to highly sophisticated investors. To rely on either exclusion, the private fund must not offer its securities publicly. Before the passage of the Dodd-Frank Act, many advisers to private funds were able to qualify for an exemption from SEC registration. Although certain private fund advisers were exempt from registration, they remained subject to antifraud (including insider trading) provisions of the federal securities laws. The Dodd-Frank Act requires that advisers to certain private funds register with SEC by July 21, 2011. Specifically, Title IV of the Dodd- Frank Act, among other things, amends the Investment Advisers Act by eliminating the exemption from SEC registration upon which advisers to private funds have generally relied--thereby generally requiring advisers only to private funds with assets of $150 million or more to register with SEC; providing SEC with the authority to require certain advisers to private funds to maintain records and file reports with SEC; providing exemptions from registration to advisers solely to venture capital funds, advisers to certain private funds with less than $150 million of assets under management, and certain foreign private advisers; authorizing SEC to collect certain systemic-risk data and share this information with the Financial Stability Oversight Council; and generally requiring that advisers with assets under management of less than $100 million register with the state in which they have their principal office, if required by the laws of that state. As shown in figure 1, according to SEC staff, 11,505 investment advisers were registered with SEC as of April 1, 2011, of which the staff estimate 2,761 advise private funds. Of these 2,761, approximately 863 registered investment advisers report on their disclosure form that their only clients are private funds, and approximately 1,898 advisers report that they advise private funds and other types of clients, such as mutual funds. When the Dodd-Frank Act's new registration provisions take effect, the composition of registered investment advisers will change. SEC staff estimates that approximately 3,200 advisers currently registered with SEC will fall below the required amount of assets under management for registration with SEC (increasing from $25 million under current law to $100 million under the Dodd-Frank Act amendments. As a result, they will be required to register with one or more state securities authorities instead of SEC--leaving 8,300 advisers registered with SEC. In addition to these advisers, SEC staff also estimates that (1) approximately 750 new investment advisers to private funds will have to register with SEC because of the elimination of the registration exemption on which private fund advisers have typically relied and (2) approximately 700 new investment advisers will register with SEC as a result of growth in the number of investment advisers (based on historical growth rates). Therefore, SEC staff estimates that there will be approximately 9,750 registered investment advisers after the implementation of these Dodd- Frank Act amendments. However, an estimate of the total number of registered investment advisers with private fund clients remains uncertain, because some of the 2,761 currently registered advisers with private fund clients may be required to deregister with SEC, depending on the amount of their assets under management, and some of the newly registering advisers may advise one or more private funds. Although advisers to certain private funds will be required to register with SEC, the private funds themselves may continue to qualify for an exclusion from the definition of an investment company under the Investment Company Act of 1940. Because private funds typically are not required to register as investment companies, SEC exercises limited oversight of these funds. Nonetheless, the Dodd-Frank Act amends the Advisers Act to state that the records and reports of private funds advised by a registered investment adviser are deemed to be the records and reports of the investment adviser. Thus, according to SEC staff, such records and reports are subject to examination by SEC staff. SEC oversees registered investment advisers primarily through its Office of Compliance Inspections and Examinations, Division of Investment Management, and Division of Enforcement. In general, SEC regulates investment advisers to determine whether they (1) provide potential investors with accurate and complete information about their background, experience, and business practices and (2) comply with the federal securities laws and related regulations. More specifically, the Office of Compliance Inspections and Examinations examines investment advisers to evaluate their compliance with federal securities laws, determine whether these firms are fulfilling their fiduciary duty to clients and operating in accordance with disclosures made to investors, and assess the effectiveness of their compliance-control systems. The Division of Investment Management administers the securities laws affecting investment advisers and engages in rulemaking for SEC consideration and other policy development intended, among other things, to strengthen SEC's oversight of investment advisers. The Division of Enforcement investigates and prosecutes violations of securities laws or regulations. Securities SROs include national securities exchanges and securities associations registered with SEC, such as the New York Stock Exchange and FINRA. SROs are primarily responsible for establishing the standards under which their members conduct business; monitoring the way that business is conducted; bringing disciplinary actions against their members for violating applicable federal statutes, SEC rules, and their own rules; and referring potential violations of nonmembers to SEC. SEC oversees SROs, in part by periodically inspecting them and by approving their rule proposals. At the time that the system of self-regulation was created, Congress, regulators, and market participants recognized that this structure possessed inherent conflicts of interest because of the dual role of SROs as both market operators and regulators. Nevertheless, Congress adopted self-regulation of the securities markets to prevent excessive government involvement in market operations, which could hinder competition and market innovation. Congress also concluded that self-regulation with federal oversight would be more efficient and less costly to taxpayers. For similar purposes, Congress created a self- regulatory structure for the futures markets. NFA is a futures SRO registered with CFTC as a national futures association. Section 914 of Title IX of the Dodd-Frank Act required SEC to study the need for enhanced examination and enforcement resources for investment advisers. Among other things, SEC was required to study the number and frequency of examinations of investment advisers by SEC over the last 5 years and the extent to which having Congress authorize SEC to designate one or more SROs to augment SEC's efforts in overseeing investment advisers would increase the frequency of examinations of investment advisers. In January 2011, SEC staff issued the report. SEC staff concluded that the number and frequency of examinations of registered investment advisers have declined over the past 6 years and that SEC faces significant capacity challenges in examining these advisers, in part because of the substantial growth of the industry and the limited resources and number of SEC staff. As a result, SEC staff recommended three options to Congress to strengthen SEC's investment adviser examination program: (1) imposing user fees on advisers to fund SEC examinations, (2) authorizing an SRO to examine all registered investment advisers, and (3) authorizing FINRA to examine its members that are also registered as investment advisers for compliance with the Advisers Act. In its report, SEC staff discusses the trade-offs of each of these options. Regulators, industry representatives, investment advisers, and others we interviewed told us that it was difficult to opine definitively on the feasibility of forming and operating a private fund adviser SRO because of the many unknown factors, such as its specific form, functions, and membership. Nonetheless, the general consensus was that forming a private fund adviser SRO similar to FINRA could be done but not without challenges. Regulators and industry representatives pointed to the creation and existence of other securities SROs as evidence that forming an SRO to oversee private fund advisers is feasible. However, SEC staff and two securities law experts told us that legislation would be needed to allow a private fund adviser SRO to be formed under the federal securities laws. Moreover, regulators, industry representatives, and others identified a number of challenges to forming a private fund adviser SRO, some of which were similar to the challenges involved in creating other SROs, such as FINRA and NFA. According to SEC staff and two securities law experts, legislation would be needed to allow for the formation of a private fund adviser SRO under the federal securities laws. Neither the Advisers Act nor the other federal securities laws expressly authorize the registration of a private fund adviser SRO. As a result, SEC staff and these experts told us that Congress would need to enact legislation to allow for such an SRO to register with SEC and for SEC to delegate any regulatory authority to the SRO. Past proposals to create an SRO to oversee investment advisers were also predicated on legislation. For example, the House of Representatives passed a bill in 1993 that, among other things, would have amended the Advisers Act to authorize the creation of an "inspection-only" SRO for investment advisers. Congress has taken different approaches in creating different types of SROs and has granted the SROs different authorities. For example, it passed the Maloney Act in 1938, which amended the Securities Exchange Act of 1934 to provide for the registration of national securities associations as SROs for the over-the-counter securities market. This provision led to the registration of the NASD, which later merged with parts of the New York Stock Exchange to become FINRA. National securities associations have broad regulatory authorities, including rulemaking, examination, and enforcement authority. In contrast, Congress in 1975 provided for SEC to establish the Municipal Securities Rulemaking Board--an SRO charged only with issuing rules for the municipal securities industry. More recently, Congress created the Public Company Accounting Oversight Board to oversee the auditors of public companies in the Sarbanes-Oxley Act of 2002. Like FINRA, the Public Company Accounting Oversight Board has broad regulatory authorities, but unlike FINRA, its board is selected by SEC, and its budget, although established by the board, is subject to SEC approval. Previously introduced legislation authorizing the registration of an SRO for investment advisers has ranged from an SRO with potentially broad regulatory authorities similar to those of FINRA to an SRO empowered only to inspect registered investment advisers for compliance with the applicable securities laws. Representatives from all of the investment funds and adviser associations we spoke with opposed forming a private fund adviser SRO, indicating that their members would not voluntarily form or join one. In addition, officials from NASAA and some industry representatives also told us that no basis exists for forming an SRO to oversee private fund advisers. According to NASAA officials, the requirement under the Dodd-Frank Act for certain private fund advisers to register with SEC obviates the need for an SRO for these advisers because SEC and state securities regulators are in the best position to oversee them. Furthermore, representatives from two industry associations told us that the nature of private equity funds and investors obviates the need for an SRO. For example, representatives from one industry association said that the terms of a private equity fund typically are negotiated between an adviser and institutional investors, providing the investors and their lawyers with the opportunity to include any protections they deem necessary. These views suggest that the feasibility of a private fund adviser SRO may depend, in part, on whether legislation authorizing such an SRO made membership mandatory for registered investment advisers to private funds. Similarly, in its section 914 study, SEC staff noted that for an investment adviser SRO to be successful, membership would need to be mandatory to ensure that all investment advisers would be subject to SRO examination. For similar purposes, the federal securities and commodities laws require broker-dealers and futures commission merchants dealing with the public to be members of a securities or futures SRO, respectively. Regulators, industry associations, and others told us that forming and operating an SRO to oversee private fund advisers would face a number of challenges. One of the principal challenges would be funding the SRO's start-up costs. None of the regulators or associations could provide us with an estimate of the start-up costs in light of the many unknown variables, including the SRO's number of members and regulatory functions. For example, advisers with only private fund clients could be the only advisers required to be members of the SRO. Alternatively, other advisers could also be required to be members, such as advisers with both private fund and other types of clients or advisers managing a certain minimum amount of private fund assets. However, representatives from two industry associations told us that the cost of forming a new SRO would be considerable and that it would exceed the cost of providing resources to SEC to conduct additional examinations of investment advisers to private funds. Data from two of the more recently created SROs show that their start-up costs varied considerably. According to the Public Company Accounting Oversight Board's 2003 Annual Report, the board's start-up costs were about $20 million dollars. In contrast, NFA officials told us they used around $250,000 to fund NFA's start-up in the early 1980s. Another challenge that a private fund adviser SRO could face is establishing and reaching agreement on matters involving the SRO's organization, including its fee and governance structures. In particular, representatives from industry associations told us that the concentration of assets under management in a small number of large firms may make reaching an agreement on how to assess fees difficult. For example, representatives from one industry association said this condition could present challenges in formulating a fee structure that does not impose too much of a financial burden on smaller advisers or allocate an inequitable share of the fees to the largest advisers. In addition, if the SRO were modeled after FINRA or NFA, it would need to create, among other things, a board of directors to administer its affairs and represent its members. Private funds advisers differ in terms of their business models, investment strategies, and amounts of assets under management. According to several industry associations and firms, such diversity means that each group's interests may differ from each other, making it difficult to reach key agreements. For example, industry associations said that, among other things, the diversity of the industry with respect to investment strategies and assets under management may make reaching agreement on the allocation of board seats a challenge. More specifically, one industry association stated that the larger firms, if required to pay a large portion of the SRO's costs, may also want, or develop greater influence over the SRO's activities. Furthermore, CFTC staff told us that reaching agreements could be complicated by the competitiveness of private fund advisers with each other and their general unwillingness to share their data with each other. According to officials from NFA, which today has a membership of about 4,000 firms and six different membership categories, it took nearly 7 years for the various parties to reach all of the necessary agreements. A private fund adviser SRO may also face challenges in developing, adopting, and enforcing member compliance with its rules, if given rulemaking authority similar to that of FINRA. According to SEC staff and industry representatives, FINRA, like other SROs, traditionally has taken a rules-based approach to regulating its members--adopting prescriptive rules to govern member conduct, particularly interactions between member broker-dealers. Representatives from one industry association told us that SROs traditionally use a rules-based approach, in part, to address the inherent conflicts of interest that exist when an industry regulates itself by minimizing the degree of judgment an SRO needs to use when enforcing its rules, thereby serving to enhance the credibility of self-regulation. In contrast, SEC staff and industry representatives told us that the regulatory regime for investment advisers is primarily principles- based, focusing on the fiduciary duty that advisers owe to their clients. The fiduciary duty has been interpreted through, among other things, case law and enforcement actions (and not defined by rules), and depends on the facts and circumstances of specific situations. According to SEC staff and industry representatives, adopting detailed or prescriptive rules to capture every fact and circumstance possible under the fiduciary duty would be difficult. Further, NASAA officials and industry representatives stated that attempting this approach could result in loopholes that would weaken the broad protections investors are currently afforded. Moreover, SEC staff and some industry representatives told us that the diversity among the different advisers would also make it difficult to adopt a single set of rules for all advisers. For example, SEC staff stated that because of the complex nature of hedge funds (such as their changing investment strategies), regulations will need to be constantly monitored for effectiveness and updated as needed; and as such, it may not be feasible to adopt detailed or prescriptive rules. Like private fund advisers, SROs, and other financial industry regulators, a private fund adviser SRO could face a challenge in attracting, hiring, and retaining qualified personnel. According to industry representatives, no organization other than SEC has experience and expertise regulating investment advisers. Private fund advisers told us that an SRO would have to compete with private fund advisers and other financial services firms for the limited number of individuals with the skills needed to establish or assess compliance with federal securities laws. For example, as registered investment advisers, private fund advisers may need to hire staff, including a chief compliance officer, to comply with SEC regulations requiring advisers to have effective policies and procedures for complying with the Advisers Act. According to two industry participants, the Dodd- Frank Act will likely further increase the need for individuals with these skills at various types of financial services firms as more entities are brought under regulation and additional requirements are placed on regulated firms. In addition to private entities, an SRO would be competing with SEC for these individuals. For example, SEC has estimated that it will need to hire about 800 staff over the next several years--contingent on its budget requests--to help implement its regulatory responsibilities under the Dodd-Frank Act. Some of the challenges of forming a private fund adviser SRO may be mitigated if the SRO were formed by an existing SRO, such as FINRA, but other challenges could remain. Representatives from FINRA, NFA, and an industry association told us that an existing SRO may have access to internal funds to help finance the start-up costs of a private fund adviser SRO. An existing SRO also may have in place the necessary offices and other infrastructure. Finally, FINRA officials said that an existing SRO may be able to leverage some of its staff and staff development programs. At the same time, however, a few of the representatives from industry associations we spoke with said that even an existing SRO would face start-up challenges. They told us that an existing SRO would still face the challenges of hiring new staff or training existing staff to examine advisers for compliance with the Advisers Act, given that no SRO currently has such responsibility and skills. Moreover, they said that an existing SRO would also face challenges reaching agreement on, among other things, the SRO's governance structures. Under Title IV of the Dodd-Frank Act, SEC is required to assume oversight responsibility for certain investment advisers to private funds. According to SEC staff, the agency plans to examine registered private fund advisers through its investment adviser examination program, as it has done in the past, and has taken steps to handle the increased number of examinations of such advisers. These steps include providing training on hedge and private equity funds, identifying staff with private fund experience or knowledge, prioritizing the hiring of candidates with private fund experience, and bringing in outside experts to educate staff about private fund operations. However, SEC staff's section 914 study reported that without a stable and scalable source of funding that could be adjusted to accommodate growth in the industry, SEC likely will not have sufficient capacity in either the near or long term to effectively examine registered investment advisers with adequate frequency. We have also previously found that SEC's examination resources generally have not kept pace with increases in workload, which have resulted in substantial delays in regulatory and oversight processes. In addition, we have previously reported that, in light of limited resources, SEC has shifted resources away from routine examinations to examinations of those advisers deemed to be of higher risk for compliance issues. One trade-off to this approach we identified was that it may limit SEC's capacity to examine funds considered lower risk within a 10-year period. According to securities regulators and industry representatives, a private fund adviser SRO could offer a number of advantages and disadvantages. A private fund adviser SRO could offer the advantage of helping augment SEC's oversight of registered private fund advisers and address SEC's examination capacity challenges. Through its membership fees, an SRO could have scalable and stable resources for funding oversight of its member investment advisers. As noted by SEC staff in its section 914 study, an SRO could use those resources to conduct earlier examinations of newly registered investment advisers and more frequent examinations of other registered investment advisers than SEC could do with its current funding levels. As evidence of this possibility, SEC staff cited FINRA's and NFA's abilities to examine a considerably larger percentage of their registrants in the past 2 years compared with those of SEC. In addition, an SEC commissioner stated that an SRO would have the necessary resources to develop and employ technology to strengthen the examination program, provide the examination program with increased flexibility to address emerging risks associated with advisers, and direct staffing and strategic responses that may help address critical areas or issues. While a private fund adviser SRO could help augment SEC's oversight, its creation would involve trade-offs in comparison to direct SEC oversight. Many of the advantages and disadvantages of a private fund adviser SRO are similar to those of any type of SRO, which have been documented by us, SEC, and others. Advantages of a private fund adviser SRO include its potential to (1) free a portion of SEC's staff and resources for other purposes by giving the SRO primary examination and other oversight responsibilities for advisers that manage private funds, (2) impose higher standards of conduct and ethical behavior on its members than are required by law or regulations, and (3) provide greater industry expertise and knowledge than SEC, given the industry's participation in the SRO. For example, according to FINRA officials, the association, as an SRO, is able to raise the standard of conduct in the industry by imposing ethical requirements beyond those that the law has established or can establish. In doing so, FINRA can address dishonest and unfair practices that might not be illegal but, nonetheless, undermine investor confidence and compromise the efficient operation of free and open markets. Some of the disadvantages of a private fund adviser SRO include its potential to (1) increase the overall cost of regulation by adding another layer of oversight; (2) create conflicts of interest, in part because of the possibility for self-regulation to favor the interests of the industry over the interests of investors and the public; and (3) limit transparency and accountability, as the SRO would be accountable primarily to its members rather than to Congress or the public. For example, an SRO would have primary oversight for it members, but SEC currently conducts oversight examinations of a select number of FINRA members each year to assess the quality of FINRA's examinations. Although these examinations serve an oversight function, we previously have found that they expose firms to duplicative examinations and costs. SEC staff told us that estimating the extent to which, if any, a private fund adviser SRO would reduce the agency's resources burden is difficult, given the hypothetical nature of such an SRO. Nonetheless, available information suggests that a private fund adviser SRO may free little, if any, SEC staff and resources for other purposes. Although SEC does not collect specific data on the number of investment advisers that have private fund clients, as discussed earlier, its staff estimate that 2,761 of the 11,505 registered investment advisers (as of April 1, 2011) report having private funds as one or more of its types of clients. If, for example, a private fund adviser SRO were limited to those advisers with only private fund clients and were to have primary responsibility for examining its members, it could relieve SEC from having to examine approximately 863 advisers. However, SEC still would have oversight responsibility for over 10,600 registered investment advisers that do not solely advise private funds. As a result, SEC may need to maintain much, if not most, of the resources it currently uses to oversee investment advisers because it would have oversight responsibility for the majority of the registered investment advisers, as well as the private fund adviser SRO. In contrast to a private fund adviser SRO, a broader investment adviser SRO could have primary responsibility for examining all of the 11,505 registered investment advisers, including private fund advisers, and thus reduce SEC's resource burden by a greater extent. A private fund adviser SRO could also create regulatory gaps in the oversight of registered investment advisers. Representatives from an investment adviser firm told us that it is common for advisers with a large amount of assets under management to manage portfolios for institutional clients, mutual funds, and private funds. The investment personnel and support functions often overlap, and a single portfolio management team often manages all three types of client portfolios. According to securities regulators, industry representatives, and others, if a private fund adviser SRO's jurisdiction was limited to only an adviser's private fund activities, the SRO would not be able to oversee and understand the full scope of activities of advisers with private fund and other clients. For example, representatives from an industry association told us that advisers typically maintain policies and procedures to allocate grouped trades (such as shares of an initial public offering) fairly among clients and avoid providing preferential treatment to a fund that pays performance fees at the expense of a fund that does not. An SRO with jurisdiction over only an adviser's private fund activities might not be able to detect trade allocation abuses involving an adviser's private fund and other clients. In such a case, SEC would be responsible for detecting such abuse and, therefore, may need to examine an investment adviser's relationship with its private fund clients--which could duplicate the SRO's efforts. In addition, a private fund adviser SRO could create conflicting or inconsistent interpretations of regulations. The formation of a private fund adviser SRO would result in the SRO overseeing investment advisers to private funds and SEC overseeing all other investment advisers. A securities regulator, industry representatives, and others told us that through examinations or enforcement actions, a private fund adviser SRO could interpret a regulation one way for its members, but SEC could interpret the same regulation another way for advisers that are not members of the SRO. Furthermore, for advisers with both private fund and other clients, if the SRO's jurisdiction were limited to an adviser's private fund activities, the opportunity would exist for the SRO to interpret a regulation one way for the adviser with respect to its private fund clients and for SEC to interpret the regulation a different way for the same adviser with respect to its other clients. Representatives from an industry association commented that SEC would have to spend significant amounts of time ensuring that the SRO and SEC staffs are applying the rules consistently among similar situations and circumstances, which would include writing guidance on interpretations beyond what is normally done. Finally, a private fund adviser SRO could result in duplicative examinations of investment advisers. As discussed earlier, many advisers with large portfolios manage assets for multiple types of clients, such as private and mutual funds, and have certain functions that serve all of their clients. According to securities regulators and industry representatives, for such advisers, their shared functions could be examined by both SEC and a private fund adviser SRO, if the SRO's jurisdiction was limited to an adviser's private fund activities. For example, the SRO could examine an adviser to ensure that it complied with its trade allocation policies and procedures for trades executed on behalf of its private funds, and SEC could examine the same policies and procedures to ensure that the adviser complied with them for trades executed on behalf of the adviser's other clients. These advisers could then be reexamined through SEC's oversight examinations. As required by the Dodd-Frank Act, SEC is taking steps to assume responsibility for registering and overseeing certain investment advisers to private funds. However, in its section 914 study, SEC staff concluded that the agency likely will not have sufficient capacity to effectively examine registered investment advisers, including private fund advisers, with adequate frequency. A private fund adviser SRO is one of several options that could be implemented to help address SEC's examination capacity challenges. However, doing so would involve trade-offs, including lessening SEC's capacity challenges versus increasing potential regulatory gaps, inconsistencies, and duplication in the oversight of registered investment advisers. As recommended by SEC staff in its recent study, other options to address SEC's capacity challenges include creating an SRO to examine all registered investment advisers or imposing user fees on advisers to fund SEC examinations. Like the private fund adviser SRO option, these two options would involve trade- offs that would have to be considered. We provided a draft of this report to SEC. SEC staff provided technical comments, which we incorporated, as appropriate. We are sending copies of this report to SEC, interested congressional committees and members, and others. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. The objectives of this report were to examine (1) the feasibility of forming and operating a private fund adviser self-regulatory organization (SRO), including the actions that would need to be taken and challenges that would need to be addressed, and (2) the potential advantages and disadvantages of a private fund adviser SRO. Although the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) directs us to assess the feasibility of forming an SRO for private funds, our study focuses on an SRO for private fund advisers. As discussed with congressional staff, the term "private funds," as used in section 416 of the Dodd-Frank Act, was intended to refer to private fund advisers. The Dodd-Frank Act amends the federal securities laws to require certain advisers to private funds, not the funds themselves, to register with the Securities and Exchange Commission (SEC). Securities SROs serve to help enforce the federal securities laws applicable to their members. An SRO for private funds (not advisers) would not serve that purpose, because private funds could continue to qualify for exclusions from registering with SEC and thus would not generally be subject to the federal securities laws. To focus our discussions with regulators, industry associations, and observers on the feasibility, associated challenges, and advantages and disadvantages of a private fund adviser SRO, we generally predicated our discussions on the assumption that such an SRO would be similar in form and function to the Financial Industry Regulatory Authority (FINRA). To address both objectives, we analyzed the Securities Exchange Act of 1934, Sarbanes-Oxley Act of 2002, and Commodity Exchange Act to identify characteristics of the various types of existing SROs, including their registration requirements, regulatory functions, and oversight framework. In addition, we reviewed past regulatory and legislative proposals for creating an SRO to oversee investment advisers or funds, relevant academic studies, SEC staff's Study on Enhancing Investment Adviser Examinations (as mandated under section 914 of the Dodd-Frank Act) (section 914 study), and related material to gain insights on the potential form and functions of a private fund adviser SRO. We did not evaluate the findings of the study or the staff's conclusions regarding the investment advisers examination program. We also reviewed letters received by SEC in connection with its section 914 study, comment letters on past proposals for an investment adviser or fund SRO, and other material to document the potential challenges in--and advantages and disadvantages of--creating a private fund adviser SRO. We obtained information on the number of registered investment advisers from SEC based on information in the Investment Adviser Registration Depository, as of April 1, 2011. Using this database, SEC provided us estimates of the number of advisers with only private fund clients and the number of advisers with private fund and other types of clients. SEC staff derived these estimates based on information from Form ADV--the uniform form that is used by investment advisers to register with SEC, which requires information about, among other things, the investment adviser's business and clients. Form ADV does not currently include a specific question on whether the adviser is an adviser to private funds. To estimate the number of advisers that potentially advise private funds, SEC includes the number of advisers whose response to Form ADV's Item 7.B equaled "yes" and Item 5.D(6) is not 0 percent. Item 7.B asks the investment adviser whether it or any related person is a general partner in an investment-related limited partnership or manager of an investment- related limited liability company, or whether it advises any other "private fund," as defined under SEC rule 203(b)(3)-1. Item 5.D(6) asks the adviser to identify whether it has other pooled investment vehicles (e.g., hedge funds) as clients and if so to indicate the approximate percentage that these clients comprise of its total number of clients. We attribute these estimates to SEC even though we were able to replicate their estimates using these procedures. We found these figures to be sufficiently reliable for the purposes of showing estimated numbers of registered investment advisers serving private clients. We interviewed regulators, including SEC, the Commodity Futures Trading Commission, FINRA, and the National Futures Association. We also interviewed representatives from the following 10 relevant industry associations representing investment advisers and private or other types of funds. Representatives of 17 advisory firms and/or investors in private funds who were members of some of these associations also participated in the interviews. Alternative Investment Management Association Association of Institutional Investors Coalition of Private Investment Companies North American Securities Administrators Association Private Equity Growth Capital Council. To gather a diverse set of perspectives, we identified industry associations representing various types of investment funds, advisers, and investors in private funds by reviewing letters received by SEC in connection with its section 914 study and previous concept releases about an investment adviser SRO. We also drew upon our institutional knowledge. In addition, we interviewed market observers including a compliance consultant firm that provides these services to the financial services industry, and two law professors who have written papers on the potential use of an SRO to oversee investment companies and one whose paper focused on an SRO for hedge funds. We conducted this performance audit from August 2010 through July 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individual named above, Richard Tsuhara, Assistant Director; Rudy Chatlos; Matthew Keeler; Marc Molino; Josephine Perez; Robert Pollard; Linda Rego; and Jennifer Schwartz made major contributions to this report.
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Over the past decade, hedge funds, private equity funds, and other private funds proliferated but were largely unregulated, causing members of Congress and Securities and Exchange Commission (SEC) staff to raise questions about investor protection and systemic risk. To address this potential regulatory gap, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) brought certain advisers to private funds under the federal securities laws, requiring them to register with SEC. The Dodd-Frank Act also requires GAO to examine the feasibility of forming a self-regulatory organization (SRO) to provide primary oversight of private fund advisers. This report discusses (1) the feasibility of forming such an SRO, and (2) the potential advantages and disadvantages of a private fund adviser SRO. To address the mandate, GAO reviewed federal securities laws, SEC staff's recently completed study on its investment adviser examination program that was mandated by the Dodd-Frank Act, past regulatory and legislative proposals to create an SRO for investment advisers, and associated comment letters. GAO also interviewed SEC and SRO staffs, other regulators, and various market participants and observers. We provided a draft of this report to SEC for review and comment. SEC staff provided technical comments, which we incorporated, as appropriate. Regulators, industry representatives, investment advisers, and others told GAO that it was difficult to opine definitively on the feasibility of a private fund adviser SRO, given its unknown form, functions, and membership. Nonetheless, the general consensus was that forming a private fund adviser SRO could be done, as evidenced by the creation and existence of other SROs. At the same time, they said that the formation of a private fund adviser SRO would require legislation and would not be without challenges. SEC staff and securities law experts said that the federal securities laws currently do not allow for the registration of a private fund adviser SRO with SEC. In addition, regulators, industry representatives, and others told GAO that forming such an SRO could face challenges, including raising the necessary start-up capital and reaching agreements on its fee and governance structures. Some of the identified challenges are similar to those that existing securities SROs had to confront during their creation. Creating a private fund adviser SRO would involve advantages and disadvantages. SEC will assume responsibility for overseeing additional investment advisers to certain private funds on July 21, 2011. It plans to oversee these advisers primarily through its investment adviser examination program. However, SEC likely will not have sufficient capacity to effectively examine registered investment advisers with adequate frequency without additional resources, according to a recent SEC staff report. A private fund adviser SRO could supplement SEC's oversight of investment advisers and help address SEC's capacity challenges. However, such an SRO would oversee only a fraction of all registered investment advisers. Specifically, SEC would need to maintain the staff and resources necessary to examine the majority of investment advisers that do not advise private funds and to oversee the private fund adviser SRO, among other things. Furthermore, by fragmenting regulation between advisers that advise private funds and those that do not, a private fund adviser SRO could lead to regulatory gaps, duplication, and inconsistencies.
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The Bureau's testing program for the 2010 Census relied principally on a small number of large-scale census-like tests. Specifically, the 2010 testing program included two national tests on the content of questionnaires in 2003 and 2005, two site tests focused on data- collection methods and systems in 2004 and 2006, and a final "dress rehearsal" at two sites in 2008. The dress rehearsal, considered to be the final step of a decade of research and testing, had the primary focus of testing automated field operations and their interfaces. The Bureau previously reported that implementing the census tests, including the dress rehearsal, cost about $108 million. As part of the Bureau's effort to conduct the 2020 Census at a cost lower than the 2010 Census, it plans to invest in early research and conduct smaller more frequent tests to inform its 2020 Census design decisions. The lifecycle for 2020 Census preparation is divided into five phases, as illustrated in figure 1. The Bureau is attempting to frontload critical research and testing to an earlier part of the decade than it had in prior decennials. It intends to use the early research and testing phase through fiscal year 2015 to develop a preliminary design and to evaluate the possible impact that changes would have on the census' cost and quality. By the end of the early research and testing phase, the Bureau plans to decide on preliminary operational designs. In August 2012, as part of the 2020 Census testing program, the Bureau issued a research and testing management plan. The plan defines eight phases of the life cycle for a census field test, as shown in figure 2. According to the plan, the first three phases culminate in the approval of a field test design by a group of senior Bureau managers that provides decision-making support to the 2020 Census program. To facilitate the field test design process, the Bureau developed templates as guidance for developing test designs. The Bureau also developed management plans in specific functional areas. One, a communications and stakeholder engagement plan, identified stakeholder groups involved in 2020 Census planning. Another, a governance plan, identified decision-making bodies for the 2020 Research and Testing program. The plans outline processes the Bureau will implement as it prepares for the 2020 Census. Prior to this, the Bureau used 2010 Census program guidance and standards to govern some of its earliest design discussions. The Bureau plans to conduct 10 field tests in preparation for the 2020 Census during the early research and testing phase. According to the Bureau, not all field tests are alike, and they vary in scope and capability. Some will be designed to encompass more exploratory questions. Others will be designed to more rigorously test the implementation of specific operations. When we initiated this review in early 2013, the Bureau had designed its initial three tests as summarized in table 1. Other planned field tests will cover topics such as building the address list and narrowing possible approaches for self-response, non-response follow-up, and workload management. The field tests will culminate in a larger test late in fiscal year 2015 to further narrow possible design options. Based on our prior work, we identified 25 key practices for a sound study plan. Following these practices before test designs are completed can help ensure that test designs are appropriate, feasible, and produce useful results. We organized the 25 practices into the following six themes. general research design, data collection plan, data analysis plan, design process management. sample and survey, stakeholders and resources, and As demonstrated in figure 3, the Bureau generally followed most of the 25 key practices for two of the three field test designs and at least partially for the third field test design. Research questions frame the scope of a test, drive the design, and help ensure that findings are useful and answer the research objectives. The objectives should be relevant, creating a clear line of sight to the Bureau's goals for the 2020 Census. In addition, clearly articulating the test design in advance of conducting a test aids researchers in discussing methodological choices with stakeholders. Across the three field tests, the Bureau generally followed three of the general research design practices, followed one practice to a varying degree, but did not follow the practice of identifying potential biases (see table 2). The Bureau defined concepts, considered relevant prior research in each test, and included objectives that were relevant. However, the Bureau omitted research questions from the design of the 2012 National Census Test (2012 NCT). Identifying specific research questions linked to the research objectives helps ensure that answers resulting from the field test will address the needs of the 2020 Census research program reflected in the research objectives. For example, the 2013 Quality Control Test (2013 QCT) design includes an objective to investigate how the Bureau can modernize and increase the efficiency and utility of its field infrastructure. The corresponding research question states that the test will research the feasibility of using Global Positioning System (GPS) data. The test would determine, among other things, if field staff appropriately visited housing units for address listing and enumeration and if GPS data can be used to reduce or eliminate field quality control checks. None of the three test designs addressed potential biases, such as cultural bias. If a test design does not address potential biases, systematic errors could be introduced. Such errors could affect the accuracy of the test and thus potential design decisions for the 2020 Census. Identifying data sources and data collection procedures is key to obtaining relevant and credible information. The Bureau generally followed two of the data collection practices for all three tests and followed the others to varying degrees (see table 3). In its initial three field test designs, the Bureau generally followed the practices of clearly presenting how data will be collected, and describing a method to encourage responses, as applicable. The three other practices were followed less consistently. These practices help researchers ensure that the data collected for a test will be sufficient and appropriate. First, only the 2013 National Census Contact Test (2013 NCCT) design included a plan for administering and monitoring data collection. The test designs should include data collection procedures that will obtain relevant and credible information to ensure that the resulting information meets the decision maker's needs. In its design documents, Bureau officials explained they would collect data using telephone interviews from Census Bureau contact centers, outbound interviewing, and telephone questionnaire assistance. The Bureau further explained that survey data and the information on the outcomes of calls would be provided to the survey team. Second, the Bureau discussed the level of difficulty in two of the test designs, but did not explain why it would be difficult to obtain the data. Bureau officials stated that with limited resources and based on the importance of the objectives of a given test, they will not be able to apply all the practices equally to every test design. For example, the 2013 QCT relied on tests of software by Bureau staff-- not a traditional field test involving contact with households. So, although the Bureau identified that it may be difficult to reliably identify deviations in procedures using GPS, it did not include an explanation or mitigation of the possible difficulty. Third, the Bureau only identified factors that may interfere with data collection in the 2013 NCCT design. Pre-specifying a data analysis plan as part of a test design can help researchers select the most appropriate data to measure and the most accurate and reliable ways to collect them. Although the Bureau generally followed two of the four practices related to a data analysis plan in the test designs that we reviewed, its discussion of the possible limitations of findings or test results varied (see table 4). For all of the test designs, the Bureau generally identified a basis for comparing the test results and included a proposed design or research plan that was directly related to the objectives and/or questions. In addition, analytical techniques were proposed for two of three of the test designs. While in the 2012 NCT design the Bureau documented that the information from re-interviewing respondents will be used to validate their initial responses, officials did not discuss how they would match this information. Lastly, only the 2013 NCCT design included a discussion of possible limitations. For example, in its design the Bureau noted that one of the data sources used in the test might not be representative. Discussing possible limitations is important so that it is clear what the test design can and cannot address, and so that test results are not overly generalized. A survey with an appropriate sample design can provide descriptive information about a population and its subgroups, as well as information about relationships among variables being measured. In addition, researchers should consult prior relevant research and test any new questions so that the survey questions will elicit appropriate information from respondents to address the Bureau's data needs. For all three tests, the Bureau generally followed two of the sample and survey practices, while use of the third practice varied across the field tests (see table 5). Across the test designs, the Bureau included both a discussion of how to reach the intended sample and the status of the survey instrument or questionnaire, as applicable. While all of the test designs included a rationale for the type of sample, the 2013 NCCT design also included a rationale for the size of its sample. Bureau documents showed this sample size was selected due to the absence of any documentation of a prior study and the test team's conservative estimation of the response rate. Further, the Bureau noted the estimated response rate and selected sample size needed to enable the team to determine the quality and comprehensiveness of the data in its analysis. Test designs that explain how their sampling methodology will yield information of sufficient quality for its intended purpose provide a better justification for their cost. Managing stakeholders, identifying team member responsibilities, and identifying resources are key to a test's success, as people are the primary resource of a high-performing organization. For the 2013 test designs, the Bureau followed all of the stakeholder and resource practices. The 2012 test design did not follow three of the four practices (see table 6). The Bureau included a timeline and required resources in each field test design, including how much each field test would cost. The Bureau also generally followed the other practices related to stakeholders and resources for two of the test designs. However, for the 2012 NCT, officials did not identify stakeholders, their respective roles in the test, or their involvement in developing the test design. The latter two tests were designed with management plans for communication, stakeholder engagement, and governance, which for example, states that stakeholders' roles should be defined and that their feedback should be gathered. The 2013 Quality Census Test design documented the role that a stakeholder had in outlining how the Bureau can increase data accuracy. By including these practices in guidance, the Bureau has better ensured that its people and resources are being effectively and efficiently leveraged during the development of future 2020 Census tests. Good management of the design process can help managers identify factors that can affect test quality, such as potential risk of delays and challenges to the lines of communication. Across the three tests, the Bureau's governance process for developing test designs varied in following the four practices (see table 7). First, the Bureau identified clear reporting relationships for only the 2013 QCT. It partially followed this practice for the 2013 NCCT design, and did not follow it for the 2012 NCT design. For the two latter tests, the Bureau utilized membership lists and responsibilities matrices to identify test and project teams, and the assigned tasks and deliverables. Second, the Bureau identified review and approval roles for two of the test designs, but not for the 2012 NCT. For example, for the 2013 QCT design, the Bureau identified which individuals were supposed to review and approve certain design documents. When authority is clearly assigned and communicated, individuals can be held responsible accordingly. Third, the Bureau's documentation of performance measures and timelines with associated milestones for all three test designs did not identify how the measures would be monitored. For example, for the 2013 QCT design the Bureau included a list of deliverables with associated dates, such as sending an initial study plan to senior Bureau officials for their review. However, it did not indicate how the Bureau would know whether these deliverables were implemented by the indicated dates. Measuring and monitoring performance allows Bureau managers to track progress toward their goals and have crucial information on which to base their organizational and management decisions. Fourth, the Bureau did not follow its guidance for approving its 2013 NCCT test design and only partially followed it for the 2013 QCT design. According to the Bureau's August 2012 research and testing management plan, the test designs should be approved at four different stages. The test design phase is complete after the fourth approval. The Bureau partially followed this practice for the 2013 QCT by documenting approval of its design at only one of the stages. According to Bureau meeting records, senior Bureau officials discussed the 2013 NCCT design after its implementation. Further, Bureau records indicate that senior Bureau officials discussed the 2012 NCT design, before the August 2012 management plan was issued, but did not document approval. In July 2013, the Bureau began using a table that includes test- design approval dates. This practice helps ensure that management's approval of a plan maintains its relevance and value to management in control over operations. Further, documenting that management has approved a design provides accountability and offers transparency as to when decisions were made. The Bureau's design templates outline the information that should be included in two of its key design documents, the field test overview and the field test plan. The templates list topics to be discussed in the overview and plan, and, in some cases, provide examples of what staff should include for a topic. We found that the templates did not address some of the practices we identified for a sound study plan. For example, the templates did not require a test design to include (1) discussion of potential biases, (2) identification of factors that could interfere with obtaining data, (3) identification of difficulties in collecting data, and (4) specification of stakeholder's roles. In response to this audit, the Bureau subsequently revised its field test template to include these four practices as topics to be discussed. As the Bureau works to develop field tests to inform decisions about the 2020 Census, Bureau officials are learning lessons that can strengthen the design of future tests. According to Bureau officials, our audit helped to reinforce the Bureau's need to draw on early lessons learned from initial tests. These lessons were derived from examining where the Bureau did not follow best practices for study designs and identifying corrective actions. The Bureau has adopted some of these test design lessons and is taking steps to adopt others. Table 8 lists six lessons learned from the initial three field tests. One lesson the Bureau identified is the importance of obtaining buy-in from management early in the test development process. While designing the three initial tests, Bureau field test designers did not brief senior Bureau management on the development of the designs or involve them in the planning or review of data collection methods. In addition, managers of various Bureau divisions responsible for methodology and other subject matter areas requested to be involved in the process earlier. According to Bureau officials, without early involvement, it may be difficult to obtain upper management approval of test designs quickly, which can lead to unexpected late changes or delays in testing. Early managerial involvement can help ensure early agreement on goals, objectives, timing, and capabilities needed to support a test. This lesson complements the practices of identifying stakeholders benefiting from the field test as well as stakeholders involved in the preparation of the design. To involve management earlier, Bureau officials began briefing upper management about the planning of tests during other regularly scheduled agency-wide executive meetings early in the test planning stages. Officials also started conducting one-day planning sessions beginning with tests planned for fiscal year 2014. Since beginning these sessions, Bureau officials said they have improved at communicating input from external experts at the National Academy of the Sciences to upper Bureau management. Further, officials said they have found the sessions to be effective in identifying issues early. Bureau officials said they now intend to hold these planning sessions for each test. In January 2013, the Bureau began convening a Bureau-wide test strategy review body. This panel of experts first met after the 2013 National Census Contact Test was implemented. In February 2013, Bureau officials decided that prior to conducting future tests, design teams would present the plans, sample design, and objectives to the panel. According to the Bureau, the panel will now look at the Bureau's research strategy and goals, design decisions, and how the field tests will affect design decisions in fiscal years 2014 and 2015, and clarify operational milestones. The first pre-implementation presentation was conducted in February 2013 for the 2013 Quality Control Test. This allowed the test team to clarify the 2013 QCT's purpose and verify its testing methodology with Bureau-wide experts. Bureau research managers believe the test's design is better because of these meetings, and expect future test designs to benefit similarly. During our review, we discussed with Bureau officials whether the Bureau took steps to evaluate the test development process after the three initial tests. The officials told us they recently started conducting staff reviews of tests they have implemented. Such post-test reviews allow the Bureau the opportunity to identify any further lessons learned from developing tests to improve either the design or management of remaining tests for the 2020 Census. The Bureau conducted its first post-test review following the 2013 National Census Contact Test. The review documented, for example, that involving stakeholders such as methodologists, in test planning and identifying their roles and responsibilities helps improve communication during the design process. Further, the review documented that test designs should not only identify responsible parties, but have information on what deliverables are expected of these parties. In addition, the Bureau also conducted a review of the 2013 Quality Control Test. Going forward, these reviews will provide the Bureau with additional opportunities to build its knowledge base on conducting small, targeted field tests. The Bureau has taken steps to improve how it monitors the status of field test design deliverables. Bureau officials said that they previously reported on the status of some test deliverables in a biweekly report. However, these reports did not track the status of all deliverables across all the tests. As a result, senior decennial managers had to contact individual test team leaders to obtain the status for each of the initial test designs. Bureau officials acknowledged that our review led them to realize that with additional field test designs being created, monitoring across all field tests would improve their test status reporting process, and increase their efficiency in collating status information for managers. In July 2013, a Bureau official informed us that they began using a new tracking sheet to monitor the progress of field test deliverables. The new tracking tool provides a more comprehensive and global perspective on the status of deliverables across all tests. Bureau officials described this as an evolving process and said that they plan to take additional steps to develop a process for monitoring the status of field tests as well. The Bureau has also recognized the importance of keeping team leaders informed about key design elements. According to the Bureau, design teams are required to submit certain documents for field test design reviews and approvals. Testing guidance is available electronically. Newly assigned team leaders are individually emailed links to baseline documents. New team leaders are also provided a team leader handbook. However, the handbook does not identify which documents are required for field test design development, nor does it indicate which documents were required for submission for test design reviews or approvals. Without having a listing of required documents, the Bureau risks duplicating its efforts to keep team leaders informed of key design elements. To ensure that team leaders are consistently informed of field test development guidance and the documents that should be prepared to support test design reviews and approvals, Bureau officials said they plan to include a listing of such documents in the team leader handbook. Bureau officials acknowledged that our work offered a way of improving how some information is disseminated to team leaders. The effort to revise the team leader handbook is in progress, but Bureau officials could not provide a timeline for completing it. Achieving a consistent understanding among team leaders of documents required for field test design approvals could help reduce possible delays in the test design review process. In response to this audit and as part of its effort to adapt its management structures to oversee multiple census field tests being developed concurrently, Bureau officials say that they are realigning field test governance processes to improve communication and accountability. Further, they said that the Bureau has already taken steps to identify one point of contact for each future test. Previously, a field test coordinator had to track input from various project team leaders involved with a particular census field test. This lesson complements the practice of identifying clear internal reporting relationships, including who reports to whom and points of contact for different types of information for a sound research plan. In addition to identifying reporting relationships, the Bureau acknowledged that taking steps like establishing one point of contact will help it to more effectively maintain clear lines of communication, and establish accountability when it develops a field test. While the Bureau has taken some initial steps to implement its proposed restructuring, such as conducting a field test management group meeting to further integrate the 2020 field tests across projects, it has not formalized other proposed field test management restructuring and guidance revisions. For example, to improve the coordination of field test planning, the Bureau has proposed creating a field test management team that would provide centralized coordination and streamline the test processes. Further, Bureau officials said that the research and testing plan is under review and being updated to reflect the current process for approving field test designs and plans. Internal controls require that agencies complete, within established time frames, all actions that correct or otherwise resolve the matters brought to management's attention. The controls also require management to periodically evaluate the organizational structure and make changes as necessary in response to changing conditions. But, the proposed restructuring and guidance revisions have not yet been formalized. The Bureau has many other competing priorities that may need attention more urgently and officials could not provide us a timeline or milestones for formalizing the changes. Meanwhile, the Bureau is continuing work on the design of tests. Without a timeline and milestones for this restructuring, the Bureau risks uncoordinated management for its field tests. This puts the field test's effectiveness and efficiency regarding possible overlap and duplication at risk. Lastly, it is important for the Bureau to document the lessons it has learned from designing its initial tests. In conducting post-test reviews, the Bureau documented some lessons learned from the 2013 National Census Contact Test and 2013 Quality Control Test. However, Bureau officials acknowledged that the Bureau did not consistently document the lessons learned from the design phases for the initial tests. Internal controls require that managers use control activities, such as the production of records or documentation, to aid in managing risk. Documenting these lessons can help reduce the risk of repeating prior deficiencies or inconsistencies that may lead to test development delays. Given the long time frames involved in planning the census, documentation is essential to ensure lessons are incorporated into future tests. In its effort to design smaller and more targeted tests for the 2020 Census, the Bureau has taken important steps that could make its testing strategy more effective. The Bureau's investments in early testing are intended to validate the use of strategies and innovations geared toward reducing cost. The three test designs we reviewed generally or partially followed most key practices for designing a sound research plan. The Bureau has already begun taking corrective actions on others, in part by adding additional requirements for designs to its standard guidance. Finalizing planned revisions that focus on field test management in the team leader handbook can help improve how team leaders learn about test design elements. Formalizing its proposed field test management restructuring and guidance revisions will enable the Bureau to ensure that there is improved accountability, communication, and monitoring of its test management design processes. Further, documenting lessons learned while designing the initial field tests can increase the Bureau's ability to take advantage of the prior experiences. By ensuring these practices are consistently used in field tests, the Bureau will increase the soundness of the tests in areas such as design management and stakeholder involvement. This, in turn, will enhance the likelihood that the Bureau achieves its goal of conducting a cost effective census. We recommend that the Secretary of Commerce require the Under Secretary for Economic Affairs who oversees the Economics and Statistics Administration, as well as the Director of the U.S. Census Bureau, to take the following three steps to improve the Bureau's process of designing its census field tests for the 2020 Census: Finalize planned revisions that focus on field test management in the team leader handbook. Set a timeline and milestones for formalizing proposed field test management restructuring and guidance revisions. Document lessons learned from designing initial field tests. We provided a draft of this report to the Department of Commerce for comment. In its written comments, reproduced in appendix II, the Department of Commerce concurred with our recommendations. The Department of Commerce also provided minor technical comments that were incorporated, as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Commerce, the Under Secretary of Economic Affairs, the Director of the U.S. Census Bureau, and interested congressional committees. 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) 512-2757 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 is listed in appendix III. The objectives of our review were to determine to what extent the Bureau followed key practices for a sound study plan in designing the earliest 2020 Decennial Census field tests, and to identify any lessons learned from the design process that may help improve future tests. To identify key practices for a sound study plan, we reviewed program evaluation literature, including our design evaluation guide, our 2004 review of Census Bureau overseas field tests, our 2012 review of the planning of the 2020 Census, and our guide to internal controls. We selected 25 key practices from these sources. We shared these practices with the Bureau and it agreed that they were reasonable. Using these criteria, we evaluated whether the Bureau's three initial field test designs followed key practices for a sound research plan. Additionally, since the program evaluation literature noted the importance of program management to developing a sound study plan, we also interviewed Bureau officials on the management processes used for developing the designs. We did not evaluate the outcomes of the field tests. To determine to what extent the designs for the initial 2020 Decennial Census field tests were consistent with key practices for a sound study plan, we reviewed Bureau design documents and interviewed Bureau officials about the field test design process. We compared each of the 25 practices to the Bureau's field test design documents for the three initial tests to answer the question of whether the respective practice was followed. Our determinations provide a measure of the general rigor of the test designs, although they do not recognize the extent to which the Bureau may have considered the key practices later in the life cycle of the designs. After comparing documents provided by the Bureau for each field test to the key practices and determining the extent each practice was followed for each test, we verified the determinations by having different auditors independently determine the extent practices were followed for 25 percent of each others' initial determinations for each test. We rated each practice as being either "generally followed," "partially followed," or "not followed." We also discussed our preliminary findings with Bureau officials to learn of additional context or documents that we might have missed. Table 9 describes how we made our determinations. For each test, we limited our scope to the "design" of the tests, which is the first three of eight phases of the field test life cycle and includes initiation, concept development, and planning, analysis and design. Our reviews of test designs were designed as snapshots "as of" the approval of the designs by senior management, or at an equivalent stage of their life cycle, intended to benchmark or baseline the preparation of future test designs. As such, our determination that a given test design did not follow a given key practice does not mean that the Bureau did not consider that key practice later in the test's life cycle. To identify lessons learned from how the tests were designed, we examined where the Bureau had not followed key practices and identified corrective actions needed. We determined the extent to which the key practice criteria were followed and then considered whether there was a pattern or an underlying cause, such as a lack of guidance. We then discussed with Bureau officials what lessons they had learned and what lessons they could implement for future field tests. We conducted this performance audit from January 2013 to October 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 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, Ty Mitchell, Assistant Director; Maya Chakko; Robert Gebhart; Ellen Grady, Wilfred Holloway; Andrea Levine; Donna Miller; and Aku Pappoe made key contributions to this report.
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The Bureau is continuing its early testing efforts to prepare for the decennial. These tests must be well designed to produce useful information about how to implement the 2020 Census. The Bureau has completed the designs of three field tests. GAO was asked to monitor the Bureau's testing for the 2020 Census. This report (1) determines the extent to which the Bureau followed key practices for a sound study plan in designing the earliest 2020 Decennial Census field tests, and (2) identifies what lessons were learned that may help improve future tests. To meet these objectives, GAO first selected 25 key practices for a sound research plan after reviewing its program evaluation literature. GAO then compared Bureau field test design documents for its three initial tests to these practices. GAO also examined where the Bureau had not followed key practices, identified actions needed to address them, and interviewed officials about lessons learned. The Census Bureau (Bureau) generally followed most key practices for a sound study plan in designing the three initial field tests. However, some practices were only partially followed. For example, the test designs varied for four practices related to design process management. Good management of the design process can help managers identify factors that can affect the quality of a test, such as potential risk of delays and challenges to the lines of communication. For example, the Bureau generally followed one of the practices for design process management--identifying clear reporting relationships--for only one of the test designs. The Bureau partially followed this practice for another test design, and did not follow it for the third. The Bureau has already begun incorporating lessons learned from its initial field test designs. These lessons include obtaining internal expert review, and conducting reviews after each test to learn additional lessons. The Bureau has also recognized the importance of keeping design team leaders informed about key design elements. Yet the Bureau has not finalized planned revisions to the team leader handbook, which could help implement this lesson. Additionally, the Bureau is realigning field test governance structures to improve communication and accountability. It has already taken such steps as identifying one point of contact for each test. However, GAO found that the Bureau needs to set timelines and milestones to formalize other restructuring proposals for managing field tests, such as creating a field test management team. Having a formalized proposal and guidance revisions will better position the Bureau to improve accountability, communication, and the monitoring of its test design processes. While lessons the Bureau identified should help it better design future field tests, it has not consistently documented these lessons learned. Documenting lessons can help reduce the risk of repeating prior deficiencies that may lead to test development delays, and can reinforce lessons learned. Given the long time frames involved in planning the census, documentation is essential to ensure lessons are incorporated into future tests. GAO recommends that the Secretary of Commerce (1) finalize field test management revisions in the team leader handbook, (2) set a timeline and milestones for formalizing proposed field test management restructuring and guidance revisions, and (3) document lessons learned from designing initial field tests. The Department of Commerce concurred with GAO's findings and recommendations, and provided minor technical comments, which were included in the final report.
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The Health Care Financing Administration (HCFA)--an agency of the Department of Health and Human Services--administers the Medicare home health care program. That program has been part of Medicare since Medicare began in 1965 and serves as an alternative to lengthy in-patient hospitalization. Medicare home health costs averaged about a 33-percent per-year growth from 1989 to 1996--from about $2 billion to almost $18 billion. This occurred primarily because the number of beneficiaries receiving services increased as did the number of services per beneficiary. A fiscal intermediary under contract to HCFA determines if a home health agency's services are reasonable and necessary and, in turn, which agency costs are reimbursable based on Medicare cost reimbursement principles. These principles authorize Medicare intermediaries to reimburse home health care providers their reasonable costs of serving beneficiaries when those claimed costs are found to be necessary, proper, actual, and related to patient care. In this regard, providers certify that they are familiar with the laws and regulations regarding the provision of health care services and that the services identified were provided in compliance with such laws and regulations. Mid-Delta Home Health is one of the largest home health care providers in Mississippi. It is owned and operated by Clara T. Reed, who is Chief Executive Officer and Chief Financial Officer. At the time of our investigation, Mid-Delta Home Health employed over 600 people and consisted of two corporations (in Belzoni and Charleston, Mississippi) that provided home health care through 16 offices in different parts of the state. Medicare reimbursement to Mid-Delta for home health care and rural health clinic services from January 1993 to December 1996 totaled approximately $77.9 million. Mrs. Reed owned and/or controlled a number of related companies and organizations, including P&T Management, Inc., which provided overall management services for Mid-Delta Home Health and its affiliates (rural health care clinics known as Taylor's Medical Clinics); Mid-Delta Development League, Inc.--a nonprofit, tax-exempt (Internal Revenue Code section 501(c)(3)) organization; and The Care Associates, Inc., a political action committee formed to aid political candidates interested in "the health and welfare of" the poor and needy. See figure 1. Mid-Delta Home Health, in our opinion, violated Medicare cost reimbursement principles in claiming costs that it had not incurred. First, Mid-Delta Home Health presented approximately $226,000 in checks to its employees, representing payment for unused leave time in the 1993-96 period. Mrs. Reed subsequently asked the employees to endorse the checks and give them back to Mid-Delta. When questioned about this, some current and former employees told us that they had felt coerced into giving back the checks. The company then improperly claimed the full amounts of the leave as part of the employees' payroll costs and was reimbursed by Medicare. Second, Mrs. Reed requested--or, again according to some employees, coerced--Mid-Delta and P&T Management employees to return a certain amount (about 20 percent or more) of their 1996 bonuses to the company. Those on a "special employee" list received larger bonuses by agreeing in advance to return certain amounts of their bonuses (an average of 29 percent) to the company. The bonus paybacks totaled about $170,000, including $80,000 from Mrs. Reed. Mid-Delta improperly claimed, and received reimbursement from Medicare for, the returned bonuses. Mrs. Reed told the employees that the returned unused leave and bonus moneys would support, among other things, an "indigent care fund" for Mid-Delta's home health care patients who had exhausted their Medicare and Medicaid visits. However, according to Mid-Delta's controller, the moneys were used largely to offset unpaid bills of private-pay patients of the affiliated Taylor's Medical Clinics. We determined that Mrs. Reed deposited moneys to P&T Management's operating account or to the account of a political action committee that she controlled. See figure 2. According to Mrs. Reed, in 1994 after consulting with legal and tax advisors, she discontinued allowing her employees to roll over unused leave from one year to the next. Thus, as a company practice, employees were given checks for the cash value of their unused leave, then were asked to endorse and return them to the company. Further, former and current employees whom we interviewed complained that between 1993 and 1996, employees had been presented with unsigned (nonnegotiable) checks in payment for their unused leave time and were asked--some employees said coerced--to endorse the checks back to the company. Some also complained that in 1993 and 1994, Mrs. Reed had issued stock certificates instead of paying them for unused leave time. At Mrs. Reed's request, according to employees we interviewed, employees endorsed the back of their checks and returned them. Mid-Delta Home Health officials deposited most of the checks in an account for the indigent care fund and some to the bank account of a political action committee, both controlled by Mrs. Reed. (See fig. 2.) For the 1993-96 period, records show that Mid-Delta employees returned approximately $226,000 in payment for unused leave. Some of the moneys from the account for the indigent care fund were subsequently deposited to P&T Management's operating account; and Mid-Delta's Director of Finance confirmed that Medicare had reimbursed the amount claimed for employee payroll costs, including the unused leave. Current and former employees told us that in some instances employees who refused to surrender to what they termed as coercion and return payments for leave faced retaliatory measures, such as demotion or firing. Indeed, two former employees who had been fired from Mid-Delta Home Health believed that they had been fired because they had not returned payments for leave as requested. Mrs. Reed denied this allegation. However, 20 of the 29 employees we interviewed about unsigned leave checks stated that they had endorsed the checks and returned them because they feared losing their jobs if they did not. In some cases in 1993 and 1994, Mrs. Reed gave employees a stock certificate representing an IOU for the monetary value of the checks they had endorsed and returned to the company. She told those employees, according to her statement to us, that she would remember that they had leave coming from the previous year and that they could take a day or so when they needed it. Some former employees complained to us that they had never been paid for their unused leave. When we asked Mrs. Reed about the unsigned checks, she said that she could not cover the employees' leave checks without causing a cash flow problem. She said that if she had presented signed checks to the employees, they would have cashed them instead of returning them to the company. Mrs. Reed stated that no one was coerced--the employees voluntarily returned money to the company. Mid-Delta Home Health paid bonuses to its employees based on various criteria, such as length of employment and annual salary. However, according to some Mid-Delta employees, a bonus's amount was also determined by the employee's willingness to return about 20 percent or more of the bonus to the company. Further, Mid-Delta then claimed, and received, the amount of the bonuses for Medicare reimbursement. (See fig. 2.) Sources informed us that when bonus checks were distributed to employees, Mrs. Reed essentially coerced employees to pay back approximately 20 percent or more of their bonuses. Although several employees told us they had returned their bonuses voluntarily and that they had not felt threatened or coerced, other employees stated that they had complied with Mrs. Reed's requests for fear of losing their jobs. Mid-Delta and P&T Management employees in December 1996 received over $933,000 in bonuses and returned about $170,000 to the indigent care fund. (See fig. 2.) At least $155,000 was then transferred from that fund to the P&T Management operating account. The $170,000 included $80,000 that Mrs. Reed returned from a $125,000 bonus she had received in December 1996. Further, according to one knowledgeable employee, Mrs. Reed had a list of "special employees" who received larger bonuses than did others if they agreed in advance to give back a certain amount. The source explained that Mrs. Reed talked to each employee on the list personally; and as each employee agreed to return the set amount to the company, she initialed by the employee's name on the list. Indeed, according to one employee, Mrs. Reed said, "I will give you a larger bonus if you agree to give some of it back." Further, another employee told us that when she did not return the bonus money immediately, she received a telephone call from Mrs. Reed asking, "Where's my money?" When the employee answered that she had thought the donation was voluntary, Mrs. Reed responded, "That was never your money in the first place. I want my money." The employee told us that when she returned her bonus in the form of four checks, asking (for personal financial reasons) that each be deposited at a later date, Mrs. Reed deposited all of them immediately. Other employees confirmed similar experiences. Our review of a "special employees" list, containing 38 employees' names, showed that 35 had returned an average of 29 percent of their original bonuses and that the range of return from these employees was between 18 percent and 57 percent. We verified with Mid-Delta's Director of Finance that the employees had returned the amounts and that Mid-Delta had claimed the full bonus amounts to Medicare for reimbursement. Table 1 lists details of bonus paybacks by some of the 35 employees. In contrast, although Mrs. Reed paid back part of her $125,000 bonus, her family members did not pay back any of their bonuses. In December 1996, Mrs. Reed's husband received a $75,000 bonus and returned none; their daughter received a $55,000 bonus and returned none. Although Medicare allows a provider to pay reasonable bonuses, Mid-Delta Home Health's Medicare intermediary was unaware that Mid-Delta employees were returning a portion of their bonus money to the company. The intermediary stated that Mid-Delta claims for the payroll-cost amounts were improper if Mid-Delta had received back part of the employees' salaries. The intermediary also informed us that intermediaries look at an entire employee compensation package to determine if the costs claimed are reasonable and that it had not conducted a detailed audit of any Mid-Delta cost report. Moreover, cost reports, which home health agencies submit to their intermediary for Medicare reimbursement, do not break down employees' total compensation by such components as base salary, bonuses, and leave. Therefore, the amounts claimed are not likely to be questioned without an audit. It is our opinion that Mid-Delta Home Health's claims for Medicare reimbursement of the returned leave moneys were also not proper because Mid-Delta had not incurred the costs. In a similar case involving an unrelated home health agency, HCFA formally ruled that "contributions" returned to the provider in the form of deductions from employees' salaries had reduced the provider's costs and therefore had been improperly claimed for Medicare reimbursement. Following the provider's appeal, the U.S. District Court for the Southern District of Mississippi upheld HCFA's decision, concluding that, under Medicare regulations, the contributions qualified as refunds of salary, thus reducing the company's salary expense. The court also noted that Medicare reimbursement was limited to costs incurred. The court in this case further determined that (1) the employee contributions created at least "a perception of impropriety" and (2) the home health agency had no safeguards in place to ensure that coercion was not involved. According to a former Mid-Delta Home Health management official and other former and current employees, Mrs. Reed told employees that their returned funds would support, in part, a Mid-Delta "indigent care fund." Those employees who complied with the bonus payback, returned the money through personal checks or money orders made payable to the indigent care fund. Further, as previously stated, Mid-Delta Home Health officials deposited most of the employees' returned unused-leave checks to the fund. Mrs. Reed told us that this fund was to assist in continuing the care of home health patients who needed it but who were no longer eligible for Medicare or Medicaid visits. However, according to one former Mid-Delta nurse, she was not paid at all for indigent-patient visits, much less from the indigent care fund. She questioned where the fund's money was going if it was not used to pay for charity visits to indigent home health care patients. When we questioned Mrs. Reed about this, she responded that she tells the nurses, "If I don't get paid, you don't get paid." Indeed, Mid-Delta's controller told us that the indigent care fund was used to offset unpaid bills of patients of the company's rural health clinics, Taylor's Medical Clinics. In support of this statement, the controller provided us with records showing that approximately $418,000 in patients' unpaid balances had been attributed to the "indigent pay" category for the 1994-96 period. Mrs. Reed told us, however, that she would transfer money from the indigent care fund account to the P&T Management operating account to alleviate cash flow problems or to cover payroll costs. Our review of the "indigent pay" category records showed that the unpaid bills belonged mostly to private-pay patients of Taylor's Medical Clinics. Mid-Delta's controller stated that the clinics' charges were too high for most self-pay and private insurance patients whose insurance companies reimbursed the clinics only for "reasonable and customary charges." She further stated that the fund was used to cover instances in which such patients did not pay the clinics' full charges. We noted that among the patients listed in the records were several Mid-Delta employees; Mrs. Reed's granddaughter; and Mrs. Reed's daughter, who was Executive Vice President for Operations of P&T Management. Additional Mid-Delta Home Health payroll-cost issues resulted in either improper or questionable claims to and reimbursement by Medicare: Mid-Delta improperly claimed Medicare reimbursement for the total 7-month salary that Mrs. Reed's daughter received while she attended school full-time and worked part-time. We question Mid-Delta's (1) claiming $65,000 in bonuses to the daughter, which equated to about 119 percent of the daughter's base salary and (2) claiming the payroll costs of "Community Education" staff who were marketing Mid-Delta and other affiliated operations. Finally, Mid-Delta purchased an employee's business in part through a salary bonus to the employee that was later improperly claimed as a payroll cost and reimbursed as such by Medicare. Mrs. Reed's daughter, Ms. Pamela Redd, attended nursing school full-time at a local community college from June to December 1996. At the same time, she held the job title of Executive Vice President for Operations at P&T Management, Inc. and received a full-time 1996 salary of approximately $54,660. An analysis of Ms. Redd's employment time-and-attendance sheets showed that 53 percent of her 8-hour work day (from June to December 1996) was spent at school and related activities. Yet, according to Mid-Delta's Director of Finance, Ms. Redd's full-time salary was charged to Medicare for reimbursement. This was, in our opinion, an improper claim. According to the intermediary, Mid-Delta should not have been reimbursed for salary--approximately $16,900 by our calculation--incurred while Ms. Redd attended school. According to Mrs. Reed and Ms. Redd, Ms. Redd was not the only employee attending school full-time; however, Ms. Redd was the only employee being paid a full-time salary for the time spent in school. We learned that in addition to her approximately $54,660 base salary, Ms. Redd received two bonuses totaling $65,000 in 1996, equal to approximately 119 percent of her base salary. This was reflected in Ms. Redd's 1996 W-2 form, which showed that she had been paid almost $122,000. When we asked Ms. Redd about the amount of the bonuses in relation to her base salary, she did not explain why she had received the large bonuses. However, the Mid-Delta controller stated that in addition to using various company criteria (e.g., length of employment and annual salary), Mrs. Reed determined bonus amounts largely at her discretion. According to Mid-Delta's Director of Finance, Ms. Redd's payroll costs, including the bonuses, were claimed to Medicare for reimbursement. In our opinion and that of the intermediary, Mid-Delta's claim to Medicare for Ms. Redd's 1996 bonuses was questionable because of the disparity between her base salary and the bonus amounts and because she was not working full-time in 1996. Under Medicare cost reimbursement principles, all payments to providers of services must be based on the reasonable cost of services covered under Medicare and related to patients' care. Although Medicare reimbursement is available for expenses associated with educating the community on home health care, it is not available for the expenses of promoting and marketing home health care services in order to increase patient utilization of a provider's facility. We noted the unavailability of Medicare reimbursement for marketing activities for this purpose in our 1995 report regarding another home health care agency. In the intermediary's review of Mid-Delta's 1993 and 1994 cost reports, it noted that it had disallowed various expenses, in part, because they were related to marketing functions. These disallowed expenses included the purchase of, among others things, radio and television advertisements; 1,100 fund-raising cookbooks; and an exhibit booth to recruit staff at a physicians convention. However, according to company records and knowledgeable former P&T Management employees, Community Education staff primarily promoted and marketed Mid-Delta Home Health and Taylor's Medical Clinic services to other providers and the public. Mid-Delta's Director of Finance also confirmed that Medicare reimbursed the salaries of the Community Education employees. Further, according to Community Education staff, Mrs. Reed changed receipts and documents for marketing-related activities to reflect that the activities were associated with Community Education and were therefore Medicare-reimbursable. For example, in December 1995, Mrs. Reed told staff to purchase about $4,000 in Christmas gifts for physicians. When an employee noted "Gift items for referral sources" on the receipt, Mrs. Reed changed the receipt to show that the gifts were for employees, which could be Medicare reimbursable. We question the propriety of Mid-Delta's submitting payroll and other costs related to marketing activities for Medicare reimbursement because the costs involved marketing and promoting the company. Minutes from staff and other meetings in December 1996, January 1997, and May 1997 noted that the Community Education staff continued to market Mid-Delta services to schools, nursing homes, and hospitals. For example, December 1996 minutes noted that staff had met with a physician "about referring patients to the agency" who had diabetes and that cards had been placed in waiting rooms "of physicians who indicated that they would refer patients to us ." January 1997 minutes noted that the Community Education staff had "sold contracts to nursing homes and other providers; . . . marketed psych services to physicians in Yazoo City area. . . ." Minutes from May 1997 stated that by operating booths at various outside meetings, Community Education staff were "promoting the Center for Specialized Diabetic Foot Services" and that the Community Education department would help to market Mid-Delta Home Health's cardiac program. Indeed, according to a former P&T Management vice president, "Community Education is a euphemism for marketing." Further, according to former Community Education managers, the primary responsibilities of Community Education staff were to promote and market on behalf of Mid-Delta and Taylor's Medical Clinics. In discussions with us, a former manager said that the duties of P&T Management's Community Education staff were "for the purpose of developing business" for Mid-Delta Home Health and Taylor's Medical Clinics, generating physician referrals, and attracting managed care contracts and for other sales functions. According to a former Mid-Delta employee, Mrs. Reed used the bonus system as a means, in part, to purchase a business and be reimbursed by Medicare. We learned that Mrs. Reed had purchased a business called Warren's Children's Services for $125,000. This business provided services under Medicaid's Early and Periodic Screening, Diagnosis, and Treatment (EPSDT) program for children from birth to age 18 years. In February 1995, Mrs. Reed hired Ms. Betty Martin, owner of Warren's Children's Services, as P&T Management's Director of EPSDT at a $70,000-a-year salary. Ms. Martin was to educate the nursing staff on the EPSDT program. Mrs. Reed gave Ms. Martin a $25,000 check as a down payment for Warren's Children's Services in March 1995 and a second check for $25,000 in December 1995. (See table 2.) A year later, in December 1996, Ms. Martin received a P&T Management bonus for about $12,000. However, Mrs. Reed told Ms. Martin that $10,000 of the bonus was partial payment for Ms. Martin's business. Ms. Martin stated to us that she was concerned because P&T Management withheld taxes from bonuses. We determined that the $10,000 portion of the bonus had been claimed improperly as part of Ms. Martin's payroll costs. In June 1997, according to Ms. Martin, she received two more checks for $5,000 each, in partial payment for the business. One check was presented as an advance bonus; and the other, as a salary advancement, or pay raise. Ms. Martin returned the checks to Mrs. Reed and demanded the remainder of the money owed her for the business. According to Ms. Martin, Mrs. Reed replied, "I'm not going to employ you and pay you [for the business] too." Shortly thereafter, Ms. Martin left the company. Ms. Martin subsequently received a check for $35,000 with a note, signed by Mrs. Reed, that said, "Before July 17, 1997, I will pay the $30,000 I owe you." We confirmed that Ms. Martin received an additional check for $30,000. When we asked Mrs. Reed about the payments to Ms. Martin, she confirmed that she had given Ms. Martin $10,000 in bonus as a payment toward the purchase of Warren's Children's Services. She also confirmed that taxes had been withheld from the bonus. After we had questioned Mrs. Reed about the matter, she talked with her controller and her Director of Finance. Mrs. Reed then informed us that the controller and the Director of Finance had determined that she still owed Ms. Martin $10,000 because the bonus should not have represented partial payment for the business. As of February 1998, Ms. Martin had not received the final $10,000 payment. Mid-Delta Home Health nurses and other professionals voiced concerns to us that Mid-Delta was providing Medicare-reimbursed home health care services to patients who, in their professional opinions, were ineligible for the services. In response, we visited and/or reviewed patient documents of 41 home health care patients. In this regard, the intermediary--whom we requested to also review patient documents--and we question the reasonableness and necessity of Mid-Delta services received by at least 34 percent of those patients. Our questions involve (1) Mid-Delta actions to ensure continued home health services to Medicare patients, (2) excessive home visits by Mid-Delta staff, and (3) the lack of documentation to justify home visits. The intermediary and we also question Mid-Delta's provision of Medicare-reimbursable home health services to some apparently ineligible patients as they did not appear to meet HCFA's requirement that their condition create an inability to leave home without "considerable, taxing effort." After interviewing a number of Mid-Delta Home Health's patients, patients' friends, and relatives and evaluating the patients' plans of care (HCFA Form 485) and other case material, we question the reasonableness and/or necessity of the Medicare-reimbursable home health care services provided to 14 of the 41 patients reviewed during our investigation. The intermediary stated that in these cases, the claim would not be allowed. For example, the intermediary and we noted that Mid-Delta was providing services that were not covered in the plans of care. The situations giving rise to these questionable Mid-Delta services included the following: Exaggerated severity of patient conditions in patient-care documents to ensure continued home health services. For example, the May-July 1997 plan of care for a patient, being seen for over 2 years for recurring seizures, stated that he had had a seizure in June 1997. However, the physician's narrative report for that patient indicated that this was untrue--the patient had not had a seizure during the plan-of-care period. For another patient, the intermediary in its review of the patient's plan of care noted that the Mid-Delta Home Health documentation "seem to exaggerate the patient's condition." Excessive use of skilled nursing visits. For example, a Mid-Delta patient had been seen for 5 years for hypertension-related conditions. For the June-August 1997 period, Mid-Delta nurses visited the patient twice a week for these conditions. However, the intermediary noted that the patient's condition as noted in the plan of care showed the necessity for only one visit a month. In addition, the June-August 1997 plan of care for a diabetic patient with hypertension ordered weekly skilled nursing visits for these conditions. However, the intermediary noted in the review of the patient's plan of care that the patient needed only monthly skilled nursing visits for bloodwork. Weekly visits were not reasonable and necessary. Lack of documentation in plans of care to justify the need for home health services. The plan of care for a diabetic Mid-Delta patient stated that the patient was unable to fill his syringes accurately, necessitating skilled nursing visits. However, the intermediary could find no documentation to support a reason for the patient's inability. In addition, another patient, having been visited for 6 years, was prescribed a new drug in late April 1997, necessitating twice-a-week visits for 4 weeks. However, the intermediary's review noted that the patient's June-August 1997 plan of care still called the medication "new." The plan of care, according to the intermediary's review, included no documentation to indicate the need for continued skilled nursing visits. Mid-Delta nurses; the intermediary, after a preliminary review of patient data; and we concluded that Mid-Delta was providing services to patients whose eligibility was questionable. Some of the Mid-Delta Home Health patients we visited or whose cases we reviewed did not appear to meet HCFA requirements that they be homebound. According to patient interviews and our observations, the efforts that the patients needed to leave home were neither considerable nor taxing. Yet, Mid-Delta provided them Medicare-reimbursable home health care services. For example, one elderly Mid-Delta Home Health patient was in his yard moving a 5-foot section of a telephone pole when we visited. The patient's actions contradicted Mid-Delta's patient records, relied on by the intermediary for eligibility determinations, that indicated that the patient had poor endurance, ambulated with a cane, and appeared homebound. Another Mid-Delta patient, under home health care for about 2 years, received skilled nursing visits twice a week to monitor her blood pressure and a heart condition. However, when we visited her, she was conducting a child care service in her home with four children, aged approximately 2 to 5 years. The intermediary stated, when we asked about this situation, that such activity meant that the Mid-Delta patient was most likely ineligible for home health care. A third homebound patient told us that he regularly walked 2 to 3 miles a day. Some other patients in our investigation also left their homes on a regular basis--whether walking or driving--for such activities as visits to a neighbor, store, bank, or post office. With regard to issues of home health care eligibility and services, we have reported in the past that few Medicare home health claims are subject to medical review, Medicare beneficiaries are rarely visited by fiscal intermediaries, and the physicians of record have limited involvement in home health care. Indeed, our 1995 report, Medicare: Allegations Against ABC Home Health (GAO/OSI-95-17), discussed questionable activities regarding the ABC Home Health Agency that were similar to those in our investigation of Mid-Delta Home Health. We conducted our investigation during 1997, following up allegations made by former and current employees of P&T Management and Mid-Delta Home Health. Our inquiry covered those organizations' participation in the Medicare home health program. We reviewed applicable laws and regulations, HCFA directives, and documents presented by these organizations and by their former and current employees. We also reviewed Mid-Delta Home Health patient files and cost records, cost reports submitted to the Medicare intermediary, and those provided by the organizations' accountant and controller. Records/documents reviewed fell primarily between January 1, 1993--the first year that the intermediary audited the Mid-Delta Home Health cost report--and December 31, 1996. In addition, we reviewed court documents cited in this report and various other records provided by the intermediary, P&T Management, Mid-Delta Home Health, Mid-Delta Development League, and other affiliated companies. We interviewed over 67 current and former employees of P&T Management and Mid-Delta Home Health and met with state regulatory officials at selected locations in Mississippi. We also interviewed a number of Mid-Delta Home Health patients, their relatives, and their friends and visited some Mid-Delta patients at their residences. In addition, we met with intermediary officials, investigators, and regulatory officials at HCFA in Florida and Maryland. As arranged with your offices, unless you announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies of this report to interested congressional committees; the Secretary of Health and Human Services; the Inspector General, Department of Health and Human Services; and other officials of the Department. Copies will also be made available to other interested parties on request. If you have any questions regarding this investigation, please contact me on (202) 512-7455 or Assistant Director Barney Gomez of my staff on (202) 512-6722. Major contributors to this report are listed in appendix I. Medicare Home Health: Success of Balanced Budget Act Cost Controls Depends on Effective and Timely Implementation (GAO/T-HEHS-98-41, Oct. 29, 1997). Medicare Home Health Agencies: Certification Process Is Ineffective in Excluding Problem Agencies (GAO/T-HEHS-97-180, July 28, 1997). Medicare: Need to Hold Home Health Agencies More Accountable for Inappropriate Billings (GAO/HEHS-97-108, June 13, 1997). Medicare Post-Acute Care: Cost Growth and Proposals to Manage It Through Prospective Payment and Other Controls (GAO/T-HEHS-97-106, Apr. 9, 1997). Medicare: Home Health Cost Growth and Administration's Proposal for Prospective Payment (GAO/T-HEHS-97-92, Mar. 5, 1997). Medicare Post-Acute Care: Home Health and Skilled Nursing Facility Cost Growth and Proposals for Prospective Payment (GAO/T-HEHS-97-90, Mar. 4, 1997). Medicare: Home Health Utilization Expands While Program Controls Deteriorate (GAO/HEHS-96-16, Mar. 27, 1996). Medicare: Allegations Against ABC Home Health Care (GAO/OSI-95-17, July 19, 1995). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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 investigated allegations of Medicare improprieties by home health care provider Mid-Delta Home Health of Belzoni, Mississippi, and affiliated companies, focusing on allegations that Mid-Delta: (1) routinely requested and received leave or bonuses back from its employees while charging Medicare their full amount; (2) paid the owner's daughter a full-time salary and charged it to Medicare although she was a full-time nursing student; and (3) conducted unnecessary and excessive home health care patient visits. GAO noted that: (1) Medicare, through the intermediary, reimbursed Mid-Delta Home Health for payroll costs between January 1993 and December 1996 that, in GAO's opinion, were improperly claimed because they did not represent actual costs to the provider; (2) specifically, the owner of the company, Clara T. Reed, regularly asked employees to return to the company the cash value of unused leave and about 20 percent or more of bonuses received; (3) the employees were told that the returned money was needed for, among other things, a Mid-Delta Home Health-sponsored indigent care fund; (4) however, rather than use the fund to provide home health care to those who could not afford it, Mid-Delta officials stated that the money was used to offset unpaid bills of private-pay patients of Mid-Delta's affiliated rural health clinics; (5) Mid-Delta Home Health also improperly claimed and was reimbursed by Medicare for other costs that did not meet Medicare cost reimbursement principles since they were not related to patient care; (6) one example involved salary paid to the owner's daughter as a P&T Management executive vice president for over half of 1996 while she attended school full-time; (7) further, GAO questions the reasonableness of the daughter's $65,000 in 1996 bonuses claimed by Mid-Delta for Medicare reimbursement; (8) in addition, Mid-Delta was reimbursed by Medicare for the payroll costs of some P&T Management employees whose positions appeared to focus on marketing activities; (9) GAO questions the propriety of these claims because Medicare does not reimburse providers for marketing costs used to increase patient utilization of the provider's facilities; (10) in another payroll-cost matter, Mrs. Reed purchased a business from a third party, hired that individual to work for P&T Management, and gave the individual a $10,000 bonus that was considered partial payment of the purchase price; (11) Mid-Delta then improperly claimed the bonus as part of its payroll costs and was reimbursed by Medicare for this payment; (12) the purchase of a business does not qualify as a payroll cost; and morever, Medicare does not reimburse providers for the cost of purchasing a business; (13) as alleged by current and former Mid-Delta Home Health nurses, Mid-Delta staff visited individual Medicare beneficiaries whose eligibility or need for the visits was questionable; and (14) GAO visited or reviewed case files for 41 of the patients identified by the nurses and determined that for at least 14, or 34 percent, of the patients, eligibility for Medicare-reimbursed services was questionable.
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SBA was established by the Small Business Act of 1953 to fulfill the role of several agencies that previously assisted small businesses affected by the Great Depression and, later, by wartime competition. SBA's stated purpose is to promote small business development and entrepreneurship through business financing, government contracting, and technical assistance programs. In addition, SBA serves as a small business advocate, working with other federal agencies to, among other things, reduce regulatory burdens on small businesses. SBA also provides low-interest, long-term loans to individuals and businesses to assist them with disaster recovery through its Disaster Loan Program--the only form of SBA assistance not limited to small businesses. Homeowners, renters, businesses of all sizes, and nonprofit organizations can apply for physical disaster loans for permanent rebuilding and replacement of uninsured or underinsured disaster-damaged property. Small businesses can also apply for economic injury disaster loans to obtain working capital funds until normal operations resume after a disaster declaration. SBA's Disaster Loan Program differs from the Federal Emergency Management Agency's (FEMA) Individuals and Households Program (IHP). For example, a key element of SBA's Disaster Loan Program is that the disaster victim must have repayment ability before a loan can be approved whereas FEMA makes grants under the IHP that do not have to be repaid. Further, FEMA grants are generally for minimal repairs and, unlike SBA disaster loans, are not designed to help restore the home to its predisaster condition. In January 2005, SBA began using DCMS to process all new disaster loan applications. SBA intended for DCMS to help it move toward a paperless processing environment by automating many of the functions staff members had performed manually under its previous system. These functions include both obtaining referral data from FEMA and credit bureau reports, as well as completing and submitting loss verification reports from remote locations. Our July 2006 report identified several significant limitations in DCMS's capacity and other system and procurement deficiencies that likely contributed to the challenges that SBA faced in providing timely assistance to Gulf Coast hurricane victims as follows: First, due to limited capacity, the number of SBA staff who could access DCMS at any one time to process disaster loans was restricted. Without access to DCMS, the ability of SBA staff to process disaster loan applications in an expeditious manner was diminished. Second, SBA experienced instability with DCMS during the initial months following Hurricane Katrina, as users encountered multiple outages and slow response times in completing loan processing tasks. According to SBA officials, the longest period of time DCMS was unavailable to users due to an unscheduled outage was 1 business day. These unscheduled outages and other system-related issues slowed productivity and affected SBA's ability to provide timely disaster assistance. Third, ineffective technical support and contractor oversight contributed to the DCMS instability that SBA staff initially encountered in using the system. Specifically, a DCMS contractor did not monitor the system as required or notify the agency of incidents that could increase system instability. Further, the contractor delivered computer hardware for DCMS to SBA that did not meet contract specifications. In the report that we are releasing today, we identified other logistical challenges that SBA experienced in providing disaster assistance to Gulf Coast hurricane victims. For example, SBA moved urgently to hire more than 2,000 mostly temporary employees at its Ft. Worth, Texas disaster loan processing center through newspaper and other advertisements (the facility increased from about 325 staff in August 2005 to 2,500 in January 2006). SBA officials said that ensuring the appropriate training and supervision of this large influx of inexperienced staff proved very difficult. Prior to Hurricane Katrina, SBA had not maintained the status of its disaster reserve corps, which was a group of potential voluntary employees trained in the agency's disaster programs. According to SBA, the reserve corps, which had been instrumental in allowing the agency to provide timely disaster assistance to victims of the September 11, 2001 terrorist attacks, shrank from about 600 in 2001 to less than 100 in August 2005. Moreover, SBA faced challenges in obtaining suitable office space to house its expanded workforce. For example, SBA's facility in Ft. Worth only had the capacity to house about 500 staff whereas the agency hired more than 2,000 mostly temporary staff to process disaster loan applications. While SBA was able to identify another facility in Ft. Worth to house the remaining staff, it had not been configured to serve as a loan processing center. SBA had to upgrade the facility to meet its requirements. Fortunately, in 2005, SBA was also able to quickly reestablish a loan processing facility in Sacramento, California, that had been previously slated for closure under an agency reorganization plan. The facility in Sacramento was available because its lease had not yet expired, and its staff was responsible for processing a significant number of Gulf Coast hurricane related disaster loan applications. As a result of these and other challenges, SBA developed a large backlog of applications during the initial months following Hurricane Katrina. This backlog peaked at more than 204,000 applications 4 months after Hurricane Katrina. By late May 2006, SBA took about 74 days on average to process disaster loan applications, compared with the agency's goal of within 21 days. As we stated in our July 2006 report, the sheer volume of disaster loan applications that SBA received was clearly a major factor contributing to the agency's challenges in providing timely assistance to Gulf Coast hurricane. As of late May 2006, SBA had issued 2.1 million loan applications to hurricane victims, which was four times the number of applications issued to victims of the 1994 Northridge, California, earthquake, the previous single largest disaster that the agency had faced. Within 3 months of Hurricane Katrina making landfall, SBA had received 280,000 disaster loan applications or about 30,000 more applications than the agency received over a period of about 1 year after the Northridge earthquake. However, our two reports on SBA's response to the Gulf Coast hurricanes also found that the absence of a comprehensive and sophisticated planning process contributed to the challenges that the agency faced. For example, in designing DCMS, SBA used the volume of applications received during the Northridge, California, earthquake and other historical data as the basis for planning the maximum number of concurrent agency users that the system could accommodate. SBA did not consider the likelihood of more severe disaster scenarios and, in contrast to insurance companies and some government agencies, use the information available from catastrophe models or disaster simulations to enhance its planning process. Since the number of disaster loan applications associated with the Gulf Coast hurricanes greatly exceeded that of the Northridge earthquake, DCMS's user capacity was not sufficient to process the surge in disaster loan applications in a timely manner. Additionally, SBA did not adequately monitor the performance of a DCMS contractor or stress test the system prior to its implementation. In particular, SBA did not verify that the contractor provided the agency with the correct computer hardware specified in its contract. SBA also did not completely stress test DCMS prior to implementation to ensure that the system could operate effectively at maximum capacity. If SBA had verified the equipment as required or conducted complete stress testing of DCMS prior to implementation, its capacity to process Gulf Coast related disaster loan applications may have been enhanced. In the report we are releasing today, we found that SBA did not engage in comprehensive disaster planning for other logistical areas--such as workforce or space acquisition planning--prior to the Gulf Coast hurricanes at either the headquarters or field office levels. For example, SBA had not taken steps to help ensure the availability of additional trained and experienced staff such as (1) cross-training agency staff not normally involved in disaster assistance to provide backup support or (2) maintaining the status of the disaster reserve corps as I previously discussed. In addition, SBA had not thoroughly planned for the office space requirements that would be necessary in a disaster the size of the Gulf Coast hurricanes. While SBA had developed some estimates of staffing and other logistical requirements, it largely relied on the expertise of agency staff and previous disaster experiences--none of which reached the magnitude of the Gulf Coast hurricanes--and, as was the case with DCMS planning, did not leverage other planning resources, including information available from disaster simulations or catastrophe models. In our July 2006 report, we recommended that SBA take several steps to enhance DCMS, such as reassessing the system's capacity in light of the Gulf Coast hurricane experience and reviewing information from disaster simulations and catastrophe models. We also recommended that SBA strengthen its DCMS contractor oversight and further stress test the system. SBA agreed with these recommendations. I note that SBA has completed an effort to expand DCMS's capacity. SBA officials said that DCMS can now support a minimum of 8,000 concurrent agency users as compared with only 1,500 concurrent users for the Gulf Coast hurricanes. Additionally, SBA has awarded a new contract for the project management and information technology support for DCMS. The contractor is responsible for a variety of DCMS tasks on SBA's behalf including technical support, software changes and hardware upgrades, and supporting all information technology operations associated with the system. In the report we are releasing today, we identified other measures that SBA has planned or implemented to better prepare for and respond to future disasters. These steps include appointing a single individual to coordinate the agency's disaster preparedness planning and coordination efforts, enhancing systems to forecast the resource requirements to respond to disasters of varying scenarios, and redesigning the process for reviewing applications and disbursing loan proceeds. Additionally, SBA has planned or initiated steps to help ensure the availability of additional trained and experienced staff in the event of a future disaster. According to SBA officials, these steps include cross-training staff not normally involved in disaster assistance to provide back up support, reaching agreements with private lenders to help process a surge in disaster loan applications, and reestablishing the disaster reserve corps with 750 individuals as of January 2007. However, the report also discusses apparent limitations we found in SBA's disaster planning processes. For example, SBA has not established a time line for completing the key elements of its disaster management plan, such as cross-training nondisaster staff to provide back up support. In addition, SBA has not assessed whether the agency could leverage outside resources to enhance its disaster planning and preparation efforts, such as information available from disaster simulations and catastrophe models. Finally, SBA had not established a long-term process to help ensure that it could acquire suitable office space to house an expanded workforce to respond to a future disaster. To strengthen SBA capacity to respond to a future disaster, the report recommends that SBA develop time frames for completing key elements of the disaster management plan (and a long-term strategy for acquiring adequate office space); and direct staff involved in developing the disaster plan to continue assessing whether the use of disaster simulations or catastrophe models would enhance the agency's overall disaster planning process. SBA agreed to implement each of these recommendations. However, it remains to be seen how comprehensive SBA's final disaster management plan will be and how effectively the agency will respond to a future disaster. Madam Chairwoman, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact William B. Shear at (202) 512- 8678 or [email protected]. Contact points for our Offices of Congressional Affairs and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony included Wesley Phillips, Assistant Director; Marshall Hamlett; Barbara S. Oliver; and Cheri Truett. 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 Small Business Administration (SBA) helps individuals and businesses recover from disasters such as hurricanes through its Disaster Loan Program. SBA faced an unprecedented demand for disaster loan assistance following the 2005 Gulf Coast hurricanes (Katrina, Rita, and Wilma), which resulted in extensive property damage and loss of life. In the aftermath of these disasters, concerns were expressed regarding the timeliness of SBA's disaster assistance. GAO initiated work and completed two reports under the Comptroller General's authority to conduct evaluations and determine how well SBA provided victims of the Gulf Coast hurricanes with timely assistance. This testimony, which is based on these two reports, discusses (1) challenges SBA experienced in providing victims of the Gulf Coast hurricanes with timely assistance, (2) factors that contributed to these challenges, and (3) steps SBA has taken since the Gulf Coast hurricanes to enhance its disaster preparedness. GAO visited the Gulf Coast region, reviewed SBA planning documents, and interviewed SBA officials. GAO identified several significant system and logistical challenges that SBA experienced in responding to the Gulf Coast hurricanes that undermined the agency's ability to provide timely disaster assistance to victims. For example, the limited capacity of SBA's automated loan processing system--the Disaster Credit Management System (DCMS)--restricted the number of staff who could access the system at any one time to process disaster loan applications. In addition, SBA staff who could access DCMS initially encountered multiple system outages and slow response times in completing loan processing tasks. SBA also faced challenges training and supervising the thousands of mostly temporary employees the agency hired to process loan applications and obtaining suitable office space for its expanded workforce. As of late May 2006, SBA processed disaster loan applications, on average, in about 74 days compared with its goal of within 21 days. While the large volume of disaster loan applications that SBA received clearly affected its capacity to provide timely disaster assistance to Gulf Coast hurricane victims, GAO's two reports found that the absence of a comprehensive and sophisticated planning process beforehand likely limited the efficiency of the agency's initial response. For example, in designing the capacity of DCMS, SBA primarily relied on historical data such as the number of loan applications that the agency received after the 1994 Northridge, California, earthquake--the most severe disaster that the agency had previously encountered. SBA did not consider disaster scenarios that were more severe or use the information available from disaster simulations (developed by federal agencies) or catastrophe models (used by insurance companies to estimate disaster losses). SBA also did not adequately monitor the performance of a DCMS contractor or completely stress test the system prior to its implementation. Moreover, SBA did not engage in comprehensive disaster planning prior to the Gulf Coast hurricanes for other logistical areas, such as workforce planning or space acquisition, at either the headquarters or field office levels. In the aftermath of the Gulf Coast hurricanes, SBA has planned or initiated several measures that officials said would enhance the agency's capacity to respond to future disasters. For example, SBA has completed an expansion of DCMS's user capacity to support a minimum of 8,000 concurrent users as compared with just 1,500 for the Gulf Coast hurricanes. Additionally, SBA initiated steps to increase the availability of trained and experienced disaster staff and redesigned its process for reviewing loan applications and disbursing funds. However, SBA has not established a time line for completing key elements of its disaster management plan, such as cross-training agency staff not typically involved in disaster assistance to provide back up support in an emergency. SBA also has not (1) assessed whether its disaster planning process could benefit from the supplemental use of disaster simulations or catastrophe models and (2) developed a long-term strategy to obtain suitable office space for its disaster staff. While SBA agreed with GAO's report recommendations to address these concerns, it remains to be seen how comprehensive the agency's final disaster plan will be and how the agency will respond to a future disaster.
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Over the years, we and others have examined the effects on the refuge system of secondary activities, such as recreation, military activities, and oil and gas activities--which include oil and gas exploration, drilling and production, and transport. Exploring for oil and gas involves seismic mapping of the subsurface topography. Seismic mapping requires surface disturbance, often involving small dynamite charges placed in a series of holes, typically in patterned grids. Oil and gas drilling and production often requires constructing, operating, and maintaining industrial infrastructure, including a network of access roads and canals, local pipelines to connect well sites to production facilities and to dispose of drilling wastes, and gravel pads to house the drilling and other equipment. In addition, production may require storage tanks, separating facilities, and gas compressors. Finally, transporting oil and gas to production facilities or to users generally requires transit pipelines. Department of the Interior regulations generally prohibit the leasing of federal minerals underlying refuges. In addition, under the National Wildlife Refuge System Administration Act of 1966, as amended, the Fish and Wildlife Service (FWS) is responsible for regulating all activities on refuges. The act requires FWS to determine the compatibility of activities with the purposes of the particular refuge and the mission of the refuge system and not allow those activities deemed incompatible. FWS does not apply the compatibility requirement to the exercise of private mineral rights on refuges. However, the activities of private mineral owners on refuges are subject to a variety of other legal restrictions under federal law. For example, the Endangered Species Act of 1973 prohibits the "take" of any endangered or threatened species and provides for penalties for violations of the act; the Migratory Bird Treaty Act prohibits killing, hunting, possessing, or selling migratory birds, except in accordance with a permit; and the Clean Water Act prohibits discharging oil and other harmful substances into waters of the United States and imposes liability for removal costs and damages resulting from a discharge. Also, FWS regulations require that oil and gas activities be performed in a way that minimizes the risk of damage to the land and wildlife and disturbance to the operation of the refuge. The regulations also require that land affected be reclaimed after operations have ceased. At least one-quarter, or 155, of the 575 refuges (538 refuges and 37 wetland management districts) that constitute the National Wildlife Refuge System have past or present oil and gas activities--exploration, drilling and production, transit pipelines, or some combination of these (see table 1).Since 1994, FWS records show that 44 refuges have had some type of oil and gas exploration activities--geologic study, survey, or seismic mapping. We also identified at least 107 refuges with transit pipelines. These pipelines are almost exclusively buried, vary in size, and carry a variety of products, including crude oil, refined petroleum products, and high-pressure natural gas. Transit pipelines may also have associated storage facilities and pumping stations, but data are not available to identify how many of these are on refuges. Over 4,400 oil and gas wells are located within 105 refuges. Although refuges with oil and gas wells are present in every FWS region, they are more heavily concentrated near the Gulf Coast of the United States. About 4 out of 10 wells (41 percent) located on refuges were known to be actively producing oil or gas or disposing of produced water during the most recent 12-month reporting period, as of January 2003. Of the 105 refuges with oil and gas wells, 36 refuges have actively producing wells. The remaining 2,600 wells did not produce oil, gas, or water during the last 12 months; many of these were plugged and abandoned or were dry holes. During the most recent 12-month reporting period, the 1,806 active wells produced 23.7 million barrels of oil and 88,171 million cubic feet of natural gas, about 1.1 and 0.4 percent of total domestic oil and gas production, respectively. Based on 2001 average prices, refuge-based production had an estimated total commercial value of $880 million. Substantial oil and gas activities also occur outside but near refuge boundaries. An additional 4,795 wells and 84 transit pipelines reside within one-half mile of refuge boundaries. The 4,795 wells bound 123 refuges, 33 of which do not have any resident oil and gas wells. The 84 pipelines border 42 different refuges. While FWS does not own the land outside refuge boundaries, lands surrounding refuges may be designated for future acquisition. The overall environmental effects of oil and gas activities on refuge resources are unknown because FWS has conducted few cumulative assessments and has no comprehensive data. Available studies, anecdotal information, and our observations show that some refuge resources have been diminished to varying degrees by spills of oil, gas, and brine and through the construction, operation, and maintenance of the infrastructure necessary to extract oil and gas. The damage varies widely in severity, duration, and visibility, ranging from infrequent small oil spills and industrial debris with no known effect on wildlife, to large and chronic spills causing wildlife deaths and long-term soil and water contamination. Some damage, such as habitat loss because of infrastructure development and soil and water contamination, may last indefinitely while other damage, such as wildlife disturbance during seismic mapping, is of shorter duration. Also, while certain types of damage are readily visible, others, such as groundwater contamination, changes in hydrology, and reduced habitat quality from infrastructure development are difficult to observe, quantify, and associate directly with oil and gas activities. Finally, oil and gas activities on refuges may hinder public access to parts of the refuge or FWS's ability to manage or improve refuge habitat, such as by conducting prescribed burns or creating seasonal wetlands. The 16 refuges we visited reported oil, gas, or brine spills, although the frequency and effects of the spills varied widely. Oil and gas spills can injure or kill wildlife by destroying the insulating capacity of feathers and fur, depleting oxygen available in water, or exposing wildlife to toxic substances. Brine spills can be lethal to young waterfowl, damage birds' feathers, kill vegetation, and decrease nutrients in water. Even small spills may contaminate soil and sediments if they occur frequently. For instance, a study of Atchafalaya and Delta National Wildlife Refuges in Louisiana found that oil contamination present near oil and gas facilities is lethal to most species of wildlife, even though refuge staff were not aware of any large spills. Constructing, operating, and maintaining the infrastructure necessary to produce oil and gas can harm wildlife by reducing the quantity and quality of habitat. Infrastructure development can reduce the quality of habitat through fragmentation, which occurs when a network of roads, canals, and other infrastructure is constructed in previously undeveloped areas of a refuge. Fragmentation increases disturbances from human activities, provides pathways for predators, and helps spread nonnative plant species. For example, officials at Anahuac and McFaddin National Wildlife Refuges in Texas said that disturbances from oil and gas activities are likely significant and expressed concern that bird nesting may be disrupted. However, no studies have been conducted at these refuges to determine the effect of these disturbances. Infrastructure networks can also damage refuge habitat by changing the hydrology of the refuge ecosystem, particularly in coastal areas. In addition, industrial activities associated with extracting oil and gas have been found to contaminate wildlife refuges with toxic substances such as mercury and polychlorinated biphenyls (PCBs). Mercury and PCBs were used in equipment such as compressors, transformers, and well production meters, although generally they are no longer used. New environmental laws and industry practice and technology have reduced, but not eliminated, some of the most detrimental effects of oil and gas activities. For example, Louisiana now generally prohibits using open pits to store production wastes and brine in coastal areas and discharging brine into drainages or state waters. Also, improvements in technology may allow operators to avoid placing wells in sensitive areas such as wetlands. However, oil and gas infrastructure continues to diminish the availability of refuge habitat for wildlife, and spills of oil, gas, and brine that damage fish and wildlife continue to occur. In addition, several refuge managers reported that operators do not always comply with legal requirements or follow best industry practices, such as constructing earthen barriers around tanks to contain spills, covering tanks to protect wildlife, and removing pits that temporarily store fluids used during well maintenance. Oil and gas operators have taken steps, in some cases voluntarily, to reverse damages resulting from oil and gas activities, but operators have not consistently taken such steps, and the adequacy of these steps is not known. For example, an operator at McFaddin National Wildlife Refuge removed a road and a well pad that had been constructed to access a new well site and restored the marsh damaged by construction after the well was no longer needed. In contrast, in some cases, officials do not know if remediation following spills is sufficient to protect refuge resources, particularly for smaller oil spills or spills into wetlands. FWS does not have a complete and accurate record of spills and other damage resulting from refuge-based oil and gas activities, has conducted few studies to quantify the extent of damage, and therefore does not know its full extent or the steps needed to reverse it. The lack of information on the effects of oil and gas activities on refuge wildlife hinders FWS's ability to identify and obtain appropriate mitigation measures and to require responsible parties to address damages from past activities. Lack of sufficient information has also hindered FWS's efforts to identify all locations with past oil and gas activities and to require responsible parties to address damages. FWS does not know the number or location of all abandoned wells and other oil and gas infrastructure or the threat of contamination they pose and, therefore, its ability to require responsible parties to address damages is limited. However, in cases where FWS has performed studies, the information has proved valuable. For example, FWS funded a study at some refuges in Oklahoma and Texas to inventory locations containing oil and gas infrastructure, to determine if they were closed legally, and to document their present condition. FWS intends to use this information to identify cleanup options with state and federal regulators. If this effort is successful, FWS may conduct similar studies on other refuges. FWS's management and oversight of oil and gas activities varies widely among refuges. Management control standards for federal agencies require federal agencies to identify risks to their assets, provide guidance to mitigate these risks, and monitor compliance. For FWS, effectively managing oil and gas activities on refuges would entail, at a minimum, identifying the extent of oil and gas activities and their attendant risks, developing procedures to minimize damages by issuing permits with conditions to protect refuge resources, and monitoring the activities with trained staff to ensure compliance and accountability. However, the 16 refuges we visited varied widely in the extent to which these management practices occur. Some refuges identify oil and gas activities and the risks they pose to refuge resources, issue permits that direct operators to minimize the effect of their activities on the refuge, monitor oil and gas activities with trained personnel, and charge mitigation fees or pursue legal remedies if damage occurs. For example, two refuges in Louisiana collect mitigation fees from oil and gas operators that are then used to pay for monitoring operator compliance with permits and state and federal laws. In contrast, other refuges do not issue permits or collect fees, are not aware of the extent of oil and gas activities or the attendant risks to refuge resources, and provide little management and oversight. Management and oversight of oil and gas activities varies for two primary reasons. First, FWS's legal authority to require oil and gas operators to obtain access permits with conditions to protect refuge resources varies considerably depending upon the nature of the mineral rights. For reserved mineral rights--cases where the property owner retained the mineral rights when selling the land to the federal government--FWS can require permits only if the property deed subjects the rights to such requirements. For outstanding mineral rights--cases where the mineral rights were separated from the surface lands before the government acquired the property--FWS has not formally determined its position regarding its authority to require access permits. However, we believe, based on statutory language and court decisions, that FWS has the authority to require owners of outstanding mineral rights to obtain permits. Second, refuge managers lack sufficient guidance, resources, and training to properly monitor oil and gas operators. Current FWS guidance regarding the management of oil and gas activities where there are private mineral rights is unclear, according to refuge staff. Refuge staff said they also lack sufficient resources to oversee oil and gas activities, which are substantial at some refuges. Only three refuges in the system have staff dedicated full-time to monitoring these activities, and some refuge staff cite a lack of time as a reason for limited oversight. Staff also cite a lack of training as limiting their capability to oversee oil and gas operators; FWS has offered only one oil- and gas-related workshop in the last 10 years. On a related management issue, FWS has not always thoroughly assessed property for possible contamination from oil and gas activities prior to its acquisition, even though FWS guidance requires an assessment of all possible contamination. For example, FWS acquired one property that is contaminated from oil and gas activities because staff did not adequately assess the subsurface property before acquiring it. After acquiring the property, FWS found that large amounts of soil were contaminated with oil. FWS has thus far spent $15,000, and a local conservation group spent another $43,000, to address the contamination. We found that the guidance and oversight provided to FWS regional and refuge personnel were not adequate to ensure that the requirements were being met. The National Wildlife Refuge System is a national asset established principally for the conservation of wildlife and habitat. While federally owned mineral rights underlying refuge lands are generally not available for oil and gas exploration and production, that prohibition does not extend to the many private parties that own mineral rights underlying refuge lands. The scale of these activities on refuges is such that some refuge resources have been diminished, although the extent is unknown without additional study. Some refuges have adopted practices--for example, developing data on the nature and extent of activities and their effects on the refuge, overseeing oil and gas operators, and training refuge staff to better carry out their management and oversight responsibilities--that limit the impact of these activities on refuge resources. If these practices were implemented throughout the agency, they could provide better assurance that environmental effects from oil and gas activities are minimized. In particular, in some cases, refuges have issued permits that establish operating conditions for oil and gas activities, giving the refuges greater control over these activities and protecting refuge resources before damage occurs. However, FWS does not have a policy requiring owners of outstanding mineral rights to obtain a permit, although we believe FWS has this authority, and FWS can require owners of reserved mineral rights to obtain a permit if the property deed subjects the rights to such requirements. Confirming or expanding FWS's authority to require reasonable permit conditions and oversee oil and gas activities, including cases where mineral rights have been reserved and the property deed does not already subject the rights to permit requirements, would strengthen and provide greater consistency in FWS's management and oversight. Such a step could be done without infringing on the rights of private mineral owners. Finally, FWS's land acquisition guidance is unclear and oversight is inadequate, thereby exposing the federal government to unexpected cleanup costs for properties acquired without adequately assessing contamination from oil and gas activities. In our report, we made several recommendations to improve the framework for managing and overseeing oil and gas activities on national wildlife refuges, including (1) collecting and maintaining better data on oil and gas activities and their environmental effects, and ensuring that staff resources, funding, and training are sufficient and (2) determining FWS's existing authority over outstanding mineral rights. We also recommended that the Secretary of the Interior, in coordination with appropriate Administration officials, seek from Congress any necessary additional authority over outstanding mineral rights, and over reserved mineral rights, to ensure that a consistent and reasonable set of regulatory and management controls are in place for all oil and gas activities occurring on national wildlife refuges. The Department of the Interior's response to our recommendations was mixed. The department was silent on our recommendations that it should collect and maintain better data on oil and gas activities and their effects and that it should ensure that staff are adequately trained to oversee oil and gas activities. Also, while the department was silent on whether it should review FWS's authority to regulate outstanding mineral rights, it raised procedural concerns about our recommendation that it seek any necessary additional authority from Congress to regulate private mineral rights. We continue to believe that our recommendation is warranted. In light of the department's opposition, we suggested that the Congress consider expanding the FWS's authority to enable it to consistently regulate the surface activities of private mineral owners on refuges. Thank you Mr. Chairman and Members of the Subcommittee. That concludes my prepared statement. I would be pleased to respond to any questions that you may have. For further information on this testimony, please contact Barry T. Hill at (202) 512-3841. Individuals making key contributions to this testimony included Paul Aussendorf, Robert Crystal, Jonathan Dent, Doreen Feldman, and Bill Swick. 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 95-million acres in the National Wildlife Refuge System are the only federal lands primarily devoted to the conservation and management of fish, wildlife, and plant resources. While the federal government owns the surface lands in the system, in many cases private parties own the subsurface mineral rights and have the legal authority to explore for and extract oil and gas. This testimony is based on an August 2003 report (GAO-03-517) in which GAO determined the extent of oil and gas activity on refuges, identified the environmental effects, and assessed the Fish and Wildlife Service's management and oversight of those activities. About one-quarter (155 of 575) of all refuges have past or present oil and gas activities, some dating to at least the 1920s. Activities range from exploration to drilling and production to pipelines transiting refuge lands. One hundred five refuges contain a total of 4,406 oil and gas wells--2,600 inactive wells and 1,806 active wells. The 1,806 wells, located at 36 refuges, many around the Gulf Coast, produced oil and gas valued at $880 million during the last 12-month reporting period, roughly 1 percent of domestic production. Thirty-five refuges contain only pipelines. The Fish and Wildlife Service has not assessed the cumulative environmental effects of oil and gas activities on refuges. Available studies, anecdotal information, and GAO's observations show that the environmental effects of oil and gas activities vary from negligible, such as effects from buried pipelines, to substantial, such as effects from large oil spills or from large-scale infrastructure. These effects also vary from the temporary to the longer term. Some of the most detrimental effects of oil and gas activities have been reduced through environmental laws and improved practices and technology. Moreover, oil and gas operators have taken steps, in some cases voluntarily, to reverse damages resulting from oil and gas activities. Federal management and oversight of oil and gas activities varies widely among refuges--some refuges take extensive measures, while others exercise little control or enforcement. GAO found that this variation occurs because of differences in authority to oversee private mineral rights and because refuge managers lack enough guidance, resources, and training to properly manage and oversee oil and gas activities. Greater attention to oil and gas activities by the Fish and Wildlife Service would increase its understanding of associated environmental effects and contribute to more consistent use of practices and technologies that protect refuge resources.
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The 1985 through 1995 period saw an increase in both the number of college students and the proportion of the college-aged population in colleges, universities, training schools, and other postsecondary institutions. In 1995, more than 34 percent of all 18- to 24-year-old U.S. residents were attending postsecondary schools, compared with slightly less than 28 percent in 1985. Many who attend also plan to stay longer: Two-thirds of college freshmen now intend to go beyond a baccalaureate degree, compared with about half in 1980. In part, this interest in postsecondary education likely reflects students' recognition that such education is associated with higher incomes later in life. Bureau of the Census statistics indicate that, on average, households headed by persons with bachelor's degrees have average incomes nearly 70 percent higher than households headed by persons with no more than high school diplomas. Households with a member that has a professional degree have incomes that average about three times those of households in which members' highest certificate is a high school diploma. As the number of students has increased, so has the size of the government's student loan programs. By the end of fiscal year 1996, the estimated outstanding amount of loans provided by the Department of Education's two largest loan programs, the principal sources of loans for postsecondary education, had reached $112 billion, up from $91 billion a year earlier and from $65 billion in 1990, in constant 1995-96 dollars. The Higher Education Amendments of 1992 increased the maximum amount that students could borrow. For example, the limit for graduate and professional students rose from $74,750 to $138,500 (in current dollars, including both graduate and undergraduate loans). Borrowing and working both play significant roles in how students pay for their education. Figure 1 shows how an "average" full-time student met the cost of his or her education at various types of postsecondary institutions in school year 1995-96. Together, borrowing and working constituted more than half of the amount of funds students needed to pay their cost of attendance at all types of schools, except private 4-year schools. While this "average" view is instructive as a way to see the general role of student borrowing and working patterns, it does not show the wide range of methods students use to finance college. Some students do not borrow or work at all, while others earn more than enough to cover the cost of attending college. To provide a more complete picture, our report focuses on those students who borrow and those who work, showing the annual and cumulative amounts of their borrowing and the number of hours worked per week while they were enrolled. The proportion of students who borrowed to finance the cost of postsecondary education increased between school years 1992-93 and 1995-96, and the amounts they borrowed increased, after taking inflation into account. In general, this was true for both undergraduates and graduate and professional students. An increasing percentage of undergraduates in all types of programs turned to borrowing to finance part of their education. To provide as complete a picture as possible of how students used borrowing during their entire period of enrollment, we focused our analysis on undergraduates who had completed their 2-year, 4-year, or other programs in 1992-93 and 1995-96. In 1992-93, 41 percent of undergraduates who completed their programs had borrowed in 1 or more years. By 1995-96, this number had risen to 52 percent. The percentage varied, however, by type of degree or certificate, with the greatest increase in the group receiving bachelor's degrees (see table 1). The average amount borrowed by undergraduates completing their program (excluding those who had not borrowed) rose from about $7,800 to about $9,700 over the 1992-93 to 1995-96 period, after adjusting for inflation. The amounts borrowed by those receiving bachelor's degrees in 1995-96 were the highest. Among bachelor's degree recipients, the portion of students who had borrowed $20,000 or more for the 1992-93 through 1995-96 time period rose from about 9 percent to about 19 percent of graduating seniors who had borrowed; see table 2. (See tables II.2, II.3, and II.4 for supporting data, including confidence intervals (degree of precision) for the estimates.) The most substantial increases in the number of graduating students who borrowed occurred at public schools. At 4-year public schools, the percentage of graduating seniors who borrowed in 1 or more years rose from 42 percent in 1992-93 to 60 percent in 1995-96 (see table 3.) This increase eliminated the earlier difference between public and private 4-year schools in the percentage of students borrowing in 1 or more years--public school students "caught up" to private school students in terms of the percentage of the group that borrowed. Students at private schools, however, still borrowed larger amounts during both school years. Students graduating from public schools offering less than 4-year degrees also borrowed in substantially higher numbers, although the average amount borrowed changed little after taking inflation into account. In the aggregate, borrowing by graduate and professional students also increased. In 1992-93, about 55 percent of graduate and professional students who completed their degrees had borrowed in 1 or more years, and those who had borrowed had a cumulative debt (for graduate, professional, and undergraduate education) averaging $16,990. By 1995-96, about 62 percent of this group borrowed, and their cumulative debt averaged $24,340. Students in professional programs were the most likely to borrow and had the highest levels of debt. For 1995-96, students completing professional programs had an average debt of $59,909, and the percentage of students who borrowed more than $50,000 had increased from 34 percent to 60 percent. (See table 4.) Changes in students' employment have been less pronounced than changes in borrowing. Compared with 1992-93, the percentage of full-time undergraduate students who worked while attending school rose slightly, while the percentage of graduate and professional students who worked generally declined. Among those who worked, the average number of hours remained relatively steady. Most full-time undergraduate students worked during the school year in both 1992-93 and 1995-96. The percentage of full-time students who worked rose in all three program categories--certificate or award, associate degree, and bachelor's degree. Overall, during 1995-96 more than two-thirds of full-time undergraduates worked while enrolled. On average, undergraduates worked 23 hours per week; however, this varied considerably by program, with students in associate and certificate or award programs working the most. The average number of hours worked per week did not change appreciably from 1992-93, although it rose somewhat among students completing associate degree programs. (See table 5.) At 4-year and proprietary schools, the percentage of full-time, full-year undergraduates who worked during the 1995-96 school year was substantially higher than the percentage who worked in 1992-93. (See table 6.) Average hours worked per week did not change significantly. (See tables II.6, II.7, and II.8.) Students in master's and doctoral programs in school year 1995-96 were more likely to work, and to work more hours per week, than were students in professional programs. Working students in professional programs averaged about 20 hours of work a week, while those in master's and doctoral programs averaged about 25 to 30 hours per week. Many of these students held jobs in their field of study, such as teaching or research assistance. About 80 percent of full-time doctoral students who worked while enrolled said they held positions directly related to their studies, compared with about 63 percent of students in master's programs and about two-thirds of students in professional programs. However, even though more students in master's and professional programs worked in off-campus jobs than did doctoral students, most of them still regarded their jobs as closely related to their field of study. (See table 7.) To gain a better understanding of student work and borrowing patterns during school year 1995-96, we analyzed amounts borrowed and hours worked by several factors, including type of school, cost of attendance, year in school, dependency status, gender, family income, race/ethnicity, cost of attendance, and expected family contribution. We focused this analysis on undergraduate students because the data for graduate and professional students did not produce statistically meaningful results when divided into many of the categories and subcategories we analyzed. (See app. III for further details on our analyses.) To help identify the relationships between the various factors selected for analysis, we conducted a series of regression analyses. Regression analysis is a statistical technique that can analyze many factors at the same time and estimate their relationship to a given outcome. In this case, our analyses were directed at determining what factors, if any, help predict the amount of money that students borrowed. Our results indicated that none of the factors we examined are strong predictors of the amount of student borrowing. Not surprisingly, the most influential factor that emerged from our analyses was the cost of the school attended. However, this factor accounted for only about 11 percent of the difference in the amounts of borrowing that occurred, after controlling for other factors. Several factors that helped account for smaller portions of the variation in amounts borrowed were the student's class level (freshmen, sophomore, junior, or senior), the amount of grant aid received, and whether the student was independent. Other factors included in the analysis (type of school, race/ethnicity, adjusted gross family income percentile, expected family contribution, and hours worked per week while enrolled) accounted for little, if any, variation. Together, all of the factors we examined accounted for about 31 percent of the variation in the amounts borrowed. The relationship we saw in the regression analysis between the cost of the school attended and the amounts borrowed is also apparent in comparing graduating seniors' average cost of attendance for 1995-96 and the average cumulative amount of their borrowing. As shown in figure 2, seniors whose annual school costs were $20,000 or more borrowed an average cumulative amount of about $18,000. In contrast, the comparable amount borrowed was about $11,000 for those whose annual school costs were between $5,000 and $9,999. Appendix IV has additional data on variations in the average cumulative amounts borrowed by undergraduates and variations in the proportion who borrowed in 1 or more years as undergraduates. For example, appendix IV shows variations in these factors by student year in school, by race/ethnicity, and by parental income. As with borrowing, we conducted a regression analysis to determine which factors, if any, would be strong predictors of how much students will work. We used the same list of factors as we did for borrowing, but in this case, different factors emerged as important. Dependency status and type of school accounted for little of the variation in hours worked (3.1 percent and 2.5 percent, respectively). Of students who worked, those who worked more hours tended to be the independent students. On average full-time, full-year independent students who were employed while enrolled worked about 28 hours per week, compared with an average of about 21 hours for their dependent counterparts. (See table II.10 for further details.) Other factors included in our regression analysis each accounted for less than 1 percent of the variation in hours worked. (For additional data on variation in work patterns, see apps. III and IV.) In contrast with the substantial amount of information about students' own borrowing experiences, little information is available about the amounts that parents borrow to pay for their children's postsecondary education. In general, studies that provide data on parents' education debt were dated or limited in scope, and they often failed to differentiate between postsecondary education debt and other types of education debt. We found three studies that come closest to describing the debt parents incur for their children's postsecondary education. Of these, the Department of Education's work contained the most useful information. The best available data are in the Department of Education's NPSAS, which we used as the basis for information on student borrowing and work patterns. As part of this survey, which is conducted periodically, the Department collected some information through telephone interviews with samples of parents. However, changes in NPSAS questions included in its 1995-96 survey did not provide similar data that allowed for comparisons with earlier survey results. The most recent NPSAS (1995-96) included parents' responses related only to certain groups of undergraduates, such as dependent students who did not receive financial aid or those whose schools' files did not include parents' adjusted gross income. Since such a sample of parents would not be representative of parents of all undergraduates, estimates based on responses from that year's survey are not included here. The 1992-93 NPSAS provided a more wide-ranging sampling of parents selected to represent a group of graduating seniors. Parents of between 8 and 11 percent of seniors under 24 years of age who graduated in 1992-93 reported borrowing to help finance their child's education during 1992-93. The average amount parents borrowed for these seniors for 1992-93 was between $10,734 and $14,553. Sources of borrowing included home equity loans, home equity lines of credit, signature loans, state- or school-sponsored parent loans, loans against life insurance policies and retirement funds, commercial loans, and federal PLUS loans. Parents have borrowed a rapidly increasing amount of loan funds through the Department of Education's PLUS program. Parents of about 5 percent of dependent undergraduate students participated in this program during 1995-96, about the same portion as in 1992-93. Among dependent students who graduated as seniors in 1995-96, about 10 percent had parents who had used the program during 1 or more years of their child's postsecondary schooling. The average cumulative amount they borrowed was about $9,748. NPSAS results indicate that the average was about $9,022 for parents of students at public 4-year schools and $10,673 for those at private 4-year schools. Amounts of PLUS borrowing have also risen in recent years, reflecting the influence of higher loan limits. According to the Department, the average amount of these loans increased by about 55 percent (from $3,588 to $5,556 in constant 1995-96 dollars) over the 1992-93 to 1995-96 period. In the Higher Education Amendment of 1992, limits on the amount of PLUS loans were lifted. Currently, eligible parents may borrow, regardless of financial need, up to their student's cost of attendance, less the amount of other financial aid received. Other survey data suggest that education has been an important use of funds obtained from home equity loans. Excluding first mortgages, U.S. home equity debt totaled about $255 billion in 1993, $110 billion of which was in home equity lines of credit and $145 billion in traditional home equity loans. According to a school year 1993-94 survey by the University of Michigan, among borrowers using home equity lines of credit, about 21 percent indicated that some or all of these loan funds were used for education, up from 18 percent in 1988. Among borrowers using traditional equity loans, about 7 percent indicated that some or all of the funds were used for education, up from 5 percent in 1988. The survey did not indicate what portion of these funds went for children's postsecondary education and how much may have been used for other educational uses, such as private elementary or secondary schools. The Federal Reserve Board's surveys of U.S. households indicate that education debt was about 1.9 percent of U.S. household debt in 1989 and about 2.5 percent in 1992 and 1995. However, the surveys are not designed to capture parents' debt for their children's postsecondary education. The survey does not make a distinction between debt for postsecondary education and debt for elementary and secondary education, nor does it distinguish between debt owed by parents for a child's education and debt owed by parents for their own education. 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. We are sending copies of this report to the Secretary of Education, appropriate congressional committees, and other interested parties. Please call me at (202) 512-7014 if you or your staff have any questions regarding this report. Major contributors included Joseph J. Eglin, Jr., Assistant Director; Charles M. Novak; Benjamin P. Pfeiffer; and Dianne L. Whitman-Miner. To analyze working and borrowing patterns among postsecondary students, we reviewed literature and data from the Department of Education and other sources, such as various professional associations. The data we analyzed included the Department of Education's periodic National Postsecondary Student Aid Study (NPSAS), the Federal Reserve Board's Survey of Consumer Finances, Claritas Inc.'s (a private research firm) survey on use of credit cards, and the University of Michigan's National Survey of Home Equity Loans. In connection with this effort, we also interviewed Department of Education officials and staff of professional associations and the Federal Reserve Board. The Department's NPSAS addresses how students and their families pay for postsecondary education and involves nationally representative samples of all students in postsecondary institutions. In 1995-96, for example, the Department selected a sample of over 950 institutions and about 50,000 students. The researchers gathered data about students from schools' institutional records and the Department's records (including financial aid applications and the National Student Loan Data System). They also gathered information by telephoning a subsample of about 27,000 undergraduates and about 4,000 graduate and professional students. We focused our analysis on the average amounts of borrowing and average cumulative debt reported in the NPSAS for school years 1992-93 and 1995-96. Unless otherwise indicated, the term "debt" in this report refers to the cumulative total of the principal amounts borrowed by students for undergraduate education (borrowing for all the costs of attendance, including room and board). The data on the amount of students' cumulative debt were self-reported and, according to the Department's NPSAS project officer, the extent to which it includes credit card debt is unknown. The portion of college students with credit cards rose from about one-half to about two-thirds from 1990 to 1996, according to a study by Claritas Inc. The estimated aggregate average balance grew from about $900 in 1990 to about $2,250 in the third quarter of 1997. (These amounts have not been adjusted for inflation, and Claritas Inc. did not provide confidence intervals for these numbers.) Average annual amounts of borrowing came from NPSAS analysis of school records for over 50,000 undergraduate students and Department of Education records for students with federal student loans. Data on cumulative debt came from telephone surveys of about 27,000 respondents to NPSAS telephone surveys. About 1,500 of these were graduating seniors. The 1989-90 NPSAS survey did not identify students who completed their degree program in that year, so we limited our analysis of those data to a comparison of 1992-93 and 1995-96 survey results. We did use the 1989-90 survey as a point of comparison for the overall portion of undergraduates who worked while enrolled. Similarly, we focused our analysis of undergraduate students' work patterns on students included in NPSAS' 1992-93 and 1995-96 surveys who enrolled as undergraduates for their first term during the May 1 through April 30 time period, and attended full-time for a full year (9 months). To assess the number of hours worked by undergraduate students while enrolled, we used NPSAS for 1992-93 and 1995-96. These data came from a computer-aided telephone interview. To assess parents' borrowing for their child's postsecondary education, we used parent responses to NPSAS' 1992-93 survey, Federal Reserve Board data from its Survey of Consumer Finances for 1995, and the University of Michigan's National Survey of Home Equity Loans. Our analysis of graduate and professional students included those in NPSAS who were enrolled in a postbaccalaureate program that began between May 1 and April 30 in the 1992-93 or 1995-96 NPSAS years. Data on hours worked while enrolled came from NPSAS telephone interviews with about 4,000 students. We limited our analysis of hours worked and earnings to those who were enrolled full time for a full year (9 months). Data on cumulative borrowing came from NPSAS telephone interviews of about 2,800 graduate students and about 1,200 professional students. Because we were unable to identify students who were in the last year of their graduate or professional degree program in school year 1989-90 or who completed their degree during that year, we limited our analysis of graduate and professional degree students' cumulative debt to 1992-93 and 1995-96. Analysts use various statistical techniques to help evaluate the relative strength of relationships that can be found in sets of data. To calculate confidence intervals for survey results, we used standard errors provided by the Department and a 95-percent confidence interval. Similarly, we tested for the statistical significance of differences between groups using t-tests and a p = 0.05 criterion. To further assess statistical relationships between variables discussed in this report, we performed two linear regression analyses with the following dependent variables: (1) the amount undergraduates borrowed for 1995-96 and (2) the average hours full-time, full-year undergraduates worked per week while enrolled during 1995-96. To indicate the extent to which borrowing and debt have changed at a rate faster or slower than changes in consumer prices, we analyzed levels of cumulative borrowing in constant 1995-96 dollars. To calculate constant 1995-96 dollars we used the Bureau of Labor Statistics' Consumer Price Index for all urban consumers. We conducted our work from April to December 1997 in accordance with generally accepted government auditing standards. Because the Department uses several methods to check and review NPSAS data and these data are widely relied upon in the education community, we did not validate the reliability of the data derived from the sources indicated. The tables in this appendix contain additional details regarding the information presented in the letter portion of this report. The tables present category-by-category estimates for various aspects of student debt and work, along with confidence intervals for each. The estimated averages shown are based on analysis of the results from a sample of students. The confidence intervals are the ranges in which the averages are likely to fall for the entire population of postsecondary students within the category indicated. The table notes indicate whether differences in the estimated averages for various sample groups are statistically significant. We identified differences as statistically significant when our statistical tests showed less than a 5-percent chance that the differences between groups occurred purely by chance. Degree or other credential received 1995-96 dollars) $5,171 $4,758 - $5,584 Percentage of graduates borrowing in 1 or more years a total of $20,000 or more 15.7 - 22.2 dollars) Table II.5: Students in Graduate and Professional Programs Who Borrowed, Amount Borrowed, and Percentage With $50,000 or More Debt, School Years 1992-93 and 1995-96 undergraduate, graduate, or recipients who borrowed in 1 or a total of $50,000 or more for 1995-96 dollars) Although our work focused primarily on the extent to which borrowing and working by undergraduates varied by each of several factors (type of school and year in school, for example), we sought more information about the extent to which these factors were predictive. To do this, we performed a series of regression analyses. Each analysis indicates what portion of variance in the working or borrowing variable examined was accounted for by each factor after taking the other factors into account. In tables III.1 and III.2, the portion of the variance accounted for is the change in the portion of variance accounted for (R expressed as a percentage) after adding each variable to the model after including (controlling for) all the other variables listed. "Total accounted for" is the percentage of variance accounted for including all variables listed. This is the coefficient of determination, a statistic that indicates how well a statistical model fits the data. If there is no linear relationship between dependent and independent variables, R equals 1 (100 percent). The regression coefficients (B) shown in each table indicate the extent to which a change in each independent variable is associated with a change in the dependent variable. For example, in table III.1, the regression coefficient for graduating seniors is $1,632.75. This indicates that after taking into account the relationships between all the variables listed, graduating seniors borrowed an average of about $110.67 less than freshmen in their first year of postsecondary education (the reference category). The standardized regression coefficients (beta) shown in each table are statistics that are standardized to allow comparison when the independent variables are measured in different units. They help analysts compare the extent to which variables help predict variation in the dependent variable, such as the amount borrowed. The unit of measure for beta weights is a standard deviation in the dependent variable. (Standard deviations are measures of the extent to which, for example, the amounts students borrowed typically differed from the average amount borrowed.) A beta weight is an estimate of the number of standard deviations more a student is expected to borrow for a one standard deviation increase in an independent variable (see table III.1). The significance test (probability based on the t-statistic) in each table indicates, for the addition of each variable in the model, the probability that the statistical relationship between each independent variable and the variation in the dependent variable not accounted for by other variables is due to random factors. In the analysis of the statistical relationship between each dependent variable and each categorical variable, such as year in school, we identified a reference category. The tables provide regression statistics that indicate the extent to which nonreference groups compare statistically with the reference group. In both tables, reference groups are white non-Hispanic, dependent, men, first-time beginning freshmen, and attending public 4-year schools. Regression coefficient (B) Standardized regression coefficient (beta) Type of school (portion of variance accounted for = 0.18%) Class level (portion of variance accounted for = 6.46%) Freshmen--not beginning postsecondary education for the first time 0.0004 < 0.0001 < 0.0001 < 0.0001 < 0.0001 (continued) Regression coefficient (B) Standardized regression coefficient (beta) Racial/ethnic group (portion of variance accounted for = 0.24%) Other portion of variances accounted for was 0.3068, with 11,171 degrees of freedom. Regression coefficient (B) Standardized regression coefficient (beta) Type of school (portion of variance accounted for = 2.55%) Class level (portion of variance accounted for = 0.65%) Freshmen - not beginning postsecondary education for the first time Racial/ethnic group (portion of variance accounted for = 0.51%) Other portion of variances accounted for (Table notes on next page) These numbers reflect an adjustment for design effect. was 0.1681, with 8,682 degrees of freedom. We were also asked to analyze borrowing and work patterns in relation to four other factors: students' class level, students' dependency status, parental income, and students' race/ethnicity. This appendix contains our findings with respect to these factors and concludes with tables that provide additional information to supplement that shown in tables IV.1 through IV.5 and figure IV.1. Not surprisingly, students who had attended school for several years were more likely to have borrowed--and in greater amounts--than their counterparts who had not been in school as long. A greater portion of students borrowed at all undergraduate levels, and the amounts they borrowed increased to a statistically significant extent for everyone but freshmen (see table IV.1). Students who were classified by the Department of Education's financial aid needs analysis process as dependent on their parents were less apt to borrow than those who were classified as independent, but when they borrowed, they tended to borrow larger amounts. Among seniors graduating in 1995-96, 51 percent of those who were dependent on their parents borrowed in 1 or more years, compared with 71 percent of independent students. On average, dependent students borrowed $13,754, compared with $12,842 for independent students. Comparing 1995-96 graduating dependent seniors with their counterparts in 1992-93, borrowing was up across all income levels. As figure IV.1 shows, borrowing tended to be most common among dependent students from families whose annual income is less than $45,000. However, the portion of dependent students who borrowed increased at all family income levels, and at the highest level ($100,000 and above), it nearly doubled from 16.3 percent to 32.6 percent. The increase in amounts borrowed was relatively uniform among all income groups except the lowest and highest. A larger portion of dependent students borrowed at most levels of parental income . . . Percentage of Dependent Students Who Borrowed in Each Income Category . . . and amounts increased across nearly every income category Amount Borrowed (Dollars in Thousands) Analysis of cumulative borrowing by race and ethnicity showed that all four groups analyzed (white, not Hispanic; black, not Hispanic; Hispanic; and Asian/Pacific Islander) showed similar increases in the portion of students borrowing. Average cumulative amounts borrowed ranged from about $11,910 for Hispanics to about $16,531 for students with Asian and Pacific Islander backgrounds. Greater portions of black and Hispanic groups borrowed than whites. (See table IV.2.) seniors who borrowed in 1 or Information is only available for 1992-93. Information was collected in 1995-96 that included American Indians/Alaskan Natives, but the data were insufficient for analysis. Increases in the percentage of students working were reflected across all undergraduate years (see table IV.3). As in 1992-93, juniors and seniors enrolled full time in 1995-96 were more apt to work while enrolled, but on average worked slightly fewer hours than freshmen or sophomores. A higher percentage of both dependent and independent students worked in 1995-96 compared with 1992-93. For 1995-96, the percentage was higher for dependent students, but among those students who worked, independent students worked about 6 hours more per week. Among dependent undergraduates, students in all income groups were more apt to work while enrolled in 1995-96 than in 1992-93 (see table IV.4). Those whose parents were in middle-income groups were more likely to work while enrolled. The average number of hours worked changed little and varied little by income group. The percentage of students who worked in 1995-96 was higher than the percentage for 1992-93 across racial and ethnic groups as well (see table IV.5). White, black, and Hispanic students had the highest percentages of students who worked, and black and Hispanic students had the highest average hours worked per week. The following tables provide data supporting the preceding figure and tables, along with additional information, including confidence intervals for each estimate. Average total principal borrowed (constant 1995-96 dollars) Parental income (constant 1995-96 dollars) Parental income (constant 1995-96 dollars) Amount borrowed (constant 1995-96 dollars) Percentage of graduating seniors who borrowed Information is only available for 1992-93. Information was collected in 1995-96 that included American Indians/Alaskan Natives, but the data were insufficient for analysis. Average total principal borrowed (constant 1995-96 dollars) Information was only available for 1992-93. Information was collected in 1995-96 that included American Indians/Alaskan Natives, but the data were insufficient for analysis. Estimated average hours worked per week while Estimated percentage of students who worked while 1994 parental income (constant 1995-96 dollars) $15,000 - $29,999 $30,000 - $44,999 $45,000 - $59,999 $60,000 - $74,999 $15,000 - $29,999 $30,000 - $44,999 $45,000 - $59,999 $60,000 - $74,999 $75,000 - $99,999 60.6 - 70.1 1994 parental income (constant 1995-96 dollars) The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO provided information on: (1) the changes that have occurred in recent years in the percentage of undergraduate and graduate/professional students who borrow and in the cumulative amount of their borrowing; (2) the changes that have occurred in the percentage of undergraduate and graduate/professional students who work and the number of hours they work; (3) how undergraduate borrowing and work patterns differ by type of school, year in school, dependency status, family income, and race/ ethnicity; and (4) information concerning the amounts of education debt parents incur. GAO based its review in large part on an analysis of data collected by the Department of Education as part of the National Postsecondary Student Aid Study. GAO noted that: (1) over the past several years, students have turned increasingly to borrowing to cope with rising education costs; (2) at the undergraduate level, the percentage of postsecondary students who had borrowed by the time they completed their programs (received a bachelor's degree, associate degree, or award or certificate) increased from 41 percent in 1992-93 to 52 percent in 1995-96; (3) the average amount of debt per student increased from about $7,800 to about $9,700 in constant 1995-96 dollars; (4) for graduating seniors (recipients of bachelor's degrees) and who had borrowed, the average rose from about $10,100 to about $13,300; (5) the portion of these graduates with $20,000 or more of student debt grew from 9 percent to 19 percent during the period; (6) students attending 4-year public institutions showed the largest increase in the number of borrowers; (7) sixty percent of seniors graduating from these schools in 1995-96 borrowed at some point in their program, up from 42 percent in 1992-93 and about even with the percentage of borrowers at private 4-year schools; (8) students at 2-year public institutions borrowed least often and in lesser amounts; (9) at the graduate and professional levels, the percentage of borrowers and the level of debt generally increased; (10) higher borrowing levels were especially pronounced at professional schools, where average debt among borrowers completing their programs climbed from about $45,000 in 1992-93 to nearly $60,000 in 1995-96; (11) more full-time undergraduates worked while attending school in 1995-96 than in 1992-93; (12) more than two-thirds of full-time undergraduate students held jobs during 1995-96, working an average of 23 hours a week while enrolled; (13) at graduate and professional schools, the percentage of full-time students who worked changed little over the same period; (14) about two-thirds of master's and doctoral students worked, usually in part-time jobs directly related to their field of study; (15) at professional schools, less than half worked while enrolled; (16) some variations in borrowing and work patterns can also be seen on the basis of the cost of attendance, dependency status, family income, and gender; (17) however, most characteristics are not very strong predictors of how much undergraduates were likely to borrow or work; (18) little information is available about amounts of debt parents accumulate in order to pay for their children's postsecondary education; and (19) in general, household debt for education remains a small share of household debt.
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Through fiscal year 1998, about $172 million has been allocated to the ACTD program and 48 projects have been approved. DOD's budget request for fiscal year 1999 for the ACTD program is $116.4 million. An additional 10 to 15 projects are expected to be funded in fiscal year 1999. Under the current ACTD program, DOD builds prototypes to assess the military utility of mature technologies, which are used to reduce or avoid the time and effort usually devoted to technology development. Demonstrations that assess a prototype's military utility are structured to be completed within 2 to 4 years and require the participation of field users (war fighters). ACTD projects are not acquisition programs. The ACTD program seeks to provide the war fighter with the opportunity to assess a prototype's capability in realistic operational scenarios. From this demonstration, the war fighter can refine operational requirements, develop an initial concept of operation, and make a determination of the military utility of the technology before DOD decides whether the technology should enter into the normal acquisition process. Not all projects will be selected for transition into the normal acquisition process. The user can conclude that the technology (1) does not have sufficient military utility and that acquisition is not warranted or (2) has sufficient utility but that additional procurement is not necessary. Of the 11 ACTD projects completed as of August 1998, 2 were found to have insufficient utility to proceed further, 8 were found to have military utility but no further procurement was found to be needed at the time, and 1 was found to have utility and has transitioned to the normal acquisition process. ACTD funding is to be used to procure enough prototypes to conduct the basic demonstration of military utility. At the conclusion of the basic demonstration, ACTD projects are expected to provide a residual operational capability for the war fighter. Under the current practice, ACTD funding is also to be available to support continued use of ACTD prototypes that have military utility for a 2-year, post-demonstration period. The 2 years of funding is to support continued use by an operational unit and provide the time needed to separately budget for the acquisition of additional systems. Further, if the ACTD prototypes--such as missiles--will be consumed during the basic demonstration, additional prototypes are to be procured. As stated in the ACTD guidance, a key to successfully exploiting the results of the demonstration is to enter the appropriate phase of acquisition without loss of momentum. ACTDs are intended to shorten the acquisition cycle by reducing or eliminating technology development and maturation activities during the normal acquisition process. Further, DOD can concentrate more on technology integration and demonstration activities. Time and effort usually devoted to technology development can be significantly reduced or avoided and the subsequent acquisition process reduced accordingly, if the project is deemed to have sufficient military utility. ACTD candidates are nominated from a variety of sources within the defense community, including the Commanders in Chief, the Joint Chiefs of Staff, the Office of the Secretary of Defense agencies, the services, and the research and development laboratories. The candidates are then reviewed and assessed by staff from the Office of the Deputy Under Secretary of Defense (Advanced Technology). After this initial screening, the remaining candidates are further assessed by a panel of technology experts. The best candidates are then submitted to the Joint Requirements Oversight Council, which assesses their priority. The final determination of the candidates to be funded is made within the Office of the Deputy Under Secretary of Defense (Advanced Technology), with final approval by the Under Secretary of Defense (Acquisition and Technology). By limiting consideration to prototypes that feature mature technology, the ACTD program avoids the time and risks associated with technology development, concentrating instead on technology integration and demonstration activities. The information gained through the demonstration of the mature technology could provide a good jump start to the normal acquisition process, if the demonstration shows that the technology has sufficient military value. Time and effort usually devoted to technology development could be reduced or avoided and the acquisition process shortened accordingly. Program officials stated that they have a mechanism in place to ensure that only those projects using mature technology are allowed to become ACTDs. These officials explained that an ACTD candidate's technology is assessed by high-ranking representatives from the services and the DOD science and technology community before candidates are selected. Program personnel stated that determining technology maturity is important before a candidate is selected because ACTD program funding is not intended to be used for technology development. According to program guidance, the ACTD funding is to be used for (1) costs incurred when existing technology programs are reoriented to support ACTD, (2) costs to procure additional assets for the basic ACTD demonstration, and (3) costs for technical support for 2 years of field operations following the basic ACTD demonstration. We were told that no ACTD money was to be used for technology development activities. However, the project selection process does not ensure that only mature technologies enter the ACTD program. We found examples where immature technologies were selected and technology development was taking place after the approval and start of the ACTD program. The current operations manager of the Combat Identification project, which began in fiscal year 1996, told us that one of his major concerns has been that some of the ACTD funding was being used for technology development, and not exclusively used for designing and implementing the assessment. However, during the ACTD project, technical or laboratory testing was still necessary to evaluate the acceptability of many of the 12 technologies included in the initial project. Eventually, 6 of the 12 technologies had to be terminated. According to the demonstration manager, 2 of the 6 technologies were terminated because they were immature. According to the manager, that is one of the reasons the project is currently behind schedule. Another example of the inclusion of immature technology occurred in the Outrider Unmanned Aerial Vehicle project. According to the management plan for the project, one of the individual technologies to be incorporated into the vehicle was a heavy fuel engine. According to a program official, it was later deemed that this individual technology was too immature and an alternate technology had to be used. However, trying to use this immature technology has already caused schedule slippage and cost overruns in the ACTD project. To complete the basic demonstration within the prescribed 2 to 4 year period, ACTDs typically use early prototypes. If the demonstrated technology is deemed to have sufficient military utility, many ACTD projects will still need to enter the normal acquisition process to complete product and concept development and testing to determine, for example, whether the system is producible and can meet the user's suitability needs. These attributes of a system go beyond the ACTD's demonstration of military utility to address whether the item can meet the full military requirement. Commercial items that do not require any further development could proceed directly to production. However, other non-software related ACTDs should enter the engineering and manufacturing development phase to proceed with product and concept development and testing. According to ACTD guidance, if further significant development is needed, a system might enter the development portion of the engineering and manufacturing development phase. However, the guidance states that, if the capability is adequate, the ACTD can directly enter production. The guidance does not specifically define what is considered an "adequate capability" to allow an ACTD system to enter low-rate production. In 1994, we reported on numerous instances of weapon systems that began production prematurely and later experienced significant operational effectiveness or suitability problems. In our best practices report, we reported that typically DOD programs allowed much more technology development to continue into the product development phase than is the case in commercial practices. Turbulence in program outcomes--in the form of production problems and associated cost and schedule increases--was the predictable consequence of DOD's actions. In contrast, commercial firms gained more knowledge about a product's technology, performance, and producibility much earlier in the product development process. Commercial firms consider not having this type of knowledge early in the acquisition process an unacceptable risk. In responding to that report, the Secretary of Defense stated that DOD is vigorously pursuing the adoption of such business practices. Specifically, he stated that DOD has taken steps to separate technology development from product development through the use of ACTDs. The ACTD guidance and DOD's current practice do not appear to reflect this emphasis. In the case of the Predator ACTD, the one ACTD that has proceeded into production, DOD decided to enter the technology into production before proceeding with product and concept development and testing, thereby accepting programmatic risks that could offset the schedule and other benefits gained through the ACTD process. In the early operational assessment of the Predator's ACTD demonstration, the Director, Operational Test and Evaluation, did not make a determination of the system's potential operational effectiveness or suitability. However, the system was found to be deficient in several areas, including mission reliability, documentation, and pilot training. The assessment also noted that the ACTD demonstration was not designed to evaluate several other areas such as system survivability, supportability, target location accuracy, training, and staffing requirements. The basic ACTD demonstration may have clarified the Predator's military utility but it did not demonstrate its system requirements or its suitability. Thus, instead of using the knowledge acquired during the demonstration to complete the Predator's development through the product and concept development and testing stages of acquisition, DOD allowed it to directly enter production. DOD's practice is to procure sufficient ACTD prototypes to provide a 2-year residual capability. When it determines that the original prototypes will be consumed during the basic demonstration, additional prototypes are procured for potential use after the basic ACTD demonstration. However, these additional assets--like the basic demonstration prototypes--have not been independently tested to determine their effectiveness and suitability. Procuring additional ACTD prototypes before product and concept development and testing is completed risks wasting resources on the procurement of items that may not work as expected or may not have sufficient military utility. Representatives from the service test agencies did not support this practice and agreed that it had the potential for problems. Without a meaningful independent assessment of a product's suitability, effectiveness, and survivability, users cannot be assured that it will operate as intended and is supportable. Congress has expressed concern about the amount of equipment being procured beyond what is needed to conduct the basic ACTD demonstration. Its concern is that DOD is making an excessive commitment to production before military utility is demonstrated and before appropriate concepts of operation are developed. For example, DOD plans to procure 192 Enhanced Fiber Optic Guided missiles at an estimated cost of $27 million and 144 Line-of-Sight Anti-Tank missiles at an estimated cost of $28 million beyond the quantities of missiles required for the ACTD demonstrations--64 and 30 missiles, respectively. The production of these additional missiles will follow the production of the missiles needed for the basic demonstration and will continue on a regular basis throughout the 2-year, post-demonstration period. If the prototypes are deemed to have sufficient military utility, the service involved will be expected to fund the production of additional missiles beyond these quantities. By establishing a regular pattern of procurement in this way, DOD risks committing to a continuing production program before a determination is made about the technology's military utility and before there is assurance that the system will meet validated requirements and be supportable. The strength of the ACTD program is in conducting basic demonstrations of mature technology in military applications before entering the normal acquisition process. This practice could significantly reduce or eliminate the time and effort needed for technology development from the acquisition process. For this to occur, it is essential that DOD use only mature technology in its ACTDs. DOD's criteria for selecting technologies for ACTD candidates should be clarified to ensure the selection of mature technology with few, if any, exceptions. Further, ACTDs may not, by themselves, result in an effective and safe deployment of military capability. It is important that product and concept development as well as test and evaluation processes be allowed to proceed before the service commits to the production of the demonstrated technology. If an ACTD project is shown to have military value, the normal acquisition processes can and should be tailored--but not bypassed--before DOD begins production. Lastly, emphasizing the need to complete concept and product development and testing before procuring more items than needed for the basic demonstration would reduce the risk of prematurely starting production. We recommend that the Secretary of Defense clarify the ACTD program guidance to (1) ensure the use of mature technology with few, if any, exceptions and (2) describe when transition to the development phase of the acquisition cycle is necessary and the types of development activity that may be appropriate. Further, we recommend that the Secretary of Defense limit the number of prototypes to be procured to the quantities needed for early user demonstrations of mature technology until the item's product and concept development and testing have been completed. ". . . new technologies proposed for incorporation into an ACTD should not be in the 6.1 (basic research) or 6.2 (applied research) budget categories. Furthermore, the technologies must have been successfully demonstrated at the subsystem or component level and at the required performance level prior to the start of the ACTD." While this guidance is improved over previous versions, the new guidance permits the selection of immature technology--even as the primary or core technology--provided that it is demonstrated prior to the ACTD demonstration. Also, some recent ACTD projects have been approved without the technologies having been identified. Moreover, the new guidance goes on to describe several types of exceptions under which immature technologies may be permitted to be used in an ACTD. As our report states, the use of immature technologies has delayed programs and we continue to believe DOD needs to focus the ACTD program on the use of mature technology with few, if any exceptions. DOD also agreed that some but not all ACTDs may require additional product and concept development before proceeding into production. DOD states that a mandatory engineering and manufacturing development phase would not be appropriate for all ACTD projects. We agree, however, the existing ACTD guidance focuses on the transition directly to production and provides too little guidance concerning a possible transition to development. As stated in our recommendation, the guidance should specify when a transition to development may be appropriate and the kinds of developmental activities that may be appropriate. Finally, DOD agreed that the number of ACTD prototypes to be procured should be limited until the Under Secretary can confirm that sufficient testing has been satisfactorily completed to support any additional procurement. We agree with DOD that test results should form the basis for starting limited procurement. However, DOD's equating a determination of military utility (based on an ACTD demonstration) with a determination of a system's readiness to begin production is inappropriate because production decisions require more testing data. We have long held the view and have consistently recommended that DOD use extreme caution to avoid premature commitments to production. To determine the adequacy of the ACTD program's selection criteria in assessing technology maturity and guidance for transitioning to the normal acquisition process, we reviewed existing program guidance, published reports, the Office of the Inspector General's April 1997 ACTD report, and the recommendations of the 1986 Packard commission and the 1996 Defense Science Board. We discussed selection criteria, transitioning to the acquisition process, and all 34 of the individual ACTD programs approved through fiscal year 1997 with representatives from the Office of the Deputy Under Secretary of Defense (Advanced Technology), Washington, D.C.; the Army's Deputy Chief of Staff for Operations and Plans, Office of Science and Technology Programs, Washington, D.C.; the Air Force's Director for Operational Requirements, Rosslyn, Virginia; the Navy's Requirements and Acquisition Support Branch, Washington, D.C.; the Marine Corps' Combat Development Command Office of Science and Innovation, Quantico, Virginia; the Joint Staff's Acquisition and Technology Division and Requirements Assessment Integration Division, Washington, D.C.; and the Office of the Commander in Chief, U.S. Atlantic Command, Norfolk, Virginia. We discussed the issue of procuring additional residual assets for early deployment with representatives from DOD's Office of the Director, Operational Test and Evaluation, Washington, D.C.; the Army's Test and Evaluation Management Agency, Washington, D.C.; the Army's Operational Test and Evaluation Command, Alexandria, Virginia; the Marine Corps' Operational Test and Evaluation Activity, Quantico, Virginia; the Air Force's Test and Evaluation Directorate, Washington, D.C.; and the Navy's Commander, Operational Test and Evaluation Force, Norfolk, Virginia. We conducted our review from September 1997 to July 1998 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies to other interested congressional committees; the Secretaries of Defense, the Army, the Air Force, and the Navy; the Commandant of the Marine Corps; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others upon request. Please contact me at (202) 512-4841, if you or your staff have any questions concerning this report. The major contributors to this report were Bill Graveline, Laura Durland, and John Randall. The following are GAO's comments on the Department of Defense's (DOD) letter, dated August 31, 1998. ". . . new technologies proposed for incorporation into an ACTD should not be in the 6.1 (basic research) or 6.2 (applied research) budget categories. Furthermore, the technologies must have been successfully demonstrated at the subsystem or component level and at the required performance level prior to the start of the ACTD." ". . .Strategies and approaches are described to facilitate transitioning from an ACTD to the acquisition process as defined in DOD 5000.2R. The suggested approaches are based on lessons learned. The focus of the suggestions are ACTDs that are planned--if successful--to enter the acquisition process at the start of LRIP." Although there is a basic recognition that the transition to development may be possible, the bulk of the guidance is on how and when to transition to production. As pointed out in the report, the guidance does not describe when a transition to development or what types of development activity may be appropriate. In our view, the guidance needs to be more balanced between the possibility of transition to development and the transition of ACTD projects directly to production. 5. As discussed in the report, the independent operational testing agencies are observers in the ACTD demonstrations and not active participants. While the Office of the Director of Operational Test and Evaluation was an observer during the Predator demonstration, a determination was not made that Predator was potentially effective and suitable. 6. We agree that ACTDs address the technology's suitability. However, the ACTD focus on suitability is in a very general sense and extensive data is not collected on the system's reliability, maintainability, and other aspects of suitability needed to support production decisions. 7. As our report states, the Predator was rushed into low-rate initial production prematurely given the limited amount of testing conducted at that time and the problems that were uncovered during that limited testing. 8. DOD's equating a determination of military utility (based on an ACTD demonstration) with a determination of a system's readiness to begin production is inappropriate because production decisions require more testing data. During our review, we noted that sufficient information was not obtained from an ACTD demonstration to make a commitment to limited production. Commercial practice would dictate that much more information be obtained about a product's effectiveness, suitability, producibility, or supportability before such a commitment is made. We believe the ACTD guidance needs to be more balanced and should anticipate that ACTD prototypes may need to conduct more product and concept development and testing prior to production. We have long held the view and have consistently recommended that DOD use extreme caution to avoid premature commitments to production. 9. We are not suggesting that a lengthy development phase be conducted on all ACTD products nor, as DOD appears to suggest, that an ACTD prototype may be ready to start limited production immediately after its basic demonstration. As DOD stated in its intent to establish the ACTD program, we believe the benefit of the ACTD process is in eliminating or reducing technology development, not in making early commitments to production or in postponing product and concept development and testing activities until after production starts. 10. While ACTD demonstrations are performed in operational environments, they are not operational tests. During the course of our work, we held several discussions with officials from the operational test community. Those officials were in favor of the user demonstrations featured in the ACTD program, but none considered those demonstrations as substitutes for operational testing because of their informality, lack of structure, and the lack of a defined requirement by which to measure performance. 11. DOD appears not to recognize the very real possibility that the ACTD demonstration may find the technology in question to have little or no military utility or to be unaffordable in today's budgetary and security environment. In fact, due to budget constraints, the Army was forced to prioritize its procurement programs, and the planned procurement funding for Enhanced Fiber Optic Guided missiles has been reallocated. 12. While we agree with DOD that test results should form the basis for starting limited procurement, the testing needed goes beyond the basic demonstration of military utility provided by the ACTD program. 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 current Advanced Concept Technology Demonstration (ACTD) program, focusing on: (1) whether the selection process includes criteria that are adequate to ensure that only mature technologies are selected for ACTD prototypes; (2) whether guidance on transitioning to the normal acquisition process ensures that a prototype appropriately completes product and concept development and testing before entering production; and (3) the Department of Defense's (DOD) current practice of procuring more ACTD prototypes than needed to assess the military utility of a mature technology. GAO noted that: (1) through the determination of military value of mature technologies and their use in the acquisition process, ACTDs have the potential to reduce the time to develop and acquire weapon systems; (2) however, several aspects of the ACTD program can be improved; (3) DOD's process for selecting ACTD candidates does not include adequate criteria for assessing the maturity of the proposed technology and has resulted in the approval of ACTD projects that included immature technology; (4) DOD has improved its guidance on the maturity of the technologies to be used in ACTD projects but the revised guidance describes several types of exceptions under which immature technologies may be used; (5) where DOD approves immature technologies as ACTD program candidates and time is spent conducting developmental activities, the goal of reduced acquisition cycle time will not be realized; (6) further, guidance on entering technologies into the normal acquisition process is not sufficient to ensure that a prototype completes product and concept development and testing before entering production; (7) the guidance does not mention the circumstances when transition to development may be appropriate or the kinds of developmental activities that may be appropriate; (8) while commercial items that do not require any further development could proceed directly to production, many ACTDs may still need to enter the engineering and manufacturing development phase to proceed with product and concept development and testing before production begins; (9) through the ACTD early user demonstration, DOD is expected to obtain more detailed knowledge about its technologies before entering into the acquisition process; (10) however, in the one case in which an ACTD has proceeded into production, DOD made that decision before completing product and concept development and testing, thereby accepting programmatic risks that could offset the schedule and other benefits gained through the ACTD process; (11) DOD's current practice of procuring prototypes beyond those needed for the basic ACTD demonstration and before completing product and concept development and testing is unnecessarily risky; and (12) this practice risks wasting resources on the procurement of items that may not work as expected or may not have sufficient military utility and risks a premature and excessive commitment to production.
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Employer-sponsored coverage is the predominant source of health insurance in the United States. In 2001, 67 percent of all nonelderly adults (over 118 million) and 64 percent of all children (46 million) obtained health insurance through an employer (see fig. 1). Nearly all large firms and almost half of smaller firms offer health insurance coverage for their employees. Federal tax laws provide incentives for employers to pay some or all of the premiums because their contributions are tax deductible as a business expense; the employer-paid portion of the premiums is also not considered taxable income for employees. Although the share of the premiums paid by employers varies with the size of the firm and the type of health plan, firms pay an average of more than 80 percent of the premiums for single coverage and more than 75 percent for family coverage. Also, for many individuals, the premiums for employment-based insurance are lower than those in the private market for comparable individual coverage. Low-income individuals without access to employer-based insurance coverage may qualify for Medicaid or SCHIP. These public insurance financing programs covered over 40 million low-income people at a cost of about $232 billion in federal and state expenditures in 2001. Established in 1965, Medicaid is a joint federal-state entitlement program that finances health care coverage for certain low-income individuals. Medicaid eligibility is based in part on family income and assets. States set their own eligibility criteria within broad federal guidelines. For example, states vary in the kind and amount of income they exclude from consideration when determining eligibility. Similarly, while some states set a ceiling on the value of assets--such as cars, savings accounts, or retirement income--that individuals may have available to them in order to be deemed eligible for Medicaid, other states have no asset test for eligibility. To the extent that asset tests are present in a state's Medicaid program, individuals would need to "spend down" or dispose of their assets to become eligible for Medicaid. More than half of the individuals enrolled in Medicaid are children. Federal law requires states to provide Medicaid coverage to children age 5 and under if their family income is at or below 133 percent of the federal poverty level and to children age 6 to 19 in families with incomes at or below the federal poverty. Most states have received federal approval to set income eligibility thresholds that expand their Medicaid programs beyond the minimum federal statutory levels for children. Medicaid eligibility for nondisabled adults is more limited. Federal law requires states to provide Medicaid coverage to pregnant women up to 133 percent of the federal poverty level, and mandatory eligibility for parents is linked to the Medicaid family coverage category established in the 1996 federal welfare reform law. At a minimum, federal law requires states to offer Medicaid coverage to parents in families that meet the income and other eligibility rules that the state had in place on July 16, 1996, for determining eligibility for welfare assistance. Nationwide, considerable variation in Medicaid eligibility thresholds for parents exists. For example, Alabama covers parents whose family income is up to 13 percent of the federal poverty level. At the other end of the spectrum, Minnesota covers parents with family incomes up to 275 percent of the federal poverty level. The Medicaid statute does not generally provide for mandatory or optional coverage of nondisabled childless adults. However, some states have received federal approval to expand their Medicaid programs to include coverage for some of them. In 1997, the Congress created SCHIP to provide health coverage to children living in families whose incomes exceed the eligibility limits for Medicaid. While SCHIP is generally targeted to children in families with incomes at or below 200 percent of the federal poverty level, each state may set its own income eligibility limits, within certain guidelines. As of January 2002, states' upper income eligibility threshold for SCHIP ranged from 133 to 350 percent of the federal poverty level. Unlike Medicaid, which entitles all those eligible to coverage, SCHIP has a statutory funding limit of $40 billion over 10 years (fiscal years 1998 through 2007). Under SCHIP, states can cover the entire family--including parents or custodians of eligible children--if it is cost-effective to do so, meaning that the expense of covering both adults and children in a family does not exceed the cost of covering just the children. Similar to Medicaid, states can obtain federal approval of SCHIP expansions through a section 1115 waiver. While more than 85 percent of Americans obtain health insurance coverage from the private insurance market or public programs, 40.9 million nonelderly Americans (16.5 percent) had no health insurance in 2001. Approximately 75 percent of the uninsured nonelderly adults had jobs. Individuals working part time, for small firms, or in certain industries, such as agriculture or construction, were more likely to be uninsured (see table 1). Young adults, minorities, and low-income persons were also more likely to be uninsured. The percentage of uninsured is generally higher in the South and West and lower in the Midwest and Northeast (see fig. 2). Texas had the highest uninsured rate of nonelderly Americans (25.9 percent) of any state in 2001, while Iowa had the lowest (8.7 percent). From March 2001 to March 2002, the national unemployment rate increased 1.4 percentage points, from 4.3 percent to 5.7 percent, with nine states experiencing above-average increases. The largest percentage point increases occurred in Colorado (2.6), Oregon (2.5), and Utah (2.0) (see table 2). Across the six states we reviewed--Colorado, New Jersey, North Carolina, Ohio, Oregon and Utah--the greatest unemployment increases were generally seen in manufacturing, construction, and transportation and public utilities (see table 3). Unemployed individuals may be eligible for financial assistance through the Unemployment Insurance Program, a federal-state partnership designed to partially replace the lost earnings of individuals who become unemployed through no fault of their own. While program requirements vary by state, individuals eligible for unemployment insurance generally (1) have worked for a specified period in a job covered by the program, (2) left the job involuntarily, and (3) are available, able to work, and actively seeking employment. Most states provide a maximum of 26 weeks of benefits, although benefits in some states have been extended for an additional 13 weeks in times of high unemployment. Benefits are generally based on a percentage of an individual's earnings over the prior year, up to a maximum amount. The national average weekly unemployment benefit was $254 in the first quarter of 2002, with benefits lasting an average of nearly 15 weeks. In the six states we reviewed, the weekly unemployment benefit ranged from $253.80 in Ohio to $327.15 in New Jersey (see table 4). Although many aspects of health insurance, including premiums, are regulated at the state level, two federal laws-- the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) and the Health Insurance Portability and Accountability Act of 1996 (HIPAA)--established requirements designed to help certain individuals maintain health coverage after loss of employment. COBRA provided that firms with 20 or more employees offer former employees and their dependents the opportunity to continue their group coverage for at least 18 months. To qualify for COBRA benefits, former employees must have been covered by the employer's plan the day before they stopped working at the firm. Former employees are eligible only for the health plan coverage that they received while employed. COBRA coverage is not available if the former employer discontinues health benefits to all employees, as in a company closure. While employers must allow COBRA-eligible former employees to continue receiving coverage under the employer's group health plan, the employer does not have to pay for it. The former employee can be required to pay the full cost of the group health premium plus 2 percent, which is designed to cover the employer's administrative cost of keeping the former employee in the plan. Based on data from a 2002 survey of employers, the average cost of COBRA coverage is approximately $260 a month for an individual and $676 a month for a family. Based on a survey of a national sample of 1,001 nonelderly adults, a recent study estimated that because of the cost of COBRA continuation coverage, "only 23 percent of employed, insured adults would be very likely to participate in the COBRA program if they lost their jobs." Unlike COBRA, which provided the opportunity for individuals losing their jobs to continue their private group health insurance, HIPAA provisions guarantee certain individuals losing group coverage the right to purchase coverage in the individual market. HIPAA provides guaranteed access to health coverage for individuals who, among other criteria, had at least 18 months of coverage without a break of more than 63 days and with the most recent coverage being under a group health plan. HIPAA stipulates that states must either require health insurers to make certain of their policies available to qualifying individuals or use an "alternative mechanism" to offer them coverage. An example of an alternative mechanism is a state-sponsored high-risk pool, which offers comprehensive insurance coverage to individuals with preexisting health conditions who are otherwise unable to obtain coverage in the individual market or who may be able to obtain coverage only at a prohibitive cost. (Appendix I describes how the six states that we reviewed guarantee access to coverage under HIPAA.) As with COBRA, individuals bear the full cost of individual coverage received under HIPAA. Since HIPAA provides for coverage in the individual insurance market, in which premiums are generally based on the characteristics of the individual applicant, this coverage is likely to be more costly for many applicants for a similar level of coverage than premiums for groups, where risk is spread over all members of the group. The differences will be smaller in some states that have imposed restrictions on how much insurers can vary premiums based on an individual's characteristics. The six states we reviewed had instituted various protections that might assist individuals who have lost their jobs in maintaining or obtaining health insurance. Unemployed individuals, however, generally bore the full cost of the premium. States did not have data on the number of individuals who lost their health insurance during the economic decline and thus, who could benefit from these protections, but did have data on the number of individuals using some of the protections. The six states we reviewed had in place a variety of protections, which were established prior to the economic downturn. Unemployed individuals, however, were generally responsible for bearing the full costs of purchasing health insurance. Key protections to assist unemployed individuals in maintaining health insurance coverage included: State-mandated continuation coverage, through which states require small businesses to extend their group health coverage to former employees and their families if the former employees pay for it; Guaranteed conversion, through which states require insurers to give eligible individuals the ability to convert their group coverage to an individual health insurance policy; Guaranteed issue, through which states require insurers to offer coverage to individuals who do not have access to group coverage or public insurance; and High-risk pools, in which states create associations that offer comprehensive health insurance benefits to individuals with acute or chronic health conditions. Table 5 indicates the extent to which the six states we reviewed had adopted such protections. Of the six states we reviewed, only Oregon assisted lower income unemployed individuals in paying for the cost of premium coverage. Previously funded solely with state resources, the program was unable to expand enrollment for nearly 3 years and had a significant waiting list due to budget constraints. However, in October 2002, Oregon received approval to expand this program using federal funds. Each of the six states that we reviewed had a health care coverage continuation law, which applied to employers with fewer than 20 employees and thus were not subject to COBRA requirements. While the states required that employers make health insurance coverage available to eligible individuals, the employers were not required to pay for this coverage. In New Jersey, North Carolina and Utah, eligible individuals can be required to pay up to 102 percent of the cost of the premium charged under their former employer's plan (the full cost of the group health premium plus a 2 percent fee to cover the employer's administrative costs) (see table 6). In the other three states, individuals may be required to pay up to the full cost of the premium, but no administrative fee may be added. Like COBRA, the state health care coverage continuation laws did not apply to companies that terminate coverage, such as when going out of business. Nationally, premiums for state continuation coverage averaged approximately $260 a month for an individual and $676 a month for a family in 2001, which equals 24 to 61 percent of the average unemployment benefit. Eligibility for, and the length of required coverage under, states' continuation coverage laws were often more limited than under COBRA. While under COBRA individuals must only be insured the day before they stop working, five of the six states that we reviewed had more stringent requirements. They required individuals to have been continuously insured for the 3 to 6 months immediately prior to the separation from their job. New Jersey, Ohio, Oregon, and Utah required employers to offer a year or less of continuation coverage, compared to 18 months under COBRA and in Colorado and North Carolina. Once individuals exhaust their COBRA or state health care continuation coverage, they may become eligible to convert to an individual policy. Although the HIPAA provisions require states to ensure that eligible individuals can move from group to individual health insurance coverage, state guaranteed conversion is specific to an insurer. Four of the six states we reviewed (Colorado, North Carolina, Ohio, and Utah) required insurers to provide individual policies to eligible individuals previously covered under a group policy sold by their company. To be eligible for guaranteed conversion, individuals had to have been continuously insured by the group health plan, or its predecessor, for 3 to 12 months (depending on the state) prior to their application for conversion--requirements that are less stringent than the 18 months of prior continuous coverage under HIPAA. State laws on guaranteed conversion contained no maximum length of required coverage; as with other individual health insurance policies, beneficiaries could renew the policies as long as they agreed to continue paying the premiums and did not commit fraud. Individuals were responsible for the conversion plan premiums, which could generally be based on the demographic and health characteristics of the individual. Thus, individual coverage under conversion policies--for which individuals pay the full premium--was generally more expensive than group coverage especially for higher-risk individuals. Of the six states we reviewed, New Jersey and Ohio had "guaranteed issue," which required insurers to offer coverage to all individuals in the state who were not eligible for group coverage or public insurance programs, if they were willing to pay for it. According to Ohio statute, insurers in that state could charge an individual up to 2.5 times the rate charged to another individual with a similar policy. In New Jersey, insurers were required to charge each applicant the same price for five standard plans, but monthly premiums varied by insurer. For a policy issued by a health maintenance organization (HMO) in New Jersey, with a $30 copayment per visit to the doctor, monthly premiums for single coverage ranged from $324 to more than $394, depending on the insurer, while premiums for the other standard health plans were more expensive. (A comparison of the five standard plans is in table 7.) In the four states we reviewed that did not have guaranteed issue laws, insurance companies could choose not to offer coverage to individual applicants and have few or no restrictions on what they could charge individuals based on their health status, age, or other factors. Three of the states we reviewed (Colorado, Oregon, and Utah) have established high-risk pools that served individuals with acute and chronic conditions. The high-risk pools in these three states began operation in the early 1990s and also served individuals eligible for coverage under HIPAA (see table 8). High-risk pools are subsidized. Because enrollees often have major health problems, medical claims costs are high and would exceed unsubsidized premiums collected from their enrollees. Oregon's risk pool was subsidized by a fee assessed on insurers based on the number of people they cover. Utah subsidized the operation of its high- risk pool with state funds. Colorado used a combination of these approaches. High-risk pool premiums are higher than standard premiums for individual insurance paid by healthy applicants although not necessarily higher than a high-risk individual would be charged in the individual market if coverage were available. State high-risk pool laws generally capped premiums at 125 to 200 percent of comparable standard commercial coverage rates. Premiums varied based on factors such as age, geographic location, type of health plan, and deductible. One state, Colorado, provided a 20 percent premium discount to certain low-income individuals. Across the three states we reviewed that had high-risk pools, undiscounted premiums for nonelderly adults ranged from less than 10 percent to close to 100 percent of the average unemployment benefit in the state. Although Ohio, Oregon, and Utah collected data on the number of uninsured residents, none of the states that we reviewed had data sufficiently current to determine how many of their residents had lost health insurance during the recent economic decline. States' knowledge of any changes in the numbers of individuals benefiting from the different states' protections varied by option and the state, with data most often available for the three states' high-risk pools. None of the states we reviewed tracked how many of its residents obtained health coverage through state-mandated continuation coverage. Of the four states that required insurers to offer conversion plans, only Utah tracked the number of policies issued but it did not have data current enough to determine whether usage increased during the current economic decline. New Jersey tracked the number of individuals receiving individual health coverage through its five standard plans. Enrollment in these standard plans declined in the past year, which a state representative attributed to the rising cost of coverage. Each of the three states we reviewed that had high-risk pools tracked enrollment in their pools. From March 2001 to March 2002, enrollment in high-risk pools increased by 47 percent in Colorado, almost 23 percent in Oregon, and 37 percent in Utah. But it is not clear how much of the increased participation came from the ranks of the unemployed. For example, a Colorado official said a large portion of the increased enrollment in the state's high-risk pool was likely due to insurers leaving the individual and small group health insurance market in the state. Therefore, it is difficult to determine how much of the increase included those dropped from individual or nonemployer-based group coverage and how much included the newly unemployed. Given the cost of maintaining coverage under their former employers' health insurance plan or obtaining alternative coverage, unemployed individuals may look to states' Medicaid and SCHIP programs for coverage for themselves and their families. Unemployed adults, however, are less likely to qualify for these programs than their children due, in part, to less generous eligibility levels set for adults than for children. Colorado, Oregon, and Utah have recently received federal approval for waivers to expand eligibility for adults in Medicaid and SCHIP, which may increase coverage for unemployed individuals. In the wake of recent fiscal pressures resulting from the economic downturn, however, New Jersey has suspended its Medicaid and SCHIP coverage expansion for new applicants. Efforts by some states to expand Medicaid and SCHIP coverage for uninsured adults have raised significant federal fiscal and legal issues, at times providing adult coverage with funds intended for children. As unemployed adults seek health insurance, they will likely find it more difficult to secure coverage under Medicaid or SCHIP for themselves than for their children. Under Medicaid, the majority of states had set eligibility levels for nondisabled adults that were less generous than those for children. In the six states we reviewed, Medicaid's maximum income eligibility levels for non-disabled adults were lower than the levels for children. In Colorado, New Jersey, North Carolina, and Utah, the maximum income levels for coverage for these adults were under 50 percent of the federal poverty level. In contrast, Medicaid and SCHIP coverage for children ranged from those in families with incomes up to 170 percent of the federal poverty level to those in families with incomes up to 350 percent of the federal poverty level (in Oregon and New Jersey, respectively). In four of six states, adults eligible for unemployment benefits might not have qualified for Medicaid because the average of their unemployment benefits would have been at least twice as much income as allowed for Medicaid eligibility. In the remaining two states--Ohio and Oregon-- adults that received the average unemployment benefit would have met the income eligibility requirements for Medicaid in those states (see table 9). In Colorado, North Carolina, Oregon, and Utah, Medicaid coverage for unemployed adults was more restricted than it was for children because adults' accumulated assets could have made them ineligible for coverage even after their unemployment benefits run out. The amount of assets allowed and the types of assets included for eligibility purposes varied by state (see table 10). For purposes of determining whether individuals reached or exceeded their asset limit, North Carolina included the cash value of life insurance, checking and savings accounts, and other investments, but excluded the value of an applicant's primary residence and vehicle. Utah required that families with children over age 6 have assets below $3,000 (with allowances for an additional $25 in assets for each additional family member) but excluded the value of one home and of one vehicle, up to $15,200. In contrast, most states nationwide have eliminated family asset tests in determining Medicaid and SCHIP eligibility for children. As of January 2002, 44 states had eliminated family asset tests for all children in families with incomes at or below the poverty level and two other states dropped it for certain categories of children. Among the six states we reviewed, four states did not have asset tests for children in Medicaid, while five states did not have asset tests for children in SCHIP (see table 11). Among unemployed adults, childless adults often had more difficulty qualifying for Medicaid than parents. The Medicaid programs in Colorado, North Carolina, and Ohio did not cover any nondisabled childless adults. In New Jersey, childless adults faced a lower Medicaid income eligibility level than parents did. Oregon and Utah covered a small number of childless adults, all of whom earned less than 150 percent of the federal poverty level (see table 12). Some states have received approval from the federal government to expand Medicaid and SCHIP coverage for parents and childless adults, including recently unemployed individuals. Of the states we reviewed, Utah recently received a section 1115 waiver to expand Medicaid coverage to certain parents and childless adults for a benefit package limited to primary care and preventive services. Utah's waiver is estimated to cover an additional 16,000 parents with family incomes under 150 percent of the federal poverty level and 9,000 childless adults with incomes under 150 percent of the federal poverty level. The expansion, implemented on July 1, 2002, is funded by enrollment fees and cost sharing by participants and savings from increased cost sharing and new limits on some optional services, such as mental health services, vision screening and physical therapy, for certain groups of currently eligible adults. On September 27, 2002, Colorado received approval to cover pregnant women with family income between 134 and 185 percent of the federal poverty level using SCHIP funds. Oregon also received approval on October 15, 2002, for a section 1115 waiver to expand insurance coverage for adults and children up to 185 percent of the federal poverty level using Medicaid and SCHIP funds. Oregon expects to cover an additional 60,000 individuals, but plans to phase in implementation of this expansion. On November 1, 2002, the state plans to expand its premium assistance program by paying between 50 and 95 percent of premiums for eligible individuals with incomes up to 185 percent of the federal poverty level, using both Medicaid and SCHIP funds. On February 1, 2003, Oregon plans to expand Medicaid and SCHIP eligibility to pregnant women and children with incomes up to 185 percent of the federal poverty level, and to other eligible individuals, including parents and childless adults, with incomes up to 110 percent of the federal poverty level. Further eligibility expansions may occur each quarter depending upon the availability of state funding. A state that has used a waiver to expand Medicaid and SCHIP coverage may be prompted by shortfalls in its budget to limit these expansions. Of the states we reviewed, in January 2001, New Jersey expanded Medicaid and SCHIP coverage for parents earning up to 200 percent of the federal poverty level. In June 2002, however, New Jersey suspended new enrollment of adults in this program, increased the premiums and reduced the benefits for those already covered under the expansion. New Jersey's program had exceeded the state's 3-year enrollment projection in 9 months. Section 1115 waivers to expand insurance coverage under Medicaid and SCHIP can extend coverage to adults who would not otherwise qualify and who would have difficulty obtaining coverage elsewhere. However, we reported earlier that some waivers are inconsistent with the goals of the Medicaid and SCHIP programs and may compromise their fiscal integrity. For example, in approving Utah's expansion, we concluded that HHS did not adequately ensure that the waiver would be budget neutral as required for approval. We estimated that Utah's waiver, if fully implemented, could cost the state and federal governments $59 million more than without the waiver. We found that the state's projection of what it would have spent without the waiver inappropriately included the estimated cost of services for a new group of people who were not being covered under the state's existing Medicaid program. Although we did not review Colorado and Oregon's waiver applications in our earlier report, we raised a broader legal issue about states' use of SCHIP funds to cover adults without children, which Oregon's recently approved expansion will do. In our earlier report, we found that HHS had approved an Arizona waiver proposal that would, among other things, use unspent SCHIP funding to cover adults without children, despite SCHIP's statutory objective to expand health care coverage to low-income children. In our view, HHS's approval of the waiver to cover childless adults is not consistent with this objective, and is not authorized. Consequently, we recommended that the Secretary of Health and Human Services not approve any more waivers that would use SCHIP funds for childless adults. In addition, we suggested that the Congress amend the Social Security Act to specify that SCHIP funds are not available to provide health insurance for childless adults. Health insurance for the majority of Americans who rely on employer- based coverage could be threatened upon job loss. Federal and state laws provide some protections that are aimed at helping individuals maintain or obtain health insurance coverage in such circumstances. The protections offered, however, are not without limitations as individuals may find that bearing the full cost of the premiums--with no employer or state subsidies--may be beyond their financial means. While those who cannot afford health insurance may look to Medicaid or SCHIP for assistance, coverage for adults is hampered by limited income eligibility and other requirements, such as asset tests, that are likely to reduce the number of adults that can qualify for coverage. Some states have made recent efforts to use the flexibility available to them under Medicaid and SCHIP to expand their programs to help cover increased numbers of uninsured adults. Tighter budgets, however, are beginning to constrain some states' ability to sustain insurance coverage expansions initiated during stronger economic times. Thus, despite program expansions, coverage under Medicaid and SCHIP may not be available to unemployed adults, while other state coverage options may be too costly for these individuals. We provided a draft of this report for technical review to representatives of insurance departments, high-risk pools, and Medicaid programs in the six states we reviewed. Each of the states provided technical comments, which we incorporated as appropriate. In addition, in its comments, Utah disagreed with our statement--based on findings in an earlier report--that HHS did not adequately ensure that the state's section 1115 waiver met the budget neutrality test. The state contends that its waiver is budget neutral and is consistent with long- standing HHS budget neutrality practices. Since 1995, we have expressed concern that HHS's methods for assessing budget neutrality allow the inclusion of certain costs that inappropriately inflate cost estimates and result in the federal government being at risk to spend more than it would have had the waivers not been approved. We believe that continued use of these methods is inconsistent with the long-standing requirement for section 1115 waivers to be budget neutral and inappropriately places the federal government at risk of increased cost for the Medicaid and SCHIP programs. We did not obtain comments from HHS on this report because we did not evaluate HHS' role or performance with respect to protections or programs that may benefit unemployed individuals. As agreed with your offices, unless you publicly announce its contents earlier, we will plan no further distribution of this report until 30 days after its date. At that time we will send copies to other interested congressional committees and other parties. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http:// www.gao.gov. If you or members of your staff have any questions regarding this report, please contact me on (202) 512-7114 or Carolyn Yocom on (202) 512-4931. Other major contributors to this report include JoAnn Martinez-Shriver, Michael Rose, and Michelle Rosenberg. HIPAA provides guaranteed access to coverage--"portability" from group to individual coverage--to eligible individuals who, among other criteria, had at least 18 months of coverage without a break of more than 63 days. Recognizing that many states had already passed reforms that could be modified to meet or exceed these requirements, HIPAA gave states the flexibility to implement this provision by using either the federal fallback or an alternative mechanism. Under the federal fallback approach, insurers must offer eligible individuals guaranteed access to coverage in one of three ways. HIPAA specified that a carrier must offer eligible individuals (1) all of its individual market plans, (2) only its two most popular plans, or (3) two representative plans--a lower-level and a higher-level coverage option-- that are subject to a risk spreading or financial subsidization mechanism. According to a 2002 report, 11 states opted for the federal fallback approach. Under an alternative mechanism, states may design their own approach to guarantee coverage to eligible individuals as long as certain minimum requirements are met. Essentially, the approach chosen must ensure that eligible individuals have guaranteed access to coverage with a choice of at least two different coverage options. For example, one possible alternative mechanism is a state high-risk pool. As shown in table 13 only one of the six states we reviewed relied on the federal fallback approach to ensure group-to-individual portability. The remaining states either relied on their high-risk pool, another alternative mechanism, or both. Medicaid and SCHIP: Recent HHS Approvals of Demonstration Waiver Projects Raise Concerns, GAO-02-817. Washington, D.C.: July 12, 2002. Health Insurance: Characteristics and Trends in the Uninsured Population, GAO-01-507T. Washington, D.C.: March 13, 2001. Health Insurance Standards: New Federal Law Creates Challenges for Consumers, Insurers, Regulators, GAO/HEHS-98-67. Washington, D.C.: February 25, 1998. Medicaid Section 1115 Waivers: Flexible Approach to Approving Demonstrations Could Increase Federal Costs, GAO/HEHS-96-44. Washington, D.C.: November 8, 1995.
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The six states reviewed had in place a variety of protections, established prior to the economic downturn, to assist unemployed individuals in maintaining health insurance coverage: State-mandated continuation coverage, which required small businesses to extend their group health coverage to former employees and their families who choose to pay for it. Guaranteed conversion, which required insurers to allow eligible individuals to convert their group coverage to individual health insurance policies. Guaranteed issue, which required insurers to offer coverage to those who did not have access to group coverage or public insurance. High-risk pools, state-created associations that offered comprehensive health insurance benefits to individuals with acute or chronic health conditions. However, individuals usually bore the full cost of the premiums, which was usually higher than their premium cost under employer-sponsored plans. For individuals who relied on unemployment benefits as their principal income, premiums absorbed a significant share of the benefit.
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The Army's ground-based military operations generally use two kinds of vehicles: combat vehicles designed for a specific fighting function and tactical vehicles designed primarily for multipurpose support functions. Most combat vehicles move on tracks--including the Abrams tank and the Bradley Fighting Vehicle--but some move on wheels, such as the Stryker. Tactical vehicles generally move on wheels, including the HMMWV and the JLTV. Most major defense acquisitions follow a structured acquisition process, which normally consists of three discrete phases: (1) technology development; (2) engineering and manufacturing development; and (3) production and deployment. Programs are expected to meet certain criteria at milestone decision points for entry into each phase. For anticipated major defense acquisition programs, like the GCV and the JLTV, the Under Secretary of Defense for Acquisition, Technology, and Logistics (USD/ATL) generally serves as the Milestone Decision Authority. The Milestone Decision Authority is responsible for approving the programs' entry into the defense acquisition system, approving entry into subsequent phases, and documenting the various approvals through acquisition decision memorandums. The Army's GCV program is intended to modernize the current ground combat vehicle fleet, replacing a portion of the Bradley Infantry Fighting Vehicles currently in inventory. In February 2010, the Army issued a request for proposals for the technology development phase of the GCV before completing the required analysis of alternatives (AOA), citing schedule urgency. In May 2010, the Army convened a "Red Team" to assess the risk of achieving the GCV schedule. The Red Team issued its report in August 2010, citing major risk areas including schedule, technical maturity, and affordability of the system. The Army rescinded the original request for proposals and issued another in late 2010. The milestone A decision was expected in April 2011, but did not occur until August 2011 (see fig. 1). In August, the Army awarded technology development contracts to two contractor teams. A third contractor team submitted a proposal but did not receive a contract award and has filed a bid protest with GAO that is still being considered. The Army has been defining a strategy to develop, demonstrate, and field a common tactical information network across its forces. Generally, such a network is expected to act as an information superhighway to collect, process, and deliver vast amounts of information such as images and communications while seamlessly linking people and systems. The Army's current strategy is to better understand current Army networking capabilities, determine capabilities needed, and chart an incremental path forward. The Army plans regular demonstrations as the network grows and its capability improves. The Army and Marine Corps generally define light tactical vehicles as capable of being transported by a rotary wing aircraft and with a cargo capacity of equal to or less than 5,100 pounds. Light tactical vehicles represent about 50 percent of the Army's tactical wheeled vehicle fleet and currently consist of the HMMWV family of vehicles. The Army's HMMWV program also provides vehicles to satisfy Marine Corps, Air Force, and other requirements. The JLTV is expected to be the next generation of light tactical vehicles and is being designed to provide the advances in protection, performance, and payload to fill the capability gap remaining between the HMMWV and MRAP family of vehicles. JLTV is being designed to protect its occupants from the effects of mines and improvised explosive devices without sacrificing its payload capability or its automotive performance, which has not been the case with the other tactical wheeled vehicles. The Army's recent history with its acquisition programs was the subject of a review by a panel chartered by the Secretary of the Army. In its January 2011 report, the panel noted that the Army has increasingly failed to take new development programs into full-rate production. From 1990 to 2010, the Army terminated 22 major defense acquisition programs before completion. While noting many different causes that contribute to a program's terminations, the panel found that many terminated programs shared several of the same problems, including weak trade studies or analyses of alternatives; unconstrained weapon system requirements; underestimation of risk, particularly technology readiness levels; affordability reprioritization; schedule delays; and requirements and technology creep. The panel made a number of recommendations to help make the Army's requirements, resourcing, and acquisition processes more effective and efficient. Over the next 2 years during the technology development phase, the Army faces major challenges to identify a feasible, cost-effective, and executable solution that meets the Army's needs. Among these are making choices on which capabilities to pursue and include in a GCV vehicle design and determining whether the best option is a new vehicle or a modified current vehicle. In our March 2011 testimony, we identified key questions about GCV pertaining to how urgently it is needed, robustness of the analysis of alternatives, plausibility of its 7-year schedule, cost and affordability, and whether mature technologies would be used. Since that time, the Army has moved the CGV program into the technology development phase. DOD and the Army have taken positive steps to increase their oversight of the program; however, the timely resolution of issues surrounding the areas previously identified will be a major challenge. Urgency of need: The Army's recent combat vehicle capability portfolio review confirmed the Army's need for GCV as a Bradley Infantry Fighting Vehicle replacement and USD/ATL approved the GCV acquisition program. USD/ATL agreed that the Army has a priority need for a GCV but the number of caveats in the approval decision (as discussed below) raises questions about the soundness of the Army's acquisition plans and time lines. Analysis of alternatives: After initially bypassing completion of the AOA process, the Army subsequently conducted an AOA but was directed by USD/ATL to conduct more robust analyses, throughout the technology development phase, to include design and capability trades intended to reduce technical risks and GCV production costs. We have reported that a robust AOA can be a key element in ensuring a program has a sound, executable business case prior to program initiation and that programs that conduct a limited AOA tended to experience poorer outcomes--including cost growth. The Army is expected to include sensitivity analyses in the AOA to explore trade-offs between specific capabilities and costs. These analyses will be supported by assessments of existing combat vehicles to determine whether they are adequate alternatives to a new vehicle, or whether some of the designs or capabilities of existing vehicles should be incorporated into a new GCV. Concurrently, the GCV contractor teams will conduct design trades and demonstrate technologies, the results of which will also be fed back into the AOA updates. Plausibility of 7-year schedule: The Army's plan to deliver the first production vehicles in 7 years still has significant risk. Since GCV was originally conceived in 2009, the Army has already reduced some requirements and encouraged interested contractors to use mature technologies in their proposals. However, the schedule remains ambitious and USD/ATL has stipulated that the Army will need to demonstrate that the schedule is both feasible and executable. According to an independent Army program evaluator, the next 2 years of technology development will require many capability and requirements trades in order to better define an acceptable solution at the same time that technology risks for that solution are to be identified and mitigated. Concurrent activities can lead to poor results, calling into question whether the 7-year schedule is executable. The independent cost estimate submitted for the milestone A review featured higher GCV development costs with the assumption that the Army would need 9 or 10 years to complete the program, instead of the assumed 7 years. Cost and affordability: Cost continues to be a challenge, as an independent cost estimate was at least 30 percent higher than the Army's estimate for GCV procurement. USD/ATL has directed that continued program approval depends on the Army's ability to meet the $13 million procurement unit cost target. As for affordability, with the expectation that less funding will be available in coming years, the Army has made some trades within the combat vehicle portfolio. According to Army officials, the Army plans to proceed with GCV as currently planned, but several other combat vehicle programs--such as anticipated upgrades for the Bradley, Abrams, and Stryker vehicles--are being reshaped or delayed. Use of mature technologies: The Army encouraged interested contractor teams to use mature technologies in their GCV proposals. Due to the current bid protest, we do not have insight into what the contractor teams proposed in terms of specific critical technologies or their maturity. A DOD official stated, and we agree, that it will be important that technologies be thoroughly evaluated at the preliminary design review before the decision to proceed to the engineering and manufacturing development phase. The Army has taken a number of steps to put together a more realistic strategy to develop and field an information network for its deployed forces than the network envisioned for the Future Combat System program. However, the Army is proceeding without defining requirements for the network and articulating clearly defined capabilities. As a result, the Army runs the risk of developing a number of stovepipe capabilities that may not work together as a network, thus wasting resources. The Army has moved away from its plan for a single network development program under Future Combat System to an incremental approach with which feasible technologies can be developed, tested, and fielded. This planned approach reflects lessons learned and changes the way the Army develops, acquires, and fields network capabilities. Under this new approach, numerous programs will be developed separately and coordinated centrally, and network increments will be integrated and demonstrated in advance of fielding rather than the previous practice of ad hoc development and integration in the field. A key aspect of the implementation of the new approach will be aligning the schedules of the separate programs with the Army's planned, semiannual field events, called network integration evaluations, where emerging technologies are put in soldiers' hands for demonstration and evaluation. Several key aspects of the Army's Network Strategy include: In our March 2011 testimony, we pointed out that roles and responsibilities for network development were not clear. Since then, senior Army leadership issued a directive detailing the collective roles, responsibilities, and functions of relevant Army organizations involved with the network modernization effort. The Army is currently working to establish a comprehensive integrated technical baseline for the network and addressing prioritized capability gaps. With this baseline, the Army expects to build on elements of the network already in place with an emphasis on capturing emerging technologies that deliver capability incrementally to multiple units at the same time. This represents a significant departure from the previous practice of fielding systems individually and often to only one element of the operational force at a time (for instance, companies, battalions, or brigades). The network integration evaluations are a key enabler of the Army's new network strategy and assess systems that may provide potential benefits and value to the Army while identifying areas requiring additional development. The evaluation process provides the Army an opportunity to improve its knowledge of current and potential network capability. Additionally, it provides soldier feedback on the equipment being tested. For example, members of the Army's network test unit, the Brigade Modernization Command, indicated that a number of systems tested should be fielded and other systems that should continue development. Several issues will need to be resolved as the Army implements its network strategy. For example, The Army has not yet announced requirements nor has it established cost and schedule projections for development and fielding of its network. Since the Future Combat System termination, the Army does not have a blueprint or framework to determine how the various capabilities it already has will fit together with capabilities it is acquiring to meet the needs of the soldier. Even with an incremental approach, it is important for the Army to clearly articulate the capabilities the system is attempting to deliver. Without this knowledge, the Army runs the risk of acquiring technologies that may work in a stand-alone mode but do not add utility to the broader network strategy. The network integration evaluation provided an extensive amount of data and knowledge on the current Army network and candidate systems for the network. However, since the network integration evaluation serves as an evaluation instrument, it is important to have test protocols that capture objective measures and data on the network's performance. Two independent Army test oversight agencies, reflecting on the evaluation results, expressed concern over not having proper instrumentation for the overall evaluations; in particular, not having the necessary instrumentation to conduct operational tests on large integrated networks and not having clear network requirements. Army officials are developing a strategy to identify, demonstrate, and field emerging technologies in an expedited fashion. To date, the Army has developed an approach to solicit ideas from industry and demonstrate the proposed technologies in the network integration evaluation. However, the Army is still formulating its proposed approach for funding and rapidly procuring the more promising technologies. Development of the Joint Tactical Radio System ground mobile radio, a software-defined radio that was expected to be a key component of the network has recently been terminated. In a letter to a congressional defense committee explaining the termination, the acting USD/ATL stated that the termination was based on growth in unit procurement costs. He added that it is unlikely that Joint Tactical Radio System ground mobile radio would affordably meet requirements and may not meet some requirements at all. The radio performed poorly during the network integration evaluation and was given a "stop development and do not field" assessment by the test unit. Based on the assessment that a competitive market had emerged with the potential to deliver alternate radios to meet the capability at a reduced cost, the acting USD/ATL also established a new program for an affordable; low-cost; reduced size, weight, and power radio product. At this point, it is not yet clear when and how that program will proceed or how these new radios will be able to fit within the Army's network strategy. The Army plans for the future tactical network to feature the use of the wideband networking and soldier radio waveforms and, in our March 2011 testimony, we reported that the Army has had trouble maturing these waveforms for several years and they are still not at acceptable levels of maturity. Although both waveforms experienced limited successes during the recent network integration evaluation testing, Army officials indicate that the wideband networking waveform continues to be very complex, and not fully understood, and there may be substantial risk maturing it to its full capability requirement. With the termination of the ground mobile radio, it is unclear how waveform maturation will continue. Although the network integration kit--expected to be a fundamental part of the Army's information network--was found to have marginal performance, poor reliability, and limited utility, the USD/ATL approved procurement of one additional brigade set of network integration kits. The decision made potential fielding of the kits-- radios, waveforms, integrated computer system, and software-- contingent on user testing that successfully demonstrates that it can improve current force capabilities. The network integration kit again performed poorly during the recent network integration evaluation and received a "stop development and do not field" assessment. Army network officials have indicated that a senior Army leadership memorandum will be forthcoming that will cancel further network integration kit development and fielding. Earlier, the Army concluded that the network integration kit was not a long-term, viable, and affordable solution. To reduce risk in the JLTV program, the Army and Marine Corps entered a technology development phase with multiple vendors to help increase their knowledge of the needed technologies, determine the technologies' maturity level, and determine which combination of requirements were achievable. The contractors delivered prototype vehicles in May 2010 and testing to evaluate the technical risks in meeting the proposed requirements, among other things, was completed on the vehicles in June 2011. Because of the knowledge gained through the technology development phase, the services have worked together to identify trades in requirements to reduce weight and to drive down the cost of the vehicle. A different outcome may have resulted if the services had proceeded directly to the engineering and manufacturing development phase, as had been considered earlier. Based on the technology development results, the services concluded that the original JLTV requirements were not achievable and its cost would be too high. For example, the services found that JLTV could not achieve both protection levels and transportability, with weight being the issue. As a result, the services have adjusted the JLTV transportability requirement to a more achievable level and the Army and Marine Corps have decided that they would rely on HMWWVs for other missions initially intended for JLTV. In fact, the Army has chosen to proceed with even higher protection levels than planned earlier for JLTV. The Army now plans to have protection levels equal to the M-ATV, including underbody protection, while the Marine Corps will continue with the original protection level, similar to the MRAP family of vehicles except for the underbody protection, but plans to conduct more off-road operations to avoid mines and roadside bombs. As for armor protection, the services have found that development of lightweight, yet robust armor has not proceeded as rapidly as hoped and production costs for these new technologies are significantly higher than for traditional armor. The services have established an average procurement cost target of $350,000. A key component of the average procurement cost is the average manufacturing unit cost which includes the cost of labor, materials, and overhead to produce and assemble the product. Achieving the average procurement cost target of $350,000 would require an average manufacturing unit cost of $250,000 to $275,000. While one recent technology development projection of a fully armored JLTV average procurement cost exceeded $600,000, the program office now estimates that, by implementing requirements trades and the cost savings from those trades, industry can meet the average manufacturing unit cost and average procurement cost targets. Nevertheless, meeting the JLTV cost targets will be a challenge and will also likely depend on what type of contract the services award. The services' current JTLV plan is to award a multiyear procurement contract with sizable annual quantities, once a stable design is achieved. Originally, the services planned to follow a traditional acquisition approach for JLTV and enter the engineering and manufacturing development phase in January 2012. According to the Army program manager for light tactical vehicles, the services now plan to use a modified MRAP acquisition model in which industry would be asked to build a set of vehicles that would subsequently be extensively tested prior to a production decision. The Army has stated that industry had demonstrated several competitive prototypes whose performance and cost has been verified and believes that industry can respond with testable prototypes within about 1 year. Many details of the new strategy have yet to be worked out but a milestone B review is anticipated in April 2012. While this approach is seen as saving time and money, it will forgo the detailed design maturation and development testing process typically done early in the engineering and manufacturing development phase. A key risk is the potential for discovering late that the vehicles are still not mature. Both the Army and the Marine Corps have articulated a significant role for the Up-Armored HMMWV in combat, combat support, and combat service support roles beyond fiscal year 2025 but their fleets are experiencing reduced automotive performance, loss of transportability, higher operation and sustainment costs, and the need for better protection as the threats have evolved. The Army plans to recapitalize a portion of its Up-Armored HMMWV fleets by establishing requirements, seeking solutions from industry through full and open competition, and testing multiple prototype vehicles before awarding a single production contract. The Army's emerging effort--the Modernized Expanded Capacity Vehicle program-- aims to modernize vehicles to increase automotive performance, regain mobility, extend service life by 15 years, and improve blast protection. The initial increment of recapitalized vehicles for the Army is expected to be about 5,700, but depending on the availability of funds, the quantity for the Army could increase. The Army plans a two-phased acquisition strategy for recapitalizing the Up-Armored HMMWV that includes awarding contracts to up to three vendors for prototype vehicles for testing and a production contract to a single vendor. The production decision is scheduled for late fiscal year 2013. The Army is anticipating a manufacturing cost of $180,000 per vehicle, not including armor, based on the cost performance of similar work on other tactical platforms managed by the Army. According to the Marine Corps developers, the Marine Corps has concluded a recapitalized HMMWV will not meet requirements for is fleet of 5,000 light combat vehicles. However, it will conduct research to find the most effective way to sustain the balance of the fleet--about 14,000 vehicles--until 2030. The Marine Corps plans to leverage components and subsystems from the Army-sponsored HMMWV recapitalization program. Detailed information on this effort is not currently available. Marine Corps and Army officials have said they intend to cooperate on the recapitalization effort and are sharing information on their individual plans to help maximize value for the available funding. As the services proceed to implement their new JLTV and HMMWV strategies, they have identified a point in fiscal year 2015 (see fig. 2) where a decision will be made on whether to pursue JLTV only or both programs. By then, the technology and cost risks of both efforts should be better understood. The Army continues to struggle to define and implement a variety of modernization initiatives since the Future Combat System program was terminated in 2009. The most recent example of this is the termination of the ground mobile radio, which will require the Army to develop new plans for relaying information to the soldier. The pending reductions in the defense budgets are having a significant impact on Army acquisition programs and the Army is already reprioritizing its combat vehicle investments. As plans for GCV move forward, it will be important for DOD, the Army, and the Congress to focus attention on what GCV will deliver and at what cost and how that compares to other needs within the combat vehicle portfolio. Beyond combat vehicles, DOD and the services will also be facing some tough decisions in the future on the tactical wheeled vehicle programs and the affordability of both the JLTV and the HMWWV recapitalization effort. Over the last few years, the Army has been conducting capability portfolio reviews which have proven to be very helpful in identifying overlaps and setting priorities. The reviews were highlighted in the Army Acquisition Review and have been important in getting the Army to think more broadly and to look beyond the individual program. On both JLTV and GCV, as the requirements have been examined more closely, the services are finding that they can make do with less in terms of capabilities than originally anticipated and projected unit costs have been reduced significantly. It is important that the Army continue to use and improve on its capability portfolio review processes going forward and to consider a broad range of alternatives. Chairman Bartlett, Ranking Member Reyes, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to answer any questions you may have at this time. For future questions about this statement, 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 statement. Individuals making key contributions to this statement include William R. Graveline, Assistant Director; William C. Allbritton; Morgan DelaneyRamaker; Marcus C. Ferguson; Dayna Foster; Danny Owens; Sylvia Schatz; Robert S. Swierczek; Alyssa B. Weir; and Paul Williams. 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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After the Army canceled the Future Combat System in June of 2009, it began developing modernization plans, including developing a new Ground Combat Vehicle (GCV) and additional network capability. At the same time, the Army was considering options on how to improve its light tactical vehicles. This statement addresses potential issues related to developing (1) the new GCV, (2) a common information network, and (3) the Joint Light Tactical Vehicle (JLTV) in a constrained budget environment. The statement is based largely on previous GAO work conducted over the last year in response to congressional requests and results of other reviews of Army modernization. To conduct this work, GAO analyzed program documentation, strategies, and test results; interviewed independent experts and Army and Department of Defense (DOD) officials; and witnessed demonstrations of current and emerging network technologies. DOD reviewed the facts contained in this statement and provided technical comments, which were incorporated as appropriate. Delivering a feasible, cost-effective, and executable GCV solution presents a major challenge to the Army, with key questions about the robustness of the analysis of alternatives, the plausibility of its 7-year schedule, and cost and affordability. DOD and the Army have taken steps to increase oversight of the program, but resolving these issues during technology development will remain a challenge. For example, the Army has already reduced some requirements and encouraged contractors to use mature technologies in their proposals, but the 7-year schedule remains ambitious, and delays would increase development costs. Independent cost estimates have suggested that 9 to 10 years is a more realistic schedule. Over the next 2 years during the technology development phase, the Army faces major challenges in deciding which capabilities to pursue and include in a GCV vehicle design and determine whether the best option is a new vehicle or modifications to a current vehicle. The Army's new information network strategy moves away from a single network development program to an incremental approach with which feasible technologies can be developed, tested, and fielded. The new strategy has noteworthy aspects, such as using periodic field evaluations to assess systems that may provide potential benefit and getting soldier feedback on the equipment being tested. However, the Army has not articulated requirements, incremental objectives, or cost and schedule projections for its new network. It is important that the Army proceed in defining requirements and expected capabilities for the network to avoid the risk of developing individual capabilities that may not work together as a network. With the cancellation last week of its ground mobile radio and continuing problems in developing technology to provide advanced networking capability, the Army will still need to find foundational pieces for its network. The Army is reworking earlier plans to develop and acquire the JLTV and is planning to recapitalize some of its High Mobility, Multipurpose Wheeled Vehicles (HMWWV). These efforts have just begun, however, and their results are not yet assured. To reduce risk in the JLTV program, the services relied on multiple vendors during technology development to increase their knowledge of the needed technologies, determine the technology maturity level, and determine which requirements were achievable. As a result, the services identified trades in requirements to drive down the cost of the vehicle. For example, the services found that JLTV could not achieve both protection level and transportability goals, so the services are accepting a heavier vehicle. A potential risk for the services in allowing industry to build vehicles for testing is that the prototypes may not be mature; the Army will need to keep its options open to changes that may result from these tests. Both the Army and the Marine Corps have articulated a significant future role for their Up-Armored HMMWV fleets, yet the fleets are experiencing reduced automotive performance, the need for better protection as threats have evolved, and other issues. The Army is planning to recapitalize a portion of its Up-Armored HMMWV fleet to increase automotive performance and improve blast protection. The Marine Corps' plans to extend the service life of some of its HMMWVs used in light tactical missions are not yet known. GAO is not making any recommendations with this statement; however, consistent with previous work, this statement underscores the importance of developing sound requirements and focusing up front on what modernization efforts will deliver and at what cost.
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During fiscal years 1993-98, the United States funded rule of law programs and related activities in countries throughout the world. Over this period, rule of law assistance totaled at least $970 million. Figure 1 illustrates the worldwide U.S. rule of law funding for fiscal years 1993-98. Over the period, the total annual rule of law funding increased from $128 million to $218 million. Although funding appears to have declined substantially in 1996, this may be largely explained by the fact that USAID could not readily provide rule of law funding information for fiscal year 1996 due to problems with its automated information system. On a regional basis, the Latin America and the Caribbean region received the largest share, with about 36 percent. Africa, Central Europe, and the newly independent states of the former Soviet Union received about 15 percent each. (See table 1.) From fiscal year 1993 to 1998, rule of law funding shifted primarily from the Latin America and the Caribbean region to other regions, mainly Central Europe. Funding for Central Europe grew from about $9 million in fiscal year 1993 to over $67 million in fiscal year 1998, accounting for 31 percent of the worldwide rule of law assistance that year. Over the same period, rule of law assistance in Latin America and the Caribbean declined from about $57 million (44 percent of the worldwide total) to $42 million (19 percent). Rule of law assistance to Africa also declined from $38 million (30 percent of the worldwide total) in 1993 to $29 million (13 percent) in 1998. Figure 2 illustrates these trends; appendix I provides more detailed data. During fiscal years 1993-98, we identified 184 countries that received at least some U.S. rule of law funding. However, over half of this assistance went to just 15 countries. Haiti received the most, primarily in connection with U.S. and international efforts to restore peace and stability to the country after a 1991 coup. Most countries (102 of the 184) received less than $1 million. Table 2 illustrates the top 15 recipients. (App. II provides detailed rule of law funding by region and country for fiscal years 1993-98.) State's Under Secretary for Global Affairs has overall responsibility for coordinating rule of law programs and activities. At least 35 entities from the departments and agencies have a role in providing U.S. rule of law assistance programs. (See app. III.) Most U.S. rule of law funding is provided through the international affairs appropriations and is transferred or reimbursed to the other departments and agencies, primarily by USAID, but to a lesser extent by State. USAID and the Department of Justice oversaw the implementation of 70 percent, or about $683 million, of all U.S. rule of law assistance programs and activities worldwide during fiscal years 1993-98. USAID focused on improving the capabilities of judges, prosecutors, and public defenders and their respective institutions as well as increasing citizen access to justice. Most of Justice's rule of law activities were carried out by its International Criminal Investigative Training Assistance Program (ICITAP), which emphasized enhancing the overall police and investigative capabilities of law enforcement organizations. State, the Department of Defense, and USIA accounted for about $258 million, or about 27 percent, of the U.S. worldwide efforts. State's activities focused on international narcotics and law enforcement and antiterrorist assistance. Defense provided rule of law training to foreign military servicemembers, but most of its rule of law assistance was provided to support its operations in Haiti. USIA focused on increasing the awareness and knowledge of rule of law issues through various educational programs, such as exchanges between host country judicial and law enforcement personnel and their U.S. counterparts. (See fig. 3.) Funding for rule of law programs and related activities was provided primarily through the international affairs appropriations for USAID, State, and USIA. These three entities accounted for more than 91 percent of all rule of law funding, or $884 million, in fiscal years 1993-98. In addition, Defense provided about $58 million (6 percent). Although they provided small amounts of funding, almost all rule of law assistance provided by Justice, the Treasury, and other departments and agencies was funded through interagency transfers and reimbursements from USAID and, to a lesser extent, State. As previously noted, the Latin America and the Caribbean region was the largest recipient of U.S. rule of law assistance in fiscal years 1993-98. As with the overall worldwide rule of law assistance, we identified the funding and recipients and the departments and agencies involved. In addition, we categorized the rule of law assistance provided to the region to help describe what the overall purposes of the assistance were. In fiscal years 1993-98, the United States provided $349 million in rule of law assistance to Latin America and the Caribbean (about 36 percent of the worldwide total). Forty countries in the region received a portion of this assistance, although the funding was concentrated among a few countries. Seven countries accounted for about 76 percent of the total regional funding. Two of the seven--Haiti and El Salvador--accounted for just over 50 percent of the regional total, with $137.9 million and $40.7 million, respectively. (See fig. 4.) Haiti was a special case. The United States provided large amounts of assistance during this period in an attempt to restore order and democracy after a coup in 1991. Nearly one-third of the assistance for Haiti was a $42.6 million, one-time commitment from Defense in 1994 for equipment, supplies, and other support to assist international police monitors and a multinational force. In subsequent years, Haiti continued to be the top recipient of rule of law funds in the region, receiving $35.5 million in fiscal year 1995, $16 million in 1996, and about $15 million in fiscal years 1997 and 1998. Most of this assistance was provided to develop and support a civilian national police force. To help illustrate what rule of law assistance was used for in the Latin America and the Caribbean region, we grouped rule of law assistance into one of six categories based on descriptions provided by the cognizant agencies. Although we placed each program or activity into one primary category, many programs, USAID's in particular, had multiple purposes that could be identified with more than one category. Figure 5 illustrates the distribution of rule of law assistance by these categories. (App. IV defines the categories we used and provides funding levels by country and category.) The largest rule of law category was assistance for criminal justice and law enforcement. About $199 million--57 percent of the regional total for fiscal years 1993-98--was dedicated to these activities. We included assistance to police, prosecutors, public defenders, and other host country agencies (such as customs) that take on law enforcement functions, as well as antinarcotics and antiterrorism assistance, in this category. Almost every country in the region that received rule of law assistance had some criminal justice and law enforcement funding. Haiti received the largest amount of such assistance--$72.5 million. Other major recipients were El Salvador ($25.9 million), Colombia ($19.9 million), Panama ($11.2 million), and Bolivia ($9.8 million). Virtually all of the assistance provided through Justice and most of the funding provided by USAID and State was in this category. Assistance for judicial and court operations was the second largest category, comprising $74.2 million (21 percent of the regional total). USAID provided 88 percent of the funding. Assistance for civil government and military reform was the third largest category--$47.6 million (13.6 percent). We included assistance for governmental entities other than the courts and criminal justice and law enforcement systems in this category. The largest single element was $42.6 million provided by Defense to Haiti in 1994. In addition, we included most of the military service training on topics such as civil-military relations and professional skills for maritime and military personnel. Much less funding was devoted to the other categories--$22 million for democracy and human rights, $5.3 million for general and other activities, and $1.1 million for law reform. In the category of democracy and human rights, we included civic education activities, as well as some efforts that focused specifically on human rights, citizen participation, and related topics. In the general/other category, we included most of the legal education grants provided by USIA, as well as assistance on various topics such as intellectual property rights and drug education and rehabilitation. To determine how much U.S. rule of law assistance was provided worldwide in fiscal years 1993-98, and to identify the U.S. departments and agencies involved, we reviewed program documentation and interviewed officials at the Department of State, USAID, the Department of Defense, and USIA--the principal sources of funding for U.S. rule of law programs. These officials identified other departments and agencies with rule of law activities. We asked officials from each of these entities to provide funding and descriptive information for its activities over the period. However, most of these departments and agencies did not have rule of law funding information readily available and had to initiate ad hoc efforts to compile data addressing our questions. Further complicating this effort was the fact that the departments and agencies did not have a commonly accepted definition of what constituted rule of law activities. Therefore, we relied on each department and agency (and the bureaus and offices within those entities) to provide us information on the programs and activities it considered rule of law. In some instances, programs with an apparent rule of law element were not included. For example, USAID did not include all of its assistance for human rights, and State did not include all of its antinarcotics assistance. Additionally, the funding data is a mix of obligated amounts and actual expenditures. For agencies (primarily USAID) that provided rule of law assistance over several years, obligation data better reflected the magnitude of the funding involved because actual expenditures (or requests for reimbursement) may not be reported until subsequent years. However, other rule of law assistance provided, for example by law enforcement agencies, was relatively low-cost, short-term training or exchange programs. In this instance, obligations and actual expenditures were virtually synonymous. Therefore, we used actual expenditures. Because of the volume of data--almost 4,600 program and activity records--and the lack of documentation in some agencies, we did not independently verify the accuracy of the data provided. Some agencies could not provide data for the entire period--fiscal years 1993-98--or lacked funding amounts for some identified rule of law activities. USAID's automated information system could not provide worldwide data for fiscal year 1996. The system was upgraded that year, and 1996 information was not captured in the new system nor was it available in USAID's prior system. At our request, USAID polled each of its missions in Latin America and the Caribbean to obtain rule of law funding data, including fiscal year 1996; however, because of the magnitude of the effort, we did not request that USAID do the same for the other regions of the world. To help mitigate this limitation, we used information from other agencies indicating USAID rule of law funding for 1996. However, this information likely understates USAID's assistance levels to regions other than Latin America and the Caribbean for the year. State's Bureau of International Narcotics and Law Enforcement Affairs provided us funding information for fiscal years 1997 and part of 1998. Essentially, this office transferred rule of law funds to U.S. law enforcement and related agencies to assist their foreign counterparts. Therefore, for the other years, we relied on the U.S. recipients of this funding to report the amount of rule of law funding provided by the Bureau. In addition, for many agencies, the fiscal year 1998 data provided to us was compiled before the fiscal year data had been finalized and may be incomplete. However, with the exception of not having complete USAID funding information for fiscal year 1996, we believe the funding levels for the other departments and agencies generally reflect their rule of law activities. We performed our work from June 1998 to May 1999 in accordance with generally accepted government auditing standards. The Departments of Commerce, Defense, Justice, State, and the Treasury; USAID; and USIA commented on a draft of this report. Defense and USAID provided written comments (see apps. V and VI); the others provided oral comments. USAID also provided its definition of rule of law. All of the agencies concurred with the report; some provided technical comments that have been incorporated, as appropriate. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days after its issue date. At that time, we will send copies of this report to the Honorable Madeleine K. Albright, the Secretary of State; the Honorable William S. Cohen, the Secretary of Defense; the Honorable Robert E. Rubin, the Secretary of the Treasury; the Honorable William M. Daley, the Secretary of Commerce; the Honorable J. Brian Atwood, the Administrator of USAID; the Honorable Penn Kemble, the Acting Director of USIA; and interested congressional committees. We will make copies available to others upon request. Please contact me at (202) 512-4128 if you or your staff have any questions about this report. Key contributors to this report are listed in appendix VII. Worldwide U.S. rule of law assistance grew from about $128 million in fiscal year 1993 to about $218 million in fiscal year 1998. The growth was not uniform across the geographic regions, with Central Europe increasing from about $8 million to over $67 million during the period--supplanting the Latin America and the Caribbean region as the leading recipient of rule of law assistance. Table I.1 shows rule of law assistance by region for fiscal years 1993-98. We used "multiregional" for rule of law assistance provided to several countries in two or more regions or when such assistance was not broken out by recipient countries. In fiscal years 1993-98, the United States provided at least some rule of law assistance to 184 countries. The assistance ranged from multiyear institutional development programs to one-time, short-term training for police or other law enforcement personnel. Table II.1 shows the dollar value of the rule of law assistance provided to all the countries we identified as receiving some assistance. In some cases, the assistance was not identified with a specific country or was provided to countries in multiple regions--such assistance is identified as "regional" or "multiregional," respectively. Table II.1: U.S. Rule of Law Funding by Region and Country, Fiscal Years 1993-98 Congo (Brazzaville) Congo (Kinshasa) In compiling the rule of law assistance data for this report, we identified 7 cabinet-level departments and 28 related agencies, bureaus, and offices involved in providing rule of law assistance. Many are law enforcement agencies providing training and technical assistance to their counterparts overseas. These are listed below. International Trade Administration National Telecommunications and Information Administration Office of General Counsel, Commercial Law Development Program U.S. Patent and Trademark Office U.S. Air Force U.S. Army U.S. Marine Corps U.S. Navy Drug Enforcement Administration Federal Bureau of Investigation Immigration and Naturalization Service Criminal Division International Criminal Investigative Training Assistance Program Office of Overseas Prosecutorial Development, Assistance and Bureau of Diplomatic Security, Office of Antiterrorism Assistance Bureau of International Narcotics and Law Enforcement Affairs Bureau of Western Hemisphere Affairs (formerly Bureau of Inter-American Affairs) Bureau of Alcohol, Tobacco and Firearms Office of International Affairs Office of Investigations Federal Law Enforcement Training Center Financial Crimes Enforcement Network Internal Revenue Service U.S. Secret Service U.S. Agency for International Development (USAID) U.S. Information Agency (USIA) To develop an overview of the types of activities being funded for the Latin America and the Caribbean region, we grouped the U.S. rule of law assistance program data for the region into six categories based on activity descriptions provided by the cognizant departments and agencies. Although we placed each program or activity into one primary category, many programs, USAID's in particular, had multiple purposes that could be identified with more than one category. The following definition for each category we used and the types of activities we included. Criminal Justice and Law Enforcement: Assistance to help criminal justice or law enforcement organizations make reforms or improve their capabilities to carry out their responsibilities in a professional and competent manner. We included technical assistance and training for police, prosecutors, public defenders, and other personnel in law enforcement-related agencies (such as Customs) in this category. Assistance for police often focused on investigative capabilities and management improvements. Technical assistance and training topics included detection and identification of firearms, development of criminal investigation units, maritime law enforcement, and detection of counterfeit currency. We also included antinarcotics and antiterrorism assistance. Judicial and Court Operations: Assistance to help reform or improve operations of judicial and court systems. We included activities that focused on modernizing court administration, training in oral advocacy skills, training judicial personnel, and establishing procedures for judge selection and a career ladder for judges. In addition, we included programs intended to improve access to the justice system and establish legal aid services and justice centers; to institute alternative dispute resolution, mediation, or arbitration procedures in various sectors; and to provide exchange opportunities, training, or research related to the judicial or legal system in general. Civil Government and Military Reform: Assistance to help promote reform in other than judicial and law enforcement government agencies, improve cooperation and understanding between civil and military agencies, or develop responsive or responsible government institutions and officials. The majority of the activities were training courses provided by the military services on topics such as civil-military relations, professional skills for maritime and military personnel, and military law, although the largest single item was the funding to support multinational forces and police monitors in Haiti. We also included training and related programs on government ethics and corruption in this category. Democracy and Human Rights: Assistance to promote democracy, electoral reforms, or respect for human rights. We included USAID human rights activities and many USIA-funded activities that focused on civic education, citizen participation, free press, and related topics in this category. General/Other Activities: Assistance that did not fit into other categories or was not clearly described. We included legal education grants provided by USIA and training or exchange programs on an assortment of topics such as intellectual property rights, drug education and rehabilitation, and domestic and gender violence. In addition, we included assistance that had no description. Law Reform: Assistance to help develop, document, or revise constitutions, laws, codes, regulations, or other guidance that institute and strengthen the rule of law. We included activities primarily focused on law reform, including judicial or criminal procedures code reforms. However, some law reform activities may be included in other categories as a component of a larger program--especially USAID programs that had multiple goals. Table IV.1 illustrates the distribution of the rule of law assistance by the categories we developed among the countries in Latin America and the Caribbean. Well over half of all U.S. rule of law assistance to the region was technical assistance and training for criminal justice and law enforcement personnel--police, prosecutors, public defenders, and others. In addition to those named above, Ann L. Baker, Mark B. Dowling, Marcelo Fava, Wyley Neal, and Richard Seldin made key contributions to this report. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary, VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO provided information on U.S. rule of law assistance programs and activities, focusing on the: (1) amount of U.S. rule of law funding provided worldwide in fiscal years 1993-1998; and (2) U.S. Departments and agencies involved in providing rule of law assistance. GAO noted that: (1) based on the funding data cognizant Departments and agencies made available, during fiscal years 1993-1998, the United States provided at least $970 million in rule of law assistance to countries throughout the world; (2) the Latin America and the Caribbean region was the largest recipient of U.S. rule of law assistance over the period, accounting for $349 million, or more than one-third of the total assistance; (3) in recent years, Central European countries received an increasingly larger share and, in 1998, Central Europe was the largest regional recipient, accounting for about one-third of all rule of law assistance; (4) the United States provided at least some assistance to 184 countries--ranging from $138 million for Haiti to $2,000 for Burkina Faso; (5) while most countries received less than $1 million, 15 countries, including 7 in Latin America and the Caribbean, accounted for just over half of the total funding; (6) at least 35 entities from various U.S. Departments and agencies have a role in the U.S. rule of law assistance programs; (7) the Departments of State and Justice and the Agency for International Development are the principal organizations providing rule of law training, technical advice, and related assistance; (8) the Department of Defense, the U.S. Information Agency, numerous law enforcement agencies and bureaus, and other U.S. Departments and agencies also have a direct role; (9) 40 countries in the Latin America and the Caribbean region received some rule of law assistance; (10) more than three-fourths of the $349 million in assistance was provided to seven countries; (11) Haiti received nearly $138 million, or about 40 percent of the regional total, largely in connection with U.S. and international efforts to restore order and democracy after a September 1991 military coup; (12) six other countries in the region--ranging from about $41 million for El Salvador to $12 million for Panama--accounted for about $127 million, or nearly 37 percent of the regional total; (13) most of the rule of law assistance for Latin America and the Caribbean was provided to help the countries reform their criminal justice or law enforcement organizations, including training and technical assistance for prosecutors, public defenders, police officers, and investigators; and (14) a substantial amount was also dedicated to improving court operations, including modernizing court administration and enhancing public access to the judicial system.
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Federal agencies, including DHS and its components, have discretion to place employees on administrative leave in appropriate circumstances and for an appropriate length of time. Administrative leave is an excused absence without loss of pay or charge to another type of leave. In the absence of statutory authority to promulgate regulations addressing administrative leave by all federal employees, OPM has mentioned this leave in limited contexts in regulations covering other types of leave and excused absences for federal employees. OPM has provided additional guidance to federal agencies on administrative leave via government- wide memorandums, handbooks, fact sheets, and frequently asked questions. For example, in May 2015, OPM sent a memorandum to federal agencies that described the steps it was taking to address the recommendations from our October 2014 report on administrative leave and that included a fact sheet focused on this type of leave. OPM guidance has acknowledged numerous purposes for which administrative leave is appropriate. To promote equity and consistency across the government, OPM advises that administrative leave be limited to those situations not specifically prohibited by law and satisfying one or more of the following criteria: The absence is directly related to the department or agency's mission, The absence is officially sponsored or sanctioned by the head of the The absence will clearly enhance the professional development or skills of the employee in his or her current position, or The absence is as brief as possible under the circumstances and is determined to be in the interest of the agency. With respect to administrative leave for personnel matters, OPM states that placing an employee on administrative leave is an immediate, temporary solution for an employee who should be kept away from the worksite. As a general rule, administrative leave should not be used for an extended or indefinite period or on a recurring basis. Specifically, OPM guidance discusses agency use of administrative leave before or after proposing an adverse action against an employee. For example, an agency may place an employee on administrative leave during an investigation prior to proposing an adverse action when the agency believes the employee poses a threat to his own safety or the safety of others, the agency mission, or government systems or property. According to OPM, a federal agency should monitor the situation and move towards longer-term actions when it is possible, appropriate, and prudent to do so. An agency may also place an employee on administrative leave after proposing an adverse action. According to OPM regulations, under ordinary circumstances, an employee whose removal or suspension has been proposed will remain in a duty status in his or her regular position after the employee receives notice of the proposed adverse action. In those rare circumstances after the agency proposes an adverse action when the agency believes the employee's continued presence in the workplace may pose a threat to the employee or others, result in loss of or damage to government property, or otherwise jeopardize legitimate government interests, the agency may place the employee on administrative leave for such time as is necessary to effect the adverse action. However, OPM strongly recommends agencies consider other options prior to using administrative leave in this scenario. Options include assigning the employee to duties and a location where he or she is not a threat to safety, the agency mission, or government property; allowing the employee to take leave (annual leave, sick leave as appropriate, or leave without pay); or curtailing the advance notice period for the proposed adverse action when the agency can invoke the "crime provision" because it has reasonable cause to believe the employee has committed a crime for which a sentence of imprisonment may be imposed. The Merit Systems Protection Board (MSPB), among other things, adjudicates individual federal employee appeals of agency adverse actions. MSPB has recognized the authority of agencies to place employees on short-term administrative leave while instituting adverse action procedures. MSPB has also ruled that placing an employee on administrative leave is not subject to procedural due process requirements and is not an appealable agency action. This is in contrast to adverse actions, such as removals or suspensions of more than 14 days, including indefinite suspensions, which require procedural due process (such as 30 days advance notice), and are subject to appeal and reversal by MSPB where agencies fail to follow such due process procedures. Similarly, where an agency bars an employee from duty for more than 14 days, requiring that employee to involuntarily use his or her own leave, such agency actions are also subject to appeal. A federal employee may obtain judicial review of a final MSPB decision with the United States Court of Appeals for the Federal Circuit by filing a petition for review within 60 days after the Board issues notice of its final action. Between fiscal years 2011 and 2015, DHS placed 116 employees on administrative leave for personnel matters for 1 year or more, with a total estimated salary cost of $19.8 million during the same period, as shown in table 1. DHS placed the majority of these employees (69 employees or 59 percent) on administrative leave for matters related to misconduct allegations, according to DHS data. For example, as of September 30, 2015, a law enforcement agent at a DHS component had been on administrative leave for over 3 years while under investigation for allegations of criminal and administrative misconduct. These allegations raised concerns about the protection of government resources and precluded him from working as a law enforcement agent, according to the component. While on administrative leave, the employee received an estimated $455,000 in salary and benefits, according to DHS. DHS also placed employees on administrative leave for personnel matters involving fitness for duty and security clearances. Of the 116 DHS employees on administrative leave for at least 1 year between fiscal years 2011 through 2015, 28 employees (24 percent) faced matters related to fitness for duty and 19 employees (or 16 percent) faced matters related to security clearances. For example, a component placed an employee on administrative leave because of concerns regarding his personal conduct and his handling of protected information. After proposing revocation of his security clearance and allowing the employee time to respond, the agency revoked the employee's security clearance. The employee's position required a security clearance, and the employee remained on administrative leave while he exhausted the agency's appeal process for revocation of his security clearance. Ultimately, after almost 18 months on administrative leave with an estimated salary cost of over $160,000, the employee was removed from the agency. As shown in table 1, CBP had the most employees placed on administrative leave for 1 year or more between fiscal years 2011 and 2015 (52 employees or 45 percent of the 116 DHS employees). The estimated salary cost for these employees for the same period was $8.9 million, according to DHS. DHS reported the current status, as of the end of fiscal year 2015, of the employees that had been on administrative leave for more than one year as one of four options: returned to duty, on indefinite suspension, separated, and on administrative leave. Prior to proposing an adverse action, such as suspension or removal, an agency often conducts an investigation. If the agency determines that for safety or security reasons the employee cannot stay in the workplace while the investigation is being conducted, the agency may put the employee on administrative leave until it has sufficient evidence to support a proposed adverse action. If the agency cannot gather sufficient evidence, the agency may need to return the employee to duty. For example, on the basis of allegations of misconduct, a component placed an employee on administrative leave. The employee remained on administrative leave--for over 3 years with an estimated salary cost of over $340,000--while the component conducted an investigation into the allegations of misconduct, according to DHS. Ultimately, the employee was returned to duty after the component determined that it had insufficient evidence to remove the employee or to put him on indefinite suspension. Table 2 shows, as of September 30, 2015, the status of the 116 DHS employees who had been on administrative leave for at least 1 year between fiscal years 2011 and 2015. Specifically, DHS ultimately returned to duty 32 employees (28 percent), separated from the agency more than half (59 percent) of the employees, and put on indefinite suspension 2 employees (2 percent), according to DHS data. As of September 30, 2015, 14 of the 116 employees (12 percent) were still on administrative leave, pending a final outcome, with an estimated salary cost of $2.6 million between fiscal years 2011 and 2015. Several factors can contribute to the length of time an employee is on administrative leave for personnel matters. Factors contributing to the time an employee is on administrative leave include (1) adverse action legal procedural requirements and the length of time needed for completing investigations related to misconduct, fitness for duty, or security clearance issues; (2) limited options other than administrative leave; and (3) agency inefficiencies in resolving administrative leave cases as expeditiously as possible. These factors are described below with examples from the DHS case files we reviewed where the employee was on administrative leave for 1 year or more. Adverse action requirements. It is important to note that an agency cannot take an adverse action, such as suspending for more than 14 days or removing an employee before taking certain procedural steps outlined in law. These procedural steps are described below. Prior to proposing an adverse action, an agency may place an employee on administrative leave in situations when the employee should be kept away from the workplace when the agency believes the employee poses a threat to his or her own safety or the safety of others, to the agency mission, or to government systems or property while an investigation is pending. For example, one DHS employee believed to be involved in alien smuggling and considered a risk was placed on administrative leave while the component collected evidence against the employee. An option could include assigning the employee to duties where he or she is no longer a threat to safety, the agency mission, or government property, if feasible. After proposing an adverse action, agencies are required to provide employees with at least 30 days advance written notice of proposed adverse action (e.g., notice of proposed indefinite suspension, notice of proposed removal), unless there is reasonable cause to believe the employee has committed a crime for which a sentence of imprisonment may be imposed, in which case a shorter notice may be provided. For example, the notice period was shortened to a 7-day notice period for a case in which an employee was indicted for extortion and bribery, among other things. After a proposed removal notice was issued, the employee resigned. In another case, there were two 30-day proposed suspension notice periods because the employee was indefinitely suspended, reinstated, and then indefinitely suspended a second time. Further, during the adverse action process, if new facts come to light it may be necessary to provide additional notification to the employee and provide them the opportunity to reply to that new information that will be considered in the final decision. An employee is also entitled to a reasonable time, but not less than 7 days, to respond to the notice of proposed adverse action orally and in writing and to furnish affidavits and other documentary evidence in support of the answer. In some cases, these responses can take months. For example, in one case the component issued a proposed removal notice in March 2014 because of the employee's lack of candor under oath. The employee responded in writing and orally over the next few months, raising issues that required clarification by the agency. Ultimately, the removal was finalized in November 2014, nearly 8 months after the original proposal. In addition, an employee or representative may request an extension of time to reply and has a right to review the information that the agency is relying upon. For example, in a case involving an employee accused of aggravated assault, the employee designated an attorney and requested time for the attorney to review the case before responding. Further, the component twice provided the employee with new information and time to respond. The original indefinite suspension proposal was issued in March 2014, but with the addition of the attorney and new evidence introduced, the oral response was not submitted until October 2014. If the employee wishes for an agency to consider any medical condition that may contribute to a conduct, performance, or leave problem, the employee must be given a reasonable time to furnish medical documentation. The agency may, if authorized, require a medical examination, or otherwise, at its option, offer a medical examination. For example, in a case that took more than 20 months to resolve, the component ordered the employee to take a fitness-for-duty exam in July 2012, after the employee exhibited hostile behavior at work. Over the course of the next 20 months, the employee received a general exam and two psychiatric exams. During this time, the employee remained on administrative leave while exams were rescheduled, physicians requested additional information, and there was miscommunication regarding medical records. In March 2014, the component determined that, according to the medical evidence, the employee was a threat to others and not able to safely perform his duties. The component ultimately removed the employee in September 2014. Conducting investigations and collecting evidence to make adverse action determination. Investigations into allegations of employee misconduct may be extensive, potentially involving multiple interviews over a lengthy period of time, or require investigations by third parties. Component officials indicated where parallel criminal investigations are ongoing by a third party, such as the Federal Bureau of Investigations, U.S. Attorney's Office, Department of Justice Office of Public Integrity, or the DHS OIG, the investigation may be lengthy and the component may be limited in its ability to conduct its own investigation because it may be precluded from obtaining documents and interviewing witnesses as that may interfere with the criminal investigation. For example, in a particularly long and complex misconduct investigation, component officials said the third-party investigation (by the DHS OIG) took over 2 years to complete, including over 50 interviews conducted abroad. However, as DHS and component officials noted, well-documented investigations are vital for ensuring adverse action decisions are properly supported, as officials are cautious to avoid liability in subsequent proceedings from an appealable decision that may result in an award of back pay and attorney's fees, which can be as much as three times or more the cost of employee back pay. For example, in one case involving an employee who had been removed for knowingly hiring an undocumented alien, the employee appealed the component's decision to the MSPB. The MSPB reversed the removal decision, finding that the deciding official's consideration of the employee's conviction as grounds for removal without first notifying her of the significance that he attached to her criminal status was a due process violation. The MSPB ordered the component to retroactively restore pay and benefits to the employee. Components have also withdrawn adverse actions in response to MSPB decisions. For example, after the MSPB handed down several decisions regarding indefinite suspensions based on security clearance investigations, DHS component officials rescinded the indefinite suspensions for two similar cases and returned the employees to administrative leave in order to reevaluate its procedures for these cases. Limited options other than administrative leave. In certain situations, management officials may have limited alternative options to administrative leave. The DHS policy and OPM guidance note that agencies should consider options other than administrative leave, such as assigning the employee to alternative work arrangements or duties where he or she is no longer a threat to safety or government property. According to DHS, telework is an alternative option to administrative leave. However, if an employee engages in alleged misconduct involving the misuse of government equipment, telework is not likely an alternative option as the individual would have access to the same government equipment and systems that they have allegedly misused. In this case, the only alternative is placing the individual on administrative leave. Also, DHS and component officials noted that reassignment to another position is not always feasible or viable, depending on other circumstances. For example, the U.S. Secret Service requires all of its employees to maintain a top secret security clearance, so if an employee's clearance is suspended pending an investigation, there are no alternative duties or positions to assign the employee to until the investigation is complete and a final decision is made. Potentially inefficient agency procedures. Inefficient procedures may also in some cases contribute to the extended use of administrative leave. While the facts and circumstances of each case are unique and management is faced with difficult decisions regarding appropriate actions to take in situations involving the use of administrative leave, our review of DHS case files identified examples where inefficient procedures may have contributed to the length of time the employee was on administrative leave. For example, at one DHS component, resolution of a case was delayed for months when the designated proposing and deciding officials--who are the officials responsible for proposing and making the decision on the adverse action regarding the employee--left their positions and the agency did not designate new officials in a timely manner. During this time, the employee remained on administrative leave. Filling the positions and allowing for replacements to become familiar with the case added time to resolve the case, according to agency officials. The component has since revised its procedures to allow flexibility in terms of who serves in those roles. In another case, an employee's top secret security clearance was suspended based on concerns about the employee's behavior and the employee was placed on administrative leave in December 2011. However, a mandatory physical examination to establish the employee's fitness for duty was not scheduled for this employee until May 2012. In another case, it was almost 5 months from the notice of proposed removal to the final decision, although the component already had medical documentation the employee was unable to perform his job. In September 2015, DHS issued a policy on the proper use of administrative leave across the department. Prior to its issuance, the department did not have a policy or guidance regarding the proper use of administrative leave. Instead, components had their own approach to managing administrative leave, and policies and procedures varied across the components in terms of oversight, approvals, and tracking. According to DHS officials, they issued this policy to help ensure proper and limited use of administrative leave across the department, consistent with OPM guidance. Component officials said they would modify their policies and procedures as necessary to ensure compliance with the requirements of the DHS policy. Key provisions in the DHS policy include the following. An emphasis on using administrative leave for short periods of time and only as a last resort for personnel matters. Citing OPM's guidance on the appropriate use of administrative leave, the policy includes examples of when it is appropriate for a manager to grant administrative leave, such as for dismissal or closure because of severe weather, voting, or blood donations. For personnel matters, such as during an investigation of the employee, the policy states that employees should remain in the workplace unless the employee is believed to pose a risk to him/her self, to others, or to government property, or otherwise jeopardize legitimate government interests. Other management options should then be considered, such as indefinite suspension, if appropriate, with administrative leave as a last resort. Requiring elevated management approval for longer periods of use. Supervisors can approve administrative leave for short periods, consistent with legal authority and relevant guidance. Supervisors are expected to consult with human resources officials and counsel as appropriate. No component may place an employee on administrative leave for more than 30 consecutive days without the approval of the component head or his/her designee. Routine reporting on administrative leave use to component and DHS management for increased visibility. Component heads are to receive quarterly reports on employees who are placed on administrative leave for 320 hours or more and to consider whether administrative leave continues to be warranted. Components are to report quarterly to the DHS Chief Human Capital Officer regarding employees placed on administrative leave for 960 hours (6 months) or more. DHS's new policy is intended to increase DHS and component awareness regarding the use of administrative leave by requiring elevated management approval and routine reporting to component heads and the DHS Chief Human Capital Officer, among other things, according to DHS officials. However, the policy does not address how DHS will evaluate the effectiveness of the policy in ensuring proper and limited use of administrative leave. Federal internal control standards call for agency management to establish internal control activities to ensure that ongoing monitoring occurs in the course of normal operations and that separate evaluations are conducted to assess effectiveness at a specific time. The standards also note that information on the deficiencies found during ongoing monitoring and evaluations should be communicated within the organization. DHS's new administrative leave policy provides for routine monitoring by component heads and the DHS Chief Human Capital Officer of administrative leave usage, which should help increase management visibility of the issue. DHS officials said they intend to use the quarterly reports to determine if administrative leave continues to be warranted for those specific cases. However, they acknowledged that conducting evaluations and sharing of evaluation results could help ensure the effectiveness of the policy and procedures across DHS. Evaluations of DHS's administrative leave policy can help the department identify and share particularly effective component practices for managing administrative leave, such as identifying alternative duties to assign employees instead of placing them on administrative leave. They may also help identify inefficient component processes, such as those we identified, that could increase the length of time an employee spends on administrative leave, allowing DHS to then take steps to address such inefficiencies and their causes. An evaluation may also identify unintended consequences resulting from DHS's administrative leave policy that monitoring does not capture. For example, an evaluation may find that the reporting aspects of the policy serves as an incentive to suspend or remove an employee before such actions are supported by an investigation, which may cost a component more if the action is successfully appealed. Finally, conducting evaluations of DHS's administrative leave policy may help ensure DHS's administrative leave policy and procedures are effective in reducing the use of administrative leave--one of the intended goals of the new policy--and ensuring the use is proper and justified. Administrative leave is a cost to the taxpayer and its use should be managed effectively. While the reporting requirements in DHS's new administrative leave policy should help increase DHS and component awareness regarding the use of such leave and will allow for regular monitoring, the policy does not require a more comprehensive separate evaluation of the effectiveness of the policy and related procedures. Once the DHS policy and procedures have been in place and administrative leave routinely monitored, a separate evaluation of the policy and procedures can help the department identify and share effective components practices for managing administrative leave as well as make adjustments needed to help ensure proper and limited use of administrative leave across DHS. To ensure that the department's administrative leave policy is working as intended, we recommend that the Secretary of Homeland Security direct the Chief Human Capital Officer to conduct evaluations of the department's policy and related procedures to identify successful practices, potential inefficiencies, and necessary policy and procedural adjustments, and to share the evaluation results across the department. We provided a draft of this product to DHS and OPM for their review and comment. DHS provided written comments, which are reproduced in full in appendix II. OPM did not provide written comments. In its comments, DHS concurred with the recommendation in the report and described planned actions to address it. Specifically, DHS stated that it will evaluate the effectiveness of the new administrative leave policy and related procedures, as GAO recommends. Also, DHS noted that an initial review of the administrative leave data from the first quarter of fiscal year 2016 was completed in February 2016, and the review of all fiscal year 2016 data and recommendations concerning administrative leave policy and related procedures will be completed by March 31, 2017. These planned actions, if fully implemented, should address the intent of the recommendation contained in this report. We are sending copies of this report to the Secretary of Homeland Security, the Acting Director of the Office of Personnel Management, and the appropriate congressional committees. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (213) 830-1011 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 significant contributions to this report are listed in appendix III. To present more detailed information on DHS's use of administrative leave, and to help verify the reliability of the information we obtained from DHS, we analyzed data from the Office of Personnel Management's (OPM) Enterprise Human Resources Integration (EHRI) system on DHS employees on at least 3 months of administrative leave between fiscal years 2011 and 2014. Fiscal year 2015 data were not available at the time of this report. As shown in table 3, during this period a total of 752 DHS employees were on administrative leave for 3 months or more between fiscal years 2011 and 2014, and 90 of these DHS employees were on this type of leave for 1 year or more during this period. This last number of employees is similar to the 87 employees on administrative leave for at least 1 year between fiscal years 2011 and 2014 reported in the DHS information. In addition to the contact named above, Adam Hoffman (Assistant Director), Juan Tapia-Videla (Analyst-in-Charge), Monica Kelly, Tracey King, David Alexander, Cynthia Grant, and Chris Zbrozek made significant contributions to this report.
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Federal agencies have the discretion to authorize administrative leave--an excused absence without loss of pay or charge to leave--for personnel matters, such as when investigating employees for misconduct allegations. In October 2014, GAO reported on the use of administrative leave in the federal government. GAO found that, between fiscal years 2011 and 2013, 263 federal employees were on this type of leave for 1 year or more during this 3-year period. Of these, 71 were DHS employees. GAO was asked to examine DHS's use of administrative leave across directorates, offices, and components (DHS components). This report describes (1) the number of DHS employees who were on administrative leave for 1 year or more for personnel matters from fiscal years 2011 through 2015, (2) the factors that contribute to the length of time employees are on administrative leave, and (3) the extent to which DHS has policies and procedures for managing such leave. GAO used data from DHS and the Office of Personnel Management, reviewed DHS policies and procedures, interviewed DHS officials, and reviewed information on selected cases of DHS employees placed on administrative leave. Cases were selected based on length of leave, reason for using leave, and DHS component, among other things. Between fiscal years 2011 and 2015, 116 Department of Homeland Security (DHS) employees were on administrative leave for personnel matters for 1 year or more, with a total estimated salary cost of $19.8 million for this period. Of these 116 employees on administrative leave: 69 employees (59 percent) were for matters related to misconduct allegations, 28 employees (24 percent) were for matters related to fitness for duty issues, and 19 employees (or 16 percent) were for matters related to security clearance investigations. As of September 30, 2015, DHS reported that of these 116 employees: 68 employees (59 percent) were separated from the agency, 32 employees (28 percent) were back on duty, 2 employees (2 percent) were on indefinite suspension, and 14 employees (12 percent) remained on administrative leave. Several factors can contribute to the length of time an employee is on administrative leave for personnel matters, such as certain legal procedural steps that must be completed before suspending or removing an employee, or time needed for completing investigations. For example, in one particularly long and complex misconduct investigation, an employee was on administrative leave for over 2 years while investigating officials conducted over 50 interviews abroad. In September 2015, DHS issued an administrative leave policy to ensure proper and limited use of administrative leave across the department. The policy clarifies when such leave is proper, elevates the level of management approval needed for longer periods of leave, and requires quarterly reporting of leave use to component heads and the Chief Human Capital Officer. Component policies and procedures varied prior to the DHS policy; however, component officials stated they would make changes needed to comply with the new policy. Federal internal control standards call for agencies to conduct routine monitoring and separate evaluations to ensure agency controls are effective, and to share their results. While the quarterly reports required under DHS's policy provide routine monitoring information, the policy does not address how DHS will evaluate the effectiveness of the policy and related procedures or how DHS will share lessons learned. DHS officials said they plan to learn from reviewing quarterly reports, but agreed evaluations could be valuable in assessing policy effectiveness. Evaluations of DHS's administrative leave policy can help the department identify effective practices for managing administrative leave, as well as agency inefficiencies that increase the time employees spend on such leave. Sharing evaluation results with components may help ensure DHS's administrative leave policy and procedures are effective, and are achieving the intended result of reducing leave use. GAO recommends that DHS evaluate the results of its administrative leave policy and share the evaluation results with the department's components. DHS concurred with the recommendation.
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Before highlighting the results of our review of the fiscal year 2003 PARs, I would like to summarize the requirements of the Improper Payments Act. The act requires the head of each agency to annually review all programs and activities that the agency administers and identify all such programs and activities that may be susceptible to significant improper payments. For each program and activity identified, the agency is required to estimate the annual amount of improper payments and submit those estimates to the Congress before March 31 of the following applicable year. The act further requires that for any agency program or activity with estimated improper payments exceeding $10 million, the head of the agency shall provide a report on the actions the agency is taking to reduce those payments. The Improper Payments Act also required the Director of OMB to prescribe guidance to implement its requirements not later than six months after the date of its enactment (Nov. 26, 2002). OMB issued this guidance on May 21, 2003. It states that each agency shall report the results of its improper payment efforts in the Management Discussion and Analysis section of its PAR for fiscal years ending on or after September 30, 2004. In general, the first set of reports required by the guidance is due in November 2004. Significantly, the guidance issued in May 2003, also required that 15 agencies report improper payment information for 46 programs identified in OMB Circular A-11, publicly in their fiscal year 2003 PARs. Section 57 required agencies to include improper payment information for the agencies and programs in their nonpublic budget submissions to OMB, beginning with the fiscal year 2003 budget proposals. According to OMB, the programs were selected primarily because of their large dollar volume ($2 billion dollars or more in outlays). In July 2003, OMB dropped the requirement for information on erroneous payments and eliminated Section 57 requirements for preparing fiscal year 2005 budget submissions. The information previously called for in the circular includes actual and estimated improper payments and rates, targets for reducing the improper payment rates identified, and corrective action plans to reach the targets. If diligently and vigorously implemented, the Improper Payments Act should have a significant impact on the governmentwide improper payments problem. The level of importance each agency, the administration, and the Congress place on the efforts to implement the act will determine its overall effectiveness and the level to which agencies reduce improper payments and ensure that federal funds are used for their intended purposes. As you requested, we reviewed the fiscal year 2003 PARs for the 15 agencies and 46 programs previously cited in OMB Circular A-11, Section 57, to identify the improper payment information contained therein. Table 1 summarizes the improper payment estimates agencies reported in their fiscal year 2003 PARs. Further review of the table shows that the PARs contained improper payment estimates for 31 of the 46 agency programs previously listed in Circular A-11. The reports contained information on agency initiatives to prevent or reduce improper payments for 22 programs and on impediments to improper payment prevention or reduction for 11 programs. Some agencies partially reported required information. Figure 1 presents, by agency program, the level of reporting that we found for the three categories of information you asked about (improper payment amounts; initiatives to prevent improper payments, reduce them, or both; and impediments to preventing or reducing them). As you can see, the level of reporting is literally all over the board. Further, although agencies may have met the reporting requirements for particular programs by addressing them in PARs, in many cases, the information reported was limited to agency plans for future measures that may not come about. In some cases, agencies reported that they had already determined that programs were not susceptible to significant improper payments, despite the fact that the auditor's reports in the same PARs identified management challenges, or material internal control weaknesses within the programs where the design or operation of an internal control procedure did not reduce, to a relatively low level, the risk that errors, fraud, or noncompliance that would be material to the financial statements may occur and not be detected promptly by employees in the normal course of performing their duties. This situation appears contradictory. Although OMB has required agencies to perform various improper- payment-related identification and corrective action activities for the past three years for these 46 programs, figure 1 shows that only seven agencies reported all of the required elements you asked about--estimated amounts, initiatives taken to reduce improper payments, and impediments to improper payment prevention or reduction--representing only 9 of the 46 programs (20 percent). One of the agencies, for one of its programs, reported estimated improper payment amounts, discussed ongoing collaborative efforts made with and between program partners (such as state agencies) to improve payment accuracy and to share "best practice" information, and further reported that recent legislation weakened the penalties imposed on program partners for high error rates and reduced the incentives offered for lower rates. Another agency reported an improper payment amount for three of its four required programs, reported initiatives such as improving program guidance and training, and addressed impediments such as the lack of available income data needed to verify applicant-provided income information. A third agency reported an estimate for one of its three required programs, and further reported initiatives including promoting and funding data exchanges with program partners, and reported that its principal impediment was the cost of detecting eligibility issues. For 10 of the 46 programs represented in six agencies, the agencies estimated improper payment amounts and initiatives taken to reduce improper payments, but did not address any impediments. For one program, an agency estimated improper payments and discussed initiatives to correct benefit computation errors and beneficiary earnings test improvements. Another is performing annual on-site reviews. One agency reported an improper payment amount for a program and discussed initiatives, such as implementing an automated system to identify coding and billing errors. Other initiatives reported by agencies included conducting recovery audits, collaborating with other federal agencies to identify and recover payments made to ineligible beneficiaries, and issuing policy notices and providing training to agency personnel on program processes. Six agencies reported estimated amounts for 11 programs, but did not discuss initiatives taken to reduce improper payments and impediments to preventing or reducing improper payments. For three programs, agencies reported no estimated amounts or impediments, but did discuss initiatives taken to reduce improper payments, such as expanding annual post award monitoring and oversight processes. One agency did not report estimated improper payment amounts or discuss initiatives taken to reduce improper payments for one of its programs but identified some of the impediments it has encountered in preventing or reducing them, such as the unavailability of the data necessary to accurately measure improper payments. For 11 of the 46 programs for which agencies were required to report improper payment information in their fiscal year 2003 PARs, four agencies did not report estimated amounts, initiatives taken to reduce improper payments, or impediments to preventing or reducing improper payments, even though OMB Circular A-11, Section 57, originally required agencies to report improper payment data, assessments, and action plans with their initial budget submissions since July 2001. One agency reported, "... erroneous payments are very unlikely ... limited to instances of fraud... " Agencies for several programs reported only that they were continuing to develop improper payment error rates, but reported no further information. In October 2001, we issued an executive guide on strategies to manage improper payments that was based on the results of information that we obtained from public and private sector organizations that identified and took actions designed to reduce improper payments in their programs. We found that the actions that these organizations took shared a common focus of improving the internal control system over problem areas. This system consists of five primary components--the control environment, risk assessments, control activities, information and communications, and monitoring. Internal controls are not one event, but a series of actions and activities that occur throughout an entity's operations and on an ongoing basis. People make internal controls work, and responsibility for good internal control rests with all managers. One of the biggest hurdles that many entities face in the process of managing improper payments is overcoming the tendency to deny the problem. It is easy to rationalize avoiding or deferring action to address a problem if you do not know how big the problem is. The nature and magnitude of the problem--determined through a systematic risk assessment process--needs to be determined and openly communicated to all relevant parties. When this occurs, especially in a strong control environment, denial is no longer an option, and managers have the information, as well as the incentive, to begin addressing improper payments. Fraud, waste, and abuse in federal activities and programs lead to the loss of billions of dollars of government funds, erode public confidence, and undermine the federal government's ability to operate effectively. Unfortunately, that assessment comes from a 1985 GAO report on federal agencies implementation of 31 U.S.C. 3512 (c), (d) (commonly referred to as the Federal Managers' Financial Integrity Act of 1982 (Financial Integrity Act)). Continuing concern over the poor condition of government internal controls and accounting systems led the Congress to pass this legislation that requires, among other things, ongoing evaluations and reports on the adequacy of the systems of internal accounting and administrative control of each executive agency. It requires the head of each agency to issue an annual report that identifies material weaknesses identified through the assessment process and the actions planned to correct those weaknesses. An August 1984 GAO report that summarized the results of our governmentwide review of agencies' efforts to implement the Financial Integrity Act found that agencies made a good start in the first year of assessing their internal control and accounting systems and have demonstrated a management commitment to implementing the act. Top agency and OMB managers were becoming involved. The report characterized the first-year effort as a learning experience and noted that much remained to be done to complete the evaluation process and correct the problems identified. Our 1984 review of the material weaknesses identified in the annual reports of 17 major agencies revealed that 16 agencies reported accounting/financial management system 14 agencies reported procurement weaknesses; 13 agencies reported property management weaknesses; 12 agencies reported cash management weaknesses; 12 agencies reported grant, loan, and debt collection management 8 agencies reported eligibility and entitlement weaknesses. We concluded that, since the initial work in implementing the act had been accomplished, agencies needed to develop comprehensive plans to correct the material weaknesses identified. Correction of problems represents the "bottom line" of the act. We further recognized that many of the weaknesses identified were long-standing. They did not develop overnight, and their solutions would not be easy. It would take a sustained, high- priority commitment. In commenting on this report, OMB agreed that a long-term commitment to improving internal control was necessary and that weaknesses identified in the first year must be corrected. "According to the testimony, a good beginning has been made toward implementing the Act. It is clear, however, that much more remains to be done .... This year agencies began the review process. Now, they must improve on the work they did last year and conduct in- depth internal control reviews. Above all, corrective actions must be taken on the deficiencies found." In our report, we noted that, while the act required agency heads to report material weaknesses in their annual reports, the annual reviews conducted identified significant numbers of less serious internal control weaknesses. For example, although Treasury did not report any additional material weaknesses in its 1984 annual statement, its component bureaus identified 89 weaknesses that they considered material and reported 127 associated corrective actions. According to Treasury's 1984 annual statement, the bureaus had completed 46 (36 percent) of these 127 corrective actions. Similarly, the military services identified and reported correcting thousands of control weaknesses at lower levels. Army managers, for example, reported correcting 3,600 internal control weaknesses in 1984 that were not considered to be material from an agency perspective. In November 1989 testimony, former Comptroller General Charles A. Bowsher again addressed this issue by noting that based on the results of the internal control assessments and examinations of the systems problems that agencies have reported and that GAO and federal audit organizations have identified in their audit reports, it is evident that the government does not currently have the internal control and accounting systems necessary to effectively operate many of its programs and safeguard its assets; many weaknesses are long-standing and have resulted in billions of dollars of losses and wasteful spending; major government scandals and system breakdowns serve to reinforce the public's perception that the federal government is poorly managed, with little or no control over its activities; and top-level officials must provide leadership if this situation is to change. In summary, during the 1980s, federal agencies conducted significant numbers of internal control assessments and identified and reported taking corrective actions to eliminate the weaknesses found. Yet, at the end of the decade, controls remained inadequate and these weaknesses resulted in billions in losses and wasteful spending. Significantly, the final item cited by Mr. Bowsher in his 1989 testimony is indicative of a weak control environment. Our past work has shown that the control environment is perhaps the most significant component of internal control to the identification, development, and implementation of activities to reduce improper payments. As pointed out in our executive guide on managing improper payments, without this top-level leadership, the outlook for overall improvements in the governmentwide effort to reduce improper payments is limited. From the early 1990s to the present, additional initiatives called for actions to strengthen internal controls over federal programs and financial management activities. The Chief Financial Officers Act (CFO) of 1990 as expanded by the Government Performance and Results Act of 1993 (GPRA); the Government Management Reform Act of 1994; and the President's Management Agenda are a few of these initiatives. Our reports that discuss these initiatives may not specifically focus on improper payments and agency efforts to reduce such payments but they do discuss agency internal controls over various programs, activities, or both and actions to identify weaknesses in those controls and to design and implement actions to eliminate those weaknesses. Therefore, there is a direct relationship between agency activities regarding those initiatives and agency actions to implement the Improper Payments Act. In recent testimony before this subcommittee on the fiscal year 2003 U.S. government financial statements, Comptroller General David M. Walker noted that certain material weaknesses in internal control and in selected accounting and reporting practices resulted in conditions that continued to prevent GAO from being able to provide the Congress and American citizens with an opinion as to whether the consolidated financial statements of the U.S. government are fairly stated in conformity with U.S. generally accepted accounting principles. One of these material weaknesses involved improper payments that, based on the limited information available, exceeded $35 billion annually. The testimony noted that without a systematic measurement of the extent of improper payments, federal agency management cannot determine (1) if improper payment problems that require corrective action exist, (2) mitigation strategies and the appropriate amount of investments to reduce them, and (3) the success of efforts implemented to reduce improper payments. GPRA is the centerpiece of a statutory framework that the Congress put in place during the 1990s to help resolve the long-standing management problems that have undermined the federal government's efficiency and effectiveness and to provide greater accountability for results. GPRA was intended to address several broad purposes, including strengthening the confidence of the American people in their government; improving federal program effectiveness, accountability, and service delivery; and enhancing congressional decision making by providing more objective information on program performance. It has resulted in a great deal of progress in making federal agencies more results oriented, but numerous challenges still exist. Top leadership commitment and sustained attention to achieving results, both within the agencies and at OMB, is essential to GPRA implementation. Top leadership commitment is a characteristic of a positive control environment. This again raises the issue of the adequacy of the control environment at federal agencies. Leadership commitment is important, not only to GPRA implementation, but other management activities and initiatives, including successful implementation of the Improper Payments Act. Our executive guide on managing improper payments identified a positive control environment as perhaps the most significant element critical to the identification, development, and implementation of activities to reduce improper payments. The guide can provide useful information to leaders in formulating and implementing their programs to reduce improper payments. In an October 2003 report on governmentwide efforts to address improper payment problems, we noted that, as part of the President's Management Agenda, officials at OMB told us that they had met with officials from all relevant agencies to provide assistance and to ensure that agencies (1) understood the requirements set forth in its guidance for implementing the Improper Payments Act, (2) have started to inventory their programs and activities for significant risk of improper payments, (3) understand the risk assessment process, and (4) understand the reporting requirements under the Improper Payments Act. In that report, we concluded that the governmentwide effort to identify and assess the magnitude of improper payments, to take actions to reduce those payments, and to publicly report the results of those efforts is generally in its infancy. We further reported that although OMB Circular A-11 had required 14 CFO Act agencies to report selected improper payment information on 44 programs to OMB beginning with their fiscal year 2003 budget submissions, those agencies had completed risk assessments for only 15 of the programs, despite the Congress's mandate in 1982 through the Financial Integrity Act that agencies continually assess their internal control systems and report annually on their adequacy. Since the issuance of our October 2003 report, federal agencies have issued their fiscal year 2003 PARs. As I discussed earlier in this testimony, the fiscal year 2003 PARs typically contained limited amounts of improper payment information even for those programs previously cited in Circular A-11 for which a reporting requirement has existed since agency submissions of their fiscal year 2003 budgets to OMB. Our executive guide on managing improper payments recognized that in federal agencies, implementation of a strong system of internal control will likely not be easy or quick and will require strong support and continuous action from the President, the Congress, top-level administration appointees, and agency management officials. Once committed to a plan of action, they must remain steadfast supporters of the end goals and their support must be transparent to all. Agencies must be held accountable for appropriately managing and controlling their programs and safeguarding program assets. OMB must continue to provide direction and support to agency management in the implementation of governmentwide efforts, such as those involving improper payments, and conduct appropriate oversight of federal agency efforts to meet their stewardship and program management responsibilities. It is also critical that the Congress continue its oversight, through public hearings such as this one, to make it clear to agency and OMB officials that efforts to reduce improper payments are expected and that failure to do so is not an option. Since 1982, various legislative and administrative initiatives have focused on and required agency assessments of internal controls over programs and financial management activities. Although these initiatives may not specifically target improper payments, by emphasizing internal controls, they have recognized the important role that internal controls have in ensuring that federal programs achieve their intended results and that federal agencies operate them effectively and efficiently. Given this long- standing emphasis on internal control and the various long-standing requirements to identify and implement actions to correct control system weaknesses identified, it is fair to ask two questions. First, is it reasonable to expect that federal agencies have significant information on the condition of internal controls over their programs and activities? Second, should agencies be able to identify their programs and activities that are susceptible to improper payments and to meet the other requirements established by the Improper Payments Act? Based on the legislative and administrative initiatives over the past 20-plus years, I think that the answer to both is an emphatic yes. Many positive improvements have resulted from the various initiatives related to internal control and financial management over the past 20-plus years. However, I am concerned that we continue to see a trend in agency actions to address internal control problems. Agencies often get off to a good start, but they do not sustain their efforts. Given this history and the unknown and potentially significant magnitude of improper payments governmentwide, it is clear that we are facing a major management challenge in adequately addressing the problem. The needed governmentwide initiatives are in place, they must now be effectively implemented. Key to this effort is the need for a strong control environment that creates a culture of accountability and establishes a positive and supportive attitude toward reducing improper payments. This concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Subcommittee may have. For further information, please contact McCoy Williams, Director, Financial Management and Assurance, at (202) 512-9508, or Tom Broderick, Assistant Director, at (202) 512-8705. You can also reach them by e-mail at [email protected] or [email protected]. Individuals making key contributions to this testimony included Bonnie McEwan and Donell Ries. 1. Department of Agriculture 2. Commodity Loan Program 3. National School Lunch and Breakfast 4. Women, Infants, and Children 2. Department of Defense 6. Military Health Benefits 3. Department of Education 7. Student Financial Assistance 4. Department of Health and Human Services 13. Foster Care - Title IV-E 14. State Children's Insurance Program 15. Child Care and Development Fund 5. Department of Housing and Urban Development 16. Low Income Public Housing 17. Section 8 Tenant Based 18. Section 8 Project Based 19. Community Development Block Grants (Entitlement Grants, States/Small Cities) 6. Department of Labor 21. Federal Employee Compensation Act 22. Workforce Investment Act 7. Department of the Treasury 23. Earned Income Tax Credit 8. Department of Transportation 24. Airport Improvement Program 25. Highway Planning and Construction 26. Federal Transit - Capital Investment Grants 27. Federal Transit - Formula Grants (Continued From Previous Page) 9. Department of Veterans Affairs 29. Dependency and Indemnity Compensation 10. Environmental Protection Agency 32. Clean Water State Revolving Funds 33. Drinking Water State Revolving Funds 11. National Science Foundation 34. Research and Education Grants and Cooperative Agreements 12. Office of Personnel Management 35. Retirement Program (Civil Service Retirement System and Federal Employees' Retirement System) 36. Federal Employees Health Benefits Program 37. Federal Employees' Group Life Insurance 13. Railroad Retirement Board 38. Retirement and Survivors Benefits 39. Railroad Unemployment Insurance Benefits 14. Small Business Administration 40. 7(a) Business Loan Program 41. 504 Certified Development Companies 43. Small Business Investment Companies 15. Social Security Administration 44. Old Age and Survivors' Insurance 46. Supplemental Security Income Program 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. 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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The Improper Payments Information Act of 2002 requires that agencies annually review all their programs and activities and identify those that may be susceptible to significant improper payments. It further requires those agencies with improper payments exceeding $10 million to provide a report on the actions being taken to reduce those payments. This testimony updates agency progress in implementing the act based on our review of agency fiscal year 2003 Performance and Accountability Reports for the 15 agencies and 46 programs previously cited in Office of Management and Budget Circular A-11, Section 57. It required those agencies and programs to report improper payment information to the Office of Management and Budget beginning with their fiscal year 2003 budget proposals. The areas we addressed were (1) agencies that reported improper payments information and the programs and activities on which that information was based, (2) amounts of improper payments reported, (3) initiatives agencies reported taking to reduce those payments and the results of those initiatives, and (4) impediments to the prevention or reduction of improper payments reported. The fiscal year 2003 Performance and Accountability Reports (PAR) typically contained limited amounts of improper payment information even for those programs previously cited in Circular A-11 for which a reporting requirement has existed for at least three years. The PARs contained improper payment estimates for 31 of the 46 programs listed in Circular A-11. They contained information on agency initiatives to prevent or reduce improper payments for 22 programs and on impediments to improper payment prevention or reduction for 11 programs. Seven of 15 agencies reported on all three categories of information requested (improper payment amounts, initiatives taken to reduce or prevent improper payments, and impediments to improper payment prevention or reduction) for 9 of the 46 programs. For 11 of the 46 programs, the four agencies did not report on any of the three elements. In some cases, agencies reported that they had already determined that their programs were not susceptible to significant improper payments. However, the auditor's reports in the same PARs identified management challenges or material internal control weaknesses within the programs where the design or operation of internal control procedures did not reduce, to a relatively low level, the risk that errors, fraud, or noncompliance that would be material to the financial statements may occur and not be detected promptly by employees in the normal course of performing their duties. Key to the effort of reducing improper payments is the need for a strong control environment, including top leadership commitment and sustained attention to achieving results. Since 1982, various legislative and administrative initiatives have focused on and required agency assessments of internal controls over programs and financial management activities. Although these initiatives may not specifically target improper payments, by emphasizing internal controls, they have recognized the importance of internal controls--including a strong control environment--in ensuring that federal programs achieve their intended results and that federal agencies operate them effectively and efficiently. If diligently and vigorously implemented, the Improper Payments Information Act of 2002 should have a significant impact on the governmentwide improper payments problem. The level of importance each agency, the administration, and the Congress place on the efforts to implement the act will determine its overall effectiveness and the level to which agencies reduce improper payments and ensure that federal funds are used efficiently and for their intended purposes.
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FPS has not taken actions against some guard contractors that did not comply with the terms of the contracts. According to FPS guard contracts, a contractor has not complied with the terms of the contract if the contractor has a guard working without valid certifications or background suitability investigations, falsifies a guard's training records, does not have a guard at a post, or has an unarmed guard working at a post at which the guard should be armed. If FPS determines that a contractor does not comply with these contract requirements, it can--among other things-- assess a financial deduction for nonperformed work, elect not to exercise a contract option, or terminate the contract for default or cause. We reviewed the official contract files for the 7 contractors who, as we testified in July 2009, had guards performing on contracts with expired certification and training requirements to determine what action, if any, FPS had taken against these contractors for contract noncompliance. The 7 contractors we reviewed had been awarded several multiyear contracts totaling $406 million to provide guards at federal facilities in 13 states and Washington, D.C. According to the documentation in the contract files, FPS did not take any enforcement action against the 7 contractors for not complying with the terms of the contract, a finding consistent with DHS's Inspector General's 2009 report. In fact, FPS exercised the option to extend the contracts of these 7 contractors. FPS contracting officials told us that the contracting officer who is responsible for enforcing the terms of the contract considers the appropriate course of action among the available contractual remedies on a case-by-case basis. For example, the decision of whether to assess financial deductions is a subjective assessment in which the contracting officer and the contracting officer technical representative (COTR) take into account the value of the nonperformance and the seriousness of the deficiency, according to FPS contracting officials. FPS requires an annual performance evaluation of each contractor and at the conclusion of contracts exceeding $100,000, and requires that these evaluations and other performance-related documentation be included in the contract file. Contractor performance evaluations are one of the most important tools available for ensuring compliance with contract terms. Moreover, given that other federal agencies rely on many of the same contractors to provide security services, completing accurate evaluations of a contractor's past performance is critical. However, we found that FPS's contracting officers and COTRs did not always evaluate contractors' performance as required, and some evaluations were incomplete and not consistent with contractors' performance. We reviewed a random sample of 99 contract performance evaluations from calendar year 2006 through June 2009. These evaluations were for 38 contractors. Eighty-two of the 99 contract performance evaluations showed that FPS assessed the quality of services provided by the majority of its guard contractors as satisfactory, very good, or exceptional. For the remaining 17 evaluations, 11 showed that the contractor's performance was marginal, 1 as unsatisfactory, and assessments for 5 contractors were not complete. According to applicable guidance, a contractor must meet contractual requirements to obtain a satisfactory evaluation and a contractor should receive an unsatisfactory evaluation if its performance does not meet most contract requirements and recovery in a timely manner is not likely. Nevertheless, we found instances where some contractors received a satisfactory or better rating although they had not met some of the terms of the contract. For example, contractors receiving satisfactory or better ratings included the 7 contractors discussed above that had guards with expired certification and training records working at federal facilities. In addition, some performance evaluations that we reviewed did not include a justification for the rating and there was no other supporting documentation in the official contract file to explain the rating. Moreover, there was no information in the contract file that indicated that the COTR had communicated any performance problems to the contracting officer. As of February 2010, FPS had yet to provide some of its guards with all of the required X-ray or magnetometer training. For example, we reported in July 2009 that in one region, FPS has not provided the required X-ray or magnetometer training to 1,500 guards since 2004. FPS officials subsequently told us that the contract for this region requires that only guards who are assigned to work on posts that contain screening equipment are required to have 8 hours of X-ray and magnetometer training. However, in response to our July 2009 testimony, FPS now requires all guards to receive 16 hours of X-ray and magnetometer training. As of February 2010, these 1,500 guards had not received the 16 hours of training but continued to work at federal facilities in this region. FPS plans to provide X-ray and magnetometer training to all guards by December 2010. X-ray and magnetometer training is important because the majority of the guards are primarily responsible for using this equipment to monitor and control access points at federal facilities. Controlling access to a facility helps ensure that only authorized personnel, vehicles, and materials are allowed to enter, move within, and leave the facility. FPS currently does not have a fully reliable system for monitoring and verifying whether its 15,000 guards have the certifications and training to stand post at federal facilities. FPS is developing a new system--Risk Assessment and Management Program (RAMP)--to help it monitor and verify the status of guard certifications and training. However, in our July 2009 report, we raised concerns about the accuracy and reliability of the information that will be entered into RAMP. Since that time, FPS has taken steps to review and update all guard training and certification records. For example, FPS is conducting an internal audit of its CERTS database. However, as of February 2010, the results of that audit showed that FPS was able to verify that about 8,600 of its 15,000 guards met the training and certification requirements. FPS is experiencing difficulty verifying the status of the remaining 6,400 guards. FPS has also received about 1,500 complaints from inspectors regarding a number of problems with RAMP. For example, some inspectors said it was difficult and sometimes impossible to find guard information in RAMP and to download guard inspection reports. Thus they were completing the inspections manually. Other inspectors have said it takes almost 2 hours to log on to RAMP. Consequently, on March 18, 2010, FPS suspended the use of RAMP until it resolves these issues. FPS is currently working on resolving issues with RAMP. Once guards are deployed to a federal facility, guards are not always complying with assigned responsibilities (post orders). As we testified in July 2009, we identified substantial security vulnerabilities related to FPS's guard program. FPS also continues to find instances where guards are not complying with post orders. For example, 2 days after our July 2009 hearing, a guard fired his firearm in a restroom in a level IV facility while practicing drawing his weapon. In addition, FPS's own penetration testing--similar to the covert testing we conducted in May 2009--showed that guards continued to experience problems with complying with post orders. Since July 2009, FPS conducted 53 similar penetration tests at federal facilities in the 6 regions we visited, and in over 66 percent of these tests, guards allowed prohibited items into federal facilities. We accompanied FPS on two penetration tests in August and November 2009, and guards at these level IV facilities failed to identify a fake bomb, gun, and knife during X-ray and magnetometer screening at access control points. During the first test we observed in August 2009, FPS agents placed a bag containing a fake gun and knife on the X-ray machine belt. The guard failed to identify the gun and knife on the X-ray screen, and the undercover FPS official was able to retrieve his bag and proceed to the check-in desk without incident. During a second test, a knife was hidden on an FPS officer. During the test, the magnetometer detected the knife, as did the hand wand, but the guard failed to locate the knife and the FPS officer was able to gain access to the facility. According to the FPS officer, the guards who failed the test had not been provided the required X-ray and magnetometer training. Upon further investigation, only 2 of the 11 guards at the facility had the required X-ray and magnetometer training. In response to the results of this test, FPS debriefed the contractor and moved one of the guard posts to improve access control. In November 2009, we accompanied FPS on another test of security countermeasures at a different level IV facility. As in the previous test, an FPS agent placed a bag containing a fake bomb on the X-ray machine belt. The guard operating the X-ray machine did not identify the fake bomb and the inspector was allowed to enter the facility with it. In a second test, an FPS inspector placed a bag containing a fake gun on the X-ray belt. The guard identified the gun and the FPS inspector was detained. However, the FPS inspector was told to stand in a corner and was not handcuffed or searched as required. In addition, while all the guards were focusing on the individual with the fake gun, a second FPS inspector walked through the security checkpoint with two knives without being screened. In response to the results of this test, FPS suspended 2 guards and provided additional training to 2 guards. In response to our July 2009 testimony, FPS has taken a number of actions that, once fully implemented, could help address the challenges the agency faces in managing its contract guard program. For example, FPS Increased guard inspections at facilities in some metropolitan areas. FPS has increased the number of guard inspections to two a week at federal facilities in some metropolitan areas. Prior to this new requirement, FPS did not have a national requirement for guard inspections, and each region we visited had requirements that ranged from no inspection requirements to each inspector having to conduct five inspections per month. Increased X-ray and magnetometer training requirements for inspectors and guards. FPS has increased its X-ray and magnetometer training for inspectors and guards from 8 hours to 16 hours. In July 2009, FPS also required each guard to watch a government-provided digital video disc (DVD) on bomb component detection by August 20, 2009. According to FPS, as of January 2010, approximately 78 percent, or 11,711 of the 15,000 guards had been certified as having watched the DVD. Implementing a new system to monitor guard training and certifications. As mentioned earlier, FPS is also implementing RAMP. According to FPS, RAMP will provide it with the capability to monitor and track guard training and certifications and enhance its ability to conduct and track guard inspections. RAMP is also designed to be a central database for capturing and managing facility security information, including the risks posed to federal facilities and the countermeasures that are in place to mitigate risk. It is also expected to enable FPS to manage guard certifications and to conduct and track guard inspections electronically as opposed to manually. However, as mentioned earlier, as of March 18, 2010, FPS suspended the use of RAMP until it can resolve existing issues. Despite FPS's recent actions, it continues to face challenges in ensuring that its $659 million guard program is effective in protecting federal facilities. While the changes FPS has made to its X-ray and magnetometer training will help to address some of the problems we found, there are some weaknesses in the guard training. For example, many of the 15,000 guards will not be fully trained until the end of 2010. In addition, one contractor told us that one of the weaknesses associated with FPS's guard training program is that it focuses primarily on prevention and detection but does not adequately address challenge and response. This contractor has developed specific scenario training and provides its guards on other contracts with an additional 12 hours of training on scenario-based examples, such as how to control a suicide bomber or active shooter situation, evacuation, and shelter in place. The contractor, who has multiple contracts with government agencies, does not provide this scenario-based training to its guards on FPS contracts because FPS does not require it. We also found that some guards were still not provided building-specific training, such as what actions to take during a building evacuation or a building emergency. According to guards we spoke to in one region, guards receive very little training on building emergency procedures during basic training or the refresher training. These guards also said that the only time they receive building emergency training is once they are on post. Consequently, some guards do not know how to operate basic building equipment, such as the locks or the building ventilation system, which is important in a building evacuation or building emergency. FPS's decision to increase guard inspections at federal facilities in metropolitan areas is a step in the right direction. However, it does not address issues with guard inspections at federal facilities outside metropolitan areas, which are equally vulnerable. Thus, without routine inspections of guards at these facilities, FPS has no assurance that guards are complying with their post orders. We believe that FPS continues to struggle with managing its contract guard program in part because, although it has used guards to supplement the agency's workforce since the 1995 bombing of the Alfred P. Murrah Federal Building, it has not undertaken a comprehensive review of its use of guards to protect federal facilities to determine whether other options and approaches would be more cost-beneficial. FPS also has not acted diligently in ensuring that its guard contractors meet the terms of the contract and taking enforcement action when noncompliance occurs. We also believe that completing the required contract performance evaluations for its contractors and maintaining contract files will put FPS in a better position to determine whether it should continue to exercise contract options with some contractors. Moreover, maintaining accurate and reliable data on whether the 15,000 guards deployed at federal facilities have met the training and certification requirements is important for a number of reasons. First, without accurate and reliable data, FPS cannot consistently ensure compliance with contract requirements and lacks information critical for effective oversight of its guard program. Second, given that other federal agencies rely on many of the same contractors to provide security services, completing accurate evaluations of a contractor's past performance is critical to future contract awards. Thus, in our report we recommend that the Secretary of Homeland Security direct the Under Secretary of NPPD and the Director of FPS to take the following eight actions: identify other approaches and options that would be most beneficial and financially feasible for protecting federal buildings; rigorously and consistently monitor guard contractors' and guards' performance and step up enforcement against contractors that are not complying with the terms of the contract; complete all contract performance evaluations in accordance with FPS and Federal Acquisition Regulation requirements; issue a standardized record-keeping format to ensure that contract files have required documentation; develop a mechanism to routinely monitor guards at federal facilities provide building-specific and scenario-based training and guidance to its develop and implement a management tool for ensuring that reliable, comprehensive data on the contract guard program are available on a real- time basis; and verify the accuracy of all guard certification and training data before entering them into RAMP, and periodically test the accuracy and reliability of RAMP data to ensure that FPS management has the information needed to effectively oversee its guard program. DHS concurred with seven of our eight recommendations. Regarding our recommendation to issue a standardized record-keeping format to ensure that contract files have required documentation, DHS concurred that contract files must have required documentation but did not concur that a new record-keeping format should be issued. DHS commented that written procedures already exist and are required for use by all DHS's Office of Procurement Operations staff and the components it serves, including NPPD. We believe that the policies referenced by DHS are a step in the right direction in ensuring that contract files have required documentation; however, although these policies exist, we found a lack of standardization and consistency in the contract files we reviewed among the three Consolidated Contract Groups. Overall, we are also concerned about some of the steps FPS plans to take to address our recommendations. For example, FPS commented that to provide routine oversight of guards in remote regions it will use an employee of a tenant agency (referred to as an Agency Technical Representative) who has authority to act as a representative of a COTR for day-to-day monitoring of contract guards. However, several FPS regional officials told us that the Agency Technical Representatives were not fully trained and did not have an understanding of the guards' roles and responsibilities. These officials also said that the program may not be appropriate for all federal facilities. We believe that if FPS plans to use Agency Tenant Representatives to oversee guards, it is important that the agency ensure that the representatives are knowledgeable of the guard's responsibilities and are trained on how and when to conduct guard inspections as well as how to evacuate facilities during an emergency. Furthermore, while we support FPS's overall plans to better manage its contract guard program, we believe it is also important for FPS to have appropriate performance metrics to evaluate whether its planned actions are fully implemented and are effective in addressing the challenges it faces managing its contract guard program. Mr. Chairman, this concludes our testimony. We are pleased to answer any questions you might have. For further information on this testimony, please contact Mark L. Goldstein, (202) 512-2834 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Tammy Conquest, Assistant Director; Tida Barakat; and Jonathan Carver. 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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To accomplish its mission of protecting about 9,000 federal facilities, the Federal Protective Service (FPS) currently has a budget of about $1 billion, about 1,225 full-time employees, and about 15,000 contract security guards. FPS obligated $659 million for guard services in fiscal year 2009. This testimony is based on our report issued on April 13, 2010, and discusses challenges FPS continues to face in (1) managing its guard contractors and (2) overseeing guards deployed at federal facilities, and (3) the actions FPS has taken to address these challenges. To address these objectives, GAO conducted site visits at 6 of FPS's 11 regions; interviewed FPS officials, guards, and contractors, and analyzed FPS's contract files. GAO also reviewed new contract guard program guidance issued since our July 2009 report and observed guard inspections and penetration testing done by FPS. FPS faces a number of challenges in managing its guard contractors that hamper its ability to protect federal facilities. FPS requires contractors to provide guards who have met training and certification requirements. FPS's guard contract also states that a contractor who does not comply with the contract is subject to enforcement action. GAO reviewed the official contract files for the seven contractors who, as GAO testified in July 2009, had guards performing on contracts with expired certification and training requirements to determine what action, if any, FPS had taken against these contractors for contract noncompliance. These contractors had been awarded several multiyear contracts totaling $406 million to provide guards at federal facilities in 13 states and Washington, D.C. FPS did not take any enforcement actions against these seven contractors for noncompliance. In fact, FPS exercised the option to extend their contracts. FPS also did not comply with its requirement that a performance evaluation of each contractor be completed annually and that these evaluations and other performance-related data be included in the contract file. FPS plans to provide additional training and hold staff responsible for completing these evaluations more accountable. FPS also faces challenges in ensuring that many of the 15,000 guards have the required training and certification to be deployed at a federal facility. In July 2009, GAO reported that since 2004, FPS had not provided X-ray and magnetometer training to about 1,500 guards in 1 region. As of January 2010, these guards had not received this training and continued to work at federal facilities in this region. X-ray and magnetometer training is important because guards control access points at federal facilities. FPS currently does not have a fully reliable system for monitoring and verifying whether its 15,000 guards have the certifications and training to stand post at federal facilities. FPS developed a new Risk Assessment and Program Management system to help monitor and track guard certifications and training. However, FPS is experiencing difficulties with this system and has suspended its use. In addition, once guards are deployed to a federal facility, they are not always complying with assigned responsibilities (post orders). Since July 2009, FPS has conducted 53 penetration tests in the 6 regions we visited, and in over half of these tests some guards did not identify prohibited items, such as guns and knives. In response to GAO's July 2009 testimony, FPS has taken a number of actions that, once fully implemented, could help address challenges it faces in managing its contract guard program. For example, FPS has increased the number of guard inspections at federal facilities in some metropolitan areas. FPS also revised its X-ray and magnetometer training; however, all guards will not be fully trained until the end of 2010, although they are deployed at federal facilities. Despite FPS's recent actions, it continues to face challenges in ensuring that its $659 million guard program is effective in protecting federal facilities. Thus, among other things, FPS needs to reassess how it protects federal facilities and rigorously enforce the terms of the contracts.
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Congress created SEC in 1934 to administer and enforce the federal securities laws to protect investors and maintain the integrity of the securities markets. SEC's mission is to (1) promote full and fair disclosure; (2) prevent and suppress fraud; (3) supervise and regulate the securities markets; and (4) regulate and oversee investment companies, investment advisers, and public utility holding companies. SEC works to fulfill this mission through various divisions and offices, among them the Office of the Executive Director, which formulates SEC's budget and authorization strategies. As a federal agency, SEC is subject to congressional oversight. Congress oversees federal agencies primarily through two distinct but complementary processes--authorizations and appropriations, which are implemented through authorizing and appropriating committees in the U.S. Senate and House of Representatives. The authorizing committees are responsible for creating a program, mandating the terms and conditions under which it operates, and establishing the basis for congressional oversight and control. SEC's authorizing committees are the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services. The appropriations committees and subcommittees are charged with assessing the need for, amount of, and period of availability of appropriations for agencies and programs under their jurisdiction. SEC's annual appropriations are under the jurisdiction of the Subcommittee on Commerce, Justice, State, and the Judiciary, U.S. Senate Committee on Appropriations; and the Subcommittee on Commerce, Justice, State, the Judiciary, and Related Agencies, House Committee on Appropriations. To fund its operations, the federal securities laws direct SEC to collect fees. SEC generally collects three types of fees: Securities registration fees, which are required to be collected under Section 6(b) of the Securities Act of 1933 (the Securities Act), are paid when companies register with SEC new stocks and bonds for sale to investors. In 2001, SEC collected $987 million in Section 6(b) fees; Securities transaction fees, which are required to be collected under Section 31 of the Securities Exchange Act of 1934 (the Exchange Act) are paid by national securities exchanges and national securities associations when registered securities and security futures are sold on or off exchanges through any member of such an association. In 2001, SEC collected $1.04 billion in Section 31 fees; and Fees on proxy solicitations for mergers, consolidations, acquisitions, or sales of a company's assets, which are required to be collected under Section 14(g) of the Exchange Act, are paid by the person filing proxy solicitation materials for such transactions. Fees on the purchase of securities by an issuer of its issued securities are paid by the issuer under Section 13(e) of the Exchange Act. In 2001, SEC collected $33 million in filing fees. SEC fees are deposited in a special SEC appropriations account to be used as offsetting collections. Although the fees were enacted to fund SEC operations, figure 1 illustrates how the amount of fees collected in recent years has far exceeded SEC's appropriated budget. For example, in 2000, SEC collected $2.27 billion in fees, while the agency's 2000 budget was $368 million. Similarly, in 2001, SEC collected about $2.1 billion, while its 2001 budget was $423 million. Projected fee collections in excess of SEC's appropriations are available to SEC's appropriators to fund other priorities within the CJS appropriations bill. Congress first addressed the issue of excess SEC fees in 1996 through the National Securities Markets Improvement Act of 1996, which reduced registration and transaction fees. However, SEC's fee collection grew even higher because of subsequent increases in stock prices and stock trading volume. Viewing these excess fees as an unwarranted tax on investment and capital formation, Congress enacted the Investor and Capital Markets Fee Relief Act on January 16, 2002. The Act substantially reduces the fees collected by SEC and designates all such fees as offsetting collections available to fund the operations of the agency, to the extent provided by Congress. Prior to the enactment of this Act, most of the fees collected were deposited in the U.S. Treasury general fund as revenue. The Act also reduces the basic rates for transaction fees, registration fees, stock repurchase fees, and merger and acquisition fees, and it eliminates certain other filing fees. The Act includes "target offsetting collection amounts" for both transaction and registration fees for fiscal years 2002 through 2011. SEC would be required to adjust the basic rates for those fees to make it "reasonably likely" that collections would equal the target amounts. The Act also grants SEC the authority to pay its employees' salaries and benefits at levels commensurate with those paid by the federal banking regulators (pay parity). For 2003, SEC currently estimates the additional cost of implementing pay parity to be $76 million. SEC anticipates that the funding to accommodate this increase will be provided exclusively out of the amount of fees SEC is scheduled to collect annually under the Act and appropriated by Congress. Although SEC fee collections as estimated for 2003 in the Act total $1.33 billion, the President's 2003 Budget request included a budget estimate of $466.9 million for SEC. This amount represents a $29 million, or 6.6 percent, increase over SEC's 2002 budget of $437.9 million but does not include any funding for a pay parity program in 2003. To date, Congress has not enacted SEC's 2003 appropriation. As reported in our SEC operations report, SEC is operating in an increasingly dynamic regulatory environment. Over the past decade, the securities markets have undergone tremendous growth and innovation as technological advances have increased the complexity of the markets and the range of products afforded to the public. Larger, more active, and more complex markets have produced more market participants, registrants, filings, examinations and inspections, legal interpretations, complaints, and opportunities for fraudulent activities. In our SEC operations report, SEC and industry officials agreed that SEC's ability to fulfill its mission in such a dynamic environment has become increasingly strained as SEC's growing workload has substantially outpaced increases in its staffing levels. Specifically, over the past decade, we found that staffing within SEC's various oversight areas has grown between 9 and 166 percent, while workload measures in those areas have grown from 60 to 264 percent. Moreover, following the sudden and highly publicized collapse of Enron Corporation and other corporate failures, SEC has been under increasing pressure to ensure that it is equipped to adequately oversee the securities markets and to ensure that investors receive accurate and meaningful financial disclosure, an important part of SEC's mission to protect investors. In addition, legislative changes such as the Gramm-Leach-Bliley Act of 1999, the Commodity Futures Modernization Act of 2000, and the USA Patriot Act of 2001 placed added demands on SEC's limited resources. All of these changes have significant repercussions and pose challenges for SEC's oversight role. In light of these challenges and prompted by concerns about SEC's ability to carry out its mission, legislators introduced H.R. 3764 and S. 2673, both of which would authorize appropriations for SEC of $776 million, and H.R. 3818, which would authorize appropriations for SEC of $876 million. Both House bills would designate more than half of these amounts for the Division of Corporate Finance and the Division of Enforcement to increase enforcement in financial reporting cases and other oversight initiatives. The Senate bill designated specific amounts for pay parity, information technology, and additional staff for oversight of audit services. Federal financial regulators are largely self-supporting through fee collections, assessments, or other funding sources, but not all of these self- funding options meet the Act's definition of self-funding. The variation among federal agencies is attributable to how and when Congress makes the funds available to the agency and how much flexibility Congress gives the agency in using the fees or other funding sources it collects. At some agencies, Congress limits the amount of assessments collected or available for agency use. Such limitations are generally established by provisions in annual appropriations acts. For example, funding for SEC in 2002 was appropriated from fees collected in 2002 and prior years. In SEC's case, although all the offsetting collections by definition are dedicated to SEC, Congress limits how much fee revenue is available. For example, in 2001, SEC collected about $2.1 billion in fees; however, Congress appropriated about $423 million for SEC's operations. Therefore, almost $1.7 billion was available to the CJS subcommittees to offset spending for other agencies and programs under CJS jurisdiction. There are other regulatory agencies, such as FCA and OFHEO, which also operate at this more congressionally controlled end of the self-funding range (see fig. 2 for a description of these two agencies' missions as well as the missions of other financial services regulators). Although FCA and OFHEO fund their operations solely by assessments from their regulated entities, these agencies remain subject to the appropriations process. That is, Congress establishes annual limits through the appropriations process by approving the amount of assessments these agencies can collect. For example, in 2001, Congress appropriated $40 million to FCA, which authorized FCA to collect assessments up to this amount as offsetting collections for 2001. Moreover, Congress limits the amount of assessments that FCA can obligate for administrative expenses. For example, in 2001, FCA's obligation for administrative expenses was limited to about $38 million. Congress also establishes OFHEO's budget in a similar manner. On the other hand, Congress has granted more self-controlled funding structures to other agencies. Some of these agencies have permanent indefinite appropriations, which means that these agencies can use whatever amount of funds are collected without any further legislative action. Agencies at this less congressionally controlled end of the range include the federal banking agencies (that is, FRS, OCC, OTS, FDIC, and NCUA). Unlike SEC, which is generally funded by transaction fees and registration-based fees and subject to annual appropriations, these agencies are supported almost entirely through examination or assessment fees on their members, deposit insurance premiums, or interest on asset holdings, and are not included in the annual congressional appropriations process. The bank regulators' self-funding structure most closely fits the Act's definition of self-funding. According to banking agency officials, they, not Congress, control their agencies' budget growth and direct how their agencies spend their funds. Although SEC continues to be subject to annual appropriations, the Act moved SEC closer to having the same authority as the banking agencies by allowing SEC to establish the compensation and benefit levels of its employees. Moving SEC to a more self-controlled funding structure has two important implications for SEC's operations. First, SEC would have more control over its own budget and funding level, which some SEC and industry officials believe may better enable SEC to take steps to address its increasing workload and some of its human capital challenges, such as recruiting and retaining quality staff. However, others knowledgeable about SEC's operations questioned whether more budget flexibility is the best means to address SEC's recruiting and retention issues. Second, SEC would have an added responsibility in managing a more self-controlled funding structure. Self-funded agencies require sound fiscal control mechanisms to compensate for the removal of the scrutiny provided by both OMB and the appropriators, as part of the federal budget process. In addition, self-funded agencies require sound fiscal discipline to ensure revenue streams. In previous reports, we found weaknesses in SEC's existing budget and planning processes. Some SEC officials told us that a more self-controlled funding approach might better enable SEC to address its increasing workload and ongoing human capital challenges, most notably high staff turnover and numerous vacancies. As mentioned previously, we reported in our SEC operations report that both SEC and industry officials agreed that current levels of human capital and budgetary resources have limited SEC's ability to address many current and evolving market issues at a time when the collapse of Enron and other corporate failures have increased SEC's workload and generated debates on reforms, which may result in increased responsibilities for SEC. However, others knowledgeable about the industry countered that while SEC may need more resources, there are more efficient ways to affect a change in SEC's budget than conversion to a self-controlled funding basis. For example, within the existing structure, SEC could justify budget increases to its authorization and appropriation committees beyond the amount included in the President's Budget. Based on their experiences with self-funding, officials from the bank regulatory agencies we interviewed said that self-funding provided their agencies with more autonomy in formulating their budgets. They also said that having more control enabled them to respond more quickly to program needs in changing market conditions because they could reallocate or increase funding without having to wait for legislative action. SEC officials said they believed they would realize similar benefits in the human capital area because they would have greater control over their funding and would be able to respond quickly to changes in the market. For example, the sudden collapse of Enron Corporation and other corporate failures have stimulated an intense debate on the need for broad-based reform in such areas as financial reporting and accounting standards, oversight of the accounting profession, and corporate governance. In response to these challenges and proposals for regulatory changes, SEC officials requested approval for 100 additional staff positions dedicated to reviewing corporate filings, enforcing securities laws, and providing accounting guidance. However, under the existing structure, Congress and the executive branch must approve any such increases in SEC's staffing allocation. Although there is general agreement on the need for these increased resources, SEC's request to increase staffing in these areas is included in a supplemental appropriations bill that was considered in April 2002 but is not yet enacted, as Congress is considering issues unrelated to SEC's funding needs. A more self-controlled funding structure would have allowed SEC to immediately implement its plan without the need for legislative action. Another SEC official said that a more self-controlled funding structure would enable SEC to allocate resources to fund pay parity, allowing SEC to offer compensation packages similar to those offered by the bank regulators and putting SEC in a better position to attract and retain quality staff. SEC believes this could also help SEC stem turnover among its attorneys, accountants, and examiners--staff necessary to carry out SEC's mission. Although the rate had decreased from 15 percent in 2000 to 9 percent in 2001, turnover at SEC was still higher than the turnover rate governmentwide in 2001. As we reported previously, most SEC employees who responded to our survey said that compensation was their primary reason for leaving or thinking of leaving SEC. Although SEC officials acknowledged that turnover will always be an issue, they said that pay parity should enable SEC to lengthen the average tenure of attorneys and examiners. We previously reported that in 1999 the average tenure for attorneys was 2.5 years and for examiners 1.9 years. According to SEC officials, new employees need at least 2 years on the job to gain the knowledge and experience necessary to significantly contribute to SEC's mission. Another implication of moving SEC to a more self-controlled funding structure is that it would require SEC to establish a system of internal controls to ensure fiscal discipline. Under SEC's current funding structure, OMB and the appropriations process provide fiscal discipline for the agency. For example, SEC's current annual budget cycle as illustrated in figure 3 begins with the preparation of an agencywide estimate that is based on the previous budget year's appropriation. SEC then develops a conforming budget estimate based on OMB's budget guidance, including a specified budget amount that OMB provides to SEC. After receiving OMB's approval, SEC's budget request is included in the President's Budget that is submitted to Congress. Under this structure, SEC's annual budget has been based on the previous year's appropriations rather than on what may be actually needed to fulfill its mission. While practical, as reported in our SEC operations report, we found that this type of reactive approach could diminish SEC's effectiveness, resulting in less effective enforcement and oversight. If moved to a self-controlled funding structure, not only would SEC have to improve its budget planning process by reviewing its staffing and resource needs independent of the budget process but the fiscal restraint provided within the federal budget process would be lost. Therefore, SEC would need to create its own internal control mechanisms and accountability structure to ensure fiscal discipline and budgetary restraint. Bank regulatory officials said that to compensate for not being subject to appropriations oversight, self-funding requires discipline in both planning and budget processes. For example, one bank regulatory official said that his agency has a budget process that mirrors the federal budget planning process: the head of the agency reviews the budget estimates for each division and holds "hearings" in which each division must justify its budget estimate, similar to OMB's budget process. Officials from NCUA, OCC, and OTS also said that their agencies routinely share their budgets with OMB as a courtesy. In addition to their own internal processes, bank regulators also said that they experience some amount of regulatory competition and scrutiny from industry groups and regulated entities. These pressures provide incentives to the regulators to keep their operations efficient. Four regulators oversee the banking industry: three charter commercial banks, and one charters thrift institutions. Moreover, commercial banks have the option of changing their national charter to a state charter, and thrifts can opt to switch from their thrift charter to one of the commercial bank charters. Unlike the bank regulators, SEC is the sole federal regulator overseeing the U.S. securities markets, and its regulated entities generally have no other regulatory options if they want to operate in the securities markets. However, this structure does afford SEC a certain amount of independence from its regulated entities, an independence that may not be afforded to other agencies facing regulatory competition. Additionally, SEC's fee payers may be less likely to scrutinize SEC's budget because unlike the banking industry, where the burden of paying assessment fees is limited to the regulated entities, the securities industry distributes the responsibility for paying SEC's transaction fees among all market participants. Therefore, in the absence of strong external pressures, a rigorous internal budget process and a related set of controls would be critical for SEC if it were to operate on a self-controlled funding basis. Fiscal discipline is also important for self-controlled funding agencies because these agencies have no guarantee that they will be included in the appropriations process if they experience budget shortfalls. Instead, short of raising fees or assessments, some of these agencies, such as OCC and OTS, rely on backup sources of funding, such as reserves established from excess funds from previous years. These two agencies have established reserves to protect them during periods of revenue shortages. However, both agencies also have established internal policies that govern the appropriate use of these reserves. OCC and OTS officials said that their agencies now are less willing to use reserves during periods of revenue shortages. For example, the heads of these agencies have chosen to downsize and cut their expenses to maintain their budgets rather than use their reserves. Unlike the banking regulators, who have more control over the amount collected through assessments, SEC relies on transaction fees, which are less predictable and more difficult to estimate. Finally, moving SEC to a more self-controlled funding basis would also increase the need for strategic planning, which also should be linked to the budget process. Based on our review of SEC's strategic plan in our SEC operations report, we found that SEC had not engaged in a comprehensive strategic planning process. We found that SEC had not systematically utilized its strategic planning process to ensure (1) that resources are best used to accomplish its basic statutorily mandated duties, and (2) that human capital planning has identified the resources necessary to fulfill the full scope of its mission. Moreover, SEC's annual plans lacked the detailed analysis and information needed to make informed workforce decisions. We found that additional information on (1) any excess or gaps in needed competencies within the agency's various divisions and offices and (2) the relationship between budget requests for full-time equivalent staff years and SEC's ability to meet individual strategic goals could make SEC's budget process more meaningful. Introducing a meaningful strategic planning process at SEC could also make budget planning more proactive, rather than reactive, as is currently the case. SEC has begun to take steps to address these issues. In March 2002, SEC hired a consulting firm to work with an internal taskforce to perform an in-depth review of SEC's operations, effectiveness, and resource needs. However, SEC officials stated that because the 2003 budget has already been finalized under the current budget process, they were concerned that even if substantive improvements were recommended by the internal taskforce, the earliest that SEC would be able to effectively react to these changes would be the 2004 budget cycle. A shift in budgetary control from Congress and OMB to make SEC self- funded as defined in the Act poses various implications for oversight of SEC. It could reduce the amount of direct control over SEC's budget and operations, because the appropriators and OMB would no longer be involved in oversight. By shifting more control to SEC and its authorizing committees, CJS subcommittees would also lose the benefit of having SEC's fees available to offset spending for other discretionary spending purposes. However, Congress and OMB could compensate for this reduction in direct control by placing other spending limits on SEC. If Congress granted SEC permanent authority to collect fees without further congressional action and authorized it to use whatever fees are collected--permanent indefinite appropriations--and posed no limitations, this shift to self-funding as defined by the Act would affect congressional oversight to a greater degree than other alternatives we considered. Under permanent indefinite appropriations, the appropriations committees generally would not be involved in overseeing SEC's appropriations. However, the authorizing committees and other oversight committees, such as the Senate Committee on Governmental Affairs and House Committee on Government Reform, could continue to oversee SEC, since congressional oversight is not limited to budgetary authority and remains an important tool for evaluating program administration and performance; making sure programs conform to congressional intent; ferreting out waste, fraud, and abuse; seeing whether programs may have outlived their usefulness; compelling an explanation or justification of policy; and ensuring that programs and agencies are administered in a cost-effective and efficient manner. Shifting SEC's budget structure to a more self-controlled model would also diminish the role of OMB, which establishes the framework by which agencies formulate their budget estimates and is responsible for ensuring that agency budget requests are consistent with specific budgetary guidelines and spending ceilings. Currently, SEC prepares its budget request based on guidance from OMB and submits this estimate to OMB for review and approval (see fig. 3). A budget hearing is subsequently held and, during this hearing, any policy changes or shifts in the SEC Chairman's priorities are discussed. OMB then determines whether the proposals are consistent with the President's policy goals. This part of the process is significant from an oversight perspective, because OMB can increase or decrease SEC's budget request based on those evaluations. For example, OMB increased SEC's budget request by $8.6 million in 1995. According to SEC officials, OMB increased SEC's budget proposals to allow it to hire additional examiners. Most recently, OMB reduced SEC's 2003 budget request by about $95.5 million, most of which could have been used to fund pay parity. According to OMB officials, they would prefer that SEC not implement pay parity immediately but instead come up with a mechanism to fund it over time. As table 1 illustrates, SEC has limited influence over appropriations levels. From 1992 to 2001, OMB reduced SEC's budget in all but 3 years. Likewise, the House of Representatives has voted to decrease SEC's funding as presented in the President's Budget every year. Conversely, the Senate has voted to restore most of the President's Budget each year. Generally, the result has been appropriations lower than SEC's budget request. In addition to annual appropriations, SEC has received supplemental appropriations or additional funding from other sources. For example, since 1994 SEC has received a supplemental appropriation or used its unobligated balances from prior years to increase its total funding level above its appropriation. If Congress wanted to give SEC greater control over its budget but still maintain some degree of control over SEC's funding level, it could place a variety of limitations on SEC's offsetting collections. These limitations include designating fees collected for SEC's use, but establishing limits on their use through annual appropriations; specifying the amount of fees to be collected and available for use in appropriations. If SEC were to collect more than that amount, Congress could specify that such amounts be designated to SEC, but not be made available without (further) congressional action; controlling the size of SEC or a particular program within SEC by limiting its obligations for specific purposes or to specific amounts; and limiting the purposes for which fees can be used. For example, Congress limits the amount of FCA's assessments that can be obligated for administrative expenses. The OMB also has various ways of enforcing accountability that can constrain a program's operations. For example, through the apportionment process OMB can control the rate of obligations by controlling the rate at which budget authority is made available during the fiscal year. Finally, a department or agency independently may place administrative limits on funding, such as restricting the amount that can be used for travel or not allowing funds to be shifted between items of expense. For example, an agency might prohibit a program manager from purchasing a computer using funds allocated, but no longer needed, for salaries and benefits. Another implication of self-controlled funding is that offsetting collections would no longer be available to offset funding for other discretionary spending purposes. As discussed earlier in this report, fees in excess of SEC's budget are used by the appropriators to offset funding for other priorities in the CJS appropriations bill. Self-controlled funding would allow SEC to dedicate the fees that it collects to fund its operations without further legislative action. Therefore, SEC's fees would not be available to offset spending for other federal programs. However, regardless of whether the SEC funding structure changes, CJS will have less funding available for discretionary spending because SEC's fees will decrease as mandated in the Act. The decision on whether to change SEC's self-funding status and to what degree is a policy decision that resides with Congress. In deciding whether to move SEC to a more self-controlled funding structure, Congress will have to weigh the increase in flexibility afforded SEC against the loss in oversight provided by the appropriators and OMB. The increased funding flexibility would likely allow SEC to more readily fund certain budget priorities, such as pay parity, and to more quickly respond to the ever- changing securities markets. On the other hand, Congress and OMB would lose the ability to directly affect the budget and direction of the agency. In return for this added flexibility and control, SEC would have to develop its own system of fiscal controls and an accountability structure to address the loss of rigor and discipline provided by the federal budget and appropriations process. The Chairman, SEC, provided written comments on a draft of this report that are reprinted in appendix II. SEC agreed that the report correctly identified the principal consequences of moving SEC to a self-funded structure. However, SEC raised several concerns with our observations about the issues that SEC would have to address were it to be given self- funding authority. Specifically, SEC commented on our observations in the report that SEC would need to (1) adequately manage its annual fee collections if it were to be moved outside of the traditional budget process and (2) improve its budget planning process if it were given self-funding authority. SEC also stated that our discussion of the fiscal discipline that would be required if SEC were given self-funding authority would benefit from an analysis of SEC's experience with unobligated balances derived primarily from fees collected in excess of amounts used to offset its appropriation. On the first issue, regarding the need for SEC to adequately manage fee collections, SEC stated that the report could benefit from a more robust discussion of SEC's responsibilities under the recently enacted Investor and Capital Markets Fee Relief Act. Among other things, this Act gives SEC the responsibility for adjusting fee rates on an annual and semi- annual basis, if necessary, to meet statutory "target collection amounts." SEC stated that it had developed an adjustment mechanism to perform this function that has provided SEC with useful experience that would be beneficial if it were to move to a self-funding structure. In our report we discussed the importance of fiscal discipline for self-controlled funding agencies, because these agencies are not guaranteed to be included in the appropriations process if they experience budget shortfalls. The report also recognized that the Act, enacted in January 2002, changed how SEC's fees are collected and statutorily established target offsetting collection amounts. We did not question SEC's ability to adequately manage its fee collections, but rather we observed that SEC as is required by statute relies on transaction-based fees, which we continue to believe generate revenues that are less predictable and more difficult to estimate than the assessments used by bank regulators to fund their operations. The second issue SEC raised was our observation that SEC's current budget planning process would have to be improved if it were converted to a self-funded basis, and it noted that "SEC's ability to be proactive with respect to budget planning is constrained by the requirements of OMB Circular A-11, and will continue to be limited...in the absence of self-funding authority." As stated in the report, SEC's annual budget is based on the past year's appropriations rather than on what is actually needed to fulfill its mission. Although this approach may be practical in the current context, we continue to believe that it would be useful for SEC to determine its staffing and resource needs to fulfill its mission regardless of its funding status. Nevertheless, we are encouraged by SEC's expressed commitment to improving its budget and strategic planning processes and the preliminary steps that are currently under way. Finally, SEC expressed concern about the report's discussion of SEC's need for fiscal discipline, and stated that the report "would benefit from an analysis of the SEC's experience with unobligated balances," which according to SEC are "derived primarily from fees collected in excess of amounts used to offset appropriation." As illustrated in table 1 of the report, SEC has used these balances in several years during the period covered. However, we are not persuaded that additional analysis of SEC's use of these balances would be beneficial to the report, because SEC does not have total control over the use of these unobligated funds. That is, in most cases the fiscal restraint provided by the current budgetary process is still a factor, because SEC is still subject to OMB and congressional review of its reprogramming proposals. In the absence of external fiscal discipline, we continue to believe that self-funded agencies have to establish systems to instill the fiscal restraint that would have been provided by the budget and appropriations processes. We are sending copies of this report to the Chairman and Ranking Minority Member of the Senate Committee on Appropriations and its Subcommittee on Commerce, Justice, State, and the Judiciary; the Chairman and Ranking Minority Member, House Committee on Appropriations, and its Subcommittee on Commerce, Justice, State, the Judiciary, and Related Agencies. We will also send copies to the Chairman of SEC and will make copies available to others upon request. The report is also available at no charge on the GAO Web site at http:/www.gao.gov. If you or your staff have any questions regarding this report, please contact me or Orice M. Williams at (202) 512-8678. To identify the existing self-funding structures used by Congress and the extent of control afforded to the appropriators under each structure, we interviewed officials from the Securities and Exchange Commission (SEC), the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) to obtain information on their budget structures and processes. Previously, we had discussed these issues with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve System (FRS). In addition, we reviewed previous GAO work on the structure of other self- funded agencies, such as the Farm Credit Administration (FCA) and the Office of Federal Housing Enterprise Oversight (OFHEO). We then compared SEC's self-funding structure to that of other federal financial regulators and analyzed the degree of control afforded to the appropriators under each structure. To determine the implications for SEC operations and congressional and executive branch oversight, we interviewed SEC officials regarding the impact of self-funding on SEC operations. We met with the SEC Chairman to obtain his views on self-funding. We interviewed financial regulators about the impact of self-funding on their respective agencies, and about the challenges and benefits associated with self-funding. We also interviewed representatives from the Senate and House CJS appropriations subcommittees, and officials from the Office of Personnel Management (OPM) and the Office of Management and Budget (OMB) to obtain their views on shifting budgetary control to SEC. Finally, we reviewed relevant GAO reports on SEC operations to identify existing issues. We did our work in Washington, D.C., between February and July 2002, in accordance with generally accepted government auditing standards. In addition to the persons named above, M'Baye Diagne, Edda Emmanuelli-Perez, Denise Fantone, Edwin Lane, Barbara Roesmann, and Karen Tremba made key contributions to this report.
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GAO studied the implications of converting the Securities and Exchange Commission (SEC) to a self-funded entity. Congress has created a range of self-funding structures, or other sources of funding, other than appropriations for the Department of the Treasury's general fund. The variations among these agencies depend on how and when Congress makes the fees available to an agency and how much flexibility Congress gives an agency in using its collected fees without further legislative action. Moving SEC to a more self-controlled funding structure has implications for two important areas. First, SEC would have more control over its own budget and funding level, which some SEC and industry officials believe may better enable SEC to address its increasing workload and some of its human capital challenges, such as its ability to recruit and retain quality staff. The second result would be a loss of checks and balances currently provided by the federal budget and appropriations processes. Moving SEC to a self-controlled funding structure would diminish congressional and executive branch oversight. On the other hand, the congressional authorizing committees would maintain or else could choose to increase their oversight of SEC. However, if Congress wanted to give SEC greater budget flexibility but still maintain some degree of control over SEC's funding level, it could place limitations on SEC's offsetting collections.
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Dramatic increases in computer interconnectivity, especially in the use of the Internet, continue to revolutionize the way our government, our nation, and much of the world communicate and conduct business. The benefits have been enormous. Vast amounts of information are now literally at our fingertips, facilitating research on virtually every topic imaginable; financial and other business transactions can be executed almost instantaneously, often 24 hours a day; and electronic mail, Internet Web sites, and computer bulletin boards allow us to communicate quickly and easily with a virtually unlimited number of individuals and groups. However, this widespread interconnectivity poses significant risks to the government's and our nation's computer systems and, more important, to the critical operations and infrastructures they support. For example, telecommunications, power distribution, water supply, public health services, national defense (including the military's warfighting capability), law enforcement, government services, and emergency services all depend on the security of their computer operations. The speed and accessibility that create the enormous benefits of the computer age, if not properly controlled, may allow individuals and organizations to inexpensively eavesdrop on or interfere with these operations from remote locations for mischievous or malicious purposes, including fraud or sabotage. Table 1 summarizes the key threats to our nation's infrastructures, as observed by the Federal Bureau of Investigation (FBI). Government officials remain concerned about attacks from individuals and groups with malicious intent, such as crime, terrorism, foreign intelligence gathering, and acts of war. According to the FBI, terrorists, transnational criminals, and intelligence services are quickly becoming aware of and using information exploitation tools such as computer viruses, Trojan horses, worms, logic bombs, and eavesdropping sniffers that can destroy, intercept, degrade the integrity of, or deny access to data. In addition, the disgruntled organization insider is a significant threat, since these individuals often have knowledge that allows them to gain unrestricted access and inflict damage or steal assets without possessing a great deal of knowledge about computer intrusions. As greater amounts of money and more sensitive economic and commercial information are exchanged electronically, and as the nation's defense and intelligence communities increasingly rely on standardized information technology (IT), the likelihood increases that information attacks will threaten vital national interests. As the number of individuals with computer skills has increased, more intrusion or "hacking" tools have become readily available and relatively easy to use. A hacker can literally download tools from the Internet and "point and click" to start an attack. Experts agree that there has been a steady advance in the sophistication and effectiveness of attack technology. Intruders quickly develop attacks to exploit vulnerabilities discovered in products, use these attacks to compromise computers, and share them with other attackers. In addition, they can combine these attacks with other forms of technology to develop programs that automatically scan the network for vulnerable systems, attack them, compromise them, and use them to spread the attack even further. Between 1995 and the first half of 2003, the CERT Coordination Center(CERT/CC) reported 11,155 security vulnerabilities that resulted from software flaws. Figure 1 illustrates the dramatic growth in security vulnerabilities over these years. The growing number of known vulnerabilities increases the number of potential attacks created by the hacker community. Attacks can be launched against specific targets or widely distributed through viruses and worms. Along with these increasing threats, the number of computer security incidents reported to the CERT/CC has also risen dramatically--from 9,859 in 1999 to 82,094 in 2002 and 76,404 for just the first half of 2003. And these are only the reported attacks. The Director of CERT Centers stated that he estimates that as much as 80 percent of actual security incidents goes unreported, in most cases because (1) the organization was unable to recognize that its systems had been penetrated or there were no indications of penetration or attack or (2) the organization was reluctant to report. Figure 2 shows the number of incidents that were reported to the CERT/CC from 1995 through the first half of 2003. According to the National Security Agency, foreign governments already have or are developing computer attack capabilities, and potential adversaries are developing a body of knowledge about U.S. systems and about methods to attack these systems. The National Infrastructure Protection Center (NIPC) reported in January 2002 that a computer belonging to an individual with indirect links to Osama bin Laden contained computer programs that suggested that the individual was interested in structural engineering as it related to dams and other water- retaining structures. The NIPC report also stated that U.S. law enforcement and intelligence agencies had received indications that Al Qaeda members had sought information about control systems from multiple Web sites, specifically on water supply and wastewater management practices in the United States and abroad. Since the terrorist attacks of September 11, 2001, warnings of the potential for terrorist cyber attacks against our critical infrastructures have also increased. For example, in his February 2002 statement for the Senate Select Committee on Intelligence, the director of central intelligence discussed the possibility of cyber warfare attack by terrorists. He stated that the September 11 attacks demonstrated the nation's dependence on critical infrastructure systems that rely on electronic and computer networks. Further, he noted that attacks of this nature would become an increasingly viable option for terrorists as they and other foreign adversaries become more familiar with these targets and the technologies required to attack them. What are control systems? Control systems are computer-based systems that are used by many infrastructures and industries to monitor and control sensitive processes and physical functions. Typically, control systems collect sensor measurements and operational data from the field, process and display this information, and relay control commands to local or remote equipment. In the electric power industry they can manage and control the transmission and delivery of electric power, for example, by opening and closing circuit breakers and setting thresholds for preventive shutdowns. Employing integrated control systems, the oil and gas industry can control the refining operations on a plant site as well as remotely monitor the pressure and flow of gas pipelines and control the flow and pathways of gas transmission. In water utilities, they can remotely monitor well levels and control the wells' pumps; monitor flows, tank levels, or pressure in storage tanks; monitor water quality characteristics, such as pH, turbidity, and chlorine residual; and control the addition of chemicals. Control system functions vary from simple to complex; they can be used to simply monitor processes--for example, the environmental conditions in a small office building--or manage most activities in a municipal water system or even a nuclear power plant. In certain industries such as chemical and power generation, safety systems are typically implemented to mitigate a disastrous event if control and other systems fail. In addition, to guard against both physical attack and system failure, organizations may establish back-up control centers that include uninterruptible power supplies and backup generators. There are two primary types of control systems. Distributed Control Systems (DCS) typically are used within a single processing or generating plant or over a small geographic area. Supervisory Control and Data Acquisition (SCADA) systems typically are used for large, geographically dispersed distribution operations. A utility company may use a DCS to generate power and a SCADA system to distribute it. Figure 3 illustrates the typical components of a control system. A control system typically consists of a "master" or central supervisory control and monitoring station consisting of one or more human-machine interfaces where an operator can view status information about the remote sites and issue commands directly to the system. Typically, this station is located at a main site along with application servers and an engineering workstation that is used to configure and troubleshoot the other control system components. The supervisory control and monitoring station is typically connected to local controller stations through a hard- wired network or to remote controller stations through a communications network--which could be the Internet, a public switched telephone network, or a cable or wireless (e.g. radio, microwave, or Wi-Fi) network. Each controller station has a Remote Terminal Unit (RTU), a Programmable Logic Controller (PLC), DCS controller, or other controller that communicates with the supervisory control and monitoring station. The controller stations also include sensors and control equipment that connect directly with the working components of the infrastructure--for example, pipelines, water towers, and power lines. The sensor takes readings from the infrastructure equipment--such as water or pressure levels, electrical voltage or current--and sends a message to the controller. The controller may be programmed to determine a course of action and send a message to the control equipment instructing it what to do--for example, to turn off a valve or dispense a chemical. If the controller is not programmed to determine a course of action, the controller communicates with the supervisory control and monitoring station before sending a command back to the control equipment. The control system also can be programmed to issue alarms back to the operator when certain conditions are detected. Handheld devices, such as personal digital assistants, can be used to locally monitor controller stations. Experts report that technologies in controller stations are becoming more intelligent and automated and communicate with the supervisory central monitoring and control station less frequently, requiring less human intervention. Historically, security concerns about control systems were related primarily to protecting against physical attack and misuse of refining and processing sites or distribution and holding facilities. However, more recently, there has been a growing recognition that control systems are now vulnerable to cyber attacks from numerous sources, including hostile governments, terrorist groups, disgruntled employees, and other malicious intruders. In October 1997, the President's Commission on Critical Infrastructure Protection specifically discussed the potential damaging effects on the electric power and oil and gas industries of successful attacks on control systems. Moreover, in 2002, the National Research Council identified "the potential for attack on control systems" as requiring "urgent attention." In February 2003, the President clearly demonstrated concern about "the threat of organized cyber attacks capable of causing debilitating disruption to our Nation's critical infrastructures, economy, or national security," noting that "disruption of these systems can have significant consequences for public health and safety" and emphasizing that the protection of control systems has become "a national priority." Several factors have contributed to the escalation of risk to control systems, including (1) the adoption of standardized technologies with known vulnerabilities, (2) the connectivity of control systems to other networks, (3) constraints on the implementation of existing security technologies and practices, (4) insecure remote connections, and (5) the widespread availability of technical information about control systems. Historically, proprietary hardware, software, and network protocols made it difficult to understand how control systems operated--and therefore how to hack into them. Today, however, to reduce costs and improve performance, organizations have been transitioning from proprietary systems to less expensive, standardized technologies such as Microsoft's Windows and Unix-like operating systems and the common networking protocols used by the Internet. These widely used standardized technologies have commonly known vulnerabilities, and sophisticated and effective exploitation tools are widely available and relatively easy to use. As a consequence, both the number of people with the knowledge to wage attacks and the number of systems subject to attack have increased. Also, common communication protocols and the emerging use of Extensible Markup Language (commonly referred to as XML) can make it easier for a hacker to interpret the content of communications among the components of a control system. Enterprises often integrate their control systems with their enterprise networks. This increased connectivity has significant advantages, including providing decision makers with access to real-time information and allowing engineers to monitor and control the process control system from different points on the enterprise network. In addition, the enterprise networks are often connected to the networks of strategic partners and to the Internet. Furthermore, control systems are increasingly using wide area networks and the Internet to transmit data to their remote or local stations and individual devices. This convergence of control networks with public and enterprise networks potentially exposes the control systems to additional security vulnerabilities. Unless appropriate security controls are deployed in the enterprise network and the control system network, breaches in enterprise security can affect the operation of control systems. According to industry experts, the use of existing security technologies, as well as strong user authentication and patch management practices, are generally not implemented in control systems because control systems operate in real time, typically are not designed with cybersecurity in mind, and usually have limited processing capabilities. Existing security technologies such as authorization, authentication, encryption, intrusion detection, and filtering of network traffic and communications require more bandwidth, processing power, and memory than control system components typically have. Because controller stations are generally designed to do specific tasks, they use low-cost, resource-constrained microprocessors. In fact, some devices in the electrical industry still use the Intel 8088 processor, introduced in 1978. Consequently, it is difficult to install existing security technologies without seriously degrading the performance of the control system. Further, complex passwords and other strong password practices are not always used to prevent unauthorized access to control systems, in part because this could hinder a rapid response to safety procedures during an emergency. As a result, according to experts, weak passwords that are easy to guess, shared, and infrequently changed are reportedly common in control systems, including the use of default passwords or even no password at all. In addition, although modern control systems are based on standard operating systems, they are typically customized to support control system applications. Consequently, vendor-provided software patches are generally either incompatible or cannot be implemented without compromising service by shutting down "always-on" systems or affecting interdependent operations. Potential vulnerabilities in control systems are exacerbated by insecure connections. Organizations often leave access links--such as dial-up modems to equipment and control information--open for remote diagnostics, maintenance, and examination of system status. Such links may not be protected with authentication or encryption, which increases the risk that hackers could use these insecure connections to break into remotely controlled systems. Also, control systems often use wireless communications systems, which are especially vulnerable to attack, or leased lines that pass through commercial telecommunications facilities. Without encryption to protect data as it flows through these insecure connections or authentication mechanisms to limit access, there is limited protection for the integrity of the information being transmitted. Public information about infrastructures and control systems is available to potential hackers and intruders. The availability of this infrastructure and vulnerability data was demonstrated earlier this year by a George Mason University graduate student, whose dissertation reportedly mapped every business and industrial sector in the American economy to the fiber- optic network that connects them--using material that was available publicly on the Internet, none of which was classified. Many of the electric utility officials who were interviewed for the National Security Telecommunications Advisory Committee's Information Assurance Task Force's Electric Power Risk Assessment expressed concern over the amount of information about their infrastructure that is readily available to the public. In the electric power industry, open sources of information--such as product data and educational videotapes from engineering associations-- can be used to understand the basics of the electrical grid. Other publicly available information--including filings of the Federal Energy Regulatory Commission (FERC), industry publications, maps, and material available on the Internet--is sufficient to allow someone to identify the most heavily loaded transmission lines and the most critical substations in the power grid. In addition, significant information on control systems is publicly available--including design and maintenance documents, technical standards for the interconnection of control systems and RTUs, and standards for communication among control devices--all of which could assist hackers in understanding the systems and how to attack them. Moreover, there are numerous former employees, vendors, support contractors, and other end users of the same equipment worldwide with inside knowledge of the operation of control systems. There is a general consensus--and increasing concern--among government officials and experts on control systems about potential cyber threats to the control systems that govern our critical infrastructures. As components of control systems increasingly make critical decisions that were once made by humans, the potential effect of a cyber threat becomes more devastating. Such cyber threats could come from numerous sources, ranging from hostile governments and terrorist groups to disgruntled employees and other malicious intruders. Based on interviews and discussions with representatives throughout the electric power industry, the Information Assurance Task Force of the National Security Telecommunications Advisory Committee concluded that an organization with sufficient resources, such as a foreign intelligence service or a well- supported terrorist group, could conduct a structured attack on the electric power grid electronically, with a high degree of anonymity and without having to set foot in the target nation. In July 2002, NIPC reported that the potential for compound cyber and physical attacks, referred to as "swarming attacks," is an emerging threat to the U.S. critical infrastructure. As NIPC reports, the effects of a swarming attack include slowing or complicating the response to a physical attack. For instance, a cyber attack that disabled the water supply or the electrical system in conjunction with a physical attack could deny emergency services the necessary resources to manage the consequences--such as controlling fires, coordinating actions, and generating light. According to the National Institute of Standards and Technology, cyber attacks on energy production and distribution systems--including electric, oil, gas, and water treatment, as well as on chemical plants containing potentially hazardous substances--could endanger public health and safety, damage the environment, and have serious financial implications, such as loss of production, generation, or distribution of public utilities; compromise of proprietary information; or liability issues. When backups for damaged components are not readily available (e.g., extra-high-voltage transformers for the electric power grid), such damage could have a long- lasting effect. Although experts in control systems report that they have substantiated reports of numerous incidents affecting control systems, there is no formalized process to collect and analyze information about control systems incidents. CERT/CC and KEMA, Inc. have proposed establishing a center that will proactively interact with industry to collect information about potential cyber incidents, analyze them, assess their potential impact, and make the results available to industry. I will now discuss potential and reported cyber attacks on control systems. Entities or individuals with malicious intent might take one or more of the following actions to successfully attack control systems: disrupt the operation of control systems by delaying or blocking the flow of information through control networks, thereby denying availability of the networks to control system operators; make unauthorized changes to programmed instructions in PLCs, RTUs, or DCS controllers, change alarm thresholds, or issue unauthorized commands to control equipment, which could potentially result in damage to equipment (if tolerances are exceeded), premature shutdown of processes (such as prematurely shutting down transmission lines), or even disabling of control equipment; send false information to control system operators either to disguise unauthorized changes or to initiate inappropriate actions by system operators; modify the control system software, producing unpredictable results; interfere with the operation of safety systems. In addition, in control systems that cover a wide geographic area, the remote sites are often unstaffed and may not be physically monitored. If such remote systems are physically breached, the attackers could establish a cyber connection to the control network. Department of Energy and industry researchers have speculated on how the following potential attack scenario could affect control systems in the electricity sector. Using war dialers to find modem phone lines that connect to the programmable circuit breakers of the electric power control system, hackers could crack passwords that control access to the circuit breakers and could change the control settings to cause local power outages and even damage equipment. A hacker could lower settings from, for example, 500 amperes to 200 on some circuit breakers; normal power usage would activate, or "trip," the circuit breakers, taking those lines out of service and diverting power to neighboring lines. If, at the same time, the hacker raised the settings on these neighboring lines to 900 amperes, circuit breakers would fail to trip at these high settings and the diverted power would overload the lines and cause significant damage to transformers and other critical equipment. The damaged equipment would require major repairs that could result in lengthy outages. Additionally, control system researchers at the Department of Energy's national laboratories have developed systems that demonstrate the feasibility of a cyber attack on a control system at an electric power substation, where high-voltage electricity is transformed for local use. Using tools that are readily available on the Internet, they are able to modify output data from field sensors and take control of the PLC directly in order to change settings and create new output. These techniques could enable a hacker to cause an outage, thus incapacitating the substation. The consequences of these threats could be lessened by the successful operation of any safety systems, which I discussed earlier in my testimony. There have been a number of reported exploits of control systems, including the following: In 1998, during the two-week military exercise known as Eligible Receiver, staff from the National Security Agency used widely available tools to simulate how sections of the U.S. electric power grid's control network could be disabled through cyber attack. In the spring of 2000, a former employee of an Australian company that develops manufacturing software applied for a job with the local government, but was rejected. The disgruntled former employee reportedly used a radio transmitter on numerous occasions to remotely hack into the controls of a sewage treatment system and ultimately release about 264,000 gallons of raw sewage into nearby rivers and parks. In August 2003, the Nuclear Regulatory Commission confirmed that in January 2003, the Microsoft SQL Server worm--otherwise known as Slammer--infected a private computer network at the Davis-Besse nuclear power plant in Oak Harbor, Ohio, disabling a safety monitoring system for nearly 5 hours. In addition, the plant's process computer failed, and it took about 6 hours for it to become available again. Slammer reportedly also affected communications on the control networks of other electricity sector organizations by propagating so quickly that control system traffic was blocked. Media reports have also indicated that the Blaster worm, which broke out three days before the August blackout, might have exacerbated the problems that contributed to the cascading effect of the blackout by blocking communications on computers that are used to monitor the power grid. FirstEnergy Corp., the Ohio utility that is the chief focus of the blackout investigation, is reportedly exploring whether Blaster might have caused the computer trouble that was described on telephone transcripts as hampering its response to multiple line failures. Several challenges must be addressed to effectively secure control systems against cyber threats. These challenges include: (1) the limitations of current security technologies in securing control systems; (2) the perception that securing control systems may not be economically justifiable; and (3) the conflicting priorities within organizations regarding the security of control systems. A significant challenge in effectively securing control systems is the lack of specialized security technologies for these systems. As I previously mentioned, the computing resources in control systems that are needed to perform security functions tend to be quite limited, making it very difficult to use security technologies within control system networks without severely hindering performance. Although technologies such as robust firewalls and strong authentication can be employed to better segment control systems from enterprise networks, research and development could help address the application of security technologies to the control systems themselves. Information security organizations have noted that a gap exists between current security technologies and the need for additional research and development to secure control systems. Research and development in a wide range of areas could lead to more effective technologies to secure control systems. Areas that have been noted for possible research and development include identifying the types of security technologies needed for different control system applications, determining acceptable performance trade-offs, and recognizing attack patterns for intrusion-detection systems. Experts and industry representatives have indicated that organizations may be reluctant to spend more money to secure control systems. Hardening the security of control systems would require industries to expend more resources, including acquiring more personnel, providing training for personnel, and potentially prematurely replacing current systems that typically have a lifespan of about 20 years. Several vendors suggested that since there has been no confirmed serious cyber attack on U.S. control systems, industry representatives believe the threat of such an attack is low. Until industry users of control systems have a business case to justify why additional security is needed, there may be little market incentive for vendors to fund research to develop more secure control systems. Finally, several experts and industry representatives indicated that the responsibility for securing control systems typically includes two separate groups: IT security personnel and control system engineers and operators. IT security personnel tend to focus on securing enterprise systems, while control system engineers and operators tend to be more concerned with the reliable performance of their control systems. Further, they indicate that, as a result, those two groups do not always fully understand each other's requirements and collaborate to implement secure control systems. These conflicting priorities may perpetuate a lack of awareness of IT security strategies that could be deployed to mitigate the vulnerabilities of control systems without affecting their performance. Although research and development will be necessary to develop technologies to secure individual control system devices, IT security technologies are currently available that could be implemented as part of a secure enterprise architecture to protect the perimeter of, and access to, control system networks. These technologies include firewalls, intrusion-detection systems, encryption, authentication, and authorization. Officials from one company indicated that, to reduce its control system vulnerabilities, it formed a team composed of IT staff, process control engineers, and manufacturing employees. This team worked collaboratively to research vulnerabilities and test fixes and workarounds. Several steps can be considered when addressing potential threats to control systems, including: Researching and developing new security technologies to protect control systems. Developing security policies, guidance, and standards for control system security. For example, the use of consensus standards could be considered to encourage industry to invest in stronger security for control systems. Increasing security awareness and sharing information about implementing more secure architectures and existing security technologies. For example, a more secure architecture might be attained by segmenting control networks with robust firewalls and strong authentication. Also, organizations may benefit from educating management about the cybersecurity risks related to control systems and sharing successful practices related to working across organizational boundaries. Implementing effective security management programs that include consideration of control system security. We have previously reported on the security management practices of leading organizations. Such programs typically consider risk assessment, development of appropriate policies and procedures, employee awareness, and regular security monitoring. Developing and testing continuity plans within organizations and industries, to ensure safe and continued operation in the event of an interruption, such as a power outage or cyber attack on control systems. Elements of continuity planning typically include (1) assessing the criticality of operations and identifying supporting resources, (2) taking steps to prevent and minimize potential damage and interruption, (3) developing and documenting a comprehensive continuity plan, and (4) periodically testing the continuity plan and making appropriate adjustments. Such plans are particularly important for control systems, where personnel may have lost familiarity with how to operate systems and processes without the use of control systems. In addition, earlier this year we reviewed the federal government's critical infrastructure protection efforts related to selected industry sectors, including electricity and oil and gas. We recommended that the federal government assess the need for grants, tax incentives, regulation, or other public policy tools to encourage increased critical infrastructure protection activities by the private sector and greater sharing of intelligence and incident information among these industry sectors and the federal government. In addition, we have made other recommendations related to critical infrastructure protection, including: developing a comprehensive and coordinated plan for national critical infrastructure protection; improving information sharing on threats and vulnerabilities between the private sector and the federal government, as well as within the government itself; and improving analysis and warning capabilities for both cyber and physical threats. Although improvements have been made, further efforts are needed to address these challenges in implementing critical infrastructure protection. Government and private industry have taken a broad look at the cybersecurity requirements of control systems and have initiated several efforts to address the technical, economic, and cultural challenges that must be addressed. These cybersecurity initiatives include efforts to promote research and development activities; develop process control security policies, guidance, and standards; and encourage security awareness and information sharing. For example, several of the Department of Energy's national laboratories have established or plan to establish test beds for control systems, the government and private sector are collaborating on efforts to develop industry standards, and Information Sharing and Analysis Centers such as the Chemical Sector Cybersecurity Program (for the chemical sector) and the North American Electric Reliability Council (for the electricity sector) have been developed to coordinate communication between industries and the federal government. Attachment I describes selected current and planned initiatives in greater detail. In summary, it is clear that the systems that monitor and control the sensitive processes and physical functions of the nation's infrastructures are at increasing risk to threats of cyber attacks. Securing these systems poses significant challenges. Both government and industry can help to address these challenges by lending support to ongoing initiatives as well as taking additional steps to overcome barriers that hinder better security. 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. Should you have any further questions about this testimony, please contact me at (202) 512-3317 or at [email protected]. Individuals making key contributions to this testimony included Shannin Addison, Joanne Fiorino, Alison Jacobs, Elizabeth Johnston, Steven Law, David Noone, and Tracy Pierson. provide additional security options to protect control systems. Several federally funded entities have ongoing efforts to research, develop, and test new technologies. At Sandia's SCADA Security Development Laboratory, industry can test and improve the security of its SCADA architectures, systems, and components. Sandia also has initiatives under way to advance technologies that strengthen control systems through the use of intrusion detection, encryption/authentication, secure protocols, system and component vulnerability analysis, secure architecture design and analysis, and intelligent self-healing infrastructure technology. Plans are under way to establish the National SCADA Test Bed, which is expected to become a full-scale infrastructure testing facility that will allow for large-scale testing of SCADA systems before actual exposure to production networks and for testing of new standards and protocols before rolling them out. Los Alamos and Sandia have established a critical infrastructure modeling, simulation, and analysis center known as the National Infrastructure Simulation and Analysis Center. The center provides modeling and simulation capabilities for the analysis of critical infrastructures, including the electricity, oil, and gas sectors. The National Science Foundation is considering pursuing cybersecurity research and development options related to the security of control systems. Several efforts to develop policies, guidance, and standards to assist in securing control systems are in progress. There are coordinated efforts between government and industry to identify threats, assess infrastructure vulnerabilities, and develop guidelines and standards for mitigating risks through protective measures. Actions that have been taken so far or are under way include the following. In February 2003, the board released the National Strategy to Secure Cyberspace. The document provides a general strategic picture, specific recommendations and policies, and the rationale for these initiatives. The strategy ranks control network security as a national priority and designates the Department of Homeland Security to be responsible for developing best practices and new technologies to increase control system security. The Instrumentation, Systems, and Automation Society is composed of users, vendors, government, and academic participants representing the electric utilities, water, chemical, petrochemical, oil and gas, food and beverage, and pharmaceutical industries. It has been working on a proposed standard since October 2002. The new standard addresses the security of manufacturing and control systems. It is to provide users with the tools necessary to integrate a comprehensive security process. Two technical reports are planned for release in October 2003. One report, ISA-TR99.00.01, Security Technologies for Manufacturing and Control Systems, will describe electronic security technologies and discuss specific types of applications within each category, the vulnerabilities addressed by each type, suggestions for deployment, and known strengths and weaknesses. The other report, ISA-TR99.00.02, Integrating Electronic Security into the Manufacturing and Control Systems Environment, will provide a framework for developing an electronic security program for manufacturing and control systems, as well as a recommended organization and structure for the security plan. Sponsored by the federal government's Technical Support Working Group, the Gas Technology Institute has researched a number of potential encryption methods to prevent hackers from accessing natural gas company control systems. This research has led to the development of an industry standard for encryption. The standard would incorporate encryption algorithms to be added to both new and existing control systems to control a wide variety of operations. This standard is outlined in the American Gas Association's report, numbered 12-1. The National Institute of Standards and Technology and the National Security Agency have organized the Process Controls Security Requirements Forum to establish security specifications that can be used in procurement, development, and retrofit of industrial control systems. They have also developed a set of security standards and certification processes. The North American Energy Reliability Council has established a cybersecurity standard for the electricity industry. The council requires members of the electricity industry to self-certify that they are meeting the cyber-security standards. However, as currently written, the standard does not apply to control systems. The Electric Power Research Institute has developed the Utility Communications Architecture, a set of standardized guidelines that provides interconnectivity and interoperability for utility data communication systems for real-time information exchange. Many efforts are under way to spread awareness about cyber threats and control system vulnerabilities and to take proactive measures to strengthen the security of control systems. The Federal Energy Regulatory Commission, the Department of Homeland Security and other federal agencies and organizations are involved in these efforts. The Department of Homeland Security created a National Cyber Security Division to identify, analyze, and reduce cyber threats and vulnerabilities, disseminate threat warning information, coordinate incident response, and provide technical assistance in continuity of operations and recovery planning. The Critical Infrastructure Assurance Office within the Department coordinates the federal government's initiatives on critical infrastructure assurance and promotes national outreach and awareness campaigns about critical infrastructure protection. Sandia National Laboratories has collaborated with the Environmental Protection Agency and industry groups to develop a risk assessment methodology for assessing the vulnerability of water systems in major U.S. cities. Sandia has also conducted vulnerability assessments of control systems within the electric power, oil and gas, transportation, and manufacturing industries. Sandia is involved with various activities to address the security of our critical infrastructures, including developing best practices, providing security training, demonstrating threat scenarios, and furthering standards efforts. North American Energy Reliability Council Designated by the Department of Energy as the electricity sector's Information Sharing and Analysis Center coordinator for critical infrastructure protection, the North American Energy Reliability Council facilitates communication between the electricity sector, the federal government, and other critical infrastructure sectors. The council has formed the Critical Infrastructure Protection Advisory Group, which guides cybersecurity activities and conducts security workshops to raise awareness of cyber and physical security in the electricity sector. The council also formed a Process Controls subcommittee within the Critical Infrastructure Protection Advisory Group to specifically address control systems. The Federal Energy Regulatory Commission regulates interstate commerce in oil, natural gas, and electricity. The commission has published a rule to promote the capturing of critical energy infrastructure information, which may lead to increased information sharing between industry and the federal government. The Process Control Systems Cyber Security Forum is a joint effort between Kema Consulting and LogOn Consulting, Inc. The forum studies the cybersecurity issues surrounding the effective operation of control systems and focuses on issues, challenges, threats, vulnerabilities, best practices/lessons learned, solutions, and related topical areas for control systems. It currently holds workshops on control system cybersecurity. The Chemical Sector Cybersecurity Program is a forum of 13 trade associations and serves as the Information Sharing and Analysis Center for the chemical sector. The Chemical Industry Data Exchange is part of the Chemical Sector Cybersecurity Program and is working to establish a common security vulnerability assessment methodology and to align the chemical industry with the ongoing initiatives at the Instrumentation Systems and Automation Society, the National Institute of Standards and Technology, and the American Chemistry Council. The President's Critical Infrastructure Protection Board and the Department of Energy developed 21 Steps to Improve the Cyber Security of SCADA Networks. These steps provide guidance for improving implementation and establishing underlying management processes and policies to help organizations improve the security of their control networks. The Joint Program Office has performed vulnerability assessments on control systems, including the areas of awareness, integration, physical testing, analytic testing, and analysis. 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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Computerized control systems perform vital functions across many of our nation's critical infrastructures. For example, in natural gas distribution, they can monitor and control the pressure and flow of gas through pipelines; in the electric power industry, they can monitor and control the current and voltage of electricity through relays and circuit breakers; and in water treatment facilities, they can monitor and adjust water levels, pressure, and chemicals used for purification. In October 1997, the President's Commission on Critical Infrastructure Protection emphasized the increasing vulnerability of control systems to cyber attacks. The House Committee on Government Reform, Subcommittee on Technology, Information Policy, Intergovernmental Relations, and the Census asked GAO to testify on potential cyber vulnerabilities. GAO's testimony focused on (1) significant cybersecurity risks associated with control systems; (2) potential and reported cyber attacks against these systems; (3) key challenges to securing control systems; and (4) steps that can be taken to strengthen the security of control systems, including current federal and private-sector initiatives. In addition to general cyber threats, which have been steadily increasing, several factors have contributed to the escalation of the risks of cyber attacks against control systems. These include the adoption of standardized technologies with known vulnerabilities, the increased connectivity of control systems to other systems, constraints on the use of existing security technologies for control systems, and the wealth of information about them that is publicly available. Control systems can be vulnerable to a variety of attacks, examples of which have already occurred. Successful attacks on control systems could have devastating consequences, such as endangering public health and safety; damaging the environment; or causing a loss of production, generation, or distribution of public utilities. Securing control systems poses significant challenges, including technical limitations, perceived lack of economic justification, and conflicting organizational priorities. However, several steps can be taken now and in the future to promote better security in control systems, such as implementing effective security management programs and researching and developing new technologies. The government and private industry have initiated several efforts intended to improve the security of control systems.
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Under the Railroad Retirement Act of 1974, the Railroad Retirement Board operates two distinct disability programs--the occupational disability program and the total and permanent disability program. The occupational disability program provides benefits for railroad workers when they are unable to perform the duties required of them by their railroad employment. The program--which uses labor- and management- negotiated disability criteria that apply only to a worker's' ability to perform his or her specific railroad occupation--provides benefits for workers who have physical or mental impairments that prevent them from performing their specific job, regardless of whether they can perform other work. For example, a railroad engineer who cannot frequently climb, bend, and reach, as required by the job, may be found occupationally disabled. Workers determined to be eligible for benefits under the occupational disability program may ultimately be able return to the workforce, but generally may not return to their original occupation. According to RRB, at the end of fiscal year 2013, the agency was paying about 60,500 occupational disability annuities, down from about 61,700 in fiscal year 2012. In fiscal year 2014, the agency approved about 97 percent of the 1,250 applications for occupational disability benefits it received. The eligibility criteria for the total and permanent disability program differ from the occupational disability program. Under the total and permanent disability program, RRB makes independent determinations of railroad workers' claimed disability using the same general criteria that the Social Security Administration (SSA) uses to administer its Disability Insurance (DI) program. For example, a worker must have a medically determinable physical or mental impairment that: (1) has lasted (or is expected to last) at least 1 year or is expected to result in death, and (2) prevents them from engaging in substantial gainful activity, defined as work activity that involves significant physical or mental activities performed for pay or profit. In other words, these workers are essentially deemed unable to perform any gainful work and are generally unable to engage in any regular employment. SSA staff review about one-third of the cases that RRB has determined to be eligible for total and permanent disability benefits for which Social Security benefits may potentially be paid. According to RRB, at the end of fiscal year 2013, the agency was paying about 20,700 total disability annuities. In fiscal year 2014, RRB approved about 78 percent of the nearly 800 applications for total and permanent disability benefits it received. While the railroad retirement system has remained separate from the Social Security system, the two systems are closely linked with regard to earnings, benefit payments, and taxes. A financial interchange links the financing of the two systems, providing a transfer of funds between RRB and SSA accounts based on the amount of Social Security benefits that workers would have received if they were covered by Social Security, as well as the payroll taxes that would have been collected if the railroad workers were covered by Social Security instead of their own system. When such benefits would exceed payroll taxes, the difference--including interest and administrative expenses--is transferred from Social Security to RRB. When such payroll taxes would exceed benefits, the transfer goes in the other direction. Since 1959, such transfers have favored RRB, and for all RRB benefits paid in fiscal year 2012, RRB received about 38 percent of the financing for benefits paid through the financial interchange. In 2009 and 2010, we reviewed the claims process for RRB's occupational disability program and found no overall evidence of unusual claims at similar commuter railroads like those exhibited at the Long Island Railroad; however, we did identify several potential program vulnerabilities including a reliance on a manual, paper-based claims process and the lack of a systematic way to evaluate potentially fraudulent claims. Our work found that RRB had not analyzed occupational disability data or performed other analyses that could have enabled the agency to identify unusual patterns in disability applications. Claims for disability through RRB are generally filed on paper and processed in paper form, which prevents the agency from detecting potential patterns of fraud or abuse that would be possible with a computer-based system. When a railroad worker files a claim and submits information--such as details about his or her disability and work history--RRB staff create a paper claims file. These files are reviewed by claims examiners who apply eligibility criteria to determine if a benefit should be awarded. Claims are assigned to examiners randomly, and due to the manual nature of the claims process, it is difficult for individual examiners and the agency to detect potential patterns of fraud or abuse such as a high concentration of claims from one source, or boilerplate medical exam information from a small number of doctors or hospitals. Such analyses are central to ensuring the integrity of the program and--more importantly--ensuring that only eligible railroad workers receive benefits. Indeed, as was the case in the Long Island Railroad incident, the use of paper files likely played a key role in allowing these patterns to go undetected. In 2009, we analyzed data from multiple RRB data systems to determine the number of occupational disability benefit awards made, relative to employment, for the Long Island Railroad compared with the other commuter railroads and determined application and approval rates for occupational disability benefits for workers at these railroads to determine if other railroads exhibited high numbers of claims like those found at the Long Island Railroad. It is important to note that the data we used for our analyses were readily available to RRB, and the agency could have used these data to identify such patterns as part of its routine monitoring and oversight of the occupational disability program. While we found no overall evidence of unusual claims like those exhibited at the Long Island Railroad, neither we nor RRB could perform analyses to detect unusual patterns in commuter rail worker's applications, approval rates, and impairments by railroad occupation because the information is paper- based. Further, RRB does not maintain electronic data for all railroads on claimants' doctors in a format that would facilitate analysis and allow the agency to analyze and detect potentially fraudulent claims. Currently, RRB only has information on claimants' doctors in their paper claim files. RRB has taken some steps to increase the use of data to detect and analyze claim patterns, but much more work needs to be done. Since the Long Island Railroad incident, RRB created a new staff position responsible for collecting, developing, and analyzing relevant data to help manage and oversee the occupational disability program. However, this office's limited reviews have thus far focused on RRB's occupational disability program and RRB officials told us during our 2014 review that there were no current plans to include and evaluate data from the total and permanent disability program in its analyses. Our recent work examining the processes and controls associated with the total and permanent disability program indicated that it too was vulnerable to fraud and improper payments. For example, we found fundamental shortcomings in this program's policies and procedures with respect to the disability determination process, internal controls, performance and accountability, and fraud awareness. Outdated earnings information: Our 2014 review found that RRB awarded total and permanent disability claims based on out-dated work and earnings information. In order to qualify for total and permanent disability benefits, a worker must meet certain work and earnings eligibility criteria. For example, a worker generally cannot earn income in excess of $850 per month from employment or net self-employment. RRB requires that claimants report any income and employment information at the time a disability claim is submitted, and RRB attempts to confirm this information by comparing it to data within the SSA Master Earnings File. However, this earnings database may not provide up-to-date information on work and earnings because the most recent data contained within the database are for the last complete calendar year before the claim was filed. As a result, the data that RRB uses to determine eligibility may lag behind actual earnings by up to 12 months. Without reviewing the most up-to-date information available, RRB is unable to ensure that only eligible workers receive benefits. There are other sources of data that could potentially provide RRB more current information on work and earnings, and as a result of our review, we recommended that RRB explore options to obtain more timely earnings data to ensure that claimants are working within allowable program limits prior to being awarded benefits. Information sources such as the National Directory of New Hires (NDNH) and The Work Number could potentially provide RRB with more timely earnings information on claimants' work histories. The NDNH was established in part to help states enforce child support orders against noncustodial parents. However, access to the NDNH is limited by statute, and RRB does not have specific legal authority to access it. The Work Number is a privately-maintained data source designed to help users identify unreported income. The Work Number allows organizations such as social service organizations to locate an individual's current place of employment or uncover unreported income, based on the most recent payroll data from over 2,500 employers nationwide. Inquiries can be made about specific individuals or through automated data matches. The Work Number is used by several other federal agencies on a fee basis and is already available to RRB. In 2014, we recommended that RRB explore options to obtain more timely earnings data to ensure that claimants are working within allowable program limits prior to being awarded benefits. RRB officials agreed with our recommendation and have told us that they will work with the Office of Management and Budget to further define and determine RRB's needs in this area. Insufficient supervisory review process: Our examination of RRB's total and permanent disability claims review process uncovered gaps in internal controls such as allowing a single claims examiner to review claims and award disability benefits--in many cases without an independent review by a second party. GAO's Standards for Internal Control in the Federal Government states that agencies should ensure that key duties and responsibilities are divided or segregated among different people to reduce the risk of error, waste, or fraud. However, we found an inconsistent review process at RRB. Specifically, at the time of our review, RRB's policies and procedures allowed for discretion at the field office level regarding how complete a case file must be before forwarding it to headquarters for a determination, and these files were subject to different levels of review. For example, at the headquarters examination and determination level, RRB policy allowed for some claims to be approved without any subsequent independent review and generally allowed examiners to use their judgment to decide which cases did not require additional scrutiny. In other words, at their discretion, a single RRB claims examiner could "self-authorize" the claim. In recent years, about one-quarter to one-third of all total and permanent initial claims were approved by the same claims examiner who reviewed the application. Without a second review, such claims can be problematic, such as when there is an error in judgment on the part of the claims examiner, or a failure to obtain key medical and vocational evidence. As a result of our review, we recommended that RRB revise its policy to require supervisory review and approval of all total and permanent disability cases. In response, RRB has subsequently changed its policy and officials stated that nearly all claim files are now reviewed by a second party. Program quality and integrity: Our 2014 review also found an insufficient commitment to quality and program integrity. We found that RRB's primary focus on quality was to ensure that claims were paid quickly and that the approved benefit amount was paid. However, RRB did not have sufficient controls to ensure that the claimant was actually eligible for benefits or that the benefit was awarded correctly--prior to the benefit being paid. In certain circumstances, RRB was able to identify improper payments after the benefit had already been paid, but this put RRB into a "pay and chase" mode where it must try and recover benefits paid to ineligible claimants. We agree with RRB that claims should be paid as quickly as possible; however it is equally important to ensure that the benefits are properly awarded. To ensure the integrity of the program, it is also critical that RRB report the results of its quality assurance efforts to Congress and other interested parties. RRB's performance monitoring standards have been focused primarily on payment timeliness and accuracy and less on whether claimants were properly qualified to receive benefits. Information on approval rates and the accuracy of disability determinations is critical towards ensuring the accountability of the agency's work. As a result, we recommended that RRB strengthen oversight of its disability determination process by establishing a regular quality assurance review of initial disability determinations to assess the quality of medical evidence, determination accuracy, and process areas in need of improvement and develop performance goals to track the accuracy of disability determinations. RRB agreed with these recommendations and plans to develop new measures of quality and program integrity and will include the development of performance goals as a part of its new quality assurance plan; however, we have yet to receive or review this plan. Fraud detection and awareness: Lastly, our review found inadequate internal controls to identify and eliminate fraud at every stage of the process and an insufficient commitment to fraud awareness throughout the agency. RRB had not engaged in a comprehensive effort to continuously identify and prevent potential fraud program- wide even after the high-profile Long Island Railroad incident exposed fraud as a key program risk. Since that incident, RRB increased its scrutiny of claims from Long Island Railroad workers--for example, by ordering more consultative medical exams. However, as noted earlier, its other actions to detect and prevent fraud have been limited and narrowly focused. For example, in 2011, RRB conducted an analysis of 89 cases of proven fraud in its occupational disability and total and permanent disability programs to identify common characteristics that could aid in indentifying at-risk cases earlier in the process. However, RRB did not draw any conclusions about new ways to identify potential fraud and, as a result, did not make any system-wide changes to the determination process. Our interviews with RRB staff also showed an inconsistent level of awareness about fraud, and claims representatives in all four of the district offices that we contacted said they had not received any training directly related to fraud awareness. While RRB had initiated fraud awareness training, agency participation was incomplete and updates and refreshers were sporadic. Due to this limited focus on fraud detection and awareness, we recommended that RRB 1) develop procedures to identify and address cases of potential fraud before claims are approved, 2) require annual training on these procedures for all agency personnel, and 3) regularly communicate management's commitment to these procedures and to the principle that fraud awareness, identification, and prevention is the responsibility of all RRB staff. RRB agreed with this recommendation and has begun taking steps to increase fraud awareness, amend its policies and procedures with new fraud detection and reporting mechanisms, and provide fraud awareness training to its staff. RRB officials also stated that the agency has hired a contractor to review the agency's fraud awareness and detection systems to identify specific areas in need of improvement. In summary, our recent work has found that RRB's disability programs lack sufficient policies and procedures to address the vulnerabilities it faces and, as a result, remains vulnerable to fraud and runs the risk of making improper payments. The weaknesses we have identified in RRB's determination process require sustained management attention and a more proactive stance by the agency. Without a commitment to fundamental aspects of internal control and program integrity, RRB remains vulnerable to fraud and runs the risk of making payments to ineligible individuals, thereby undermining the public's confidence in these important disability programs. While the Board agreed with all of our recommendations and the agency has taken steps to address them, more work remains to be done. We look forward to working with members of the subcommittee, RRB officials, and Inspector General staff as RRB continues to implement our recommendations. Chairman Meadows, Ranking Member Connolly, and members of the subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff have any questions about this testimony, please contact Daniel Bertoni, Director, Education, Workforce, and Income Security issues at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff members who made key contributions to this testimony are David Lehrer (Assistant Director), Jessica Botsford, Alex Galuten, Jamila Kennedy, Jean McSween, Arthur Merriam, and Kate van Gelder. GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1, 1999). Railroad Retirement Board: Total and Permanent Disability Program at Risk of Improper Payments, GAO-14-418. Washington, D.C.: June 26, 2014. Use of the Railroad Retirement Board Occupational Disability Program across the Rail Industry, GAO-10-351R. Washington, D.C.: February 4, 2010. Railroad Retirement Board: Review of Commuter Railroad Occupational Disability Claims Reveals Potential Program Vulnerabilities, GAO-09-821R. Washington, D.C.: September 9, 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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Over time, GAO, the RRB Inspector General, and the U.S. Department of Justice have reviewed or investigated RRB's disability benefit programs and found them to be vulnerable to fraud and abuse which places the agency at risk of making improper payments. In 2008, the Department of Justice investigated and prosecuted railroad workers who were suspected of falsely claiming RRB benefits. As of September 30, 2014, these investigations and prosecutions have resulted in approximately $614 million in restitution, forfeiture, and fines, raising concerns about RRB's administration of its disability claims process. Implementing strong preventive controls can serve as a frontline defense against improper payments. Examples of preventive controls include 1) ensuring that key duties and responsibilities are divided or segregated among different people to reduce the risk of error, waste or fraud and 2) using timely earnings information to ensure claimants are eligible to receive program benefits. GAO did not make recommendations regarding the occupational disability program, and in 2014, made five recommendations regarding the total and permanent disability program. This testimony provides information on (1) the critical program vulnerabilities of RRB's occupational disability program, and (2) the potential for fraud and threat of improper payments in RRB's total and permanent disability program. GAO is not making any new recommendations in this testimony. The Railroad Retirement Board (RRB) administers two disability programs--the occupational disability program and the total and permanent disability program. The occupational disability program provides benefits to railroad workers in situations where workers are unable to perform their railroad work, but may be able to return to the workforce in another occupation. The total and permanent disability program provides benefits to workers who have a medically determinable physical or mental impairment severe enough that they are generally unable to engage in any regular employment. As a steward of taxpayer dollars, the RRB is responsible for how it disperses billions of taxpayer dollars each year. In recent years, the RRB has been the subject of Government Accountability Office (GAO) audits that have highlighted shortcomings in RRB's administration of its disability programs. RRB Inspector General audits and a U.S. Department of Justice investigation have found similar challenges. GAO found that RRB's continued reliance on a paper-based process and the agency's lack of a robust analytical framework to target potential fraud and abuse in the occupational disability program left the agency susceptible to making improper payments to individuals who did not qualify for benefits. For example, individual occupational disability claims were kept in paper-based files making it difficult for claims examiners to identify unusual patterns or instances where medical information may originate from a small number of doctors or hospitals. Similarly, RRB did not maintain information on doctors in a format that would allow the agency to detect and analyze potential instances of fraud. RRB had begun separately collecting data to detect unusual patterns in relation to a high-profile fraud incident involving employees of the Long Island Railroad, but had not expanded these analyses to other railroads or to other programs outside the occupational disability program. GAO also found last year that RRB's total and permanent disability program was vulnerable to fraud and improper payments. A shortage of timely data, gaps in internal controls, a lack of a comprehensive system of quality assurance and performance monitoring, and insufficient focus on potential fraud all contributed to a need for fundamental program reform. For example, GAO found that RRB was using information to verify a claimant's self-reported work and earnings history that was up to 1 year old when newer data were available. Further, RRB's claims review process did not follow accepted internal controls by sufficiently separating claim reviews from approvals and, as a result, from one-quarter to one-third of total and permanent disability cases were approved without independent review by a second party. In addition, RRB's performance monitoring standards were focused primarily on payment timeliness and accuracy and less on whether claimants were properly qualified to receive benefits. Lastly, RRB's process lacked a fundamental awareness and sensitivity to instances of potential fraud. In a recent report examining the total and permanent disability program, GAO made several recommendations to improve the oversight of this program including ways to improve information, increase internal controls and foster fraud awareness. RRB officials agreed with all of GAO's recommendations and the agency has begun taking steps to implement them.
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For over 2 decades, we have reported on problems with DOD's personnel security clearance program as well as the financial costs and risks to national security resulting from these problems (see Related GAO Reports at the end of this statement). For example, at the turn of the century, we documented problems such as incomplete investigations, inconsistency in determining eligibility for clearances, and a backlog of overdue clearance reinvestigations that exceeded 500,000 cases. More recently in 2004, we identified continuing and new impediments hampering DOD's clearance program and made recommendations for increasing the effectiveness and efficiency of the program. Also in September 2004 and June and November 2005, we testified before this Subcommittee on clearance- related problems faced governmentwide, DOD-wide, and for industry personnel in particular. A critical step in the federal government's efforts to protect national security is to determine whether an individual is eligible for a personnel security clearance. Specifically, an individual whose job requires access to classified information must undergo a background investigation and adjudication (determination of eligibility) in order to obtain a clearance. As with federal government workers, the demand for personnel security clearances for industry personnel has increased during recent years. Additional awareness of threats to our national security since September 11, 2001, and efforts to privatize federal jobs during the last decade are but two of the reasons for the greater number of industry personnel needing clearances today. As of September 30, 2003, industry personnel held about one-third of the approximately 2 million DOD-issued clearances. DOD's Office of the Under Secretary of Defense for Intelligence has overall responsibility for DOD clearances, and its responsibilities also extend beyond DOD. Specifically, that office's responsibilities include obtaining background investigations and adjudicating clearance eligibility for industry personnel in more than 20 other federal agencies, as well as the clearances of staff in the federal government's legislative branch. Problems in the clearance program can negatively affect national security. For example, delays reviewing security clearances for personnel who are already doing classified work can lead to a heightened risk of disclosure of classified information. In contrast, delays in providing initial security clearances for previously non cleared personnel can result in other negative consequences, such as additional costs and delays in completing national security-related contracts, lost-opportunity costs, and problems retaining the best qualified personnel. Long-standing delays in completing hundreds of thousands of clearance requests for servicemembers, federal employees, and industry personnel as well as numerous impediments that hinder DOD's ability to accurately estimate and eliminate its clearance backlog led us to declare the program a high-risk area in January 2005. The 25 areas on our high-risk list at that time received their designation because they are major programs and operations that need urgent attention and transformation in order to ensure that our national government functions in the most economical, efficient, and effective manner possible. Shortly after we placed DOD's clearance program on our high-risk list, a major change in DOD's program occurred. In February 2005, DOD transferred its personnel security investigations functions and about 1,800 investigative positions to the Office of Personnel Management (OPM). Now, DOD obtains nearly all of its clearance investigations from OPM, which is currently responsible for 90 percent of the personnel security clearance investigations in the federal government. DOD retained responsibility for adjudication of military personnel, DOD civilians, and industry personnel. Other recent significant events affecting DOD's clearance program have been the passage of the Intelligence Reform and Terrorism Prevention Act of 2004 and the issuance of the June 2005 Executive Order 13381, "Strengthening Processes Relating to Determining Eligibility for Access to Classified National Security Information." The act included milestones for reducing the time to complete clearances, general specifications for a database on security clearances, and requirements for greater reciprocity of clearances (the acceptance of a clearance and access granted by another department, agency, or military service). Among other things, the executive order resulted in the Office of Management and Budget (OMB) taking a lead role in preparing a strategic plan to improve personnel security clearance processes governmentwide. Using the context that I have laid out for understanding the interplay between DOD and OPM in DOD's personnel security clearance processes, I will address three issues. First, I will provide a status update and preliminary observations from our ongoing audit on the timeliness and completeness of the processes used to determine whether industry personnel are eligible to hold a top secret clearance--an audit that this Subcommittee requested. Second, I will discuss potential adverse effects that might result from the July 1, 2006, expiration of Executive Order 13381. Finally, I will discuss DOD's recent action to suspend the processing of clearance requests for industry personnel. With the exception of the update and preliminary observations on our current audit, my comments today are based primarily on our completed work and our institutional knowledge from our prior reviews of the clearance processes used by DOD and, to a lesser extent, other agencies. In addition, we used information from the Intelligence Reform and Terrorism Prevention Act of 2004, executive orders, and other documents such as a memorandum of agreement between DOD and OPM. We conducted our work in accordance with generally accepted government auditing standards in May 2006. Mr. Chairman, at your and other congressional members request, we continue to examine the timeliness and completeness of the processes used to determine whether industry personnel are eligible to hold a top secret clearance. Two key elements of the security clearance process are investigation and adjudication. In the investigation portion of the security clearance process, the investigator seeks to obtain information pertaining to the security clearance applicant's loyalty, character, reliability, trustworthiness, honesty, and financial responsibility. For top secret security clearances, the types or sources of information include an interview with the subject of the investigation, national agency checks (e.g., Federal Bureau of Investigations and immigration records), local agency checks (e.g., municipal police and court records), financial checks, birth date and place, citizenship, education, employment, public records for information such as bankruptcy or divorce, and interviews with references. In the adjudication portion of the security clearance process, government employees in 10 DOD adjudication facilities--2 of which serve industry--use the information gathered at the investigation stage to approve, deny, or revoke eligibility to access classified information. Once adjudicated, the security clearance is then issued up to the appropriate eligibility level, or alternative actions are taken if eligibility is denied or revoked. A major part of our audit is reviewing fully adjudicated industry cases to determine the completeness of both the investigations and the adjudications for top secret clearances. We will complete this audit and issue a report to your Subcommittee and other congressional requesters this fall. I will briefly mention three of the preliminary observations that we have been able to derive thus far from our audit. Communication problems may be limiting governmentwide efforts to improve the personnel security clearance process. The billing dispute that I discuss later in this testimony is one example of a communication breakdown. In addition, until recently, OPM had not officially shared its investigator's handbook with DOD adjudicators. Adjudicators raised concerns that without knowing what was required for an investigation by the investigator's handbook, they could not fully understand how investigations were conducted and the investigative reports that form the basis for their adjudicative decisions. OPM indicates that it is revising the investigator's handbook and is obtaining comments from DOD and other customers. OPM acknowledges that despite its significant effort to develop a domestic investigative workforce, performance problems remain because of the workforce's inexperience. OPM reports that they are making progress in hiring and training new investigators, however, they have also noted that it will take a couple of years for the investigative workforce to reach desired performance levels. In addition, OPM is still in the process of developing a foreign presence to investigate leads overseas. OPM also reports that it is making progress in establishing an overseas presence, but that it will take time to fully meet the demand for overseas investigative coverage. Some DOD adjudication facilities have stopped accepting closed pending cases--investigations forwarded to adjudicators even though some required information is not included--from OPM. DOD adjudication officials need all of the required investigative information in order to determine clearance eligibility. Without complete investigative information, DOD adjudication facilities must store the hard-copy closed pending case files until the required additional information is provided by OPM. According to DOD officials, this has created a significant administrative burden. The July 1, 2006, expiration of Executive Order 13381 could slow improvements in personnel security clearance processes governmentwide as well as for DOD in particular. Among other things, this new executive order delegated responsibility for improving the clearance process to the OMB Director from June 30, 2005, to July 1, 2006. We have been encouraged by the high level of commitment that OMB demonstrated in the development of a plan to improve the personnel security clearance process governmentwide. Also, the OMB Deputy Director met with GAO officials to discuss OMB's general strategy for addressing the problems that led to our high-risk designation for DOD's clearance program. Demonstrating strong management commitment and top leadership support to address a known risk is one of the requirements for removing DOD's clearance program from GAO's high-risk list. Because there has been no indication that the executive order will be extended, we are concerned about whether such progress will continue without OMB's high-level management involvement. While OPM has provided some leadership in assisting OMB with the development of the governmentwide plan, OPM may not be in a position to assume additional high-level commitment for a variety of reasons if OMB does not continue in its current role. These reasons include: (1) the governmentwide plan lists many management challenges facing OPM and the Associate Director of its investigations unit, such as establishing a presence to conduct overseas investigations and adjusting its investigative workforce to the increasing demand for clearances; (2) adjudication of personnel security clearances and determination of which organizational positions require such clearances is not an OPM responsibility; and (3) agencies' disputes with OPM--such as the current billing dispute with DOD--may need a high-level, impartial third party to mediate a resolution. DOD stopped processing applications for clearances for industry personnel on April 28, 2006. DOD attributed its actions to an overwhelming volume of requests for industry personnel security investigations and funding constraints. The unexpected volume of security clearance requests resulted in DOD having to halt the processing of industry security clearances. We have testified repeatedly that a major impediment to providing timely clearances is DOD's inaccurately projected number of requests for security clearances DOD-wide and for industry personnel specifically. DOD's inability to accurately project clearance requirements makes it difficult to determine clearance-related budgets and staffing. In fiscal year 2001, DOD received 18 percent fewer requests than it projected (about 150,000); and in fiscal years 2002 and 2003, it received 19 and 13 percent (about 135,000 and 90,000), respectively, more requests than projected. In 2005, DOD was again uncertain about the number and level of clearances that it required, but the department reported plans and efforts to identify clearance requirements for servicemembers, civilian employees, and contractors. For example, in response to our May 2004 recommendation to improve the projection of clearance requests for industry personnel, DOD indicated that it is developing a plan and computer software to have the government's contracting officers (1) authorize the number of industry personnel clearance investigations required to perform the classified work on a given contract and (2) link the clearance investigations to the contract number. An important consideration in understanding the funding constraints that contributed to the stoppage is a DOD-OPM billing dispute, which has resulted in the Under Secretary of Defense for Intelligence requesting OMB mediation. The dispute stems from the February 2005 transfer of DOD's personnel security investigations function to OPM. The memorandum of agreement signed by the OPM Director and the DOD Deputy Secretary prior to the transfer lists many types of costs that DOD may incur for up to 3 years after the transfer of the investigations function to OPM. One cost, an adjustment to the rates charged to agencies for clearance investigations, provides that "OPM may charge DOD for investigations at DOD's current rates plus annual price adjustments plus a 25 percent premium to offset potential operating losses. OPM will be able to adjust, at any point of time during the first three year period after the start of transfer, the premium as necessary to cover estimated future costs or operating losses, if any, or offset gains, if any." The Under Secretary's memorandum says that OPM has collected approximately $50 million in premiums in addition to approximately $144 million for other costs associated with the transfer. The OPM Associate Director subsequently listed costs that OPM has incurred. To help resolve this billing matter, DOD requested mediation from OMB, in accordance with the memorandum of agreement between DOD and OPM. Information from DOD and OPM indicates that OMB subsequently directed the two agencies to continue to work together to resolve the matter on their own. According to representatives from DOD and OPM inspector general offices, they are currently investigating all of the issues raised in the Under Secretary's and Associate Director's correspondences and have indicated that they intend to issue reports on their reviews during the summer. Mr. Chairman, I want to assure you that we will continue taking multiple steps to assess and monitor DOD's personnel security clearance program. As I have discussed, we are currently reviewing the timeliness and completeness of the processes used to determine whether industry personnel are eligible to hold a top secret clearance. We will report that information to your Subcommittee this fall. Also, our standard steps of monitoring programs on our high-risk list require that we evaluate the progress that agencies make toward being removed from GAO's high-risk list. Finally, we continuously monitor our recommendations to agencies to determine whether active steps are being taken to overcome program deficiencies. Mr. Chairman and Members of the Subcommittee, this concludes my prepared statement. I would be happy to answer any questions you may have at this time. For further information regarding this testimony, please contact me at 202- 512-5559 or [email protected]. Individuals making key contributions to this testimony include Jack E. Edwards, Assistant Director; Jerome Brown; Kurt A. Burgeson; Susan C. Ditto; David Epstein; Sara Hackley; James Klein; and Kenneth E. Patton. Managing Sensitive Information: Departments of Energy and Defense Policies and Oversight Could Be Improved. GAO-06-369. Washington, D.C.: March 7, 2006. Managing Sensitive Information: DOE and DOD Could Improve Their Policies and Oversight. GAO-06-531T. Washington, D.C.: March 14, 2006. GAO's High-Risk Program. GAO-06-497T. Washington, D.C.: March 15, 2006. Questions for the Record Related to DOD's Personnel Security Clearance Program and the Government Plan for Improving the Clearance Process. GAO-06-323R. Washington, D.C.: January 17, 2006. DOD Personnel Clearances: Government Plan Addresses Some Long- standing Problems with DOD's Program, But Concerns Remain. GAO-06- 233T. Washington, D.C.: November 9, 2005. Defense Management: Better Review Needed of Program Protection Issues Associated with Manufacturing Presidential Helicopters. GAO-06- 71SU. Washington, D.C.: November 4, 2005. DOD's High-Risk Areas: High-Level Commitment and Oversight Needed for DOD Supply Chain Plan to Succeed. GAO-06-113T. Washington, D.C.: October 6, 2005. Questions for the Record Related to DOD's Personnel Security Clearance Program. GAO-05-988R. Washington, D.C.: August 19, 2005. Industrial Security: DOD Cannot Ensure Its Oversight of Contractors under Foreign Influence Is Sufficient. GAO-05-681. Washington, D.C.: July 15, 2005. DOD Personnel Clearances: Some Progress Has Been Made but Hurdles Remain to Overcome the Challenges That Led to GAO's High-Risk Designation. GAO-05-842T. Washington, D.C.: June 28, 2005. Defense Management: Key Elements Needed to Successfully Transform DOD Business Operations. GAO-05-629T. Washington, D.C.: April 28, 2005. Maritime Security: New Structures Have Improved Information Sharing, but Security Clearance Processing Requires Further Attention. GAO-05-394. Washington, D.C.: April 15, 2005. DOD's High-Risk Areas: Successful Business Transformation Requires Sound Strategic Planning and Sustained Leadership. GAO-05-520T. Washington, D.C.: April 13, 2005. GAO's 2005 High-Risk Update. GAO-05-350T. Washington, D.C.: February 17, 2005. High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 2005. Intelligence Reform: Human Capital Considerations Critical to 9/11 Commission's Proposed Reforms. GAO-04-1084T. Washington, D.C.: September 14, 2004. DOD Personnel Clearances: Additional Steps Can Be Taken to Reduce Backlogs and Delays in Determining Security Clearance Eligibility for Industry Personnel. GAO-04-632. Washington, D.C.: May 26, 2004. DOD Personnel Clearances: Preliminary Observations Related to Backlogs and Delays in Determining Security Clearance Eligibility for Industry Personnel. GAO-04-202T. Washington, D.C.: May 6, 2004. Security Clearances: FBI Has Enhanced Its Process for State and Local Law Enforcement Officials. GAO-04-596. Washington, D.C.: April 30, 2004. Industrial Security: DOD Cannot Provide Adequate Assurances That Its Oversight Ensures the Protection of Classified Information. GAO-04-332. Washington, D.C.: March 3, 2004. DOD Personnel Clearances: DOD Needs to Overcome Impediments to Eliminating Backlog and Determining Its Size. GAO-04-344. Washington, D.C.: February 9, 2004. Aviation Security: Federal Air Marshal Service Is Addressing Challenges of Its Expanded Mission and Workforce, but Additional Actions Needed. GAO-04-242. Washington, D.C.: November 19, 2003. Results-Oriented Cultures: Creating a Clear Linkage between Individual Performance and Organizational Success. GAO-03-488. Washington, D.C.: March 14, 2003. Defense Acquisitions: Steps Needed to Ensure Interoperability of Systems That Process Intelligence Data. GAO-03-329. Washington D.C.: March 31, 2003. Managing for Results: Agency Progress in Linking Performance Plans With Budgets and Financial Statements. GAO-02-236. Washington D.C.: January 4, 2002. Central Intelligence Agency: Observations on GAO Access to Information on CIA Programs and Activities. GAO-01-975T. Washington, D.C.: July 18, 2001. Determining Performance and Accountability Challenges and High Risks. GAO-01-159SP. Washington, D.C.: November 2000. DOD Personnel: More Consistency Needed in Determining Eligibility for Top Secret Clearances. GAO-01-465. Washington, D.C.: April 18, 2001. DOD Personnel: More Accurate Estimate of Overdue Security Clearance Reinvestigations Is Needed. GAO/T-NSIAD-00-246. Washington, D.C.: September 20, 2000. DOD Personnel: More Actions Needed to Address Backlog of Security Clearance Reinvestigations. GAO/NSIAD-00-215. Washington, D.C.: August 24, 2000. Security Protection: Standardization Issues Regarding Protection of Executive Branch Officials. GAO/T-GGD/OSI-00-177. Washington, D.C.: July 27, 2000. Security Protection: Standardization Issues Regarding Protection of Executive Branch Officials. GAO/GGD/OSI-00-139. Washington, D.C.: July 11, 2000. Computer Security: FAA Is Addressing Personnel Weaknesses, But Further Action Is Required. GAO/AIMD-00-169. Washington, D.C.: May 31, 2000. DOD Personnel: Weaknesses in Security Investigation Program Are Being Addressed. GAO/T-NSIAD-00-148. Washington, D.C.: April 6, 2000. DOD Personnel: Inadequate Personnel Security Investigations Pose National Security Risks. GAO/T-NSIAD-00-65. Washington, D.C.: February 16, 2000. DOD Personnel: Inadequate Personnel Security Investigations Pose National Security Risks. GAO/NSIAD-00-12. Washington, D.C.: October 27, 1999. Background Investigations: Program Deficiencies May Lead DEA to Relinquish Its Authority to OPM. GAO/GGD-99-173. Washington, D.C.: September 7, 1999. Department of Energy: Key Factors Underlying Security Problems at DOE Facilities. GAO/T-RCED-99-159. Washington, D.C.: April 20, 1999. Performance Budgeting: Initial Experiences Under the Results Act in Linking Plans With Budgets. GAO/AIMD/GGD-99-67. Washington, D.C.: April 12, 1999. Military Recruiting: New Initiatives Could Improve Criminal History Screening. GAO/NSIAD-99-53. Washington, D.C.: February 23, 1999. Executive Office of the President: Procedures for Acquiring Access to and Safeguarding Intelligence Information. GAO/NSIAD-98-245. Washington, D.C.: September 30, 1998. Inspectors General: Joint Investigation of Personnel Actions Regarding a Former Defense Employee. GAO/AIMD/OSI-97-81R. Washington, D.C.: July 10, 1997. Privatization of OPM's Investigations Service. GAO/GGD-96-97R. Washington, D.C.: August 22, 1996. Cost Analysis: Privatizing OPM Investigations. GAO/GGD-96-121R. Washington, D.C.: July 5, 1996. Personnel Security: Pass and Security Clearance Data for the Executive Office of the President. GAO/NSIAD-96-20. Washington, D.C.: October 19, 1995. Privatizing OPM Investigations: Implementation Issues. GAO/T-GGD-95- 186. Washington, D.C.: June 15, 1995. Privatizing OPM Investigations: Perspectives on OPM's Role in Background Investigations. GAO/T-GGD-95-185. Washington, D.C.: June 14, 1995. Security Clearances: Consideration of Sexual Orientation in the Clearance Process. GAO/NSIAD-95-21. Washington, D.C.: March 24, 1995. Background Investigations: Impediments to Consolidating Investigations and Adjudicative Functions. GAO/NSIAD-95-101. Washington, D.C.: March 24, 1995. Managing DOE: Further Review Needed of Suspensions of Security Clearances for Minority Employees. GAO/RCED-95-15. Washington, D.C.: December 8, 1994. Personnel Security Investigations. GAO/NSIAD-94-135R. Washington, D.C.: March 4, 1994. Classified Information: Costs of Protection Are Integrated With Other Security Costs. GAO/NSIAD-94-55. Washington, D.C.: October 20, 1993. Nuclear Security: DOE's Progress on Reducing Its Security Clearance Work Load. GAO/RCED-93-183. Washington, D.C.: August 12, 1993. Personnel Security: Efforts by DOD and DOE to Eliminate Duplicative Background Investigations. GAO/RCED-93-23. Washington, D.C.: May 10, 1993. Administrative Due Process: Denials and Revocations of Security Clearances and Access to Special Programs. GAO/T-NSIAD-93-14. Washington, D.C.: May 5, 1993. DOD Special Access Programs: Administrative Due Process Not Provided When Access Is Denied or Revoked. GAO/NSIAD-93-162. Washington, D.C.: May 5, 1993. Security Clearances: Due Process for Denials and Revocations by Defense, Energy, and State. GAO/NSIAD-92-99. Washington, D.C.: May 6, 1992. Due Process: Procedures for Unfavorable Suitability and Security Clearance Actions. GAO/NSIAD-90-97FS. Washington, D.C.: April 23, 1990. Weaknesses in NRC's Security Clearance Program. GAO/T-RCED-89-14. Washington, D.C.: March 15, 1989. Nuclear Regulation: NRC's Security Clearance Program Can Be Strengthened. GAO/RCED-89-41. Washington, D.C.: December 20, 1988. Nuclear Security: DOE Actions to Improve the Personnel Clearance Program. GAO/RCED-89-34. Washington, D.C.: November 9, 1988. Nuclear Security: DOE Needs a More Accurate and Efficient Security Clearance Program. GAO/RCED-88-28. Washington, D.C.: December 29, 1987. National Security: DOD Clearance Reduction and Related Issues. GAO/NSIAD-87-170BR. Washington, D.C.: September 18, 1987. Oil Reserves: Proposed DOE Legislation for Firearm and Arrest Authority Has Merit. GAO/RCED-87-178. Washington, D.C.: August 11, 1987. Embassy Blueprints: Controlling Blueprints and Selecting Contractors for Construction Abroad. GAO/NSIAD-87-83. Washington, D.C.: April 14, 1987. Security Clearance Reinvestigations of Employees Has Not Been Timely at the Department of Energy. GAO/T-RCED-87-14. Washington, D.C.: April 9, 1987. Improvements Needed in the Government's Personnel Security Clearance Program. Washington, D.C.: April 16, 1985. Need for Central Adjudication Facility for Security Clearances for Navy Personnel. GAO/GGD-83-66. Washington, D.C.: May 18, 1983. Effect of National Security Decision Directive 84, Safeguarding National Security Information. GAO/NSIAD-84-26. Washington, D.C.: October 18, 1983. Faster Processing of DOD Personnel Security Clearances Could Avoid Millions in Losses. GAO/GGD-81-105. Washington, D.C.: September 15, 1981. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The Department of Defense (DOD) is responsible for about 2 million active personnel security clearances. About one-third of the clearances are for industry personnel working on contracts for DOD and more than 20 other executive agencies. Delays in determining eligibility for a clearance can heighten the risk that classified information will be disclosed to unauthorized sources and increase contract costs and problems attracting and retaining qualified personnel. Long-standing delays in completing hundreds of thousands of clearance requests and numerous impediments that hinder DOD's ability to accurately estimate and eliminate its clearance backlog led GAO to declare DOD's personnel security clearance program a high-risk area in January 2005. This testimony presents GAO's (1) preliminary observations from its ongoing review of the timeliness and completeness of clearances, (2) concerns about the upcoming expiration of an executive order that has resulted in high level commitment to improving the governmentwide clearance process, and (3) views on factors underlying DOD's decision to stop accepting clearance requests for industry personnel. GAO's ongoing review of the timeliness and completeness of security clearance processes for industry personnel has provided three preliminary observations. First, communication problems between DOD and the Office of Personnel Management (OPM) may be limiting governmentwide efforts to improve the personnel security clearance process. Second, OPM faces performance problems due to the inexperience of its domestic investigative workforce, and it is still in the process of developing a foreign presence to investigate leads overseas. Third, some DOD adjudication facilities have stopped accepting closed pending cases--that is, investigations formerly forwarded to DOD adjudicators from OPM--even though some required investigative information was not included. In addition, the expiration of Executive Order 13381 could slow improvements in the security clearance processes governmentwide, as well as for DOD in particular. The executive order, which among other things delegated responsibility for improving the clearance process to the Office of Management and Budget (OMB), is set to expire on July 1, 2006. GAO has been encouraged by the high level of commitment that OMB has demonstrated in the development of a plan to address clearance-related problems. Because there has been no indication that the executive order will be extended, GAO is concerned about whether the progress that has resulted from OMB's high-level management involvement will continue. Issues such as OPM's need to establish an overseas presence are discussed as potential reasons why OPM may not be in a position to assume an additional high-level commitment if OMB does not continue in its current role. Finally, inaccurate projections of clearance requests and funding constraints are delaying the processing of security clearance requests for industry personnel. DOD stopped processing new applications for clearance investigations for industry personnel on April 28, 2006. DOD attributed its actions, in part, to an overwhelming volume of requests for industry personnel security investigations. DOD's long-standing inability to accurately project its security clearance workload makes it difficult to determine clearance-related budgets and staffing requirements. The funding constraints that also underlie the stoppage are related to the transfer of DOD's personnel security investigations functions to OPM. DOD has questioned some of the costs being charged by OPM and has asked OMB to mediate the DOD-OPM dispute. Information from the two agencies indicates that OMB has directed the agencies to continue to work together to resolve the matter. According to officials in the DOD and OPM inspector general offices, they are investigating the billing dispute and expect to report on the results of their investigations this summer.
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Pension plans can generally be characterized as either defined benefit or defined contribution plans. In a defined benefit plan, the amount of the benefit payment is determined by a formula typically based on the retiree's years of service and final average salary, and is most often provided as a lifetime annuity. For state and local government retirees, postretirement cost-of-living adjustments (COLAs) are frequently provided in defined benefit plans. But benefit payments are generally reduced for early retirement, and in some cases payments may be offset for receipt of Social Security. In a defined contribution plan, the key determinants of the benefit amount are the employee's and employer's contribution rates, and the rate of return achieved on the amounts contributed to an individual's account over time. The employee assumes the investment risk; the account balance at the time of retirement is the total amount of funds available, and unlike with defined benefit plans, there are generally no COLAs. Until depleted, however, a defined contribution account balance may continue to earn investment returns after retirement, and a retiree could use the balance to purchase an inflation-protected annuity. Also, defined contribution plans are more portable than defined benefit plans, as employees own their accounts individually and can generally take their balances with them when they leave government employment. There are no reductions based on early retirement or for participation in Social Security. Both government employers and employees generally make contributions to fund state and local pension benefits. For plans in which employees are covered by Social Security, the median contribution rate in fiscal year 2006 was 8.5 percent of payroll for employers and 5 percent of pay for employees, in addition to 6.2 percent of payroll from both employers and employees to Social Security. For plans in which employees are not covered by Social Security, the median contribution rate was 11.5 percent of payroll for employers and 8 percent of pay for employees. Actuaries estimate the amount that will be needed to pay future benefits. The benefits that are attributable to past service are called "actuarial accrued liabilities." (In this report, the actuarial accrued liabilities are referred to as "liabilities." Actuaries calculate liabilities based on an actuarial cost method and a number of assumptions including discount rates and worker and retiree mortality. Actuaries also estimate the "actuarial value of assets" that fund a plan. (In this report, the actuarial value of assets is referred to simply as "assets"). The excess of actuarial accrued liabilities over the actuarial value of assets is referred to as the "unfunded actuarial accrued liability" or "unfunded liability." Under accounting standards, such information is disclosed in financial statements. In contrast, the liability that is recognized on the balance sheet is the cumulative excess of annual benefit costs over contributions to the plan. Certain amounts included in the actuarial accrued liability are not yet recognized as annual benefit costs under accounting standards, as they are amortized over several years. State and local government pension plans are not covered by most of the substantive requirements, or the insurance program operated by the Pension Benefit Guaranty Corporation (PBGC), under the Employee Retirement Income Security Act of 1974 (ERISA), which apply to most private employer benefit plans. Federal law generally does not require state and local governments to prefund or report on the funded status of pension plans. However, in order to receive preferential tax treatment, state and local pensions must comply with requirements of the Internal Revenue Code. In addition, the retirement income security of Americans is an ongoing concern of the federal government. Although ERISA imposes participation, vesting, and other requirements directly upon employee pension plans offered by private sector employers, governmental plans such as those provided by state and local governments to their employees are excepted from these requirements. In addition, ERISA established an insurance program for defined benefit plans under which promised benefits are paid (up to a statutorily set amount) if an employer cannot pay them--but this too does not apply to governmental plans. However, for participants in governmental pension plans to receive preferential tax treatment (that is, for plan contributions and investment earnings to be tax-deferred), plans must be deemed "qualified" by the Internal Revenue Service. Since the 1980s, the Governmental Accounting Standards Board (GASB) has maintained standards for accounting and financial reporting for state and local governments. GASB operates independently and has no authority to enforce the use of its standards. Still, many state laws require local governments to follow GASB standards, and bond raters do consider whether GASB standards are followed. Also, to receive a "clean" audit opinion under generally accepted accounting principles, state and local governments are required to follow GASB standards. These standards require disclosing financial information on pensions, such as the amount of contributions and the ratio of assets to liabilities. Three measures are key to understanding pension plans' funded status: contributions, funded ratios, and unfunded liabilities. According to experts we interviewed, any single measure at a point in time may give a dimension of a plan's funded status, but it does not give a complete picture. Instead, the measures should be reviewed collectively over time to understand how the funded status is improving or worsening. For example, a strong funded status means that, over time, the amount of assets, along with future schedule contributions, comes close to matching a plan's liabilities. Under GASB reporting standards, the funded status of different pension plans cannot be compared easily because governments use different actuarial approaches such as different actuarial cost methods, assumptions, amortization periods, and "smoothing" mechanisms. Most public pension plans use one of three "actuarial cost methods," out of the six GASB approves. Actuarial costs methods differ in several ways. First, each uses a different approach to calculate the "normal cost," the portion of future benefits that the cost method allocates to a specific year, resulting in different funding patterns for each. In addition to the cost methods, differences in assumptions used to calculate the funded status can result in significant differences among plans that make comparison difficult. Also differences in amortization periods make it difficult to compare the funded status of different plans. Finally, actuaries for many plans calculate the value of current assets based on an average value of past years. As a result, if the value of assets fluctuates significantly from year to year, the "smoothed" value of assets changes less dramatically. Comparing the funded status of plans that use different smoothing periods can be confusing because the value of the different plans' assets reflects a different number of years. We reported recently that state and local governments will likely face daunting fiscal challenges, driven in large part by the growth in health- related costs, such as Medicaid and health insurance for state and local employees. Our report was based on simulations for the state and local government sector that indicated that in the absence of policy changes, large and growing fiscal challenges will likely emerge within a decade. We found that, as is true for the federal sector, the growth in health-related costs is a primary driver of these fiscal challenges. State and local governments typically provide their employees with retirement benefits that include a defined benefit plan and a supplemental defined contribution plan for voluntary savings. However, the way each of these components is structured and the level of benefits provided varies widely--both across states, and within states based on such things as date of hire, employee occupation, and local jurisdiction. Statutes and local ordinances protect and manage pension plans and are often anchored by provisions in state constitutions and local charters. State and local law also typically requires that pensions be managed as trust funds and overseen by boards. Most state and local government workers are provided traditional pension plans with defined benefits. About 90 percent of full-time state and local employees participated in defined benefit plans as of 1998. In fiscal year 2006, state and local government pension systems covered 18.4 million members and made periodic payments to 7.3 million beneficiaries, paying out $151.7 billion in benefits. State and local government employees are generally required to contribute a percentage of their salaries to their defined benefit plans, unlike private sector employees, who generally make no contribution when they participate in defined benefit plans. According to a 50-state survey conducted by Workplace Economics, Inc., 43 of 48 states with defined benefit plans reported that general state employees were required to make contributions ranging from 1.25 to 10.5 percent of their salaries. Nevertheless, these contributions have no influence on the amount of benefits paid because benefits are based solely on the formula. In 1998, all states had defined benefit plans as their primary pension plans for their general state workers except for Michigan and Nebraska (and the District of Columbia), which had defined contribution plans as their primary plans, and Indiana, which combined both defined benefit and defined contribution components in its primary plan. Almost a decade later, we found that as of 2007, only one additional state (Alaska) had adopted a defined contribution plan as its primary plan; one additional state (Oregon) had adopted a combined plan, and Nebraska had replaced its defined contribution plan with a cash balance defined benefit plan. (See fig. 1.) Although still providing defined benefit plans as their primary plans for general state employees, some states also offer defined contribution plans (or hybrid defined benefit/defined contribution plans) as optional alternatives to their primary plans. These states include Colorado, Florida, Montana, Ohio, South Carolina, and Washington. In states that have adopted defined contribution plans as their primary plans, most employees continue to participate in defined benefit plans because employees are allowed to continue their participation in their previous plans (which is rare in the private sector). Thus, in contrast to the private sector, which has moved increasingly away from defined benefit plans over the past several decades, the overwhelming majority of states continue to provide defined benefit plans for their general state employees. Most states have multiple pension plans providing benefits to different groups of state and local government workers based on occupation (such as police officer or teacher) and/or local jurisdiction. According to the most recent Census data available, in fiscal year 2004-2005 there were a total of 2,656 state and local government pension plans. We found that defined benefit plans were still prevalent for most of these other state and local employees as well. For example, a nationwide study conducted by the National Education Association in 2006 found that of 99 large pension plans serving teachers and other school employees, 79 were defined benefit plans, 3 were defined contribution plans, and the remainder offered a range of alternative, optional, or combined plan designs with both defined benefit and defined contribution features. In addition to primary pension plans (whether defined benefit or defined contribution), data we gathered from various national organizations show that each of the 50 states has also established a defined contribution plan as a supplementary, voluntary option for tax-deferred retirement savings for their general state employees. Such plans appear to be common among other employee groups as well. These supplementary defined contribution plans are typically voluntary deferred compensation plans under section 457(b) of the federal tax code. While these defined contribution plans are fairly universally available, state and local worker participation in the plans has been modest. In a 2006 nationwide survey conducted by the National Association of Government Defined Contribution Administrators, the average participation rate for all defined contribution plans was 21.6 percent. One reason cited for low participation rates in these supplementary plans is that, unlike in the private sector, it has been relatively rare for employers to match workers' contributions to these plans, but the number of states offering a match has been increasing. According to a state employee benefit survey of all 50 states conducted by Workplace Economics, Inc., in 2006 12 states matched the employee's contribution up to a specified percent or dollar amount. Among our site visit states, none made contributions to the supplementary savings plans for their general state employees, and employee participation rates generally ranged between 20 to 50 percent. In San Francisco, however, despite the lack of an employer match, 75 percent of employees had established 457(b) accounts. The executive director of the city's retirement system attributed this success to several factors, including (1) that the plan had been in place for over 25 years, (2) that the plan offers good investment options for employees to choose from, and (3) that plan administrators have a strong outreach program. In the private sector, a growing number of employers are attempting to increase participation rates and retirement savings in defined contribution plans by automatically enrolling workers and offering new types of investment funds. State and local laws generally provide the most direct source of any specific legal protections for the pensions of state and local workers. Provisions in state constitutions often protect pensions from being eliminated or diminished. In addition, constitutional provisions often specify how pension funds are to be managed, such as by mandating certain funding requirements and/or requiring that the funds be overseen by boards of trustees. Moreover, we found that at the sites we visited, locally administered plans were generally governed by local laws. However, state employees, as well as the vast majority of local employees, are covered by state-administered plans. Protections for pensions in state constitutions are the strongest form of legal protection states can provide because constitutions--which set out the system of fundamental laws for the governance of each state-- preempt state statutes and are difficult to change. Furthermore, changing a state constitution usually requires broad public support. For example, often a supermajority (such as three-fifths) of a state's legislature may need to first approve proposed constitutional changes and typically if a change passes the legislature, voters must also approve it. The majority of states have some form of constitutional protection for their pensions. According to AARP data compiled in 2000, 31 states have a total of 93 constitutional provisions explicitly protecting pensions. (The other 19 states all have pension protections in their statutes or recognize legal protections under common law.) These constitutional pension provisions prescribe some combination of how pension trusts are to be funded, protected, managed, or governed. (See table 1.) In nine states, constitutional provisions take the form of a specific guarantee of the right to a benefit. In two of the states we visited, the state constitution provided protection for pension benefits. In California, for example, the state constitution provides that public plan assets are trust funds to be used only for providing pension benefits to plan participants. In Michigan, the state constitution provides that public pension benefits are contractual obligations that cannot be diminished or impaired and must be funded annually. The basic features of pension plans--such as eligibility, contributions, and types of benefits--are often spelled out in state or local statute. State- administered plans are generally governed by state laws. For example, in California, the formulas used to calculate pension benefit levels for employees participating in the California Public Employees' Retirement System (CalPERS) are provided in state law. Similarly, in Oregon, pension benefit formulas for state and local employees participating in the Oregon Public Employees Retirement System (OPERS) plans are provided in state statute. In addition, we found that at the sites we visited locally administered plans were generally governed by local laws. For example, in San Francisco, contribution rates for employees participating in the San Francisco City and County Employees' Retirement System are spelled out in the city charter. Legal protections usually apply to benefits for existing workers or benefits that have already accrued; thus, state and local governments generally can change the benefits for new hires by creating a series of new tiers or plans that apply to employees hired only after the date of the change. For example, the Oregon legislature changed the pension benefit for employees hired on or after January 1, 1996, and again for employees hired on or after August 29, 2003, each time increasing the retirement age for the new group of employees. For some state and local workers whose benefit provisions are not laid out in detail in state or local statutes, specific provisions are left to be negotiated between employers and unions. For example, in California, according to state officials, various benefit formula options for local employees are laid out in state statutes, but the specific provisions adopted are generally determined through collective bargaining between the more than 1,500 different local public employers and rank-and-file bargaining units. In all three states we visited, unions also lobby the state legislature on behalf of their members. For example, in Michigan, according to officials from the Department of Management and Budget, unions marshal support for or against a proposal by taking such actions as initiating letter-writing campaigns to support or oppose legislative measures. In accordance with state constitution and/or statute, the assets of state and local government pension plans are typically managed as trusts and overseen by boards of trustees to ensure that the assets are used for the sole purpose of meeting retirement system obligations and that the plans are in compliance with the federal tax code. Boards of trustees, of varying size and composition, often serve the purpose of establishing the overall policies for the operation and management of the pension plans, which can include adopting actuarial assumptions, establishing procedures for financial control and reporting, and setting investment strategy. On the basis of our analysis of data from the National Education Association, the National Association of State Retirement Administrators (NASRA), and reports and publications from selected states, we found that 46 states had boards overseeing the administration of their pension plans for general state employees. These boards ranged in size from 5 to 19 members, with various combinations of those elected by plan members, those appointed by a state official, and those who serve automatically based on their office in state government (known as ex officio members). (See fig. 2.) Different types of members bring different perspectives to bear, and can help to balance competing demands on retirement system resources. For example, board members who are elected by active and retired members of the retirement system, or who are union members, generally help to ensure that members' benefits are protected. Board members who are appointed sometimes are required to have some type of technical knowledge, such as investment expertise. Finally, ex officio board members generally represent the financial concerns of the state government. Some pension boards do not have each of these perspectives represented. For example, boards governing the primary public employee pension plans in all three states we visited had various compositions and responsibilities. (See table 2.) At the local level, in Detroit, Michigan, a majority of the board of Detroit's General Retirement System is composed of members of the system. According to officials from the General Retirement System, this is thought to protect pension plan assets from being used for purposes other than providing benefits to members of the retirement system. Regarding responsibilities, the board administers the General Retirement System and, as specified in local city ordinances, is responsible for the system's proper operation and investment strategy. Pension boards of trustees typically serve as pension plan fiduciaries, and as fiduciaries, they usually have significant independence in terms of how they manage the funds. Boards make policy decisions within the framework of the plan's enabling statutes, which may include adopting actuarial assumptions, establishing procedures for financial control and reporting, and setting investment policy. In the course of managing pension trusts, boards generally obtain the services of independent advisors, actuaries, or investment professionals. Also, some states' pension plans have investment boards in addition to, or instead of, general oversight boards. For example, three of the four states without general oversight boards have investment boards responsible for setting investment policy. While public employees may have a broad mandate to serve all citizens, board members generally have a fiduciary duty to act solely in the interests of plan participants and beneficiaries. One study of approximately 250 pension plans at the state and local level found that plans with boards overseeing them were associated with greater funding than those without boards. When state pension plans do not have a general oversight board, these responsibilities tend to be handled directly by legislators and/or senior executive officials. For example, in the state of Washington, the pension plan for general state employees is overseen by the Pension Funding Council--a six-member body whose membership, by statute, includes four state legislators. The council adopts changes to economic assumptions and contribution rates for state retirement systems by majority vote. In Florida, the Florida Retirement System is not overseen by a separate independent board; instead, the pension plan is the responsibility of the State Board of Administration, composed of the governor, the chief financial officer of the state, and the state attorney general. In New York, the state comptroller, an elected official, serves as sole trustee and administrative head of the New York State and Local Employees' Retirement System. Currently, most state and local government pension plans have enough invested resources set aside to pay for the benefits they are scheduled to pay over the next several decades. Many experts consider a funded ratio of about 80 percent or better to be sound for state and local government pensions. While most plans' funding may be sound, a few plans have persistently reported low funded ratios, which will eventually require the government employer to improve funding, for example, by reducing benefits or by increasing contributions. Even for many plans with lower funded ratios, benefits are generally not at risk in the near term because current assets and new contributions may be sufficient to pay benefits for several years. Still, many governments have often contributed less than the amount need to improve or maintain funded ratios. Low contributions raise concerns about the future funded status, and may shift costs to future generations. Most public pension plans report having sufficient assets to pay for retiree benefits over the next several decades. Many experts and officials to whom we spoke consider a funded ratio of 80 percent to be sufficient for public plans for a couple of reasons. First, it is unlikely that public entities will go out of business or cease operations as can happen with private sector employers, and state and local governments can spread the costs of unfunded liabilities over a period of up to 30 years under current GASB standards. In addition, several commented that it can be politically unwise for a plan to be overfunded; that is, to have a funded ratio over 100 percent. The contributions made to funds with "excess" assets can become a target for lawmakers with other priorities or for those wishing to increase retiree benefits. More than half of state and local governments' plans reviewed by the Public Fund Survey (PFS) had a funded ratio of 80 percent or better in fiscal year 2006, but the percentage of plans with a funded ratio of 80 percent or better has decreased since 2000, as shown in figure 3. Our analysis of the PFS data on 65 self-reported state and local government pension plans showed that 38 (58 percent) had a funded ratio of 80 percent or more, while 27 (42 percent) had a funded ratio of less than 80 percent. In the early 2000s, according to one study, the funded ratio of 114 state and local government pension plans together reached about 100 percent; it has since declined. In fiscal year 2006, the aggregate funded ratio was about 86 percent. Some officials attribute the decline in funded ratios since the late 1990s to the decline of the stock market, which reduced the value of assets. This sharp decline would likely affect funded ratios for several years because most plans use smoothing techniques to average out the value of assets over several years. Our analysis of several factors affecting the funded ratio showed that changes in investment returns had the most significant impact on the funded ratio between 1988 and 2005, followed by changes in liabilities. Although most plans report being soundly funded in 2006, a few have been persistently underfunded, and some plans have seen funded ratio declines in recent years. We found that several plans in our data set had funded ratios below 80 percent in each of the years for which data is available. Of 70 plans in our data set, 6 had funded ratios below 80 percent for 9 years between 1994 and 2006. Two plans had funded ratios below 50 percent for the same time period. In addition, of the 27 plans that had funded ratios below 80 percent in 2006, 15 had lower funded ratios in 2006 than in 1994. The sponsors of these plans may be at risk in the future of increased budget pressures. By themselves, lower funded ratios and unfunded liabilities do not necessarily indicate that benefits for current plan members are at risk, according to experts we interviewed. Unfunded liabilities are generally not paid off in a single year, so it can be misleading to review total unfunded liabilities without knowing the length of the period over which the government plans to pay them off. Large unfunded liabilities may represent a fiscal challenge, particularly if the period to pay them off is short. But all unfunded liabilities shift the responsibility for paying for benefits accrued in past years to the future. Unfunded liabilities will eventually require the government employer to increase revenue, reduce benefits or other government spending, or do some combination of these. Revenue increase could include higher taxes, returns on investments, or employee contributions. Nevertheless, we found that unfunded liabilities do not necessarily imply that pension benefits are at risk in the near term. Current funds and new contributions may be sufficient to pay benefits for several years, even when funded rations are relatively low. A number of governments reported not contributing enough to keep up with yearly costs. Governments need to contribute the full annual required contribution (ARC) yearly to maintain the funded ratio of a fully funded plan or improve the funded ratio of a plan with unfunded liabilities. In fiscal year 2006, the sponsors of 46 percent of the 70 plans in our data set contributed less than 100 percent of the ARC, as shown in figure 4, including 39 percent that contributed less than 90 percent of the ARC. In fact, the percentage of governments contributing less than the full ARC has risen in recent years. This continues a trend in recent years of about half of governments making full contributions. In particular, some of the governments that did not contribute the full ARC in multiple years were sponsors of plans with lower funded ratios. In 2006, almost two-thirds of plans with funded ratios below 80 percent in 2006 did not contribute the full ARC in multiple years. Of the 32 plans that in 2006 had funded ratios below 80 percent, 20 did not contribute the full ARC in more than half of the 9 years for which data is available. In addition, 17 of these governments did not contribute more than 90 percent of the full ARC in more than half the years. State and local government pension representatives told us that governments may not contribute the full ARC each year for a number of reasons. First, when state and local governments are under fiscal pressure, they may have to make difficult choices about paying for competing interests. State and local governments will likely face increasing fiscal challenges in the next several years as the cost of health care continues to rise. In light of this stress, the ability of some governments to continue to pay the ARC may be questioned. Second, changes in the value of assets can affect governments' expectations about how much they will have to contribute. Moreover, some plans have contribution rates that are fixed by constitution, statute, or practice and do not change in response to changes in the ARC. Even when the contribution rate is not fixed, the political process may take time to recognize and act on the need for increased contributions. Nonetheless, many states have been increasing their contribution rates in recent years, according to information compiled by the National Conference of State Legislatures. Third, some governments may not contribute the full ARC because they are not committed to prefunding their pension plans and instead have other priorities. When a government contributes less than the full ARC, the funded ratio can decline and unfunded liabilities can rise, if all other assumptions are met about the change in assets and liabilities. Increased unfunded liabilities will require larger contributions in the future to keep pace with the liabilities that accrue each year and to make up for liabilities that accrued in the past. As a result, costs are shifted from current to future generations. The funded status of state and local government pensions overall is reasonably sound, though recent deterioration underscores the importance of keeping up with contributions. Since the stock market downturn in the early 2000s, the funded ratios of some governments have declined. Although governments can gradually recover from these losses, the failure of some to consistently make the annual required contributions undermines that progress and is cause for concern. This is especially important as state and local governments face increasing fiscal pressure in the coming decades. The ability to maintain current levels of public sector retiree benefits will depend, in large part, on the nature and extent of the fiscal challenges these governments face in the years ahead. As state and local governments begin to comply with GASB accounting and reporting standards, information about the future costs of retiree health benefits will become more transparent. In light of the initial estimates of the cost of future retiree health benefits, state and local governments will likely have to find new strategies for dealing with their unfunded liabilities. Although public sector workers have thus far been relatively shielded from many of the changes that have occurred in private sector defined benefit commitments, these protections could undergo revision under the pressure of overall future fiscal commitments. We are continuing our work on state and local government retiree benefits. We have two engagements underway; the first study will examine the various approaches these governments are taking to address their retiree health care liabilities, while the second examines the ways state and local governments allocate the assets in their pension and retiree health care funds. We are pleased that this committee is interested in our work and look forward to working with you in the future. That concludes my testimony: I would be pleased to respond to any questions the committee has. For further information regarding this testimony, please contact Barbara D. Bovbjerg, Director, Education, Workforce, and Income Security Issues at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Tamara Cross (Assistant Director), Bill Keller (Assistant Director), Anna Bonelli, Margie Shields, Joe Applebaum, and Craig Winslow. 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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Millions of state and local government employees are promised pension benefits when they retire. Although these benefits are not subject, for the most part, to federal laws governing private sector benefits, there is a federal interest in ensuring that all American have a secure retirement, as reflected in the special tax treatment provided for private and public pension funds. Recently, new accounting standards have called for the reporting of liabilities for future retiree health benefits. It is unclear what actions state and local governments may take once the extent of these liabilities become clear but such anticipated fiscal and economic challenges have raised questions about the unfunded liabilities for state and local retiree benefits, including pension benefits. GAO was asked to report on (1) the current structure of state and local government pension plans and how pension benefits are protected and managed, and (2) the current funded status of state and local government pension plans. GAO spoke to a wide range of public experts and officials from various federal and nongovernmental entities, made several site visits and gathered detailed information about state benefits, and analyzed self-reported data on the funded status of state and local pension plans from the Public Fund Survey and Public Pension Coordinating Council. State and local entities typically provide pension plans with defined benefits and a supplemental defined contribution plan for voluntary savings. Most states still have traditional defined benefit plans as the primary retirement plans for their workers. However, a couple of states have adopted defined contribution and other plans as their primary plan. State and local entities typically offer tax-deferred supplemental voluntary plans to encourage workers to save. State statutes and local ordinances protect and manage pension benefit and often include explicit protections, such as provisions stating that pensions promised to public employees cannot be eliminated or diminished. In addition, state constitutions and/or statutes often require pension plans to be managed as trust funds and overseen by boards of trustees. Most state and local government pension plans have enough invested resources set aside to fund the benefits they are scheduled to pay over the next several decades. Many experts consider a funded ratio (actuarial value of assets divided by actuarial accrued liabilities) of about 80 percent or better to be sound for government pensions. We found that 58 percent of 65 large pension plans were funded to that level in 2006, a decrease since 2000 when about 90 percent of plans were so funded. Low funded ratios would eventually require the government employer to improve funding, for example, by reducing benefits or by increasing contributions. However, pension benefits are generally not at risk in the near term because current assets and new contributions may be sufficient to pay benefits for several years. Still, many governments have often contributed less than the amount needed to improve or maintain funded ratios. Low contributions raise concerns about the future funded status.
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In July 1993, DOD changed a long-standing practice and permitted defense contractors to charge restructuring costs to transferred flexibly pricedcontracts, provided (1) the restructuring costs were allowable under the Federal Acquisition Regulation and (2) a DOD contracting officer determined the business combination would result in overall reduced costs to DOD or preserve a critical defense capability. Concerns over the payment of such costs led Congress to pass legislation requiring that certain conditions be met before DOD reimbursed defense contractors for restructuring-related expenses. The legislation required, in part, that a senior DOD official certify that projections of restructuring savings are based on audited cost data; DOD's share of projected savings exceeds allowed costs; and the Secretary of Defense reports to Congress on DOD's experience with defense contractor business combinations, including whether savings associated with each restructuring actually exceed restructuring costs. The Secretary of Defense is currently required by 10 U.S.C. 2325 to determine in writing that the savings will be at least twice the amount of allowed costs or that projected savings will exceed costs allowed and that the combination will result in the preservation of a critical capability. DOD's process to comply with these provisions requires, in part, that (1) the contractor submit a restructuring proposal, including details on planned restructuring activities, their projected costs, and anticipated savings; (2) the Defense Contract Audit Agency (DCAA) audits the proposal; and (3) following the audit, a DOD contracting official recommends whether the proposal should be certified. Assuming a favorable recommendation, a senior DOD official issues a written certification stating that projected savings should exceed the projected costs. The certification enables the contractor to bill restructuring costs to DOD and, in turn, allows DOD to reimburse the contractor for DOD's share of such costs. Through December 31, 1997, DOD issued nine certifications for restructuring proposals associated with six business combinations. DOD officials indicated that another six restructuring proposals are in various stages of review within DOD, and several significant business combinations may result in future restructuring proposals. This latter category includes Raytheon's acquisition of the defense units of Texas Instruments and Hughes Electronics, respectively, and the merger of Boeing and McDonnell Douglas. For the seven business combinations we examined, certified restructuring costs totaled about $1.5 billion. At the time of our review, the businesses estimated they had spent about $1.2 billion (see table 1). Restructuring costs are allocated to all of a contractor's customers; consequently, DOD's portion of these costs depends on its share of the contractor's total business base. Based on estimates made at the time of certification, DOD projected it would pay about 56 percent of the restructuring costs. Restructuring after a business combination includes a wide range of activities, such as the disposal and modification of facilities, consolidation of operations and systems, relocation of workers and equipment, and workforce reductions. We grouped the estimated amount of restructuring costs incurred by the seven business combinations into broad categories (see table 2). Of the $1.2 billion in estimated restructuring costs, disposal and relocation of facilities and equipment was the largest cost category. The seven business combinations included in our review projected that about 21,000 workers or positions would be eliminated as a result of restructuring activities. The business combinations also reported that, at the time of our review, about 18,000 workers or positions had actually been eliminated (see table 3). While the job losses attributed to restructuring are significant, the losses reflect the overall downsizing in defense-related employment. DOD estimates that defense-related industry employment will decrease from about 2.7 million workers in 1993 to about 2.1 million workers by the end of 1998. The seven business combinations estimated they spent about $115.4 million--or about 10 percent--of the total restructuring costs for benefits and services associated with workforce reductions. The majority of these costs were for severance pay, with less amounts for temporary health benefits and outplacement services. Outplacement included such services as career transition workshops, resume development, career counseling services, job listings, and information on state and federal programs. The costs for worker benefits and services varied by business combination, ranging from 3 percent to 14 percent of the combination's total restructuring costs. A key determinant in whether laid-off workers received severance payments was whether the company provided such benefits prior to the business combination. For example, General Dynamics, Northrop, and the Vought corporations did not provide severance benefits to their workers prior to the combination; consequently, workers who were laid off as a result of restructuring received no severance benefits from their former employer. For those companies that provided severance pay, the amount varied, depending on such factors as whether the workers were salaried or hourly employees and the length of time they had been with the corporations. Laid-off workers may also be provided benefits and services that were not funded by DOD. For example, the state of California, through the San Diego Consortium and the Private Industry Council, awarded Martin Marietta $935,000 to assist General Dynamics' laid-off employees. Each of the combinations that sought payment for restructuring activities was required to demonstrate that DOD's share of the estimated savings from the restructuring would exceed DOD's share of the projected costs. Overall, DOD estimates that it should realize a net savings of about $3.3 billion from restructuring activities (see table 4). DOD's figures indicate that for each dollar of restructuring costs it expects to pay, it will receive about $4.81 in benefits. However, not all of the reported savings may be directly attributable to restructuring. DCAA's guidance on auditing restructuring proposals may not provide sufficient criteria to ensure that the proposed savings are directly due to restructuring. DCAA's guidance discusses at length factors to consider in evaluating proposed costs, but it provides far less guidance on evaluating savings. Relative to evaluating projected restructuring savings, the guidance notes that contractor restructuring efforts are intended to result in the combinations of facilities, operations, or workforce that eliminate redundant capabilities, improve future operations, and reduce overall costs. It further notes that it is the contractor's responsibility to establish and support the reasonableness of the baseline to measure restructuring savings, but notes that various techniques can be used to do so. Finally, the guidance requires DCAA auditors to ensure that the estimates of future savings are reasonable and not due to other factors, such as changes in inflation or interest rates. This broad framework may result in DOD's accepting proposed savings that are not directly attributable to restructuring. For example, as part of our ongoing work at Lockheed Martin's Space and Strategic Missiles sector, we attempted to isolate the effects of restructuring from nonrestructuring- related activities. The overall savings from this sector are considerable, amounting to about 43 percent of the total amount of projected restructuring savings from the seven combinations in our review. Of the savings accepted by DOD for certification purposes, about $489 million was attributed to increased operational efficiencies at one location through the adoption of improved business practices. Contractor officials acknowledged that some of the improvements and associated savings could have been implemented without restructuring, noting that the contractor had various efforts to improve its operational efficiency underway or planned prior to restructuring. However, these officials believed that the business combination provided the means to overcome organizational and cultural barriers that might otherwise have hindered these efforts. A senior Lockheed Martin official emphasized that the merger provided the company a unique opportunity to evaluate and implement the best practices from four Lockheed and Martin Marietta facilities. DCAA officials told us that during their audit of the restructure proposal for certification, they did not consider whether such savings could have been accomplished in the absence of restructuring. They noted, however, that they did not believe that DCAA's guidance provides sufficient criteria to distinguish savings attributable to restructuring from those savings that would have occurred regardless of the restructuring. The Department of Justice and the Federal Trade Commission face a similar issue during their reviews of proposed mergers and acquisitions. In April 1997, the agencies issued revised guidance that discusses the types of efficiencies they consider germane to their reviews. In general, while the agencies will consider savings as part of their analysis, these agencies consider only those savings that are specific to the merger and that are unlikely to be accomplished in the absence of the merger. For example, the guidance notes that efficiencies resulting from shifting production among facilities formerly owned by the separate firms are more likely to be related to the merger. On the other hand, the guidance notes that other efficiencies, such as those relating to management improvements, are less likely to be specifically related to the merger. In our view, while evaluating proposed savings requires flexibility and the use of professional judgment, reflecting a similar approach in DCAA's guidance would provide a better depiction of the impact of restructuring activities. While DOD reports to Congress its estimates of whether savings associated with each business combination actually exceed restructuring costs, it acknowledges that making accurate estimates is inherently difficult. DOD reported that, as of August 1997, it had reimbursed defense contractors approximately $294.3 million in restructuring-related expenses, while it estimated that savings of about $2.2 billion had been realized (see table 5). As a result, DOD estimated that it has realized a net benefit of about $1.9 billion, or more than half the $3.3 billion in net savings certified for the seven business combinations. The savings reported by DOD were generally not developed from a detailed analysis of the effect of restructuring on individual contract prices, but rather were calculated using the same or similar methodologies employed during the certification process. Caution should be exercised when interpreting the reported savings. DOD has consistently said that it is inherently difficult to precisely identify the amount of actual savings realized through restructuring activities several years after the initial estimate. For example, DOD has stated it is not feasible to completely isolate the effects of restructuring from such other factors as fluctuations in a contractor's business base, changes in the inflation rate, accounting system changes, subsequent reorganizations, and unexpected events, which also impact a contractor's cost of operations. Recognizing such difficulties, DOD initially agreed that it would not require validation of the projected savings for two business combinations, noting in one agreement that such a validation was not practical because of business dynamics and future uncertainties. However, DOD estimates actual savings resulting from these two business combinations in response to the reporting requirement. The difficulty in isolating the effect of nonrestructuring activities and their impact on estimating savings is illustrated by restructuring activities following Martin Marietta's acquisition of General Dynamics Space Systems Division. In this case, DCAA used a different business base in estimating actual restructuring savings than was used to estimate the certified savings. The use of a different business base led, in part, to DOD's share of net savings shown in table 5--$137.3 million--being considerably higher than the $88.9 million of net savings expected at certification. DCAA officials told us that they were unaware of any way to isolate changes in Martin Marietta's current business base to make it comparable to that used during the certification process. The impact of restructuring savings on DOD's budget requirements has been limited. Projected savings constituted a small percentage of DOD's budgets and were generally not considered by DOD officials in formulating budget requests. Also, even when restructuring activities influenced a weapon system's cost, the impact was often offset by nonrestructuring- related events or used to fund other program-related needs. DOD's estimate of restructuring savings--which includes those savings that may not be directly related to restructuring--represents a cumulative amount of savings, often spread over a 5-year period, for each business combination. Overall, DOD estimated it would realize a net savings of about $3.3 billion between 1993 and 2000. In comparison, DOD's approved or projected budgets for research and procurement totaled more than $658 billion over that same period. Consequently, DOD's share of certified savings constitutes less than 1 percent of DOD's budgets. A senior DOD budget official stated that DOD generally has not considered restructuring savings when formulating its budget requests and relied on the individual program offices to do so. He acknowledged, however, that DOD's budget guidance does not specifically require the program offices to consider restructuring savings. This official also told us that the one exception that he was aware of involved Raytheon's recent acquisition of Hughes' defense business, for which DOD considered reducing the projected budgets for the advanced medium range air-to-air missile (AMRAAM), a joint Air Force/Navy program, and the Navy's standard missile program to reflect anticipated savings. Regarding the AMRAAM, Air Force officials argued that any savings that resulted from the business combination were needed to fund future programmatic needs. According to Navy officials, the savings were used to budget for additional missiles for both programs. DOD subsequently agreed not to reduce the proposed budgets to reflect restructuring savings. Our work provides two other examples of how restructuring activities influenced the costs of major weapon systems without directly affecting budgetary requirements. For example, following the Northrop Grumman business combination, several restructuring activities, including closing Grumman's former headquarters in Bethpage, New York, were undertaken. Consequently, the amount of corporate overhead costs allocated to Northrop Grumman's business units, including the B-2 program, was less than projected before the business combination. B-2 program officials told us that no adjustments were made to the B-2 program's estimated costs or future budget requests due to restructuring. According to these officials, projected savings from the combination may have been reflected in new overhead rates, which would then be used in preparing new contract proposals or finalizing overhead rates on existing flexibly priced contracts. In fact, the B-2's general and administrative overhead rate--to which corporate overhead costs are allocated--actually rose significantly from 1993 to 1996, due principally to the decrease in the planned procurement of B-2s. Consequently, while the lower corporate overhead costs resulted in the B-2's general and administrative overhead rate being slightly lower than it would have been without the restructuring, the changes in planned procurement more than offset the impact of restructuring. Similarly, the Air Force's Titan IV launch vehicle program was affected by the Martin Marietta-General Dynamics and Lockheed-Martin Marietta business combinations. According to Lockheed Martin, restructuring activities resulted in a benefit of over $600 million to the Titan IV program. Titan IV program officials agreed that restructuring activities reduced projected program costs, but indicated that it was not possible to precisely quantify the impact of restructuring. These officials explained that a number of changes were occurring concurrently on the Titan program, including a reduction in the number of launch vehicles and the implementation of various acquisition reform initiatives. Nevertheless, program officials told us that restructuring activities contributed to their ability to absorb congressional, DOD, or Air Force budget cuts or to fund other program-related needs. Our work indicates that DCAA's guidance does not provide sufficient criteria to evaluate restructuring savings, particularly savings that may have been achievable without restructuring. Estimates based on this guidance may not accurately depict the savings associated with restructuring. Consequently, we recommend that the Secretary of Defense direct the Director, DCAA, to clarify DCAA's guidance on evaluating restructuring savings. In particular, the guidance should discuss how to evaluate proposed savings based on activities that were ongoing or planned prior to restructuring or that could have been achieved absent restructuring, such as those achievable by management improvements. DOD commented on a draft of the proprietary report. DOD disagreed with our finding that some of the savings it reports may not be directly attributable to restructuring. DOD also disagreed with our recommendation that DCAA's guidance needs to be clarified. DOD believed DCAA's current guidance properly implements the legislative requirements. DOD indicated that in reviewing restructuring proposals, it is most concerned with ensuring both that savings exceed costs by the required ratio and that restructuring costs and savings are factored into contract pricing mechanisms as quickly as possible. DOD further noted that when a contractor can demonstrate that savings will significantly exceed costs, there is usually no reason to argue over whether the savings could have been accomplished without restructuring. We agree with DOD that it has established a process to comply with the legislative intent that DOD's share of projected savings exceeds its projected share of costs, and strongly agree that DOD should ensure that the impact of restructuring is factored into contract pricing mechanisms as quickly as possible. We also believe DCAA's guidance provides an overall framework to evaluate savings. For example, the guidance states contractor restructuring efforts are intended to result in the combinations of facilities, operations, or workforce that eliminate redundant capabilities, improve future operations, and reduce overall costs. The guidance further states that auditors should ensure that future savings are reasonable and not due to other factors, such as changes in inflation or interest rates. Nevertheless, our work indicates that this broad framework may result in DOD accepting savings that may not be directly attributable to restructuring. At one location at which a considerable amount of savings were proposed due to the adoption of improved business practices, contractor officials acknowledged that some of the improvements and associated savings could have been implemented without restructuring, noting that the contractor had various efforts to improve its operational efficiency underway or planned prior to restructuring. DCAA officials indicated that DCAA's guidance does not provide sufficient criteria to allow them to question such savings. Ensuring that such savings are related to restructuring would seem a basic element necessary to satisfy the legislative criteria and DCAA's own guidance. Further, DOD reports annually to Congress on the net savings expected from combinations certified during the preceding year, as well as estimates of savings actually realized. While making such estimates is inherently difficult, the reports should, in our view, attempt to accurately depict the impact of restructuring to the extent possible. Finally, several business combinations have recently announced their intent to restructure, including Raytheon and Boeing. Our discussions with DCAA, Defense Contract Management Command (DCMC), and contractor officials indicated that better guidance as to what constitutes restructuring-related savings would assist in these efforts. Consequently, we believe augmenting the existing criteria with a discussion of the various factors that auditors should consider in evaluating savings is a reasonable request. DOD's comments are reprinted in appendix I. To determine the amount and nature of restructuring costs, we requested the cognizant DCMC office to provide updated restructuring-related cost and savings information for each of the business combinations in our review. We analyzed this information to determine the amount of restructuring costs incurred for workforce reductions and to identify the costs associated with services provided to assist laid-off workers find reemployment. We did not, however, independently verify the information provided. In assessing restructuring savings relative to the restructuring costs paid by DOD, we relied on the information contained in DOD's November 22, 1997, report to Congress. We did examine, however, the methodology DCAA used to estimate the amount of restructuring costs paid by DOD and the amount of estimated savings at selected units of business combinations at which we conducted work. To determine the budgetary implications of restructuring savings, we compared DOD's share of certified restructuring savings to DOD's actual or projected budgets for the period over which the savings were expected to be realized. We discussed how DOD uses projected restructuring savings in formulating its budget requests with officials from the Office of the Under Secretary of Defense (Comptroller/Chief Financial Officer). We also discussed how projected restructuring savings were used by the Air Force's Titan IV and B-2 program offices in formulating their budget requests. Finally, we discussed various aspects of the restructuring costs and savings with officials from the business combinations, DOD, DCMC, and DCAA. We performed our review between December 1997 and March 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to appropriate congressional committees; the Secretary of Defense; the Commander, DCMC; and the Director, DCAA. We will also provide copies to other committees and Members of Congress upon request. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. The major contributors to this report are listed in appendix II. 1. Questions regarding the treatment of proposed restructuring savings have arisen during other certifications. We illustrated it at one business segment because of the large amount of savings there and the concerns expressed by the Defense Contract Audit Agency (DCAA), Defense Contract Management Command (DCMC), and contractor officials regarding the need for additional guidance. However, we did not intend to imply that certification of the overall business combination--which had to demonstrate only that DOD's share of projected savings exceeded its projected share of costs--was improper. It should be noted that the issue as to what constitutes restructuring- related savings is not limited to the certification process, but also plays a role in DOD's report to Congress on realized savings. For example, based in part on our work at this business segment, DCAA officials rejected $66 million in savings the contractor claimed on one program. While DCAA rejected more than $124 million overall at this location, DCAA officials told us the absence of clear criteria precluded them from questioning additional amounts of the claimed savings. 2. We would agree that any costs associated with activities that are not directly related to restructuring should not be subject to the certification process, but rather should be reviewed under normal auditing practices. As with savings, eliminating costs that are not restructuring-related would provide a more accurate depiction of restructuring activities. 3. We did not intend to suggest that DOD should adopt the joint guidance issued by the Department of Justice and the Federal Trade Commission per se, but rather we used the joint guidance to illustrate an approach that DCAA should consider in revising its guidance. We have revised the text accordingly. Dorian R. Dunbar Kenneth H. Roberts Thaddeus S. Rytel, Jr. Ruth-Ann Hijazi Donald Y. Yamada The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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Pursuant to a legislative requirement, GAO provided information on restructuring costs of defense contractors involved in business combinations since 1993, focusing on the: (1) specific costs associated with workforce reductions; (2) services provided to workers affected by business combinations; (3) savings reached from the business combinations relative to the restructuring costs paid by the Department of Defense (DOD); and (4) budgetary implications of reported restructuring savings. GAO noted that: (1) the seven business combinations estimated they had spent $1.2 billion at the same time of GAO's review for such restructuring activities as the disposal and relocation of facilities and equipment, consolidation of operations and systems, relocation of employees, and workforce reductions; (2) severance pay constituted the majority of these expenses, with less amounts provided for temporary health benefits and outplacement services; (3) outplacement services included career transition workshops, resume development, career counseling services, job listings, and information on state and federal programs; (4) overall, the business combinations reported that about 18,000 workers or positions were eliminated due to restructuring activities; (5) DOD estimated it would realize a net benefit of about $3.3 billion from certified restructuring activities; (6) further, DOD estimated that as of August 1997 it had realized a net savings of about $1.9 billion, or more than half of the certified amount; (7) however, DOD's figures may overstate the amount that is directly attributable to restructuring; (8) the lack of specific DOD guidance on evaluating savings may contribute to this condition; (9) caution should be exercised when using or interpreting estimates of restructuring savings; (10) in a budgetary context, the $3.3 billion of estimated restructuring savings represents a cumulative amount of savings for each business combination, often spread over a 5-year period; (11) such savings constituted less than 1 percent of DOD's research and procurement budgets over the period for which the savings were projected; (12) with one exception, DOD officials told GAO they did not consider restructuring savings when formulating DOD's budget requests; (13) the one case cited by DOD involved two Air Force and Navy missile programs; (14) while DOD had initially proposed reducing the programs' budgets to reflect anticipated restructuring savings, DOD subsequently agreed with the military services that the projected savings were needed to fund other program-related needs; and (15) in cases in which restructuring activities influenced a particular weapon system's cost, projected savings were often offset by nonrestructuring-related events.
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The Centers for Disease Control and Prevention (CDC) is the federal agency primarily responsible for monitoring the incidence of foodborne illness in the United States. In collaboration with state and local health departments and other federal agencies, CDC investigates outbreaks of foodborne illnesses and supports disease surveillance, research, prevention efforts, and training related to foodborne illnesses. CDC coordinates its activities concerning the safety of the food supply with the Food and Drug Administration (FDA) in the Department of Health and Human Services and those concerning the safety of meat, poultry, and eggs with the Food Safety and Inspection Service (FSIS) in the U.S. Department of Agriculture (USDA). FDA and FSIS, which are the primary federal agencies responsible for overseeing the safety of the food supply, maintain liaison with CDC in Atlanta, Georgia. CDC monitors individual cases of illness from harmful bacteria, viruses, chemicals, and parasites (hereafter referred to collectively as pathogens) that are known to be transmitted by foods, as well as foodborne outbreaks, through reports from state and local health departments, FDA, and FSIS. CDC does not have the authority to require states to report data on foodborne illnesses. In practice, each state determines which diseases it will routinely report to CDC. In addition, state laboratories voluntarily report the number of positive test results for several diseases that CDC has chosen to monitor. However, these reports do not identify the source of infection and are not limited to cases of foodborne illness. CDC also investigates a limited number of more severe or unusual outbreaks when state authorities request assistance. (For a description of the data that CDC relies on to monitor foodborne illnesses, see app. I.) At least 30 pathogens are associated with foodborne illnesses. For reporting purposes, CDC categorizes the causes of outbreaks of foodborne illnesses as bacterial, chemical, viral, parasitic, or unknown pathogens. (See app. II. for information on these pathogens and the illnesses they cause.) Although many people associate foodborne illnesses primarily with meat, poultry, eggs, and seafood products, many other foods, including milk, cheese, ice cream, orange and apple juices, cantaloupes, and vegetables, have also been involved in outbreaks during the last decade. Bacterial pathogens are the most commonly identified cause of outbreaks of foodborne illnesses. Bacterial pathogens can be easily transmitted and can multiply rapidly in food, making them difficult to control. CDC has targeted four of them--E. coli O157:H7, Salmonella Enteritidis, Listeria monocytogenes, and Campylobacter jejuni--as those of greatest concern. (See app. III.) CDC is also concerned about other bacterial pathogens, such as Vibrio vulnificus and Yersinia enterocolitica, which can cause serious illnesses, and Clostridium perfringens and Staphylococcus aureus, which cause less serious illnesses but are very common. The chemical causes of foodborne illnesses are primarily natural toxins that occur in fish or other foods but also include heavy metals, such as copper and cadmium. Viral pathogens are often transmitted by infected food handlers or through contact with sewage. Only a few viral pathogens, such as the Hepatitis A and Norwalk viruses, have been proven to cause foodborne illnesses. Finally, parasitic pathogens, such as Trichinella--found in undercooked or raw pork--multiply only in host animals, not in food. CDC officials believe that viral and parasitic pathogens are less likely than bacterial pathogens to be identified as the source of an outbreak of foodborne illness because their presence is more difficult to detect. The existing data on the extent of foodborne illnesses have weaknesses and may not fully depict the extent of the problem. Public health experts believe that the majority of cases of foodborne illness are not reported because the initial symptoms of most foodborne illnesses are not severe enough to warrant medical attention, the medical facility or state does not report such cases, or the illness is not recognized as foodborne. However, according to the best available estimates, based largely on CDC's data, millions of people become sick from contaminated food each year, and several thousand die. In addition, public health and food safety officials believe that the risk of foodborne illnesses is increasing for several reasons. For example, as a result of large-scale food production and broad distribution of products, those products that may be contaminated can reach a great number of people in many locations. Furthermore, new and more virulent strains of previously identified harmful bacteria have been identified in the past several decades. Also, mishandling or improper preparation can further increase the risk. Between 6.5 million and 81 million cases of foodborne illness and as many as 9,100 related deaths occur each year, according to the estimates provided by several studies conducted over the past 10 years. Table 1 shows the range of estimates from four studies cited by food safety experts as among the best available estimates on the subject. The table also identifies the data on which these estimates are based. While various foods have been implicated as vehicles for pathogens in foodborne illnesses and related deaths, the available data do not allow a precise breakdown by specific foods. In general, animal foods--beef, pork, poultry, seafood, milk, and eggs--are more frequently identified as the source of outbreaks in the United States than non-animal foods. USDA, which regulates meat and poultry products, has estimated that over half of all foodborne illnesses and deaths are caused by contaminated meat and poultry products. The wide range in the estimated number of foodborne illnesses and related deaths is due primarily to the considerable uncertainty about the number of cases that are never reported to CDC and the methodology used to make the estimate. Public health and food safety officials believe that many of these illnesses are not reported because the episodes are mild and do not require medical treatment. For example, CDC officials believe that many intestinal illnesses that are commonly referred to as the stomach flu are caused by foodborne pathogens. According to these officials, people do not usually associate these illnesses with food because the onset of symptoms occurs 2 or more days after the contaminated food was eaten. In other cases, a foodborne illness may contribute to the death of an already ill person. In these cases, a foodborne illness may not be reported as the cause of death. In the absence of more complete reporting, researchers can only broadly estimate the number of illnesses and related deaths. Furthermore, most physicians and health professionals treat patients who have diarrhea without ever identifying the specific cause of the illness. In severe or persistent cases, a laboratory test may be ordered to identify the responsible pathogen. However, some laboratories may not have the ability to identify a given pathogen. Finally, physicians may not associate the symptoms they observe with a pathogen that they are required to report to the state or local health authorities. For example, a CDC official cited a Nevada outbreak in which no illnesses from E. coli O157:H7 had been reported to health officials, despite a requirement that physicians report such cases to the state health department. Nevertheless, 58 illnesses from this outbreak were identified after public service announcements alerted the public and health professionals that contaminated hamburger had been shipped to restaurants in a specific area of the state. Food safety and public health officials believe that the risk of foodborne illnesses is increasing. Several factors contribute to this increased risk. First, the food supply is changing in ways that can promote foodborne illnesses. For example, as a result of modern animal husbandry techniques, such as crowding a large number of animals together, the pathogens that can cause foodborne illnesses in humans can spread throughout the herd. Because of broad distribution, contaminated products can reach individuals in more locations. Mishandling of food can also lead to contamination. For example, leaving perishable foods at room temperature increases the likelihood of bacterial growth, and improper preparation, such as undercooking, reduces the likelihood that bacteria will be killed and can further increase the risk of illness. There are no comprehensive data to explain at what point pathogens are introduced into foods. Knowledgeable experts believe that although illnesses and deaths often result after improper handling and preparation, the pathogens were, in many cases, already present at the processing stage. Furthermore, the pathogens found on meat and poultry products may have arrived on the live animals. Second, because of demographic changes, more people are at greater risk of contracting a foodborne illness. Certain populations are at greater risk for these illnesses: people with suppressed immune systems, children, and the elderly. In addition, children are more at risk because group settings, such as day care centers, increase the likelihood of person-to-person transmission of pathogens. The number of children in these settings is increasing, as is the number in other high-risk groups, according to CDC. Third, three of the four pathogens CDC considers the most important were unrecognized as causes of foodborne illness 20 years ago--Campylobacter, Listeria, and E. coli O157:H7. Fourth, bacteria already recognized as sources of foodborne illnesses have found new modes of transmission. While many illnesses from E. coli O157:H7 occur from eating insufficiently cooked hamburger, these bacteria have also been found more recently in other foods, such as salami, raw milk, apple cider, and lettuce. Other bacteria associated with contaminated meat and poultry, such as Salmonella, have also been found in foods that the public does not usually consider to be a potential source of illness, such as ice cream, tomatoes, melons, alfalfa sprouts, and orange juice. Fifth, some pathogens are far more resistant than expected to long-standing food-processing and storage techniques previously believed to provide some protection against the growth of bacteria. For example, some bacterial pathogens, such as Yersinia and Listeria, can continue to grow in food under refrigeration. Finally, according to CDC officials, virulent strains of well-known bacteria have continued to emerge. For example, one such pathogen, E. coli O104:H21, is another potentially deadly strain of E. coli. In 1994, CDC found this new strain in milk from a Montana dairy. While foodborne illnesses are often temporary, they can also result in more serious illnesses requiring hospitalization, long-term disability, and death. Although the overall cost of foodborne illnesses is not known, two recent estimates place some of the costs in the range of $5.6 billion to more than $22 billion per year. The first estimate, covering only the portion related to the medical costs and productivity losses of seven specific pathogens, places the costs in the range of $5.6 billion to $9.4 billion. The second, covering only the value of avoiding deaths from five specific pathogens, places the costs in the range of $6.6 billion to $22 billion. While foodborne illnesses are often brief and do not require medical treatment, they can also result in more serious illnesses and death. In a small percentage of cases, foodborne infections spread through the bloodstream to other organs, resulting in serious long-term disability or even death. Serious complications can also result when diarrhetic infections resulting from foodborne pathogens act as a triggering mechanism in susceptible individuals, causing an illness such as reactive arthritis to flare up. In other cases, no immediate symptoms may appear, but serious consequences may eventually develop. The likelihood of serious complications is unknown, but some experts estimate that about 2 to 3 percent of all cases of foodborne illness lead to serious consequences. For example: E. coli O157:H7 can cause kidney failure in young children and infants and is most commonly transmitted to humans through the consumption of undercooked ground beef. The largest reported outbreak in North America occurred in 1993 and affected over 700 people, including many children who ate undercooked hamburgers at a fast food restaurant chain. Fifty-five patients, including four children who died, developed a severe disease, Hemolytic Uremic Syndrome, which is characterized by kidney failure. Salmonella can lead to reactive arthritis, serious infections, and deaths. In recent years, outbreaks have been caused by the consumption of many different foods of animal origin, including beef, poultry, eggs, milk and dairy products, and pork. The largest outbreak, occurring in the Chicago area in 1985, involved over 16,000 laboratory-confirmed cases and an estimated 200,000 total cases. Some of these cases resulted in reactive arthritis. For example, one institution that treated 565 patients from this outbreak confirmed that 13 patients had developed reactive arthritis after consuming contaminated milk. In addition, 14 deaths may have been associated with this outbreak. Listeria can cause meningitis and stillbirths and has a fatality rate of 20 to 40 percent. All foods may contain these bacteria, particularly poultry and dairy products. Illnesses from this pathogen occur mostly in single cases rather than in outbreaks. The largest outbreak in North America occurred in 1985 in Los Angeles, largely in pregnant women and their fetuses. More than 140 cases of illness were reported, including at least 13 cases of meningitis. At least 48 deaths, including 20 stillbirths or miscarriages, were attributed to the outbreak. Soft cheese produced in a contaminated factory environment was confirmed as the source. Campylobacter may be the most common precipitating factor for Guillain-Barre syndrome, which is now one of the leading cause of paralysis from disease in the United States. Campylobacter infections occur in all age groups, with the greatest incidence in children under 1 year of age. The vast majority of cases occur individually, primarily from poultry, not during outbreaks. Researchers estimate that 4,250 cases of Guillain-Barre syndrome occur each year and that about 425 to 1,275 of these cases are preceded by Campylobacter infections. While the overall annual cost of foodborne illnesses is unknown, the studies we reviewed estimate that it is in the billions of dollars. The range of estimates among the studies is wide, however, principally because of uncertainty about the number of cases of foodborne illness and related deaths. (See app. IV.) Other differences stem from the differences in the analytical approach used to prepare the estimate. Some economists attempt to estimate the costs related to medical treatment and lost wages (the cost-of-illness method); others attempt to estimate the value of reducing the incidence of illness or loss of life (the willingness-to-pay method). Two recent estimates demonstrate these differences in analytical approach. In the first, USDA's Economic Research Service (ERS) used the cost-of-illness approach to estimate that the 1993 medical costs and losses in productivity resulting from seven major foodborne pathogens ranged between $5.6 billion and $9.4 billion. Of these costs, $2.3 billion to $4.3 billion were the estimated medical costs for the treatment of acute and chronic illnesses, and $3.3 billion to $5.1 billion were the productivity losses from the long-term effects of foodborne illnesses. Medical expenses ranged from more modest expenses for routine doctors' visits and laboratory tests to more substantial expenses for hospital rooms and kidney transplants. Productivity losses included expenses such as lost wages from long-term disabilities and deaths caused by foodborne illnesses. Table 2 provides information on the costs associated with each of the seven pathogens. CDC, FDA, and ERS economists stated that these estimates may be low for several reasons. First, the cost-of-illness approach generates low values for reducing health risks to children and the elderly because these groups have low earnings and hence low productivity losses. Second, this approach does not recognize the value that individuals may place on (and pay for) feeling healthy, avoiding pain, or using their free time. In addition, not all of the 30 pathogens associated with foodborne illnesses were included. In the second analysis, ERS used the willingness-to-pay method to estimate the value of preventing deaths for five of the seven major pathogens (included in the first analysis) at $6.6 billion to $22.0 billion in 1992. The estimate's range reflected the range in the estimated number of deaths, 1,646 to 3,144, and the range in the estimated value of preventing a death, $4 million to $7 million. Although these estimated values were higher than those resulting from the first approach, they may have also understated the economic cost of foodborne illnesses because they did not include an estimate of the value of preventing nonfatal illnesses and included only five of the seven major pathogens included in the first analysis. While current data indicate that the risk of foodborne illnesses is significant, public health and food safety officials believe that these data do not identify the level of risk, the sources of contamination, and the populations most at risk in sufficient detail. More uniform and comprehensive data on the number and causes of foodborne illnesses could form the basis of more effective control strategies. Beginning in 1995, federal and state agencies took steps to collect such data in five areas across the country. While this effort will provide additional data, CDC officials believe that collecting data at more locations and for other pathogens would provide even more representative data and identify more causes of foodborne illnesses. According to public health and food safety officials, the current voluntary reporting system does not provide sufficient data on the prevalence and sources of foodborne illnesses. There are no specific national requirements for reporting on foodborne pathogens. According to CDC, states do not (1) report on all pathogens of concern, (2) usually identify whether food was the source of the illness, or (3) identify many of the outbreaks or individual cases of foodborne illness that occur. Consequently, according to CDC, FDA, and FSIS, public health officials cannot precisely determine the level of risk from known pathogens or be certain that they can detect the existence and spread of new pathogens in a timely manner. They also cannot identify all factors that put the public at risk or all types of food or situations in which microbial contamination is likely to occur. Finally, without better data, regulators cannot assess the effectiveness of their efforts to control the level of pathogens in food. According to public health and food safety officials, a better system for monitoring the extent of foodborne illnesses would actively seek out specific cases. Such a system would require outreach to physicians and clinical laboratories. CDC demonstrated the effectiveness of such an outreach effort when it conducted a long-term study, initiated in 1986, to determine the number of cases of illness caused by Listeria. This study showed that a lower rate of illness caused by Listeria occurred between 1989 and 1993 during the implementation of food safety programs designed to reduce the prevalence of Listeria in food. In July 1995, CDC, FDA, and FSIS began a comprehensive effort to track the major bacterial pathogens that cause foodborne illnesses. These agencies are collaborating with state health departments in five areas across the country to better determine the incidence of infection with Salmonella and E. coli O157:H7 and other foodborne bacteria and to identify these sources of diarrheal illness from Salmonella and E. coli O157:H7. Initially, FDA provided $378,000 and FSIS provided $500,000 through CDC to the five locations for 6 months. The agencies believe that this effort should be a permanent part of a sound public health system. For fiscal year 1996, FSIS is providing $1 million and FDA is providing $300,000. CDC provides overall management and coordination and facilitates the development of technical expertise at the sites through its established relationships with the state health departments. The project consists of three parts: a survey of the local population in the five locations and interviews with local health professionals to estimate the number of diarrheal illnesses and determine the number of illnesses for which medical attention was sought and laboratory samples were taken; a survey of laboratories to determine the microbiological testing procedures and processes used to identify foodborne illnesses and an audit of the participating laboratories' test results to determine what proportion of cases were detected; and statistical studies to determine, among other things, the risks associated with different foods. CDC and the five sites will use the information to identify emerging foodborne pathogens and monitor the incidence of foodborne illness. FSIS will use the data to evaluate the effectiveness of new food safety programs and regulations to reduce foodborne pathogens in meat and poultry and assist in future program development. FDA will use the data to evaluate its efforts to reduce foodborne pathogens in seafood, dairy products, fruit, and vegetables. According to CDC, FDA, and FSIS officials, such projects must collect data over a number of years to identify national trends and evaluate the effectiveness of strategies to control pathogens in food. Funding was decreased slightly for this project in 1996, and these officials are concerned about the continuing availability of funding, in this era of budget constraints, to conduct this discretionary effort over the longer term. We provided copies of a draft of this report to CDC, FSIS, and FDA for their review and comment. We met with the Director, Division of Bacterial and Mycotic Diseases, CDC; the Associate Administrator, FSIS; and other relevant officials from both agencies. These officials generally agreed with the information discussed and provided some clarifying comments that we incorporated into the report. FDA's Office of Legislative Affairs notified us that FDA generally agreed with the contents of the report and provided several technical comments that we incorporated. To conduct this review, we spoke with, and obtained studies, data, and other information on foodborne illnesses from, officials at CDC, ERS, FDA, and FSIS. We met with these officials at their headquarters in Atlanta, Georgia, and Washington, D.C. To examine the frequency of foodborne illness, we met with agency officials to identify and discuss the most widely recognized studies on the incidence of foodborne illness in the United States and obtained documentation. To examine the health consequences of foodborne illnesses, we relied primarily on discussions with medical experts at CDC and articles that have appeared in professional journals obtained from CDC officials and our literature review. To examine the economic impacts of foodborne illnesses, we reviewed the analytical approaches used to estimate the costs of foodborne illnesses and recent examples of such estimates and spoke with economists at CDC, ERS, and FDA. To examine the adequacy of knowledge about foodborne illnesses to develop effective control strategies, we spoke with the project managers from CDC, FDA, and FSIS and other agency officials associated with a joint effort with five state health departments recently undertaken to improve their knowledge about foodborne illnesses and collected agency documents. We reviewed but did not independently verify the accuracy of the data available on the number of reported cases of foodborne illness, the overall estimates of incidence, or the estimates of costs from specific pathogens because this effort would have required the verification of multiple databases and other information from state and federal agencies and other sources. This verification process would have required a large commitment of additional resources. We did not review data on the incidence of foodborne illness in other countries because comparable data were not readily available and the data that are available have some of the same limitations as the data on U.S. foodborne illnesses. We conducted our review from June 1995 through April 1996 in accordance with generally accepted government auditing standards. We are sending this report to you because of your role in overseeing the activities and funding of the agencies responsible for the issues discussed. If you or your staff have any questions about this report, I can be reached at (202) 512-5138. Major contributors to this report are listed in appendix V. To monitor, control, and prevent foodborne illnesses, the Centers for Disease Control and Prevention (CDC) relies primarily on four types of data from local and state health departments, according to CDC officials. These four types of data are shown in table I.1. Reported annually for most outbreaks (more frequently for outbreaks of E. coli O157:H7 and Salmonella Enteritidis) As table I.1 notes, each type of data has limitations, particularly the outbreak and laboratory data, which have been CDC's primary monitoring tools. More specifically, in about half of the outbreaks as shown in figure I.1, the data do not identify the agent that caused the outbreak. Furthermore, these data generally do not provide information about the cause of a new trend. One or more factors can account for a new trend: a change in consumption behavior, such as a preference for turkey over red meat; a reporting bias, such as an increase in the number of laboratories testing for the disease; or a change in the nature of the disease, such as the emergence of a new strain. Finally, there is a delay from the time these data are reported to CDC until they are compiled into annual summaries. At the time of our review, complete annual summaries of data were only available through 1991. Furthermore, CDC's laboratory data, from its Public Health Laboratory Information System, represent only a fraction of the cases of illnesses that occur from four pathogens that CDC tracks. For example, only one confirmed case of infection was cited in the laboratory data that the Georgia Health Department reported to CDC during an outbreak caused by contaminated ice cream products in 1994. However, on the basis of a survey of home delivery customers that it conducted, CDC estimated that 11,404 cases occurred in Georgia alone (products were distributed in 48 states). Finally, these data do not include information about the source of the illness. In addition to its program activities to monitor, control, and prevent foodborne illnesses, CDC collects national data on a range of pathogens and illnesses from a variety of data sources. These sources include the National Notifiable Diseases Surveillance System, the National Hospital Discharge Survey, the National Ambulatory Medical Care Survey, the National Health Interview Survey, and the National Vital Statistics System. Researchers use these data to estimate the number of foodborne illnesses, their severity, and their costs. But these data have major limitations for understanding foodborne illnesses, primarily because they rarely identify the specific pathogen or indicate the method of transmission. For example, illnesses, such as those caused by E.coli O157:H7, cannot always be distinguished from other similar illnesses. Researchers may supplement national data with data from health maintenance organizations or community health studies. Such studies provide more detailed information about foodborne illnesses but are limited to small samples and have only been done occasionally. Although foodborne illnesses are often short term and do not require medical treatment, in some cases, these illnesses can involve other organs, resulting in serious complications. In other cases, foodborne illnesses may not result in immediate symptoms but ultimately may produce serious health problems. CDC has classified the causes of foodborne illnesses into the following four categories: Bacterial pathogens are microorganisms that can be seen with a microscope but not with the naked eye. Some bacterial pathogens are infectious themselves or can produce toxins. Furthermore, bacteria can multiply rapidly in food, making them difficult to control and can be transmitted through person-to-person contact. Some bacteria, such as Clostridium botulinum, which causes botulism, can form spores in food that can resist some food preservation treatments, including boiling. Chemical agents are primarily naturally occurring toxins that can enter the food supply. Paralytic shellfish poisoning and mushroom poisoning are caused by such chemicals. Heavy metals--such as cadmium, copper, iron, tin, and zinc--are also included in this category. These pathogens can cause a variety of gastrointestinal, neurologic, respiratory, and other symptoms. Viral pathogens are too small to be seen with a conventional microscope. Only a few viral pathogens, such as the Hepatitis A and Norwalk viruses, have been proven to cause foodborne illnesses. Viral pathogens are often transmitted by infected food handlers or through contact with sewage. Parasitic pathogens are larger than bacterial pathogens and include protozoa (one-celled microorganisms) and multicelled parasites. They multiply only in host animals, not in food. Protozoa form cysts that are similar to spores but less resistant to heat. Cysts can be transmitted to new hosts through food that has been eaten. Multicelled parasites, such as Trichinella spiralis, which causes trichinosis, occur in microscopic forms, such as eggs and larvae. Thorough cooking will destroy larvae. While the likelihood of serious complications from foodborne illnesses is unknown, some researchers estimate that about 2 to 3 percent of all cases of foodborne illness lead to serious consequences. Although anyone can suffer from foodborne illnesses, certain populations are more at risk from them or their complications than others: pregnant women, children, those with compromised or suppressed immune systems, and the elderly. These groups are more at risk because of altered, underdeveloped, damaged, or weakened immune systems. Table II.1 provides information on several foodborne pathogens, the serious complications they may result in, and some of the foods in which they have been found. In 1990, the Public Health Service identified E. coli O157:H7, Salmonella, Listeria monocytogenes and Campylobacter jejuni as the four most important foodborne pathogens in the United States because of the severity and the estimated number of illnesses they cause. According to CDC officials, illnesses caused by E. coli O157:H7 and Listeria monocytogenes are generally more deadly than illnesses caused by other foodborne pathogens. In contrast, illnesses caused by Salmonella and Campylobacter jejuni are less likely to be deadly but are more common. This appendix discusses the estimated number of cases of foodborne illness caused by these pathogens. E. coli O157:H7 has emerged as an important cause of outbreaks of foodborne illness in the United States since 1982. (See fig. III.1). Because few laboratories in the United States routinely test for E. coli O157:H7, the actual number of illnesses caused by this pathogen is unknown, but CDC officials estimate that this pathogen causes approximately 21,000 illnesses annually. As shown in figure III.2, only 33 states required reporting of such illnesses through the end of 1994, according to information provided by CDC. Figure III.3 provides estimates of the percentage of people who recover, remain ill, or die from E. coli O157:H7. On the basis of population-based studies, CDC officials estimate that between 800,000 and 4 million illnesses from the more than 2,000 strains of Salmonella occur each year in the United States. In 1994, one strain, Salmonella Enteritidis, accounted for more than 25 percent of all reported infections from Salmonella. Confirmed laboratory reports of the Salmonella Enteritidis strain increased from 3,322 to 10,009 between 1982 to 1994. While the number of outbreaks from Salmonella Enteritidis has declined since 1989, over 5,000 people, more than in any other year, became ill from the 44 outbreaks reported in 1994. Figure III.4 shows the estimated percentage of people who recover or die from all strains of Salmonella. CDC estimates that the number of illnesses and deaths caused by Listeria monocytogenes declined between 1989 and 1993, from 1,965 cases and 481 deaths to 1,092 cases and 248 deaths. CDC attributes this downward trend to prevention efforts implemented by the food industry and regulatory agencies. Figure III.5 shows the estimated percentages of people who recover, remain ill, or die from Listeria monocytogenes. According to CDC, Campylobacter jejuni is the most common bacterial cause of diarrhea in the industrialized world. An estimated 2 million to 4 million cases occur each year in the United States, according to population-based studies. Although the number of Campylobacter jejuni cases confirmed by laboratory reports represents only a small proportion of the total number of illnesses that are estimated to occur from Campylobacter jejuni, the reported number more than doubled from 3,947 in 1982 to 7,970 in 1989. Most cases of illness occur sporadically and not as part of an outbreak. Illness can occur from contact with raw foods (often poultry) during food preparation. Figure III.6 shows the estimate of the percentage of people who recover or die from Campylobacter jejuni. This appendix provides information on the cost of foodborne illnesses using both the cost-of-illness and the willingness-to-pay methods. The range of estimates is wide, however, principally because of uncertainty over the number of cases of foodborne illness and deaths. Table IV.1 provides the estimated number of illnesses and deaths in 1993 used to calculate the cost-of-illness estimate. As the table indicates, food was the most frequent source of contamination for five of the seven pathogens the U.S. Department of Agriculture's (USDA) Economic Research Service examined. CDC has targeted four of these seven pathogens as the most threatening foodborne pathogens. Table IV.2 presents cost-of-illness estimates for all foodborne illnesses and illnesses from meat and poultry. Contaminated meat and poultry are believed to be among the most common sources of foodborne illness from these pathogens. ERS also used the willingness-to-pay method to estimate the value of preventing deaths for five of the seven major pathogens. The results of this analysis are shown in table IV.3. Edward M. Zadjura, Assistant Director Jay Cherlow, Assistant Director for Economic Analysis Daniel F. Alspaugh, Project Leader Carol Herrnstadt Shulman Jonathan M. Silverman The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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GAO reviewed the extent of foodborne illnesses caused by microbal contamination, focusing on: (1) the frequency, health consequences, and economic impacts of these illnesses; and (2) the extent of information available to develop effective control strategies. GAO found that: (1) between 6.5 million and 81 million cases of foodborne illness and as many as 9,100 related deaths occur each year; (2) the risk of foodborne illness is increasing due to changes in food supply and consumption, recognition of new causes of foodborne illnesses, new modes of transmission, increased resistance to long-standing food-processing and storage techniques, and emerging virulent strains of well-known bacteria; (3) while foodborne illnesses are most often brief and do not require medical care, a small percentage cause long-term disability or even death; (4) foodborne illness may cost billions of dollars every year in medical costs and lost productivity; (5) the current voluntary reporting system does not provide sufficient data on the prevalence and sources of foodborne illnesses; (6) efforts are under way to collect more and better data on the prevalence and sources of foodborne illnesses; and (7) more uniform and comprehensive data on the number and causes of foodborne illnesses could lead to more effective control strategies.
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Medicare covers up to 100 days of care in a SNF after a beneficiary has been hospitalized for at least 3 days. To qualify for the benefit, the patient must need skilled nursing or therapy on a daily basis. For the first 20 days of SNF care, Medicare pays all the costs, and for the 21st through the 100th day, the beneficiary is responsible for daily coinsurance of $95 in 1997. physician; and have the services furnished under a plan of care prescribed and periodically reviewed by a physician. If these conditions are met, Medicare will pay for skilled nursing; physical, occupational, and speech therapy; medical social services; and home health aide visits. Beneficiaries are not liable for any coinsurance or deductibles for these home health services, and there is no limit on the number of visits for which Medicare will pay. Medicare covers care in rehabilitation hospitals that specialize in such care and units within acute-care hospitals that also specialize. To qualify, beneficiaries must have one or more conditions requiring intensive and multidisciplinary rehabilitation services on an inpatient basis. In addition, to qualify as a rehabilitation facility, hospitals and units in acute-care hospitals must demonstrate their status by such factors as furnishing primarily intensive rehabilitation services to an inpatient population, at least 75 percent of whom require treatment of 1 or more of 10 specified conditions (for example, stroke or hip fracture). Rehabilitation facilities must also use a treatment plan for each patient that is established, reviewed, and revised as needed by a physician in consultation with other professional personnel. Inpatient rehabilitation is treated like any other hospitalization for beneficiary cost-sharing purposes. agencies, and exceptions to the limits are available to those that can show that their costs are above the limits for reasons not under their control. Inpatient rehabilitation care, provided at both rehabilitation hospitals and units of acute-care hospitals, is exempt from Medicare's hospital prospective payment system (PPS), but is subject to the payment limitations and incentives established by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Under this law, Medicare pays these facilities the lower of the facility's average Medicare allowable inpatient operating costs per discharge or its target amount. The target amount is based on the provider's allowable costs per discharge in a base year,trended to the current year through an annual update factor. A TEFRA facility with inpatient operating costs below its ceiling receives its costs plus 50 percent of the difference between these costs and the ceiling or 5 percent of the ceiling, whichever is less. Rehabilitation facilities receive cost-based payments without regard to the TEFRA limits until they complete a full cost-reporting year, and that year is then used as their base year. Long-term care hospitals are another category exempted from the hospital PPS. To qualify as long term, hospitals must have an average length of stay of a least 25 days for their Medicare patients. Medicare pays these hospitals on the basis of their costs, subject to TEFRA limits, just like rehabilitation hospitals. The number of long-term care hospitals has grown from 94 in 1986 to 146 in 1994, and Medicare payments to them have increased considerably from about $200 million in 1989 to about $800 million in 1994. However, these hospitals remain a small part of the Medicare program, representing less than 0.5 percent of expenditures, and little research or analysis has been done on them. As a result, little is known about the reasons for the growth that has occurred in the long-term care hospital area. rehabilitation facilities but is not included in the administration's fiscal year 1998 budget proposals. The Medicare SNF, home health, and inpatient rehabilitation benefits are three of the fastest growing components of Medicare spending. From 1989 to 1996, Medicare part A SNF expenditures increased over 300 percent, from $2.8 billion to $11.3 billion. During the same period, part A expenditures for home health increased from $2.4 billion to $17.7 billion--an increase of over 600 percent. Rehabilitation facility payments increased from $1.4 billion in 1989 to $3.9 billion in 1994, the latest year for which complete data were available. SNF payments currently represent 8.6 percent of part A Medicare expenditures; home health, 13.5 percent; and rehabilitation facilities, 3.4 percent. At Medicare's inception in 1966, the home health benefit under part A provided limited posthospital care of up to 100 visits per year after a hospitalization of at least 3 days. In addition, the services could only be provided within 1 year after the patient's discharge and had to be for the same illness. Part B coverage of home health also was limited to 100 visits per year. These restrictions under part A and part B were eliminated by the Omnibus Reconciliation Act of 1980 (ORA) (P.L. 96-499), but little immediate effect on Medicare costs occurred. With the implementation of the Medicare inpatient PPS in 1983, use of the SNF and home health benefits was expected to grow as patients were discharged from the hospital earlier in their recovery periods. But HCFA's relatively stringent interpretation of coverage and eligibility criteria held growth in check for the next few years. As a result of court decisions in the late 1980s, HCFA issued guideline changes for the SNF and home health benefits that had the effect of liberalizing coverage criteria, thereby making it easier for beneficiaries to obtain SNF and home health coverage. Additionally, the changes prevent HCFA's claims processing contractors from denying physician-ordered SNF or home health services unless the contractors can supply specific clinical evidence that indicates which particular services should not be covered. changes.) For example, ORA 1980 and HCFA's 1989 home health guideline changes have essentially transformed the home health benefit from one focused on patients needing short-term posthospital care to one that serves chronic, long-term care patients as well. The number of beneficiaries receiving home health care more than doubled in the last few years, from 1.7 million in 1989 to about 3.9 million in 1996. During the same period, the average number of visits to home health beneficiaries also more than doubled, from 27 to 72. In a recent review of home health care, we found that from 1989 to 1993, the proportion of home health users receiving more than 30 visits increased from 24 to 43 percent and those receiving more than 90 visits tripled, from 6 to 18 percent, indicating that the program is serving a larger proportion of longer-term patients. Moreover, about a third of beneficiaries receiving home health care did not have a prior hospitalization, another possible indication that care for chronic conditions is being provided. Similarly, the number of people receiving care from SNFs has also almost doubled, from 636,000 in 1989 to 1.1 million in 1996. While the average length of a Medicare-covered SNF stay has not changed much during that time, the average Medicare payment per day has almost tripled--from $98 in 1990 to $292 in 1996. Use of ancillary services, such as physical and occupational therapy, has increased dramatically and accounts for most of the growth in per-day cost. For example, our analysis of 1992 through 1995 SNF cost reports shows that reported ancillary costs per day have increased 67 percent, from $75 per day to $125 per day, while reported routine costs per day have increased only 20 percent, from $123 to $148. Unlike routine costs, which are subject to limits, ancillary services are only subject to medical necessity criteria, and Medicare does relatively little review of their use. Moreover, SNFs can cite high ancillary service use to justify an exception to routine service cost limits, thereby increasing payments for routine services. 1994, patients with any of 12 DRGs commonly associated with posthospital SNF use had 4- to 21-percent shorter stays in hospitals with SNF units than patients with the same DRGs in hospitals without SNF units. Additionally, by owning a SNF, hospitals can increase their Medicare revenues through receipt of the full DRG payment for patients with shorter lengths of stay and a cost-based payment after the patients are transferred to the SNF. The availability of inpatient rehabilitation beds has also increased dramatically. Between 1986 and 1994, the number of Medicare-certified rehabilitation facilities grew from 545 to 1,019, an 87-percent increase. A major portion of this growth represents the increase in rehabilitation units located in PPS hospitals, which went from 470 to 824 over the same period. Inpatient rehabilitation admissions for Medicare beneficiaries increased from 2.9 per 1,000 in 1986 to 7.2 per 1,000 in 1993, or 148 percent. Some of this increase in beneficiary use was due to increases in the number of acute-care admissions that often lead to use of rehabilitation facilities. For example, the DRG that includes hip replacement grew from 218,000 discharges during fiscal year 1989 to 344,000 in fiscal year 1995. For the same DRG, average length of stay in acute-care hospitals decreased from 12 to 6.7 days over that period. As was the case with SNFs, beneficiaries admitted to rehabilitation units in 1994 following a stay in an acute-care hospital had shorter average lengths of stay than beneficiaries admitted to rehabilitation hospitals. They also had shorter stays in the acute-care hospital. Moreover, the same scenario that applies to hospital-based SNFs applies to rehabilitation units. The quicker that hospitals discharge a patient to the rehabilitation unit, the lower that patient's acute-care costs are. By having a rehabilitation unit, hospitals can increase their Medicare revenues through receipt of the full DRG payment for patients with shorter lengths of stay and a cost-based payment after the patients are admitted to rehabilitation. Rapid growth in SNF and home health expenditures has been accompanied by decreased, rather than increased, funding for program safeguard activities. For example, our March 1996 report found that part A contractor funding for medical review had decreased by almost 50 percent between 1989 and 1995. As a result, while contractors had reviewed over 60 percent of home health claims in fiscal year 1987, their review target had been lowered by 1995 to 3.2 percent of all claims (or sometimes, depending on available resources, to a required minimum of 1 percent). We found that a lack of adequate controls over the home health program, such as little intermediary medical review and limited physician involvement, makes it nearly impossible to know whether the beneficiary receiving home health care qualifies for the benefit, needs the care being delivered, or even receives the services being billed to Medicare. Also, because of the small percentage of claims now selected for review, home health agencies that bill for noncovered services are less likely to be identified than they were 10 years ago. Similarly, the low level of review of SNF services makes it difficult to know whether the recent increase in ancillary service use is legitimate (for example, because patient mix has shifted toward those who need more services) or is simply a way for SNFs to get more revenues. Medicare's peer review organization (PRO) contractors have responsibility for oversight of Medicare inpatient rehabilitation hospitals and units from both utilization and quality-of-care perspectives. However, the PROs' emphasis has changed in recent years, with a greater focus on quality reviews and less emphasis on case review. In fact, the current range of work for PROs requires no specific review for the appropriateness of inpatient rehabilitation use. Finally, because relatively few resources have been available for auditing end-of-year provider cost reports, HCFA has little ability to identify whether home health agencies, SNFs, and rehabilitation facilities are charging Medicare for costs unrelated to patient care or other unallowable costs. Because of the lack of adequate program controls, it is quite possible that some of the recent increase in home health, SNF, and rehabilitation facility expenditures stems from abusive practices. The Health Insurance Portability and Accountability Act of 1996 (P.L. 104-191), also known as the Kassebaum-Kennedy Act, has increased funding for program safeguards. However, per-claim expenditures will remain below the level they were in 1989, after adjusting for inflation. We project that, in 2003, payment safeguard spending as authorized by Kassebaum-Kennedy will be just over one-half of the 1989 per-claim level, after adjusting for inflation. The goal in designing a PPS is to ensure that providers have incentives to control costs and that, at the same time, payments are adequate for efficient providers to furnish needed services and at least recover their costs. If payments are set too high, Medicare will not save money and cost-control incentives can be weak. If payments are set too low, access to and quality of care can suffer. In designing a PPS, selection of the unit of service for payment purposes is important because the unit used has a strong effect on the incentives providers have for the quantity and quality of services they provide. Taking into account the varying needs of patients for different types of services--routine, ancillary, or all--is also important. A third important factor is the reliability of the cost and utilization data used to compute rates. Good choices for unit of service and cost coverage can be overwhelmed by bad data. We understand that the administration will propose a SNF PPS that would pay per diem rates covering all facility cost types and that payments would be adjusted for differences in patient case mix. Such a system is expected to be similar to HCFA's ongoing SNF PPS demonstration project that is testing the use of per diem rates adjusted for resource need differences using the Resource Utilization Group, version III (RUG-III) patient classification system. This project was recently expanded to include coverage of ancillary costs in the prospective payment rates. An alternative to the proposal's choice of a day of care as the unit of service is an episode of care--the entire period of SNF care covered by Medicare. While substantial variation exists in the amount of resources needed to treat beneficiaries with the same conditions when viewed from the day-of-care perspective, even more variation exists at the episode-of-care level. Resource needs are less predictable for episodes of care. Moreover, payment on an episode basis may result in some SNFs inappropriately reducing the number of covered days. Both factors make a day of care the better candidate for a PPS unit of service. Furthermore, the likely patient classification system, RUG-III, is designed for and being tested in a per diem PPS. On the other hand, a day-of-care unit gives few, if any, incentives to control length of stay, so a review process for this purpose would still be needed. The states and HCFA have a lot of experience with per diem payment methods for nursing homes under the Medicaid program, primarily for routine costs but also, in some cases, for total costs. This experience should prove useful in designing a per diem Medicare PPS. services, particularly therapy services. This, in turn, means that it is important to give SNFs incentives to control ancillary costs, and including them under PPS is a way to do so. However, adding ancillary costs does increase the variability of costs across patients and places additional importance on the case-mix adjuster to ensure reasonable and adequate rates. Turning to the adequacy of HCFA's databases for SNF PPS rate-setting purposes, our work, and that of the Department of Health and Human Services' (HHS) Inspector General, has found examples of questionable costs in SNF cost reports. For example, we found extremely high charges for occupational and speech therapy with no assurance that cost reports reflected only allowable costs. Cost-report audits are the primary means available to ensure that SNF cost reports reflect only allowable costs. However, the resources expended on auditing cost reports have been declining in relation to the number of SNFs and SNF costs for a number of years. The percentage of SNFs subjected to field audits has decreased as has the extent of auditing done at the facilities that are audited. Under these circumstances, we think it would be prudent for HCFA to do thorough audits of a projectable sample of SNF cost reports. The results could then be used to adjust cost-report databases to remove the influence of unallowable costs, which would help ensure that inflated costs are not used as the base for PPS rate setting. The summary of the administration's proposal for a home health PPS is very general, saying only that a PPS for an appropriate unit of service would be established in 1999 using budget neutral rates calculated after reducing expenditures by 15 percent. HCFA estimates that this reduction will result in savings of $4.7 billion over fiscal years 1999 through 2002. period of time such as 30 or 100 days as the unit of service has a greater potential for controlling costs. However, agencies could gain by reducing the number of visits during that period, potentially lowering quality of care. If an episode of care is chosen as the unit of service, HCFA would need a method to ensure that beneficiaries receive adequate services and that any reduction in services that can be accounted for by past overprovision of care does not result in windfall profits for agencies. In addition, HCFA would need to be vigilant to ensure that patients meet coverage requirements, because agencies would be rewarded for increasing their caseloads. HCFA is currently testing various PPS methods and patient classification systems for possible use with home health care, and the results of these efforts may shed light on how to best design a home health PPS. We have the same concerns about the quality of HCFA's home health care cost-report databases for PPS rate-setting purposes that we do for the SNF database. Again, we believe that adjusting the home health databases, using the results of thorough cost-report audits of a projectable sample of agencies, would be wise. We are also concerned about the appropriateness of using current Medicare data on visit rates to determine payments under a PPS for episodes of care. As we reported in March 1996, controls over the use of home health care are virtually nonexistent. Operation Restore Trust, a joint effort by federal and state agencies in several states to identify fraud and abuse in Medicare and Medicaid, found very high rates of noncompliance with Medicare's coverage conditions in targeted agencies. For example, in a sample of 740 beneficiaries drawn from 43 home health agencies in Texas and 31 in Louisiana that were selected because of potential problems, some or all of the services received by 39 percent of the beneficiaries were denied. About 70 percent of the denials were because the beneficiary did not meet the homebound definition. Although these are results from agencies suspected of having problems, they illustrate that substantial amounts of noncovered care are likely to be reflected in HCFA's home health care utilization data. For these reasons, it would also be prudent for HCFA to conduct thorough on-site medical reviews of a projectable sample of agencies to give it a basis to adjust utilization rates for purposes of establishing a PPS. detailing a model for a PPS is currently undergoing review. The research was directed at designing a per-episode payment system adjusted for case mix, using a measure of patient functional status--for example, the patient's mobility--as the adjuster. In general, this and other research has shown that patients in the rehabilitation facilities are more homogeneous than those in SNFs or home health care. Because the goals for the care are also more homogeneous and defined, an episode may be a reasonable choice for a unit of service. Again, the per-episode payment should be structured to reduce the incentives for premature discharge, and adequate review mechanisms to prevent such discharges and other quality problems would be needed. As with SNFs and home health care, we have concerns about the reliability of HCFA's databases for rate-setting purposes for rehabilitation hospitals because of the low levels of utilization review and cost-report auditing. As we stated earlier, HCFA should do enough audits and medical review to enable it to adjust its databases to remove the effects of any problems. HCFA would also need an adequate review system under a PPS because rehabilitation facilities would probably have incentives to increase their caseloads, cut corners on quality, or both. HCFA is not currently studying a PPS for long-term care hospitals. Rather, the administration is proposing that any hospitals that newly qualify for long-term care status be paid under the regular inpatient hospital PPS. Also, HCFA officials told us that the agency plans to recommend in the future a coordinated payment system for post-acute care and that long-term care hospitals are being considered for inclusion under such a payment system. I will discuss the coordinated payment concept later in this statement. The administration has also announced that it will propose requiring SNFs to bill Medicare directly for all services provided to their beneficiary residents except for physician and some practitioner services. We support this proposal as we did in a September 1995 letter to the House Ways and Means Committee. We and the HHS Inspector General have reported on problems, such as overutilization of supplies, that can arise when suppliers bill separately for services for SNF residents. help prevent duplicate billings for supplies and services and billings for services not actually furnished by suppliers. In effect, outside suppliers would have to make arrangements with SNFs under such a provision so that nursing homes would bill for suppliers' services and would be financially liable and medically responsible for the care. There can be considerable overlap in the types of services provided and the types of beneficiaries that are treated in each of the three post-acute care settings. For example, physical therapy and other rehabilitation services can be provided by a SNF, a home health agency, or a rehabilitation facility. Both HCFA and the prospective payment assessment commission (ProPAC) have noted that the ability to substitute care among post-acute settings may contribute to inappropriate spending growth, even after payment policies are improved for individual provider types.Although prospective payment encourages providers to deliver care more efficiently, facility-specific payments may encourage them to lower their costs by shifting services to other settings. The administration has therefore announced that it will in the future recommend a coordinated payment system for post-acute care services. Such a system will be designed to help ensure that beneficiaries receive quality care in the appropriate settings, and that any patient transfers among settings occur only when medically appropriate rather than in efforts to generate additional revenues. While no details are available about how a coordinated post-acute payment system would operate, presumably it will entail consolidated (bundled) payments to one entity for the different types of providers. In fact, ProPAC has suggested a system that bundles acute and post-acute payments. One of the most important design issues in a bundled payment approach is deciding which provider would receive the payment. Because this provider would have to organize and oversee the continuum of services for beneficiaries, it would bear the risk that payments would not cover costs. Options for this role include an acute-care hospital, a post-acute care provider, or a provider service network. care utilization needs to be accurately predicted to ensure that prospective rates are adequate to cover costs but also give an incentive to provide cost-effective care. Bundling acute and post-acute care would have a number of potential advantages and disadvantages. Optimally, bundling of payments would encourage continuity of care. If, for example, the inpatient hospital has a greater stake in the results, bundling could lead to both better discharge planning as well as improved transfer of information from the hospital to the post-acute provider. Bundling payments to the hospital could also eliminate a PPS hospital's financial incentive to discharge Medicare patients before they are ready, because patients discharged prematurely may require extensive post-acute services for which the hospital is liable. Furthermore, bundling with an appropriate payment rate would give providers more incentive to furnish the mix of inpatient and posthospital services that yield the least costly treatment of an entire episode of care and thus help control growth in the volume of post-acute services. Finally, to the extent that the bundling arrangement promotes joint accountability, combining responsibility for hospital and post-acute providers could lead to better outcomes. There are a number of potential disadvantages as well. Because bundled payments would represent some level of financial risk, whoever received the bundled payment would need to have the resources to accept the risk. Moreover, bearing risk often gives incentive to shift the risk to others and raises concerns about quality. A key to the success of any bundling system is coordinating care and continuously monitoring a patient during the entire episode. However, some providers might not have the capabilities to do this. For example, if, as ProPAC has suggested, both acute- and post-acute care were bundled and if hospitals received the bundled payment, some hospitals might not have the resources, information, or expertise to properly manage patients' post-acute care. The same could be said for SNFs and home health agencies. An additional concern is that whoever received the bundled payment could have dominance over the other providers and make choices about acute- and post-acute care settings that are driven primarily by concerns about cost. For example, hospitals might try to maximize their profit by limiting post-acute services or be tempted to screen admissions to avoid patients with high risks of heavy posthospital care. fall into this category. A bundled payment system would not affect home health agency incentives for such patients. Finally, beneficiary advocacy groups have expressed concern about potential harmful effects of this system on patients' freedom of choice and how the quality and appropriateness of care could be ensured. In conclusion, it is clear from the dramatic cost growth for SNF, home health, and rehabilitation facility care that the current Medicare payment mechanisms for the providers need to be revised. As more details concerning the administration's or others' proposals for revising those systems become available, we would be glad to work with the Committee and others to help sort out the potential implications of suggested revisions. This concludes my prepared remarks, and I will be happy to answer any questions. For more information on this testimony, please call William Scanlon on (202) 512-7114 or Thomas Dowdal, Senior Assistant Director, on (202) 512-6588. Other major contributors include Patricia Davis, Roger Hultgren, and Sally Kaplan. 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 Medicare's skilled nursing facility (SNF), home health care, and inpatient rehabilitation benefits and the administration's forthcoming legislative proposals related to them. GAO noted that: (1) Medicare's SNF costs have grown primarily because a larger portion of beneficiaries use SNFs than in the past and because of a large increase in the provision of ancillary services; (2) for home health care costs, both the number of beneficiaries and the number of services used by each beneficiary have more than doubled; (3) although the average length of stay has decreased for inpatient rehabilitation facilities, a larger portion of Medicare beneficiaries use them now, which results in cost growth; (4) the administration's major proposals for both SNFs and home health care are designed to to give the providers of these services increased incentives to operate efficiently by moving them from a cost reimbursement to a prospective payment system; (5) what remains unclear about these proposals is whether an appropriate unit of service can be defined for calculating prospective payments and whether the Health Care Financing Administration's data bases are adequate for it to set reasonable rates; (6) administration officials also have discussed their intention to propose in the future a coordinated payment system for post-acute care as methods to give providers efficiency incentives; (7) these concepts have appeal, but GAO has concerns about them similar to those it has for SNF and home health prospective payments; (8) finally, the administration is proposing that SNFs be required to bill for all services provided to their Medicare residents rather than allowing outside suppliers to bill; and (9) this latter proposal has merit because it would make control over the use of ancillary services significantly easier.
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We reported in September 2012 that FEMA's administrative costs had been increasing for all sizes of disasters. According to FEMA, administrative costs include, among other things, the salary and travel costs for its disaster workforce, rent and security expenses associated with establishing and operating its field office facilities, and supplies and information technology support for its deployed staff. In September 2012, based on our analysis of 1,221 small, medium, and large federal disaster declarations during fiscal years 1989 through 2011, we found that the average administrative cost percentage for these disaster declarations doubled from 9 percent in the 1989-to-1995 period to 18 percent in the 2004-to-2011 period, as shown in table 1. We also found that the growth in administrative costs occurred for all types of disaster assistance, including those related to providing Individual Assistance, Public Assistance, and assistance for those disasters that provided both Individual Assistance and Public Assistance.As shown in table 2, since fiscal year 1989, administrative cost percentages doubled for disaster declarations with Individual Assistance only, quadrupled for declarations with Public Assistance only, and doubled for declarations with Public Assistance and Individual Assistance. To address these rising costs, FEMA issued guidelines and targets intended to improve the efficiency of its efforts and to help reduce administrative costs. In November 2010, FEMA issued guidance on how to better control administrative costs associated with disaster declarations. The guide noted that incidents of similar size and type had witnessed growing administrative costs for 20 years, and that, in the past, little emphasis had been placed on controlling overall costs. The document provided guidance on how to set targets for administrative cost percentages, plan staffing levels, time the deployment of staff, and determine whether to use "virtual" field offices instead of physical field offices. However, in September 2012, we found that FEMA did not require that this guidance be followed or targets be met because the agency's intent was to ensure that it was providing guidance to shape how its leaders in the field think about gaining and sustaining efficiencies in operations rather than to lay out a prescriptive formula. As a result, we concluded that FEMA did not track or monitor whether its cost targets were being used or achieved. In September 2012, we also found that in many cases, FEMA exceeded its cost targets for administrative costs. Specifically, based on our analysis of the 539 disaster declarations during fiscal years 2004 through 2011, we found that 37 percent of the declarations exceeded the 2010 administrative cost percentage targets. Specifically: For small disaster declarations (total obligations of less than $50 million), FEMA's target range for administrative costs is 12 percent to 20 percent; for the 409 small declarations that we analyzed, 4 out of every 10 had administrative costs that exceeded 20 percent. For medium disaster declarations (total obligations of $50 million to $500 million), the target range for administrative costs is 9 percent to 15 percent; for the 111 declarations that we analyzed, almost 3 out of every 10 had administrative costs that exceeded 15 percent. For large disaster declarations (total obligations greater than $500 million to $5 billion), the target range for administrative costs is 8 percent to 12 percent; for the 19 large declarations that we analyzed, about 4 out of every 10 had administrative costs that exceeded 12 percent. As a result, in September 2012, we recommended that FEMA implement goals for administrative cost percentages and monitor performance to achieve these goals. However, as of July 2014, FEMA had not taken steps to implement our recommendation. In December 2013, FEMA officials stated that they are implementing a system called FEMAStat to, among other things, collect and analyze data on the administrative costs associated with managing disasters to enable managers to better assess performance and progress within the organization. As part of the FEMAStat effort, in 2012 and 2013, FEMA collected and analyzed data on the administrative costs associated with managing disasters. However, as of July 2014, FEMA is still working on systematically collecting the data and utilizing them to develop a model for decision making. As a result, it is too early to assess whether this effort will improve the efficiencies or reduce the cost associated with administering assistance in response to disasters. As part of our ongoing work, we will be reviewing these efforts and working with FEMA to better understand the progress the agency has made in monitoring and controlling its administrative costs associated with delivery of disaster assistance and its efforts to decrease the administrative burden associated with its Public Assistance program. We have also reported on opportunities to strengthen and increase the effectiveness of FEMA's workforce. More specifically, we previously reported on various FEMA human capital management efforts (as well as human capital management efforts across the federal government) and have made a number of related recommendations for improvement. FEMA has implemented some of these, but others are still underway. Specifically: In June 2011, we found that FEMA's Strategic Human Capital Plan did not define critical skills and competencies that FEMA would need in the coming years or provide specific strategies and program objectives to motivate, deploy, and retain employees, among other things. As a result, we recommended that FEMA develop a comprehensive workforce plan that identifies agency staffing and skills requirements, addresses turnover and staff vacancies, and analyzes FEMA's use of contractors. FEMA agreed, and in responding to this recommendation, reported that it had acquired a contractor to conduct an assessment of its workforce to inform the agency's future workforce planning efforts. In April 2012, we found that FEMA had taken steps to incorporate some strategic management principles into its workforce planning and training efforts but could incorporate additional principles to ensure a more strategic approach is used to address longstanding management challenges. Further, FEMA's workforce planning and training could be enhanced by establishing lines of authority for these efforts. We also found that FEMA had not developed processes to systematically collect and analyze agencywide workforce and training data that could be used to better inform its decision making. We recommended that FEMA: identify long-term quantifiable mission- critical goals that reflect the agency's priorities for workforce planning and training; establish a time frame for completing the development of quantifiable performance measures related to workforce planning and training efforts; establish lines of authority for agency-wide workforce planning and training efforts; and develop systematic processes to collect and analyze workforce and training data. DHS concurred with all the recommendations and FEMA is still working to address them. For example, in April 2014, FEMA issued a notice soliciting contracting services for a comprehensive workforce structure analysis for the agency. As part of our ongoing review of FEMA's workforce management, we are gathering information on FEMA's other efforts to address our recommendations. In May 2012, we reported on the management and training of FEMA Reservists, a component of FEMA's workforce, referred to at that time as Disaster Assistance Employees (DAE). Specifically, we found that FEMA did not monitor how the regions implement DAE policies and how DAEs implement disaster policies across regions to ensure consistency. While FEMA's regional DAE managers were responsible for hiring DAEs, FEMA had not established hiring criteria and had limited salary criteria. Regarding FEMA's performance appraisal system for DAEs, we found that FEMA did not have criteria for supervisors to assign DAEs satisfactory or unsatisfactory ratings. We also found that FEMA did not have a plan to ensure DAEs receive necessary training and did not track how much of the Disaster Relief Fund was spent on training for DAEs. We recommended, among other things, that FEMA develop a plan for how it will better communicate policies and procedures to DAEs when they are not deployed; establish a mechanism to monitor both its regions' implementation of DAE policies and DAEs' implementation of FEMA's disaster policies; establish standardized criteria for hiring and compensating DAEs; and establish a plan to ensure that DAEs have opportunities to participate in training and are qualified. DHS concurred with the recommendations and FEMA has taken steps to address several of them. For example, in June 2012, FEMA implemented a communication strategy with its reservist workforce that included video conferences, a web blog series, and a FEMA weekly bulletin sent to Reservists' personal email addresses, among other things. Also, in October 2012, DHS reported that FEMA had resolved the outstanding issues of inconsistent implementation of DAE policies by centralizing control over hiring, training, equipment, and deployment within a single headquarters-based office. FEMA is working to address our other recommendations, and we will continue to monitor its progress. In our March 2013 report, we examined how FEMA's reservist workforce training compared with training of other similar agencies, and the extent to which FEMA had examined these agencies' training programs to identify useful practices. We found that FEMA had not examined other agencies' training programs, and therefore, we recommended that FEMA examine the training practices of other agencies with disaster reservist workforces to identify potentially useful practices; DHS concurred with our recommendation and described plans to address it. As part of our ongoing review, we are gathering information on FEMA's efforts to address our recommendation. At the request of this committee, we are also currently assessing the impact of workforce management and development provisions in the Post-Katrina Act on FEMA's response to Hurricane Sandy. We also have plans to conduct additional work to assess the impact of a variety of other emergency management related provisions in the Post-Katrina Act (for example, provisions related to FEMA's contracting efforts, information technology systems, and disaster relief efforts). Among other things, the Post-Katrina Act directed FEMA to implement efforts to enhance workforce planning and development, standards for deployment capabilities, including credentialing of personnel, and establish a surge capacity force (SCF) to deploy to natural and man-made disasters, including catastrophic incidents. Some of these efforts were highlighted during Hurricane Sandy when FEMA executed one of the largest deployments of personnel in its history. 5 U.S.C. SSSS 10101-10106; 6 U.S.C. SSSS 414-415. For example, the agency's response to Hurricane Sandy marked the first activation of the DHS SCF, with nearly 2,400 DHS employees deploying to New York and New Jersey to support response and recovery efforts. The agency also launched the new FEMA Qualification System (FQS) on October 1, 2012, just in time for FEMA employees' deployment to areas affected by Hurricane Sandy. In 2012, FEMA also created a new disaster assistance workforce component called the FEMA Corps. Forty-two FEMA Corps teams, consisting of approximately 1,100 members, were deployed to support Hurricane Sandy response and recovery efforts in the fall of 2012. FEMA's deployment of its disaster assistance workforce during the response to Hurricane Sandy revealed a number of challenges and, as a result, FEMA is analyzing its disaster assistance workforce structure to ensure the agency is capable of responding to large and complex incidents, as well as simultaneous disasters and emergencies. For example, FEMA reported that: before deployment for Hurricane Sandy, 28 percent of the staffing positions called for by FEMA's force structure analysis were vacant (approximately 47 percent of positions required by the force structure were filled with qualified personnel, and the remaining 25 percent were filled by trainees). Deployment of its disaster workforce nearly exhausted the number of available personnel. By November 12, 2012, FEMA had only 355 Reservists (5 percent) available for potential deployment: 4,708 (67 percent) were already deployed to ongoing disasters, and 1,854 (26 percent) were unavailable. Its plans had not fully considered how to balance a large deployment of personnel and still maintain day-to-day operations. As part of our ongoing work, we will be evaluating FEMA's efforts to address the challenges identified during the agency's response to Hurricane Sandy and assessing their impact. We will also determine what progress the agency has made in its workforce planning and development efforts. In March 2011, we reported on another area of opportunity for FEMA to increase the efficiency of its operations--the management of its preparedness grants. We found that FEMA could benefit from examining its grant programs and coordinating its application process to eliminate or reduce redundancy among grant recipients and program purposes. As we again reported in February 2012, four of FEMA's largest preparedness grants (Urban Areas Security Initiative, State Homeland Security Program, Port Security Grant Program, and Transit Security Grant Program) which have similar goals, fund similar types of projects, and are awarded in many of the same urban areas, have application review processes that are not coordinated. In March 2014 in our annual update to our duplication and cost savings work in GAO's Online Action Tracker, we reported that FEMA has attempted to capture more robust data from grantees during applications for the Port Security Grant Program and the Transit Security Grant Program--because applicants provide project-level data. However, applications for the State Homeland Security Grant Program and Urban Areas Security Initiative do not contain enough detail to allow for the coordinated review across the four grants, according to FEMA officials. FEMA intends to begin collecting and analyzing additional project-level data using a new system called the Non-Disaster Grants Management System (NDGrants). However, FEMA officials said that implementation of NDGrants had been delayed until 2016 because of reduced funding. While implementing NDGrants should help FEMA strengthen the administration and oversight of its grant programs, a report released by the DHS Office of Inspector General (OIG) in May 2014 identified a number of information control system deficiencies associated with FEMA development and deployment of the NDGrants system that could limit the usefulness of the system. Specifically, the OIG reported NDGrants system deficiencies related to security management, access control, and configuration management. According to the OIG's report, DHS management concurred with the findings and recommendations in the report and plans to work with component management to address these issues. We will continue to monitor FEMA's implementation of the system as part of our annual update for our duplication and cost savings work. FEMA has proposed, through the President's budget requests to Congress, to consolidate its preparedness grant programs to streamline the grant application process, responding to a recommendation we made in March 2011 by eliminating the need to coordinate application reviews. GAO, Government Operations: Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue GAO-11-318SP, (Washington, D.C.: Mar 1, 2011.) committees, however, expressed concern that the consolidation plan lacked detail, and the NPGP was not approved for either fiscal year 2013 or 2014. Nonetheless, FEMA again proposed the NPGP consolidation approach for 2015 providing additional details such as clarification and revised language relating to governance structures under the proposed program. In responding to questions submitted by the House Committee on Homeland Security's Subcommittee on Emergency Preparedness, Response and Communications in April 2014, FEMA officials reported that the NPGP would help increase the efficiency of preparedness grants by requiring fewer grants notices for staff to issue and fewer grants to award, and reduce processing time and monitoring trips due to the reduction in the number of grantees. If approved in the future, and depending on its final form and execution, we believe a consolidated NPGP could help reduce redundancies and mitigate the potential for unnecessary duplication and is consistent with our prior recommendation. Chairman Begich, Ranking Member Paul, 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. If you or your staff members have any questions about this testimony, please contact me at (404) 679-1875 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Christopher Keisling, Assistant Director; Aditi Archer, Andrew Berglund, Jeffrey Fiore, Michelle R. Su, Tracey King, David Alexander, and Jessica Orr made contributions to this testimony. Disaster Resilience: Actions Are Underway, but Federal Fiscal Exposure Highlights the Need for Continued Attention to Longstanding Challenges. GAO-14-603T. Washington, D.C.: May 14, 2014. Extreme Weather Events: Limiting Federal Fiscal Exposure and Increasing the Nation's Resilience. GAO-14-364T. Washington, D.C.: February 12, 2014. National Preparedness: FEMA Has Made Progress, but Additional Steps Are Needed to Improve Grant Management and Assess Capabilities. GAO-13-637T. Washington, D.C.: June 25, 2013. FEMA Reservists: Training Could Benefit from Examination of Practices at Other Agencies. GAO-13-250R. Washington, D.C.: March 22, 2013. National Preparedness: FEMA Has Made Progress in Improving Grant Management and Assessing Capabilities, but Challenges Remain. GAO-13-456T. Washington, D.C.: March 19, 2013. High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February 14, 2013. Federal Disaster Assistance: Improved Criteria Needed to Assess a Jurisdiction's Capability to Respond and Recover on Its Own. GAO-12-838. Washington, D.C.: September 12, 2012. Disaster Assistance Workforce: FEMA Could Enhance Human Capital Management and Training. GAO-12-538. Washington, D.C.: May 25, 2012. Federal Emergency Management Agency: Workforce Planning and Training Could Be Enhanced by Incorporating Strategic Management Principles. GAO-12-487. Washington, D.C.: April 26, 2012. Homeland Security: DHS Needs Better Project Information and Coordination among Four Overlapping Grant Programs. GAO-12-303. Washington, D.C.: February 28, 2012. More Efficient and Effective Government: Opportunities to Reduce Duplication, Overlap and Fragmentation, Achieve Savings, and Enhance Revenue. GAO-12-449T. Washington, D.C.: February 28, 2012. Government Operations: Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011. FEMA: Action Needed to Improve Administration of the National Flood Insurance Program. GAO-11-297. Washington, D.C.: June 9, 2011 Government Operations: Actions Taken to Implement the Post-Katrina Emergency Management Reform Act of 2006. GAO-09-59R. Washington, D.C.: November 21, 2008. Natural Hazard Mitigation: Various Mitigation Efforts Exist, but Federal Efforts Do Not Provide a Comprehensive Strategic Framework. GAO-07-403. Washington, D.C.: August 22, 2007. High Risk Series: GAO's High-Risk Program. GAO-06-497T. Washington, D.C.: March 15, 2006. Disaster Assistance: Information on the Cost-Effectiveness of Hazard Mitigation Projects. GAO/T-RCED-99-106. Washington, D.C.: March 4, 1999. Disaster Assistance: Information on Federal Disaster Mitigation Efforts. GAO/T-RCED-98-67. Washington, D.C.: January 28, 1998. Disaster Assistance: Information on Expenditures and Proposals to Improve Effectiveness and Reduce Future Costs. GAO/T-RCED-95-140. Washington, D.C.: March 16, 1995. Federal Disaster Assistance: What Should the Policy Be? PAD-80-39. Washington, D.C.: June 16, 1980. 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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Preparing for, responding to, and recovering from disasters is becoming increasingly complex and costly. GAO reported that from fiscal years 2002 through 2013, the federal government appropriated about $41 billion for preparedness grant programs and $6.2 billion to FEMA's Disaster Relief Fund in fiscal year 2014. In addition, FEMA obligated over $80 billion in federal disaster assistance for major disasters declared from fiscal years 2004 through 2011 and responded to more disasters than in any other year in its history during fiscal year 2011. The larger number and size of disasters has required increasingly complex and costly FEMA operations and processes to prepare for and respond to these events. For example, Hurricane Sandy in September 2012 required one of the largest deployment of disaster personnel in FEMA's history. Similarly, FEMA's own administrative costs--such as the cost to house and deploy its disaster personnel--have also increased. This testimony discusses GAO's work on opportunities to enhance efficiencies in FEMA's operations in three areas: (1) disaster administrative costs, (2) workforce management, and (3) preparedness grant management. This testimony is based on previous GAO reports issued from 2008 to 2014 with selected updates and preliminary observations from GAO's ongoing work on disaster administrative costs and workforce management issues in response to Hurricane Sandy. GAO's recent and ongoing work examining the Federal Emergency Management Agency's (FEMA) administrative costs of providing disaster assistance highlights opportunities to increase efficiencies and potentially reduce these costs. In September 2012, GAO reported that FEMA's administrative costs for disaster assistance had doubled in size as a percentage of the overall cost of the disasters since fiscal year 1989, and often surpassed its targets for controlling administrative costs. GAO also concluded that FEMA's administrative costs were increasing for all sizes of disasters and for all types of disaster assistance. FEMA issued guidelines intended to improve the efficiency of its efforts and to help reduce administrative costs. However, FEMA did not make this guidance mandatory because it wanted to allow for flexibility in responding to a variety of disaster situations. In 2012, GAO recommended that the FEMA Administrator implement goals for administrative cost percentages and monitor performance to achieve these goals. However, as of June 2014, FEMA had not taken steps to implement GAO's recommendation. GAO's ongoing work indicates that FEMA is implementing a new system to, among other things, collect and analyze data on the administrative costs associated with managing disasters to enable managers to better assess performance. However, according to officials, FEMA is still working on systematically collecting the data. As a result, it is too early to assess whether this effort will improve efficiencies or reduce administrative costs. GAO has also reported on opportunities to strengthen and increase the effectiveness of FEMA's workforce management. Specifically, GAO reviewed FEMA human capital management efforts in 2012 and 2013 and has made a number of related recommendations, many of which FEMA has implemented; some of which are still underway. For example, GAO recommended that FEMA identify long-term quantifiable mission-critical goals and establish a time frame for completing the development of quantifiable performance measures for workforce planning and training, establish lines of authority for agency-wide efforts related to workforce planning and training, and develop systematic processes to collect and analyze workforce and training data. FEMA concurred and is still working to address these recommendations. For example, FEMA's deployment of its disaster assistance workforce during the response to Hurricane Sandy revealed a number of challenges. In response, according to agency officials, FEMA is, among other things, analyzing its disaster assistance workforce structure to ensure the agency is capable of responding to large and complex incidents. GAO will continue to evaluate these efforts to assess their effectiveness. In March 2011, GAO reported that FEMA could enhance the coordination of application reviews of grant projects across four of the largest preparedness grants (Urban Areas Security Initiative, State Homeland Security Program, Port Security Grant Program, and Transit Security Grant Program) which have similar goals, fund similar types of projects, and are awarded in many of the same urban areas. GAO recommended that FEMA coordinate the grant application process to reduce the potential for duplication. FEMA has attempted to use data to coordinate two programs and also proposed to consolidate its preparedness grant programs, but FEMA's data system has been delayed, and Congress did not approve FEMA's consolidation proposal for either fiscal year 2013 or 2014.
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The Comptroller General recognized that he needed to shift the emphasis of the then Office of Civil Rights from a reactive, complaint processing focus to a more proactive, integrated approach. He wanted to create a work environment where differences are valued and all employees are offered the opportunity to reach their full potential and maximize their contributions to the agency's mission. In 2001, the Comptroller General changed the name of the Office of Civil Rights to the Office of Opportunity and Inclusiveness and gave the office responsibility for creating a fair and inclusive work environment by incorporating diversity principles in GAO's strategic plan and throughout our human capital policies. Along with this new strategic mission, the Comptroller General changed organizational alignment of the Office of Opportunity and Inclusiveness by having the office report directly to him. Also, in 2001, I was selected as the first Managing Director of the Office of Opportunity and Inclusiveness. The Office of Opportunity and Inclusiveness (O&I) is the principal adviser to the Comptroller General on diversity and equal opportunity matters. The office manages GAO's Equal Employment Opportunity (EEO) program, including informal precomplaint counseling, and GAO's formal discrimination complaint process. We also operate the agency's early resolution and mediation program by helping managers and employees resolve workplace disputes and EEO concerns without resorting to the formal process. In addition, O&I monitors the implementation of GAO's disability policy and oversees the management of GAO's interpreting service for our deaf and hard-of-hearing employees. But effective efforts to create a diverse, fair, and inclusive work place require much more. In furtherance of a more proactive approach, O&I monitors, evaluates, and recommends changes to GAO's major human capital policies and processes including those related to recruiting, hiring, performance management, promotion, awards, and training. These reviews are generally conducted before final decisions are made in an effort to provide reasonable assurance that GAO's human capital processes and practices promote fairness and support a diverse workforce. Throughout the year, O&I actively promotes diversity throughout GAO. For example, last year we met with the summer interns to discuss their experiences and to provide guidance on steps that interns can take to enhance their chances for successful conversion to permanent employment at GAO. We also took steps to increase retention of our entry- level staff by counseling our Professional Development Program advisers on the importance of consistent and appropriate training opportunities and job assignments that afford all staff the opportunity to demonstrate all of GAO's competencies. I also made several presentations that reinforced the agency's strategic commitment to diversity, including a panel discussion on diversity in the workforce, a presentation to new Band II analysts on the importance of promoting an environment that is fair and unbiased and that values opportunity and inclusiveness for all staff, and a presentation to Senior Executive Service (SES) managers on leading practices for maintaining diversity, focusing on top leadership commitment and ways that managers can communicate that commitment and hold staff accountable for results. This proactive and integrated approach to promoting inclusiveness and addressing diversity issues differs from my experience as Director of the Office of Civil Rights at a major executive branch agency. As Director of that office, a position I held immediately before coming to GAO, I had little direct authority to affect human capital decisions before they were implemented, even though those decisions could adversely affect protected groups within the agency. For the most part, my role was to focus on the required barrier analysis and planning process. The problem with this approach is that agencies generally make just enough of an effort to meet the minimal requirements of the plan developed by this process. In addition to these plans, diversity principles should be built into every major human capital initiative, along with effective monitoring and oversight functions. The war for talent, especially given increasing competition with the private sector, has made it more competitive for GAO and other federal agencies to attract and retain top talent. Graduates of color from our nation's top colleges and universities have an ever increasing array of career options. In response to this challenge, GAO has taken a variety of steps to attract a diverse pool of top candidates. We have identified a group of colleges and universities that have demonstrated overall superior academic quality, and either have a particular program or a high concentration of minority students. They include several Historically Black Colleges and Universities, Hispanic-serving institutions, and institutions with a significant portion of Asian-American students. In addition, GAO has established partnerships with professional organizations and associations with members from groups that traditionally have been underrepresented in the federal workforce, such as the American Association of Hispanic CPAs, the National Association of Black Accountants, the Federal Asian Pacific American Council, the Association of Latino Professionals in Finance and Accounting, and the American Association of Women Accountants. GAO's recruiting materials reflect the diversity of our workforce, and we annually train our campus recruiters on the best practices for identifying a broad spectrum of diverse candidates. GAO's student intern program serves as a critically important pipeline for attracting high-quality candidates to GAO. In order to maximize the diversity of our summer interns, O&I reviews all preliminary student intern offers to ensure that the intern hiring is consistent with the agency's strategic commitment to maintaining a diverse workforce. O&I also meets with a significant percentage of our interns in order to get their perspectives on the fairness of GAO's work environment. Moreover, our office recently analyzed the operation of the summer intern program and the conversion process and identified areas for improvement. GAO is implementing changes to address these areas, including taking steps to better ensure consistency in the interns' experiences and to improve the processes for evaluating their performance and making decisions about permanent job offers. Competency-based performance management systems are extremely complex. It is important to implement safeguards to monitor implementation of such systems. As a way to ensure accountability and promote transparency, the Comptroller General made an unprecedented decision to disseminate performance rating and promotion data. Over some objections, the Comptroller General agreed to place appraisal and promotion data by race, gender, age, disability, veteran status, location, and pay band on the GAO intranet and made this information available to all GAO staff. This approach allows all managers and staff to monitor the implementation of our competency-based performance management systems and serves as an important safeguard in relation to the processes. As far as I am aware, no other federal agency has ever done this, nor am I aware of any major corporation in America that has taken such an action. The Comptroller General rejected the argument that an increased litigation risk should drive the agency away from disseminating this information. Instead he stood by his position that the principles of accountability and transparency dictated that we should make this data available to all GAO employees. In addition to making this data available to all GAO staff, O&I and the Human Capital Office conduct separate and independent reviews of each performance appraisal and promotion cycle before ratings and promotions are final. In conducting its review of performance appraisals, O&I uses a two-part approach; we review statistical data on performance ratings by demographic group within each unit, and where appropriate, we conduct assessments of individual ratings. In conducting the individual assessments we (a) examine each individual rating within the specific protected group; (b) review the adequacy of any written justification; (c) determine whether GAO's guidance on applying the standards for each of the performance competencies has been consistently followed, to the extent possible; and (d) compare the rating with the self-assessment to identify the extent to which there are differences. I meet with team managing directors to resolve any concerns we have after our review. In some instances ratings are changed, and in other cases we obtain additional information that addresses our concerns. Our promotion process review entails analyzing all recommended best- qualified (BQ) lists. We review each applicant's performance ratings for the last three years. In addition, we also review each applicant's supervisory experience. I discuss concerns about an applicant's placement with the relevant panel chair. I then meet with the Chief Operating Officer and the Chief Administrative Officer to discuss any continuing concerns. A similar process is used regarding managing director's selection decisions. In addition to these independent reviews, GAO provides employees with several avenues to raise specific concerns regarding their individual performance ratings. The agency has an administrative grievance process that permits employees to receive expedited reviews of performance appraisal matters. Moreover, employees have access to early resolution efforts and a formal complaint process with O&I and at the Personnel Appeals Board. Despite our continuing efforts to ensure a level playing field at GAO, more needs to be done. The data show that for 2002 to 2005 the most significant differences in average appraisal ratings were among African-Americans at all bands for most years compared with Caucasian analysts. Furthermore, the rating data for entry level staff show a difference in ratings for African- Americans in comparison to Caucasian staff at the entry-level from the first rating, with the gap widening in subsequent ratings. These differences are inconsistent with the concerted effort to hire analysts with very similar qualifications, educational backgrounds, and skill sets. In June 2006, we held an SES off-site meeting specifically focusing on concerns regarding the performance ratings of our African-American staff. Shortly thereafter, the Comptroller General decided that in view of the importance of this issue, GAO should undertake an independent, objective, third-party assessment of the factors influencing the average rating differences between African-Americans and Caucasians. I agree with this decision. We should approach our concern about appraisal ratings for African- Americans with the same analytical rigor and independence that we use when approaching any engagement. We must also be prepared to implement recommendations coming out of this review. While we continue to have a major challenge regarding the average performance ratings of African-Americans, the percentages of African- Americans in senior management positions at GAO have increased in the last several years. I believe that the O&I monitoring reviews, direct access to top GAO management, and the other safeguards have played a significant role in these improvements. Specifically, from fiscal year 2000 to fiscal year 2007, the percentage of African-American staff in the SES/Senior Level (SL) increased from 7.1 percent to 11.6 percent, and at the Band III level the percentages increased from 6.7 percent to 10.8 percent. The following table shows the change in representation of African-American staff at the SES/SL and Band III levels for each year. Furthermore, the percentages of African-Americans in senior management positions at GAO compare favorably to the governmentwide percentages. While the percentage of African-Americans at the SES/SL level at GAO was lower than the governmentwide percentage in 2000, by September 2006, the GAO percentage had increased and exceeded the governmentwide percentage. At the Band III/GS-15 level, the percentage of African- American staff at GAO exceeded the governmentwide percentage in 2000 as well as in 2006. Table 2 lists the GAO and governmentwide percentages. Nonetheless, as an agency that leads by example, additional steps should be taken. We must continue to improve our expectation-setting and feedback process so that it is more timely and specific. We need additional individualized training for designated staff, and we need to provide training for all supervisors on having candid conversations about performance. We also need to improve transparency in assigning supervisory roles, ensure that all staff have similar opportunities to perform key competencies, and hold managers accountable for results. Finally, we will implement an agencywide mentoring program this summer. We expect that this program will help all participants enhance job performance and career development opportunities. Overall, GAO is making progress toward improving its processes and implementing various program changes that will help address important issues. I believe there are two compelling diversity challenges confronting GAO and the federal government. First, is the continuing challenge of implementing sufficiently specific merit-based policies, safeguards, and training in order to minimize the ability of individual biases to adversely affect the outcome of those policies. Second, is the challenge of having managers that can communicate with diverse groups of staff, respecting their differences and effectively using their creativity to develop a more dynamic and productive work environment. For many people, the workplace is the most diverse place they encounter during the course of their day. We owe it to our employees and to the future of our country to improve our understanding of our differences, and to work toward a fairer and more inclusive workplace. Chairman Akaka, Chairman Davis, and members of the subcommittees, this concludes my prepared statement. At this time I would be pleased to answer any questions that you or other members of the subcommittees may have. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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Vigorous enforcement of anti-discrimination laws remains an essential responsibility of government. Moreover, diversity in the federal government can be a key component for executing agency missions and achieving results. Not only is it the right thing to do, but an inclusive work environment can improve retention, reduce turnover, increase our ability to recruit, and improve overall organizational effectiveness. In 2001, the Comptroller General changed the name of the Office of Civil Rights to the Office of Opportunity and Inclusiveness and gave the office responsibility for creating a fair and inclusive work environment by incorporating diversity principles in GAO's strategic plan and throughout our human capital policies. Along with this new strategic mission, the Comptroller General changed organizational alignment of the Office of Opportunity and Inclusiveness (O&I) by having the office report directly to him. Despite our continuing efforts to ensure a level playing field at GAO, more needs to be done. The data show that for 2002 to 2005 the most significant differences in average appraisal ratings were among African-Americans at all bands for most years compared with Caucasian analysts. Furthermore, the rating data for entry level staff show a difference in ratings for African-Americans in comparison to Caucasian staff at the entry-level from the first rating, with the gap widening in subsequent ratings. These differences are inconsistent with the concerted effort to hire analysts with very similar qualifications, educational backgrounds, and skill sets. In June 2006, we held an Senior Executive Service (SES) off-site meeting specifically focusing on concerns regarding the performance ratings of our African-American staff. Shortly thereafter, the Comptroller General decided that in view of the importance of this issue, GAO should undertake an independent, objective, third-party assessment of the factors influencing the average rating differences between African-Americans and Caucasians. We should approach our concern about appraisal ratings for African-Americans with the same analytical rigor and independence that we use when approaching any engagement. We must also be prepared to implement recommendations coming out of this review. Additional Efforts to Enhance Diversity Are Needed and Planned While we continue to have a major challenge regarding the average performance ratings of African-Americans, the percentages of African-Americans in senior management positions at GAO have increased in the last several years. GAO believes that the O&I monitoring reviews, direct access to top GAO management, and the other safeguards have played a significant role in these improvements. Specifically, from fiscal year 2000 to fiscal year 2007, the percentage of African-American staff in the SES/Senior Level (SL) increased from 7.1 percent to 11.6 percent, and at the Band III level the percentages increased from 6.7 percent to 10.8 percent. Furthermore, the percentages of African-Americans in senior management positions at GAO compare favorably to the governmentwide percentages. While the percentage of African-Americans at the SES/SL level at GAO was lower than the governmentwide percentage in 2000, by September 2006, the GAO percentage had increased and exceeded the governmentwide percentage. At the Band III/GS-15 level, the percentage of African-American staff at GAO exceeded the governmentwide percentage in 2000 as well as in 2006. Nonetheless, as an agency that leads by example, additional steps should be taken.
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The Coast Guard, a maritime military service within DHS, has a variety of responsibilities including port security and vessel escort, search-and- rescue, and polar ice operations. To carry out these and other responsibilities, the Coast Guard operates a number of vessels, aircraft, and information technology programs. The Coast Guard intends to further meet these responsibilities through ongoing efforts to modernize or replace assets through the Deepwater program. The Coast Guard's current acquisition portfolio, at $27 billion, includes 17 major acquisition programs and projects and is managed by the Coast Guard Acquisition Directorate, CG-9. Major acquisitions--level I and level II--have life-cycle cost estimates equal to or greater than $1 billion (level I) or from $300 million to less than $1 billion (level II). Major acquisition programs are to receive oversight from DHS's acquisition review board, which is responsible for reviewing acquisitions for executable business strategies, resources, management, accountability, and alignment to strategic initiatives. The board also supports the Acquisition Decision Authority in determining the appropriate direction for an acquisition at key acquisition decision events. At each Acquisition Decision Event, the Acquisition Decision Authority approves acquisitions to proceed through the acquisition life-cycle phases upon satisfaction of applicable criteria. Additionally, the Coast Guard and other DHS components have Component Acquisition Executives responsible in part for managing and overseeing their respective acquisition portfolios. DHS has a four-phase acquisition process: (1) Need phase--Define a problem and identify the need for a new acquisition; (2) Analyze/Select phase--Identify alternatives and select the best option; (3) Obtain phase--Develop, test, and evaluate the selected option and determine whether to approve production; and (4) Produce/Deploy/Support phase--Produce and deploy the selected option and support it throughout the operational life cycle. Table 1 provides further information about the Coast Guard major acquisition programs. Since 2001, we have reviewed Coast Guard acquisition programs and have reported to Congress, DHS, and the Coast Guard on the risks and uncertainties inherent in its acquisitions. In our June 2010 report on selected DHS major acquisitions, we found that acquisition cost estimates increased by more than 20 percent in five of the Coast Guard's six major programs we reviewed. For example, the National Security Cutter's acquisition cost estimate grew from an initial figure of $3.45 billion to $4.75 billion from 2006 to 2009--a 38 percent increase. Moreover, five of six programs faced challenges due to unapproved or unstable baseline requirements, and all six programs experienced schedule delays. The Rescue 21 search-and-rescue program, for example, had both unapproved or unstable baseline requirements and schedule delays. Several of our reports have focused on the Coast Guard's Deepwater acquisition program. Most recently, in our July 2010 report on the program, we found that the Coast Guard had generally revised its acquisition management policies to align with DHS directives, was taking steps to address acquisition workforce needs, and was decreasing its dependence on the Integrated Deepwater Systems contractor by planning for alternate vendors for some assets, and to award and manage work outside of the Integrated Coast Guard Systems contract for other assets. We also have ongoing work on the status of the Deepwater program that is related but complementary to this report and will result in a separate published report later this year. The Coast Guard updated its overarching acquisition policy since we last reported in July 2010 to better reflect best practices and respond to our prior recommendations, and to more closely align its policy with the DHS Acquisition Management Directive Number 102-01. For example, in November 2010, the Coast Guard revised its Major Systems Acquisition Manual, which establishes policy and procedures, and provides guidance for major acquisition programs. Revisions included a list of the Executive Oversight Council's roles and responsibilities; aligning roles and responsibilities of independent test authorities to DHS standards, which satisfied one of our prior recommendations; a formal acquisition decision event before a program receives approval for low-rate initial production, which addresses one of our prior recommendations; and a requirement to present an acquisition strategy at a program's first formal acquisition decision event. The Coast Guard's Blueprint for Continuous Improvement (Blueprint) was created after the Coast Guard began realigning its acquisition function in 2007 and is designed to provide strategic direction for acquisition improvements. The Blueprint uses GAO's Framework for Assessing the Acquisition Function at Federal Agencies and the Office of Federal Procurement Policy's Guidelines for Assessing the Acquisition Function as guidance, but also includes quantitative and qualitative measures important to the acquisitions process. Through these measures, the Coast Guard plans to gain a clearer picture of its acquisition organization's health. The Blueprint was revised in October 2010 to formalize the acquisition directorate's integration with the Coast Guard's mission support structure and includes plans to annually evaluate the Blueprint's measures. The Coast Guard developed the Blueprint as a top-level planning document to provide acquisition process objectives and strategic direction as well as to establish action items, but DHS's Inspector General expressed concern that the agency did not prioritize action items and consider the effects of delayed completion of action items on subsequent program outcomes. For example, the 2010 Inspector General report found that by the end of fiscal year 2009, 23 percent of assigned action item completion dates slipped without determining the effect on acquisition improvements. In response to the Inspector General's report, the Coast Guard has taken steps to prioritize its action items; however, it is too soon to tell the outcome of these actions. These policies were updated to align with DHS guidance and reflect best practices. Coast Guard officials also attribute acquisition reforms to the Coast Guard's efforts to assume responsibilities for all major acquisition programs. We previously reported in 2009 that the Coast Guard acknowledged its need to define systems integrator functions and assign them to Coast Guard stakeholders as it assumed the systems integrator role. As a result, the Coast Guard established new relationships among its directorates to assume control of key systems integrator roles and responsibilities formerly carried out by the contractor. For example, according to Coast Guard officials, the Coast Guard formally designated certain directorates as technical authorities responsible for establishing, monitoring, and approving technical standards for all assets related to design, construction, maintenance, logistics, C4ISR, life-cycle staffing, and training. In addition, the Coast Guard is developing a Commandant's Instruction to further institutionalize the roles and responsibilities for Coast Guard's acquisition management. Beyond updating its major acquisition policies and guidance, the Coast Guard Acquisition Directorate also increased the involvement of its Executive Oversight Council to facilitate its acquisition process. Coast Guard officials stated that the council, initially established in 2009 with an updated charter in November 2010, provides a structured way for flag-level and senior executive officials in the requirements, acquisition, and resources directorates, among others, to discuss programs and provide oversight on a regular basis. As the Coast Guard began assuming the system integrator function from the Deepwater contractor in 2007, it believed it needed a forum to make trade-offs and other program decisions especially in a constrained budget environment; according to officials, the council was established in response to that need. Coast Guard officials noted that major programs are now required to brief the formalized council annually, prior to milestones, and on an ad hoc basis when major risks are identified. According to Coast Guard documentation, from fiscal year 2010 through the first quarter of fiscal year 2011, the council met over 40 times to discuss major programs. For example, the council held more than five meetings to discuss the Offshore Patrol Cutter's life-cycle costs and system requirements, among other issues. The discussions are captured at a general level in meeting minutes and sent to the Coast Guard Acquisition Directorate for approval. The Coast Guard has made progress in reducing its acquisition workforce vacancies since April 2010. As of November 2010, the percentage of vacancies dropped from about 20 percent to 13 percent or from 190 to 119 unfilled billets out of 951 total billets. Acquisition workforce vacancies have decreased, but program managers have ongoing concerns about staffing program offices. For example, the HH-65 program office has funded and filled 10 positions out of an identified need for 33 positions. Although the program has requested funding for an additional 8 billets for fiscal year 2012, due to the timing of the request, the funding outcome is unknown as of April 2011. Similarly, the Interagency Operations Center program is another office affected by acquisition workforce shortages. According to the Coast Guard, as of March 2011, the program office has funded and filled 11 positions out of the 27 needed. For some of these positions, the Interagency Operations Center program uses staff from the Coast Guard's Command, Control, and Communications Engineering Center for systems engineering support; however, workforce shortages remain. Program officials may face additional challenges in hiring staff depending on the location of the vacancies within the program's management levels. For example, a program official stated that vacant supervisory positions must be filled first before filling remaining positions because lower-level positions would not have guidance for their activities. Figure 1 shows the status of the Coast Guard's acquisition workforce vacancies as of November 2010. We reported in January 2010 that the Coast Guard faces difficulty in identifying critical skills, defining staffing levels, and allocating staff to accomplish its diverse missions. An official Coast Guard statement from 2009 partially attributed the challenge of attracting staff for certain positions to hiring competition with other federal agencies. In February 2010, we reported on the Coast Guard's long-standing workforce challenges and evaluated the agency's efforts to address these challenges. For example, we reported that while the Coast Guard developed specific plans to address its human capital challenges, the fell short of identifying gaps between mission areas and personn plans el needed. The Coast Guard has taken steps to outline specific areas of workforce needs, including developing a human-capital strategic plan and commissioning a human-capital staffing study published in August 2010, but program managers continue to state concerns with the Coast Guard's ability to satisfy certain skill areas. For example, the August 2010 human- capital staffing study stated that program managers reported concerns with staffing adequacy in program management and technical areas. To make up for shortfalls in hiring systems engineers and other acquisition workforce positions for its major programs, the Coast Guard uses support contractors. As of November 2010, support contractors constituted 25 percent of the Coast Guard's acquisition workforce. While we have stated the risks in using support contractors, we reported in July 2010 that the Coast Guard acknowledged the risks of using support contractors and had taken steps to address these risks by training its staff to identify potential conflicts of interest and by releasing guidance regarding the role of the government and appropriate oversight of contractors and the work that they perform. The Coast Guard has also made progress ensuring that program management staff received training and DHS certifications to manage major programs. For example, according to Coast Guard officials, in December 2010, the Coast Guard was 100 percent compliant with DHS personnel certification requirements for program-management positions. We have previously reported that having the right people with the right skills is critical in ensuring that the government achieves the best value for its spending. Most of the Coast Guard's major acquisition programs continue to experience challenges in program execution, schedule, and resources. For program execution, the Coast Guard reported in December 2010 that 12 of its 17 major programs face moderate to significant risk in one or more execution metrics such as technical maturity or logistics, which required management attention. Of these, seven programs have carried these risks for 1 year or more. For example, the HC-130J program has reported logistics-assessment risks requiring management attention for 3 years. Regarding schedule challenges, the Coast Guard reported in December 2010 that 10 of its 12 major programs with approved acquisition program baselines exceeded schedule objective or threshold parameters. For example, the Maritime Patrol Aircraft HC-144A program exceeded its schedule because it delayed a production decision in order to complete initial operational testing and evaluation per a DHS acquisition review board decision. As this program was already 4 years behind schedule, added schedule delays may require the Coast Guard to extend a legacy aircraft's service life, which may incur additional costs to sustain it. Major Coast Guard programs also face resource risks. As of December 2010, 12 of the Coast Guard's 17 major programs face moderate to significant risk in project resource metrics such as budgeting and funding. For 9 of these programs, risks have been reported for more than 1 year. In addition, four Coast Guard programs, HC-130H aircraft, Nationwide Automatic Identification System, C4ISR, and HH-60 helicopter, have notified DHS of acquisition program baseline breaches. The Coast Guard's unrealistic acquisition budget planning also exacerbates the challenges Coast Guard acquisition programs face. We have previously reported that the Coast Guard faced risks from unrealistic funding levels and that its reliance on sustained high funding levels in an environment of budget constraints puts program outcomes at risk if projected funds are not received. In December 2010, the Coast Guard reported that 8 of the 17 major program offices were updating their acquisition program baselines due in part to reduced funding in the fiscal year 2011-2015 Capital Investment Plan. According to Coast Guard acquisition officials, when a Capital Investment Plan has funding levels that are lower than what a program planned to receive, then the program is more likely to have schedule breaches and other problems. For example, in November 2010 the HC-130H program reported a schedule breach to DHS due in part to reduced Capital Investment Plan funding projections for fiscal years 2011-2015 and had to revise its schedule parameters to reflect the lower projected funding levels. This also occurred in the Nationwide Automatic Identification System major acquisition program. The program had an estimated cost growth of approximately $32 million due to reduced out-year funding in the fiscal year 2009-2013 plan, and after further funding reductions in the fiscal year 2011-2015 plan, the program subsequently deferred efforts to update the program baseline. According to Coast Guard officials, the Coast Guard is currently reevaluating the program's system requirements and associated project cost, schedule, and performance objectives. In 2011, DHS acquisition oversight officials informed the Coast Guard that future breaches in other programs would be almost inevitable as funding resources decrease. Figure 2 illustrates Coast Guard major acquisition programs facing execution, schedule, resource, and budget planning challenges as of December 2010. Progr experiencing inability de to redced projected fnding level. The Coast Guard developed several action items in its October 2010 update to its Blueprint for Continuous Improvement to address budget planning challenges. According to Coast Guard acquisition officials, the most important step is for Coast Guard leadership to establish a priority list for the major programs based on actual acquisition budgets received in prior years, and then to make trade-offs between programs to fit within historical budget constraints. The Coast Guard developed an action item to assess the percentage of program funding profiles that fit into the Capital Investment Plan. Specifically, the Blueprint indicates that the Coast Guard will establish and implement a process to compare and report the extent to which each individual program's funding fits into the Capital Investment Plan funding parameters. Further, the Coast Guard plans to analyze and regularly report gaps in these funding profiles to the Coast Guard's acquisition leadership. The Coast Guard also identified the need to promote funding stability in the Capital Investment Plan and intends to evaluate that effort by establishing a mechanism and baseline to measure Capital Investment Plan stability by comparing project funding against previous, current, and future 5-year Capital Investment Plans. However, while the Coast Guard officials stated their intention to use these metrics to elevate the priority and funding issues to leadership, it is too soon to tell the outcome of these steps. In a separate ongoing review, we are further assessing the Coast Guard's management of program costs and other budget issues. According to the Coast Guard, it currently has 81 interagency agreements, memorandums of agreement, and other arrangements in place primarily with DOD agencies to support its major acquisition programs. Each of the 17 major Coast Guard acquisition programs leverages DOD support, primarily from the Navy. According to Coast Guard officials, they rely on DOD experience and technical expertise because they both procure similar major equipment, including ships and aircraft. Examples range from acquiring products and services from established DOD contracts to using engineering and testing expertise from the Navy. Some major programs also receive assistance from other DHS components or other agencies on a more limited basis. For example, the Rescue 21 program partnered with the Federal Aviation Administration at two sites to use its land and towers to install search and rescue capabilities. The Secretary of Homeland Security is authorized to enter into agreements with other executive agencies and to transfer funds as required. This authority has been delegated to the Commandant of the Coast Guard. Interagency agreements include a description of the general terms and conditions that govern the relationship between agencies, and specific information on the requesting agencies' requirement to establish a need and to authorize the transfer of funds. According to Coast Guard officials, Coast Guard interagency agreements with DOD typically include a memorandum of agreement or a memorandum of understanding with a DOD agency. A memorandum of agreement is a document that defines the responsibilities of, and actions to be taken by, each of the parties so that their goals will be accomplished. A memorandum of understanding is a document that describes broad concepts of mutual understanding, goals, and plans shared by the parties. Interagency agreements also are typically funded by military interdepartmental purchasing requests in which the requiring agency must include a description of the end items purchased and the funding data for acquiring these supplies or services. Interagency agreements can be for direct, assisted, or other than assisted acquisitions. In direct acquisitions, the requesting agency places orders against another agency's indefinite-delivery contracts, such as task and delivery order contracts, while assisted acquisitions use the acquisition services of a servicing agency. Other than assisted acquisitions utilize the internal expertise of a servicing agency. In 2001, the Chief of Naval Operations and the Commandant of the Coast Guard agreed to build a national fleet that combines Navy and Coast Guard forces to maximize effectiveness across all naval and maritime missions. More than 50 of the Coast Guard's agreements with DOD leverage support from the Department of the Navy. Moreover, Coast Guard and Navy officials have noted an increase in Navy involvement to support the Coast Guard's major acquisition programs since the Coast Guard assumed the Deepwater lead systems integrator role in 2007. Examples of updated support agreements in place with Navy entities include the following: A 2011 interagency agreement with the Naval Sea Systems Command (NAVSEA) to support Coast Guard acquisition programs in program management, design, technical assistance, cost estimating, and other support. A 2010 memorandum of agreement with the Navy's Commander, Operational Test and Evaluation Forces, allows the Coast Guard to request the Navy to serve as the operational test authority for Coast Guard major acquisition programs. Two memorandums of agreement / interagency agreements in 2009 with the Naval Air Systems Command (NAVAIR), which allow Coast Guard major acquisition programs to leverage Navy services and aviation program office assistance including: planning, technical assistance, cost estimation, warfare modeling and analysis, requirements definition, risk management, and integrated logistics support. A 2009 memorandum of agreement with the Navy's Space and Naval Warfare Systems Command Pacific that allows Coast Guard programs to request and obtain technical and other support services for the research and development, design, engineering, integration, acquisition, test and evaluation, installation, and life-cycle support of Coast Guard systems. Most Coast Guard major acquisition programs leverage Navy expertise, in some way, to support a range of testing, engineering, and other program activities. For example, the Fast Response Cutter program used Naval Surface Warfare Center Dahlgren services to help with topside design and electromagnetic testing. In another instance, the Coast Guard used Naval Surface Warfare Center Carderock division to test and evaluate boats and provide technical expertise for the Response Boat-Medium program. According to Coast Guard officials, the Coast Guard also collaborated with Navy cost estimators and contracting staff to prepare for negotiations to award the November 2010 production contract for the fourth National Security Cutter. In another instance, the Navy provided engineering and technical support for the Coast Guard's MH-60 helicopter program. Further, the Navy's Operational Test and Evaluation Command is currently supporting testing activities for 11 Coast Guard programs. According to Coast Guard and DOD officials, the Coast Guard has achieved cost savings from using DOD contracts through quantity discounts and reduced unit prices when Coast Guard orders are combined with orders from other DOD departments. Additional benefits include reductions in contracting administrative costs, and expedited processing times. According to Coast Guard officials, examples include the following: The Coast Guard's HC-130J program coordinated C-130J contracting efforts through the Air Force acquisition office's contract rather than contracting directly with the aircraft manufacturer and benefited from discounts in ordering along with other DOD agencies. In addition, by using the standard configuration of the C-130J common among U.S. government users, the Coast Guard benefited from cost savings in aircraft sustainment. The Coast Guard obtained Navy systems, such as the SPQ-9B Radar, at a reduced cost for Coast Guard cutter programs. The National Security Cutter program used Navy contracts to provide and install ultra high frequency radios and electronic warfare systems. The Rescue 21 program placed search-and-rescue sensors on Army, Air Force, Navy, and Marine Corps facilities, which reduced recurring Coast Guard costs. The HH-65 program office reduced procurement costs by approximately 12 percent or $25,000 by purchasing a range of subsystems and components, such as a cockpit display unit, from an Army contract. The Coast Guard has also identified opportunities to further leverage DOD resources. In 2009, the Navy and Coast Guard conducted a commonality study that identified, among other things, 17 commonality opportunities with near term potential for mutual benefit that required little or no up- front investment to execute. Typically they require only the modification of a policy document. Key opportunities identified included the following: Acquisition personnel exchanges with NAVSEA to promote collaboration and leveraging of cross-service capabilities in the acquisition community. Leveraging existing Navy logistics management systems during the development of the Coast Guard Logistics Information Management System to reduce developmental costs. Coast Guard program managers largely rely on informal contacts to learn about the agreements in place with DOD to support program activities. Many Coast Guard program managers we met with indicated that they became aware of DOD resources that could be leveraged for their programs through contacts with their DOD counterparts or by other means. According to Coast Guard officials, program managers also learn about another agency's expertise or resources through word of mouth, market research, head of contracting activity discussions, conferences, or networking channels. While this interaction has led to Coast Guard programs successfully leveraging DOD resources, Navy officials told us that in the past Navy leadership was not always fully aware of support being provided to the Coast Guard, and as such was unable to ensure that the right Navy entities were conducting the work and that the results provided to the Coast Guard met Navy standards. NAVAIR and NAVSEA have each established a liaison assigned to the Coast Guard to facilitate information and knowledge sharing about Navy capabilities and contracts available to Coast Guard programs. For example, NAVAIR and NAVSEA liaisons serve as Coast Guard on-site experts, engage in dialogue with Coast Guard, and work to increase Coast Guard awareness of Navy resources. However, without current knowledge of existing interagency agreements, Coast Guard program managers may not be aware of the liaisons and their role in working with the Navy. Relying on informal contacts may also present missed opportunities for greater cooperation and leveraging of DOD resources. For example, the Coast Guard has 50 or more agreements with the Navy, some of which are broad agreements with major Navy commands such as NAVSEA or NAVAIR, while others are specific agreements with Navy agencies such as the Naval Ordnance Safety and Security Office, Naval Surface Warfare Center Dahlgren Division, and the Naval Supply Systems Command. Interagency agreements may call for a designated point of contact for Coast Guard program managers to contact, but program managers do not have a systematic way to gain insight into the details of the agreements. According to Coast Guard contracting officials, the Coast Guard has recently begun to develop a database of interagency agreements with DOD and other agencies that Coast Guard programs can leverage to support acquisition activities. However, due to limited attention devoted to this issue, Coast Guard officials noted that only 5 of the approximately 81 interagency agreements are in a data system accessible to program staff. These officials also noted that a database is needed to avoid duplicative efforts and to ensure program staff are aware of existing agreements, including the latest versions of agreements specifying updated products and services available. The Coast Guard has continued to make progress in strengthening its capabilities to manage its acquisition portfolio by updating acquisition policies and practices as well as reducing vacancies in the acquisition workforce. As the Coast Guard improves its acquisition management capabilities, it may find that adjustments and changes will be necessary in light of how well its major acquisition programs are progressing. The Coast Guard has leveraged DOD contracts to help support its major acquisition programs, but reliance on informal contacts may also present missed opportunities for greater cooperation and leveraging of DOD resources to help save scarce resources, manage programs risks, and support positive acquisition outcomes. To provide Coast Guard program management staff with greater access to updated information about agreements in place with DOD to facilitate leveraging support for major acquisition programs, we recommend that the Commandant of the Coast Guard take steps to ensure all interagency agreements are captured in a database or other format and make this information readily accessible to program staff. We provided a draft of this report to the Coast Guard, DHS, and DOD. DHS provided oral comments stating that it concurred with the recommendation. The Coast Guard and DOD provided technical comments, which we incorporated into the report as appropriate. We are sending copies of this report to interested congressional committees, the Secretary of Homeland Security, the Secretary of Defense, and the Commandant of the Coast Guard. This report will also be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions about this report or need additional information, 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. Staff acknowledgments are provided in appendix II. The Coast Guard Authorization Act of fiscal year 2010, as amended, specified that "Within 180 days after the date of enactment of the Coast Guard Authorization Act for fiscal year 2010, the Comptroller General of the United States shall transmit a report to the appropriate congressional committees that--(1) contains an assessment of current Coast Guard acquisition and management capabilities to manage Level 1 and Level 2 acquisitions; (2) includes recommendations as to how the Coast Guard can improve its acquisition management, either through internal reforms or by seeking acquisition expertise from the Department of Defense (DOD); and (3) addresses specifically the question of whether the Coast Guard can better leverage Department of Defense or other agencies' contracts that would meet the needs of Level 1 or Level 2 acquisitions in order to obtain the best possible price." To determine the Coast Guard's current management capabilities for its major acquisition programs, we evaluated the Coast Guard's acquisition policies and processes, status of its acquisition workforce, and execution of its major programs since we last reported on the Coast Guard's acquisitions and acquisition management in June and July 2010. We reviewed Coast Guard acquisition governance, policy, and process documents such as the Coast Guard's Major Systems Acquisition Manual and Blueprint for Continuous Improvement that have been issued, implemented, or updated since July 2010. We also interviewed Coast Guard and other Department of Homeland Security (DHS) acquisition officials to analyze and explain the factors behind the acquisition governance changes as well as how changes have been implemented to date through review of meeting briefings, minutes, and subsequent decision memos. To evaluate the Coast Guard's status of its acquisition workforce, we reviewed Coast Guard information on government, contractor, and vacant positions to identify any progress made in reducing acquisition workforce vacancies and filling critical positions since July 2010 as well as any positions that continue to be challenging to fill. Additionally, we obtained and analyzed Coast Guard program staff information to determine specific programs experiencing staffing shortfalls and conducted interviews to supplement Coast Guard information and determine the extent to which staffing shortfalls affect program execution. To evaluate the Coast Guard's execution of its major programs we analyzed information on the status of those programs since July 2010 through reviews of general acquisition status reports (e.g., Quarterly Acquisition Reports to Congress and Quarterly Performance Reports), program briefings, and acquisition process documents (e.g., Acquisition Program Baselines) to determine how many programs have cost, schedule, or performance issues based on criteria in the Major Systems Acquisition Manual. Further, we analyzed additional program performance, schedule, cost, and funding information from the Capital Investment Plan, breach memos, and acquisition decision memos to identify funding stability issues and the extent to which funding issues were factors leading to breaches in established program baselines. We also corroborated program information with interviews of Coast Guard program staff and interviews with external DHS stakeholders, such as acquisition oversight and cost analysis staff in the acquisition program management directorate. Moreover, we examined and identified best practices from prior GAO reporting on Coast Guard funding stability as a factor in program continuity and successful outcomes. To determine the extent to which the Coast Guard leverages DOD and other agency contracts or expertise to support its major acquisition programs, we examined the Coast Guard's interagency agreements and identified the agencies the Coast Guard most commonly used to support major acquisition programs. On the basis of this analysis, we interviewed Coast Guard officials, as well as DOD, Navy, and Air Force officials about resources provided to support Coast Guard major acquisition programs. We also discussed with Coast Guard officials any current efforts to update the agreements. Using this analysis, we identified examples of cost savings and other benefits for selected Coast Guard acquisitions. Further, we reviewed relevant GAO and DHS Inspector General reports. We corroborated testimonial information from interviews with Coast Guard acquisition and program staff by reviewing contracts, agreements, and other documents that show the amount of resources expended by the Coast Guard for DOD-provided goods and services and by interviewing DOD officials at the Naval Sea Systems Command, Naval Air Systems Command, Space and Naval Warfare Systems Commands, and the Department of the Air Force. We conducted this performance audit from January 2011 to April 2011 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. Other individuals making key contributions to this report were John Neumann, Assistant Director; William Russell; Jessica Drucker; Sylvia Schatz; Kenneth Patton; and Morgan Delaney Ramaker. Coast Guard: Deepwater Requirements, Quantities, and Cost Require Revalidation to Reflect Knowledge Gained. GAO-10-790. Washington, D.C.: July 27, 2010. Department of Homeland Security: Assessments of Selected Complex Acquisitions. GAO-10-588SP. Washington, D.C.: June 30, 2010. Coast Guard: Observations on the Requested Fiscal Year 2011 Budget, Past Performance, and Current Challenges. GAO-10-411T. Washington, D.C.: February 25, 2010. Coast Guard: Better Logistics Planning Needed to Aid Operational Decisions Related to the Deployment of the National Security Cutter and Its Support Assets. GAO-09-497. Washington, D.C.: July 17, 2009. Coast Guard: As Deepwater Systems Integrator, Coast Guard Is Reassessing Costs and Capabilities but Lags in Applying Its Disciplined Acquisition Approach. GAO-09-682. Washington, D.C.: July 14, 2009. Coast Guard: Observations on Changes to Management and Oversight of the Deepwater Program. GAO-09-462T. Washington, D.C.: March 24, 2009. Coast Guard: Change in Course Improves Deepwater Management and Oversight, but Outcome Still Uncertain. GAO-08-745. Washington, D.C.: June 24, 2008. Coast Guard: Status of Selected Assets of the Coast Guard's Deepwater Program. GAO-08-270R. Washington, D.C.: March 11, 2008. Coast Guard: Status of Efforts to Improve Deepwater Program Management and Address Operational Challenges. GAO-07-575T. Washington, D.C.: March 8, 2007. Coast Guard: Status of Deepwater Fast Response Cutter Design Efforts. GAO-06-764. Washington, D.C.: June 23, 2006. Coast Guard: Changes to Deepwater Plan Appear Sound, and Program Management Has Improved, but Continued Monitoring Is Warranted. GAO-06-546. Washington, D.C.: April 28, 2006. Coast Guard: Progress Being Made on Addressing Deepwater Legacy Asset Condition Issues and Program Management, but Acquisition Challenges Remain. GAO-05-757. Washington, D.C.: July 22, 2005. Coast Guard: Preliminary Observations on the Condition of Deepwater Legacy Assets and Acquisition Management Challenges. GAO-05-651T. Washington, D.C.: June 21, 2005. Coast Guard: Deepwater Program Acquisition Schedule Update Needed. GAO-04-695. Washington, D.C.: June 14, 2004. Contract Management: Coast Guard's Deepwater Program Needs Increased Attention to Management and Contractor Oversight. GAO-04-380. Washington, D.C.: March 9, 2004. Coast Guard: Actions Needed to Mitigate Deepwater Project Risks. GAO-01-659T. Washington, D.C.: May 3, 2001.
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The Coast Guard manages a broad $27 billion major acquisition portfolio intended to modernize its ships, aircraft, command and control systems, and other capabilities. GAO has reported extensively on the Coast Guard's significant acquisition challenges, including project challenges in its Deepwater program. GAO's prior work on the Coast Guard acquisition programs identified problems in costs, management, and oversight, but it also recognized several steps the Coast Guard has taken to improve acquisition management. In response to the Coast Guard Authorization Act of 2010, GAO (1) assessed Coast Guard capabilities to manage its major acquisition programs, and (2) determined the extent to which the Coast Guard leverages Department of Defense (DOD) and other agency contracts or expertise to support its major acquisition programs. GAO reviewed Department of Homeland Security (DHS) and Coast Guard acquisition documents, GAO and DHS Inspector General reports, and selected DOD contracts; and interviewed Coast Guard, DHS, and DOD officials The Coast Guard continues to strengthen its acquisition management capabilities by updating acquisitions management policies and reducing acquisition workforce vacancies, but significant challenges remain. In November 2010, the Coast Guard updated its acquisition policy to further incorporate best practices and respond to prior GAO recommendations, such as aligning independent testing requirements with DHS policies and formalizing the Executive Oversight Council to review programs and provide oversight. Additionally, the Coast Guard reduced acquisition workforce vacancies from 20 to 13 percent from April to November 2010, but shortfalls persist in hiring staff for certain key areas such as systems engineers, and some programs continue to be affected by unfilled positions. While the Coast Guard has increased its acquisition management capabilities, most Coast Guard major acquisition programs have ongoing cost, schedule, or program execution risks. Additionally, unrealistic budget planning for the Coast Guard's acquisition portfolio exacerbates these challenges and will likely lead to more program cost and schedule issues. The Coast Guard has several actions under way to further improve acquisition policies and workforce shortfalls, as well as address budget planning issues, but it is too soon to tell whether the actions will be effective. The Coast Guard leveraged DOD contracts to purchase products and services or to gain expertise in support of major acquisition programs. The Coast Guard has entered into approximately 81 memorandums of agreement and other arrangements primarily with DOD, which has experience and technical expertise in purchasing major equipment such as ships and aircraft, to support its major acquisition programs. Examples range from acquiring products and services from established DOD contracts to obtaining engineering and testing expertise from the Navy. According to the Coast Guard, leveraging DOD contracts has led to cost savings for Coast Guard acquisition programs. For instance, the Coast Guard received price discounts for C-130J aircraft by coordinating contracting efforts with the Air Force rather than contracting directly with the aircraft manufacturer. In another example, Coast Guard officials used Navy cost estimators and contracting staff in the November 2010 production contract for the National Security Cutter. At this point, Coast Guard program managers rely on informal contacts to learn about the agreements in place to support program activities, thus potentially limiting staff knowledge of DOD resources available. Coast Guard contracting officials only recently recognized the need to make DOD agreements available to program staff, but due to limited attention to this issue, only about 5 of the 81 agreements are currently accessible to program managers. GAO recommends that the Coast Guard take steps to ensure program staff have access to interagency agreements with DOD. DHS concurred with the recommendation.
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The FEHBP is the largest employer-sponsored health insurance program in the country. Through it, about 8 million federal employees, retirees, and their dependents received health coverage--including for prescription drugs--in 2008. Coverage is provided under competing plans offered by multiple private health insurers under contract with OPM, which administers the program, subject to applicable requirements. In 2009, 269 health plan options were offered by participating insurers, 10 of which were offered nationally while the remaining health plan options were offered in certain geographic regions. According to OPM, plans must cover all medically necessary prescription drugs approved by the Food and Drug Administration (FDA), but plans may maintain formularies that encourage the use of certain drugs over others. Enrollees may obtain prescriptions from retail pharmacies that contract with the plans or from mail-order pharmacies offered by the plans. In 2005, FEHBP prescription drug spending was an estimated $8.3 billion. Medicare--the federal health insurance program that serves about 45 million elderly and disabled individuals--offers an outpatient prescription drug benefit known as Medicare Part D. This benefit was established by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) beginning January 1, 2006. As of February 2009, Part D provided federally subsidized prescription drug coverage for nearly 27 million beneficiaries. The Centers for Medicare & Medicaid Services (CMS), part of the Department of Health and Human Services (HHS), manages and oversees Part D. Medicare beneficiaries may choose a Part D plan from multiple competing plans offered nationally or in certain geographic areas by private sponsors, largely commercial insurers, under contract with CMS. Part D plan sponsors offer drug coverage either through stand-alone prescription drug plans for beneficiaries in traditional fee-for-service Medicare or through Medicare managed care plans, known as Medicare Advantage. In 2009, there were over 3,700 prescription drug plans offered. Under Medicare Part D, plans can design their own formularies, but each formulary must include drugs within each therapeutic category and class of covered Part D drugs. Enrollees may obtain prescriptions from retail pharmacies that contract with the plans or from mail-order pharmacies offered by the plans. Medicare Part D spending is estimated to be about $51 billion in 2009. The VA pharmacy benefit is provided to eligible veterans and certain others. As of 2006, about 8 million veterans were enrolled in the VA system. In general, medications must be prescribed by a VA provider, filled at a VA pharmacy, and listed on the VA national drug formulary, which comprises 570 categories of drugs. In addition to the VA national formulary, VA facilities can establish local formularies to cover additional drugs. VA may provide nonformulary drugs in cases of medical necessity. In 2006, VA spent an estimated $3.4 billion on prescription drugs. The DOD pharmacy benefit is provided to TRICARE beneficiaries, including active duty personnel, certain reservists, retired uniformed service members, and dependents. As of 2009, there were about 9.4 million eligible TRICARE beneficiaries. In addition to maintaining a formulary, DOD provides options for obtaining nonformulary drugs. Beneficiaries can obtain prescription drugs through a network of retail pharmacies, nonnetwork retail pharmacies, DOD military treatment facilities, and DOD's TRICARE Mail-Order Pharmacy. In 2006, DOD spent $6.2 billion on prescription drugs. Medicaid, a joint federal-state program, finances medical services for certain low-income adults and children. In fiscal year 2008, approximately 63 million beneficiaries were enrolled in Medicaid. While some benefits are federally required, outpatient prescription drug coverage is an optional benefit that all states have elected to offer. Drug coverage depends on the manufacturer's participation in the federal Medicaid drug rebate program, through which manufacturers pay rebates to state Medicaid programs for covered drugs used by Medicaid beneficiaries. Retail pharmacies distribute drugs to Medicaid beneficiaries and then receive reimbursements from states for the acquisition cost of the drug and a dispensing fee. Medicaid outpatient drug spending has decreased since 2006 because Medicare Part D replaced Medicaid as the primary source of drug coverage for low-income beneficiaries with coverage under both programs--referred to as dual eligible beneficiaries. In fiscal year 2008, Medicaid outpatient drug spending was $9.3 billion--including $5.5 billion as the federal share--which was calculated after adjusting for manufacturer rebates to states under the Medicaid drug rebate program. FEHBP uses competition among health plans as the primary measure to control prescription drug spending and other program costs. Under an annual "open season," enrollees may remain enrolled in the same plan or select another competing plan based on benefits, services, premiums, and other such factors. Thus, plans have the incentive to try to retain or increase their market share by providing the benefits sought by enrollees along with competitive premiums. In turn, the larger a plan's market share, the more leverage it has for obtaining favorable drug prices on behalf of its enrollees and controlling prescription drug spending. Similar to most private employer-sponsored or individually purchased health plans, most FEHBP plans contract with pharmacy benefit managers (PBMs) to help them administer the prescription drug benefit and control drug spending. In a 2003 report reviewing the use of PBMs by three plans representing about 55 percent of total FEHBP enrollment, we found that the PBMs used three key approaches to achieve savings for the health plans: negotiating rebates with drug manufacturers and passing some of the savings to the plans; obtaining drug price discounts from retail pharmacies and dispensing drugs at lower costs through mail-order pharmacies operated by the PBMs; and using other intervention techniques that reduce utilization of certain drugs or substitute other, less costly drugs. For example, under generic substitution PBMs substituted less expensive, chemically equivalent generic drugs for brand-name drugs; under therapeutic interchange PBMs encouraged the substitution of less expensive formulary brand-name drugs for more expensive nonformulary drugs within the same drug class; under prior authorization PBMs required enrollees to receive approval from the plan or PBM before dispensing certain drugs that are high cost or meet other criteria; and under drug utilization review PBMs examined prescriptions at the time of purchase or retrospectively to assess safety considerations and compliance with clinical guidelines, including appropriate quantity and dosage. The PBMs were compensated by retaining some of the negotiated savings. The PBMs also collected fees from the plans for administrative and clinical services, kept a portion of the payments from FEHBP plans for mail-order drugs in excess of the prices they paid manufacturers to acquire the drugs, and in some cases retained a share of the rebates that PBMs negotiated with drug manufacturers. While OPM does not play a role in negotiating prescription drug prices or discounts, it does attempt to limit prescription drug spending through its leverage with participating health plans in annual premium and benefit negotiations. Each year, OPM negotiates benefit and rate proposals with participating plans and announces key policy goals for the program, including those relating to spending control. For example, in preparation for benefit and rate negotiations for the 2007 plan year, OPM encouraged proposals from plans to continue to explore the appropriate substitution for higher cost drugs with lower cost therapeutic alternatives, such as generic drugs, and the use of tiered formularies or prescription drug lists. OPM also sought proposals from plans to pursue the advantages of specialty pharmacy programs aimed at reducing the high costs of infused and intravenously administered drugs. In preparation for 2010 benefit and rate negotiations, OPM reiterated its desire for proposals from plansto substitute lower cost for higher cost therapeutically equivalent drug s, adding emphasis to using evidence-based health outcome measures. Medicare Part D uses a competitive model similar to FEHBP, while other federal programs use other methods, such as statutorily mandated prices or direct negotiations with drug suppliers. Medicare Part D follows a model similar to the FEHBP by relying on competing prescription drug plans to control prescription drug spending. As with the FEHBP, during an annual open season Part D enrollees may remain enrolled in the same plan or select from among other competing plans based on benefit design, premiums, and other plan features. To attract enrollees, plans have the incentive to offer benefits that will meet beneficiaries' prescription drug needs at competitive premiums. The larger a plan's market share, the more leverage it has for obtaining favorable drug prices on behalf of its enrollees and controlling prescription drug spending. As a result, Part D plans vary in their monthly premiums, the annual deductibles, and cost sharing for drugs. Plans also differ in the drugs they cover on their formulary and the pharmacies they use. Part D uses competing sponsors to generate prescription drug savings for beneficiaries, in part through their ability to negotiate prices with drug manufacturers and pharmacies. To generate these savings, sponsors often contract with PBMs to negotiate rebates with drug manufacturers, discounts with retail pharmacies, and other price concessions on behalf of the sponsor. MMA specifically states that the Secretary of HHS may not interfere with negotiations between sponsors and drug manufacturers and pharmacies. Even though CMS is not involved in price negotiations, it attempts to determine whether beneficiaries are receiving the benefit of negotiated drug prices and price concessions when it calculates the final plan payments. Sponsors must report the price concession amounts to CMS and pass price concessions onto beneficiaries and the program through lower cost sharing, lower drug prices, or lower premiums. Similar to OPM, CMS also negotiates plan design with participating plans and announces key policy goals for the program, including those relating to spending control. For example, in preparation for 2010 benefit and rate negotiations, CMS noted that one of its goals is to establish a more transparent process so that beneficiaries will be able to better predict their out-of-pocket costs. Part D sponsors or their PBMs also use other methods to help contain drug spending similar to FEHBP plans. For example, most plans assign covered drugs to distinct tiers, each of which carries a different level of cost sharing. A plan may establish separate tiers for generic drugs and brand-name drugs--with the generic drug tier requiring a lower level of cost sharing than the brand-name drug tier. Plans may also require utilization management for certain drugs on their formulary. Common utilization management practices include requiring physicians to obtain authorization from the plan prior to prescribing a drug; step therapy, which requires beneficiaries to first try a less costly drug to treat their condition; and imposing quantity limits for dispensed drugs. Additionally, all Part D plans must meet requirements with respect to the extent of their pharmacy networks and the categories of drugs they must cover. Plan formularies generally must cover at least two Part D drugs in each therapeutic category and class, except when there is only one drug in the category or class or when CMS has allowed the plan to cover only one drug. CMS has also designated six categories of drugs of clinical concern for which plans must cover all or substantially all of the drugs. While FEHBP and Medicare Part D use competition between health plans to control prescription drug spending, VA and DOD rely on statutorily mandated prices and discounts and further negotiations with drug suppliers to obtain lower prices for drugs covered on their formularies. VA and DOD have access to a number of prices to consider when purchasing drugs, paying the lowest available. Federal Supply Schedule (FSS) prices. VA's National Acquisition Center negotiates FSS prices with drug manufacturers, and these prices are available to all direct federal purchasers. FSS prices are intended to be no more than the prices manufacturers charge their most-favored nonfederal customers under comparable terms and conditions. Under federal law, drug manufacturers must list their brand-name drugs on the FSS to receive reimbursement for drugs covered by Medicaid. All FSS prices include a fee of 0.5 percent of the price to fund VA's National Acquisition Center. Blanket purchase agreements and other national contracts. B purchase agreements and other national contracts with drug manufacturers allow VA and DOD--either separately or jointly--to negotiate prices below FSS prices. The lower prices may depend on the volume of specific drugs being purchased by particular facilities, such as VA or military hospitals, or on being ass OD's respective national formularies. D igned preferred status on VA's and In a few cases, individual VA and DOD medical centers have obtained lower prices through local agreements with suppliers than they could through the national contracts, FSS prices, or federal ceiling prices. In addition, VA's and DOD's use of formularies, pharmacies, and prime vendors can further affect drug prices and help control drug spending. Both VA and DOD use their own national, standard formulary to obtain more competitive prices from manufacturers that have their drugs listed on the formulary. VA and DOD formularies also encourage the substitution of lower cost drugs determined to be as or more effective than hig drugs. VA and DOD use prime vendors, which are preferred drug distributors, to purchase drugs from manufacturers and deliver the drugs to VA or DOD facilities. VA and DOD receive discounts from their prime vendors that also reduce the prices that they pay for drugs. For DOD, the discounts vary among prime vendors and the areas they serve. As of June 2004, VA's prime vendor discount was 5 percent, while DOD's discounts averaged about 2.9 percent within the United States. Additionally, si to FEHBP and Medicare Part D, DOD uses utilization management methods to limit drug spending including prior authorization, dispensin limitations, and higher cost sharing for nonformulary drugs and drugs dispensed at retail pharmacies. Unlike VA and DOD, Medicaid programs do not negotiate drug prices with il manufacturers to control prescription drug spending, but reimburse reta pharmacies for drugs dispensed to beneficiaries at set prices. CMS sets aggregate payment limits--known as the federal upper limit (FUL)--for certain outpatient multiple-source prescription drugs. CMS also provides guidelines regarding drug payment. States are to pay pharmacies the lower of the state's estimate of the drug's acquisition cost to the pharmacy, pl a dispensing fee, or the pharmacy's usual and customary charge to the general public; for certain d costs may apply if lower. rugs the FUL or the state maximum allowable In addition to these retail pharmacy reimbursements, Medicaid programs also control prescription drug spending through the Medicaid drug rebate program. Under the drug rebate program, drug manufacturers are required to provide quarterly rebates for covered outpatient prescription drugs purchased by state Medicaid programs. Under the rebate program, states take advantage of the prices manufacturers receive for drugs in the commercial market that reflect the results of negotiations by private payers such as discounts and rebates. For brand-name drugs, the rebates are based on two price benchmarks per drug that manufacturers report to CMS: best price and average manufacturer price (AMP). The relationship between best price and AMP determines the unit rebate amount and thus the overall size of the rebate that states receive. The basic unit rebate amount is the greater of two values: the difference between best price and AMP or 15.1 percent of AMP. If the brand-name drug's AMP rises faster than inflation as measured by the change in the consumer price index, the manufacturer is required to provide an additional rebate to the state Medicaid program. In addition to brand-name drugs, states also receive rebates for generic drugs. For generic drugs, the basic unit rebate amount is 11 percent of the AMP. A state's rebate for a drug is the product of the unit rebate amount plus any applicable additional rebate amount and the number of units of the drug paid for by the state's Medicaid program. In addition to the rebates mandated under the drug rebate program, states can also negotiate additional rebates with manufacturers. Like FEHBP and Medicare Part D participating plans, Medicaid programs also use other utilization management methods to control prescription drug spending including prior authorization and utilization review programs, dispensing limitations, and cost-sharing requirements. Mr. Chairman, this concludes my prepared remarks. I would be happy to answer any questions that you or other members of the Subcommittee may have. For future contacts regarding this testimony, please contact John E. Dicken at (202) 512-7114 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Randy DiRosa, Assistant Director; Rashmi Agarwal; William A. Crafton; Martha Kelly; and Timothy Walker made key contributions to this statement. Federal Employees Health Benefits Program: Enrollee Cost Sharing for Selected Specialty Prescription Drugs. GAO-09-517R. Washington, D.C.: April 30, 2009. Medicare Part D Prescription Drug Coverage: Federal Oversight of Reported Price Concessions Data. GAO-08-1074R. Washington, D.C.: September 30, 2008. DOD Pharmacy Program: Continued Efforts Needed to Reduce Growth in Spending at Retail Pharmacies. GAO-08-327. Washington, D.C.: April 4, 2008. DOD Pharmacy Benefits Program: Reduced Pharmacy Costs Resulting from the Uniform Formulary and Manufacturer Rebates. GAO-08-172R. Washington, D.C.: October 31, 2007. Military Health Care: TRICARE Cost-Sharing Proposals Would Help Offset Increasing Health Care Spending, but Projected Savings Are Likely Overestimated. GAO-07-647. Washington, D.C.: May 31, 2007. Federal Employees Health Benefits Program: Premiums Continue to Rise, but Rate of Growth Has Recently Slowed. GAO-07-873T. Washington, D.C.: May 18, 2007. Prescription Drugs: Oversight of Drug Pricing in Federal Programs. GAO-07-481T. Washington, D.C.: February 9, 2007. Prescription Drugs: An Overview of Approaches to Negotiate Drug Prices Used by Other Countries and U.S. Private Payers and Federal Programs. GAO-07-358T. Washington, D.C.: January 11, 2007. Medicaid Outpatient Prescription Drugs: Estimated 2007 Federal Upper Limits for Reimbursement Compared with Retail Pharmacy Acquisition Costs. GAO-07-239R. Washington, D.C.: December 22, 2006. Federal Employees Health Benefits Program: Premium Growth Has Recently Slowed, and Varies among Participating Plans. GAO-07-141. Washington, D.C.: December 22, 2006. Medicaid: States' Payments for Outpatient Prescription Drugs. GAO-06-69R. Washington, D.C.: October 31, 2005.
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Millions of individuals receive prescription drugs through federal programs. The increasing cost of prescription drugs has put pressure to control drug spending on federal programs such as the Federal Employees Health Benefits Program (FEHBP), Medicare Part D, the Department of Veterans Affairs (VA), the Department of Defense (DOD), and Medicaid. Prescription drug spending within the FEHBP in particular, which provides health and drug coverage to about 8 million federal employees, retirees, and their dependents, has been a significant contributor to FEHBP cost and premium growth. The Office of Personnel Management (OPM), which administers the FEHBP, predicted that prescription drugs would continue to be a primary driver of program costs in 2009. GAO was asked to describe approaches used by the FEHBP to control prescription drug spending and summarize approaches used by other federal programs. This testimony is based on prior GAO work, including Prescription Drugs: Oversight of Drug Pricing in Federal Programs (GAO-07-481T) and Prescription Drugs: An Overview of Approaches to Negotiate Drug Prices Used by Other Countries and U.S. Private Payers and Federal Programs (GAO-07-358T) and selected updates from relevant literature on drug spending controls prepared by other congressional and federal agencies. FEHBP uses competition among health plans to control prescription drug spending, giving plans an incentive to rein in costs and leverage their market share to obtain favorable drug prices. Most FEHBP plans contract with pharmacy benefit managers (PBMs) to help administer the prescription drug benefit. In a 2003 report, GAO found that the PBMs reduced drug spending by: negotiating rebates with drug manufacturers and passing some of the savings to the plans; obtaining drug price discounts from retail pharmacies and dispensing drugs at lower costs through mail-order pharmacies operated by the PBMs; and using other techniques that reduce utilization of certain drugs or substitute other, less costly drugs. While OPM does not negotiate drug prices or discounts for FEHBP, it attempts to limit spending through annual premium and benefit negotiations with plans, including the encouragement of spending controls such as generic substitution. Other federal programs use a range of approaches to control prescription drug spending. (1) Medicare--the federal health insurance program for the elderly and disabled--offers an outpatient prescription drug benefit known as Medicare Part D that uses competition between plan sponsors and their PBMs to limit drug spending, in part through the ability to negotiate prices and price concessions with drug manufacturers and pharmacies. Plans are required to report these negotiated price concessions to the Centers for Medicare & Medicaid Services (CMS), to help CMS determine the extent to which they are passed on to beneficiaries. (2) VA and DOD pharmacy benefit programs for veterans, active duty military personnel, and others may use statutorily mandated discounts as well as negotiations with drug suppliers to limit drug spending. VA and DOD have access to a number of prices to consider when purchasing drugs--including the Federal Supply Schedule prices that VA negotiates with drug manufacturers--paying the lowest of all available prices. (3) The Medicaid program for low-income adults and children is subject to aggregate payment limits and drug payment guidelines set by CMS. Medicaid does not negotiate drug prices with manufacturers, but reimburses retail pharmacies for drugs dispensed to beneficiaries at set prices. An important element of controlling Medicaid drug spending is the Medicaid drug rebate program, under which drug manufacturers are required by law to provide rebates for certain drugs covered by Medicaid. Under the rebate program, states take advantage of prices manufacturers receive for drugs in the commercial market that reflect discounts and rebates negotiated by private payers. In addition, Part D, VA and DOD, and Medicaid use techniques similar to FEHBP to limit drug spending, such as generic substitution, prior authorization, utilization review programs, or cost-sharing requirements.
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8(a) ANC contracting represents a small amount of total federal procurement spending. However, dollars obligated to ANC firms through the 8(a) program grew from $265 million in fiscal year 2000 to $1.1 billion in 2004. Overall, during the 5-year period, the government obligated $4.6 billion to ANC firms, of which $2.9 billion, or 63 percent, went through the 8(a) program. During this period, six federal agencies--the departments of Defense, Energy, the Interior, State, and Transportation and NASA--accounted for almost 85 percent of total 8(a) ANC obligations. Obligations for 8(a) sole- source contracts by these agencies to ANC firms increased from about $180 million in fiscal year 2000 to about $876 million in fiscal year 2004. ANCs use the 8(a) program as one of many tools to generate revenue with the goal of benefiting their shareholders. Some ANCs are heavily reliant on the 8(a) program for revenues, while others approach the program as one of many revenue-generating opportunities, such as investments in stocks or real estate. ANCs are using the congressionally authorized advantages afforded to them, such as ownership of multiple 8(a) subsidiaries, sometimes in diversified lines of business. From fiscal year 1988 to 2005, numbers increased from one 8(a) subsidiary owned by one ANC to 154 subsidiaries owned by 49 ANCs. Figure 1 shows the recent growth in ANCs' 8(a) subsidiaries. ANCs use their ability to own multiple businesses in the 8(a) program, as allowed by law, in different ways. For example, some ANCs create a second subsidiary in anticipation of winning follow-on work from one of their graduating subsidiaries; wholly own their 8(a) subsidiaries, while others invest in partially- diversify their subsidiaries' capabilities to increase opportunities to win government contracts in various industries. Our review of 16 large sole-source contracts awarded by 7 agencies found that agency officials view contracting with 8(a) ANC firms as a quick, easy, and legal way to award contracts while at the same time helping their agencies meet small business goals. Memoranda of Understanding (partnership agreements) between SBA and agencies delegate the contract execution function to federal agencies, although SBA remains responsible for implementing the 8(a) program. We found that contracting officials had not always complied with requirements to notify SBA when modifying contracts, such as increasing the scope of work or the dollar value, and to monitor the percentage of the work performed by the 8(a) firms versus their subcontractors. For example: Federal regulation requires that when 8(a) firms subcontract under an 8(a) service contract, they incur at least 50 percent of the personnel costs with their own employees. The purpose of this provision, which limits the amount of work that can be performed by the subcontractor, is to ensure that small businesses do not pass along the benefits of their contracts to their subcontractors. For the 16 files we reviewed, we found almost no evidence that the agencies are effectively monitoring compliance with this requirement. In general, the contracting officers we spoke with were confused about whose responsibility it is. Agencies are also required to notify SBA of all 8(a) contract awards, modifications, and exercised options where the contract execution function has been delegated to the agencies in the partnership agreements. We found that not all contracting officers were doing so. In one case, the Department of Energy contracting officer had broadened the scope of a contract a year after award, adding 10 additional lines of business that almost tripled the value of the contract. These changes were not coordinated with SBA. We reported in 2006 that SBA had not tailored its policies and practices to account for ANCs' unique status and growth in the 8(a) program, even though officials recognize that ANC firms enter into more complex business relationships than other 8(a) participants. SBA officials told us that they have faced a challenge in overseeing the activity of the 8(a) ANC firms because ANCs' charter under the Alaska Native Claims Settlement Act is not always consistent with the business development intent of the 8(a) program. The officials noted that the goal of ANCs--economic development for Alaska Natives from a community standpoint--can be in conflict with the primary purpose of the 8(a) program, which is business development for individual small, disadvantaged businesses. SBA's oversight fell short in that it did not: track the primary business industries in which ANC subsidiaries had 8(a) contracts to ensure that more than one subsidiary of the same ANC was not generating the majority of its revenue under the same primary industry code; consistently determine whether other small businesses were losing contracting opportunities when large sole-source contracts were awarded to 8(a) ANC firms; adhere to a statutory and regulatory requirement to ascertain whether 8(a) ANC firms, when entering the 8(a) program or for each contract award, had, or were likely to obtain, a substantial unfair competitive advantage within an industry; ensure that partnerships between 8(a) ANC firms and large firms were functioning in the way they were intended under the 8(a) program; and maintain information on ANC 8(a) activity. SBA officials from the Alaska district office had reported to headquarters that the makeup of their 8(a) portfolio was challenging and required more contracting knowledge and business savvy than usual because the majority of the firms they oversee are owned by ANCs and tribal entities. The officials commented that these firms tend to pursue complex business relationships and tend to be awarded large and often complex contracts. We found that the district office officials were having difficulty managing their large volume and the unique type of work in their 8(a) portfolio. When we began our review, SBA headquarters officials responsible for overseeing the 8(a) program did not seem aware of the growth in the ANC 8(a) portfolio and had not taken steps to address the increased volume of work in their Alaska office. In 2006, we reported that ANCs were increasingly using the contracting advantages Congress has provided them. Our work showed that procuring agencies' contracting officers are in need of guidance on how to use these contracts while exercising diligence to ensure that taxpayer dollars are spent effectively. Equally important, we stated, significant improvements were needed in SBA's oversight of the program. Without stronger oversight, we noted the potential for abuse and unintended consequences. In our April 2006 report, we made 10 recommendations to SBA on actions that can be taken to revise its regulations and policies and to improve practices pertaining to its oversight of ANC 8(a) procurements. Our recommendations and SBA's June 2007 response are as follows. We recommended that the Administrator of SBA: 1. Ascertain and then clearly articulate in regulation how SBA will comply with existing law to determine whether and when one or more ANC firms are obtaining, or are likely to obtain, a substantial unfair competitive advantage in an industry. SBA response: SBA is exploring possible regulatory changes that would address the issue of better controlling the award of sole- source 8(a) contracts over the competitive threshold dollar limitation to joint ventures between tribally and ANC-owned 8(a) firms and other business concerns. 2. In regulation, specifically address SBA's role in monitoring ownership of ANC holding companies that manage 8(a) operations to ensure that the companies are wholly owned by the ANC and that any changes in ownership are reported to SBA. SBA response: SBA is building a Business Development Management Information System to electronically manage all aspects of the 8(a) program. According to SBA, this system, scheduled to be completed in fiscal year 2008, will monitor program participants' continuing eligibility in the 8(a) program and could include an ANC element in the electronic annual review that would monitor the ownership of ANC holding companies that manage 8(a) operations and ensure that any changes in ownership are reported to SBA. 3. Collect information on ANCs' 8(a) participation as part of required overall 8(a) monitoring, to include tracking the primary revenue generators for 8(a) ANC firms to ensure that multiple subsidiaries under one ANC are not generating their revenue in the same primary industry. SBA response: The planned electronic annual review can collect information on ANCs' multiple subsidiaries to ensure that they are not generating the majority of their revenues from the same primary industry. Further, to ensure that an ANC-owned firm does not enter the 8(a) program with the same North American Industry Classification System (NAICS) code as another current or former 8(a) firm owned by that ANC, the ANC-owned applicant must certify that it operates in a distinct primary industry and must demonstrate that fact through revenues generated. SBA notes that the planned annual electronic reviews can validate this information. 4. Revisit regulation that requires agencies to notify SBA of all contract modifications and consider establishing thresholds for notification, such as when new NAICS codes are added to the contract or there is a certain percentage increase in the dollar value of the contract. Once notification criteria are determined, provide guidance to the agencies on when to notify SBA of contract modifications and scope changes. SBA response: SBA stated that its revisions to its partnership agreements with federal agencies address this recommendation. However, we note that the revised agreement does not establish thresholds or include new criteria for when agencies should send SBA contract modifications or award documentation. The agreement states that agencies "shall provide a copy of any contract...including basic contracts, orders, modifications, and purchase orders" to SBA. 5. Consistently determine whether other small businesses are losing contracting opportunities when awarding contracts through the 8(a) program to ANC firms. SBA response: SBA stated that it plans to require the contracting agencies to include impact statements in their contract offer letters to SBA. 6. Standardize approval letters for each 8(a) procurement to clearly assign accountability for monitoring of subcontracting and for notifying SBA of contract modifications. SBA response: SBA agreed with the recommendation but did not indicate an action taken or planned. 7. Tailor wording in approval letters to explain the basis for adverse impact determinations. SBA response: SBA agreed with the recommendation but did not indicate an action taken or planned. 8. Clarify memorandums of understanding (known as partnership agreements) with procuring agencies to state that it is the agency contracting officer's responsibility to monitor compliance with the limitation on subcontracting clause. SBA response: SBA has implemented this recommendation by revising the partnership agreements with the procuring agencies. It added several provisions that delineate the agencies' responsibilities for oversight, monitoring, and compliance with procurement laws and regulations governing 8(a) contracts, including the limitation on subcontracting clause. 9. Evaluate staffing levels and training needed to effectively oversee ANC participation in the 8(a) program and take steps to allocate appropriate resources to the Alaska district office. SBA response: SBA stated that the planned Business Development Management Information System should help the Alaska district office more effectively oversee ANC participation in the 8(a) program. It stated that it is providing training to the Alaska district office. However, no plans were in place to evaluate staffing levels at the office. 10. Provide more training to agencies on the 8(a) program, specifically including a component on ANC 8(a) participation. SBA response: SBA has provided training to agencies on the revised 8(a) partnership agreements; however, our review of the slides SBA used for the training found no reference to ANC 8(a) firms specifically. According to an SBA official, SBA will include a component on ANC 8(a) participants in future training sessions. We also recommended that procuring agencies provide guidance to contracting officers to ensure proper oversight of ANC contracts. The procuring agencies generally agreed with the recommendation. Some agencies are waiting for SBA to implement our recommendations before they take their own actions, but others have taken steps to tighten their oversight of contracts with 8(a) ANC firms. The Department of Homeland Security, for example, recently issued an "acquisition alert" requiring that its heads of contracting activities provide guidance and training on the use of 8(a) firms owned by ANCs. The alert provides that use of the authority to award sole-source 8(a) contracts to ANCs must be judicious with appropriate safeguards to ensure that the cost/price is fair and reasonable, that the ANC has the technical ability to perform the work, that the ANC will be performing the required percentage of the work and that the award is in the best interests of the government. The Department of Energy revised its acquisition guidance regarding small business programs to remind contracting officers to use care in awarding and administering ANC contracts, to include notifying SBA of contract modifications and monitoring the limits on subcontracting. The Department also provided training on the 8(a) program, to include contracting with ANC firms. By providing contracting officers with appropriate training on these issues, the government is taking steps to ensure that the ANC firms are operating in the program as intended, thereby mitigating the risk of unintended consequences or abuse of some of the privileges provided to these firms. This concludes my testimony. I would be happy to answer any questions you may have. For further information regarding this testimony, 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 statement. Key contributors were Michele Mackin, Sylvia Schatz, and Tatiana Winger. 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. 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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Alaska Native corporations (ANC) were created to settle land claims with Alaska Natives and foster economic development. In 1986, legislation passed that allowed ANCs to participate in the Small Business Administration's (SBA) 8(a) program. Since then, Congress has extended special procurement advantages to 8(a) ANC firms, such as the ability to receive sole-source contracts for any dollar amount and to own multiple subsidiaries in the 8(a) program. We were asked to testify on an earlier report where we identified (1) trends in the government's 8(a) contracting with ANC firms, (2) the reasons agencies have awarded 8(a) sole-source contracts to ANC firms and the facts and circumstances behind some of these contracts, and (3) how ANCs are using the 8(a) program. GAO also evaluated SBA's oversight of 8(a) ANC firms. GAO made recommendations aimed at improving SBA's oversight of 8(a) ANC contracting activity and ensuring that procuring agencies properly oversee 8(a) contracts they award to ANC firms. SBA has either taken action or plans to take action on the recommendations. The procuring agencies generally agreed with our recommendation to them. We believe implementation of our recommendations will provide better oversight of 8(a) ANC contracting activity and provide decision makers with information to know whether the program is operating as intended. While representing a small amount of total federal procurement spending, obligations for 8(a) contracts to ANC firms increased from $265 million in fiscal year 2000 to $1.1 billion in 2004. Over the 5-year period, agencies obligated $4.6 billion to ANC firms, of which $2.9 billion, or 63 percent, went through the 8(a) program. During this period, six federal agencies--the departments of Defense, Energy, the Interior, State, and Transportation and the National Aeronautics and Space Administration--accounted for over 85 percent of 8(a) contracting activity. Obligations for 8(a) sole source contracts by these agencies to ANC firms increased from about $180 million in fiscal year 2000 to about $876 million in fiscal year 2004. ANCs use the 8(a) program as one of many tools to generate revenue with the goal of providing benefits to their shareholders. Some ANCs are heavily reliant on the 8(a) program for revenues, while others approach the program as one of many revenue-generating opportunities. GAO found that some ANCs have increasingly made use of the congressionally authorized advantages afforded to them. One of the key practices is the creation of multiple 8(a) subsidiaries, sometimes in highly diversified lines of business. From fiscal year 1988 to 2005, ANC 8(a) subsidiaries increased from one subsidiary owned by one ANC to 154 subsidiaries owned by 49 ANCs. In general, acquisition officials at the agencies reviewed told GAO that the option of using ANC firms under the 8(a) program allows them to quickly, easily, and legally award contracts for any value. They also noted that these contracts help them meet small business goals. In reviewing selected large sole-source 8(a) contracts awarded to ANC firms, GAO found that contracting officials had not always complied with certain requirements, such as notifying SBA of contract modifications and monitoring the percentage of work that is subcontracted. SBA, which is primarily responsible for implementing the 8(a) program, had not tailored its policies and practices to account for ANCs' unique status and growth in the 8(a) program, even though SBA officials recognized that ANCs enter into more complex business relationships than other 8(a) participants. Areas where SBA's oversight fell short included determining whether more than one subsidiary of the same ANC was generating a majority of its revenue in the same primary industry, consistently determining whether awards to 8(a) ANC firms had resulted in other small businesses losing contract opportunities, and ensuring that the partnerships between 8(a) ANC firms and large firms were functioning in the way they were intended.
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In 1962, DOD instituted the Planning, Programming, and Budgeting System to establish near-term projections in defense spending. This system was intended to provide the necessary data to assist defense decision makers in making trade-offs among potential alternatives, thereby resulting in the best possible mix of forces, equipment, and support to accomplish DOD's mission. The military services and other DOD components developed the detailed data projections for the budget year in which funds were being requested and at least the 4 succeeding years and provided them to the Office of the Secretary of Defense. The resulting projections were compiled and recorded in a 5-year plan. In 1987, Congress directed the Secretary of Defense to submit the five-year defense program (currently referred to as the future years defense program, or FYDP) used by the Secretary in formulating the estimated expenditures and proposed appropriations included in the President's annual budget to support DOD programs, projects and activities. The FYDP, which is submitted annually to Congress, is considered the official report that fulfills this legislative requirement. The Office of Program Analysis and Evaluation has responsibility for the assembly and distribution of the FYDP. The Office of the Under Secretary of Defense (Comptroller) has responsibility for the annual budget justification material that is presented to Congress. These offices work collaboratively to ensure that the data presented in the budget justification material and the FYDP are equivalent at the appropriation account level. The FYDP provides DOD and Congress a tool for looking at future funding needs beyond immediate budget priorities and can be considered a long- term capital plan. As GAO has previously reported, leading practices in capital decision making include developing a long-term capital plan to guide implementation of organizational goals and objectives and help decision makers establish priorities over the long term. In 2002, Congress directed the Department of Homeland Security to begin developing a future budget plan modeled after DOD's FYDP. In the 2001 QDR Report, DOD established a new defense strategy and shifted the basis of defense planning from a "threat-based" model to a "capabilities-based" model. According to the QDR report, the capabilities- based model is intended to focus more on how an adversary might fight rather than specifically on whom the adversary might be or where a war might occur. The report further states that in adopting a capabilities-based approach, the United States must identify the capabilities required to deter and defeat adversaries, maintain its military advantage, and transform its forces and institutions. The QDR report also outlined a new risk management framework to use in considering trade-offs among defense objectives and resource constraints. This framework consists of four dimensions of risk: Force management-the ability to recruit, retain, train, and equip sufficient numbers of quality personnel and sustain the readiness of the force while accomplishing its many operational tasks; Operational-the ability to achieve military objectives in a near-term conflict or other contingency; Future challenges-the ability to invest in new capabilities and develop new operational concepts needed to dissuade or defeat mid- to long-term military challenges; and Institutional-the ability to develop management practices and controls that use resources efficiently and promote the effective operation of the Defense establishment. These risk areas will form the basis for DOD's annual performance goals and for tracking associated performance results. Moreover, the QDR states that an assessment of the capabilities needed to counter both current and future threats must be included in DOD's approach to assessing and mitigating risk. The FYDP provides Congress visibility of broad DOD funding shifts and priorities regarding thousands of programs that have been aggregated, or grouped, by appropriation category. For example, we noted that DOD increases its Research, Development, Test and Evaluation (RDT&E) account category and decreases other account categories in the 2004 FYDP. Other funding shifts/priorities are less visible because the FYDP report, organized by program, cannot display some specific costs that are important to decision makers, such as funding for DOD's civilian workforce. Moreover, the FYDP is a reflection of the limitations of DOD's budget preparation process. For example, as we have reported in the past, the FYDP reflects DOD's overly optimistic estimations of future program costs that often lead to costs being understated. Such understatements may have implications for many programs beyond the years covered by the FYDP. Finally, the costs of ongoing operations in Iraq and Afghanistan, which have been funded through supplemental appropriations, are not projected in the FYDP thereby limiting the visibility over these funds. The administration is expected to request additional supplemental funds in calendar year 2005 according to DOD officials. Although some costs are difficult to predict, DOD expects costs to become more predictable later this year. However, some requirements it plans to fund with the supplemental appropriation have already been identified. The FYDP was designed to provide resource information at the program level that could be aggregated a variety of ways including up to the appropriation category level. For individual programs, this means that decision makers have visibility over planned funding for 4 or 5 years beyond the current budget year. Similarly, the programs can be aggregated in a variety of ways to analyze future funding trends. For example, our comparison of the 2003 FYDP to the 2004 FYDP provides visibility of funding shifts that DOD made at the appropriation category level, specifically showing that over the common years of both FYDPs, DOD plans to increase funding in its RDT&E appropriation category, while in most years decreasing funds to Procurement, Military Construction, Military Personnel, and Operation and Maintenance. According to DOD officials, this shift toward RDT&E reflects DOD's emphasis on transforming military forces. Since the FYDP does not clearly identify those programs DOD considers transformational, we could not validate this claim. Figure 1 shows the changes made between the 2003 and 2004 FYDPs to the department's appropriation categories for the common 4-year period, 2004-2007. Appendix II provides a more detailed table. Compared to the 2003 FYDP, funding in the Operation and Maintenance appropriation category in the 2004 FYDP was reduced by at least $9 billion per year from 2004 through 2007 for a total of $42 billion over that period. About $41 billion of that decrease is accounted for by the elimination of the Defense Emergency Response Fund, which had projected over $10 billion in funding each year for 2004 through 2007 in the 2003 FYDP, but had no funding in the 2004 FYDP for those years. Over those same years, the "Other DOD accounts" category increased by a total of $19 billion. The increase in these categories was mainly fueled by a $22 billion increase in the Defense Health Program, which was offset somewhat by a decrease in Revolving Management Funds. Although DOD's policy priorities can be discerned at the appropriation level, some important funding categories cannot be identified because program elements, the most basic components of the report, are intended to capture the total cost of the program, as opposed to individual costs that comprise the program. For example, funding for spare parts, civilian personnel, and information technology are included in funding for individual programs and cannot be readily extracted from them. Congress has expressed interest in all of these funding categories. We note that DOD officials stated that these funding categories are delineated in other reports to Congress. Program elements that encompass multiple systems, such as the Army's Future Combat Systems and DOD's Ballistic Missile Defense System, could also limit visibility over funding trends and trade-offs in the FYDP. For example, in its 2004 budget justification material, the administration requested funding for the Army's Future Combat Systems--often referred to as a "system of systems"--under a single program element. In the National Defense Authorization Act for Fiscal Year 2004, Congress rejected the single program element and instead required the Secretary of Defense to break Future Combat Systems into three program elements. In the conference report accompanying the bill, the conferees noted that "the high cost and high risk require congressional oversight which can be better accomplished through the application of separate and distinct program elements for the [Future Combat System]." In another example, DOD had proposed that Congress repeal its requirement for specifying Ballistic Missile Defense System program elements. According to DOD's legislative proposal, this would coincide with the Secretary of Defense's goal to establish a single program that allows allocating and re-allocating of funds among competing priorities within the program. While Congress provided the administration flexibility for specifying program elements related to Ballistic Missile Defense, it nonetheless noted that budget reporting for Ballistic Missile Defense under one program element would be inappropriate. Since the mid-1980s, we have reported a limitation in DOD's budget formulation--the use of overly optimistic planning assumptions. Such overly optimistic assumptions limit the visibility of costs projected throughout the FYDP period and beyond. As a result, DOD has too many programs for the available dollars, which often leads to program instability, costly program stretch-outs, and program termination. For example, in January 2003, we reported that the estimated cost of developing eight major weapon systems had increased from about $47 billion in fiscal year 1998 to about $72 billion by fiscal year 2003. We currently expect DOD's funding needs in some areas to be higher than the estimates in the FYDP. The following are some examples of anticipated cost increases based on recent reports where we made recommendations to improve the management and costs estimates of these programs. As we reported in April 2003, cost increases have been a factor in the Air Force substantially decreasing the number of F/A-22 Raptors to be purchased--from 648 to 276. Moreover, current budget estimates, which exceed mandated cost limitations, are dependent on billions of dollars of cost offset initiatives which, if not achieved as planned, will further increase program costs. In addition, GAO considers continued acquisition of this aircraft at increasing annual rates before adequate testing is completed to be a high-risk strategy that could further increase production costs. DOD has not required the services to set aside funds to support the procurement and maintenance of elements of the Ballistic Missile Defense System. Management of this "system of systems" was shifted from the services to the Department's Missile Defense Agency in January 2002, but procurement and maintenance costs will be borne by the services as elements of the system demonstrate sufficient maturity to enter into full- rate production. In April 2003, we concluded that because DOD had not yet set aside funds to cover its long-term costs, the department could find that it cannot afford to procure and maintain that system unless it reduces or eliminates its investment in other important weapons systems. We recommended that the Secretary of Defense explore the option of requiring the services to set aside funds for this purpose in the FYDP. DOD concurred with this recommendation, noting that doing so would not only promote the stability of the overall defense budget but would also significantly improve the likelihood that an element or component would actually be fielded. Since its inception in fiscal year 1986, DOD's $24 billion chemical demilitarization program (a 2001 estimate) has been plagued by frequent schedule delays, cost overruns, and continuing management problems. In October 2003, we testified that program officials had raised preliminary total program cost estimates by $1.4 billion and that other factors, yet to be considered, could raise these estimates even more. In written comments on a draft of this report, DOD strongly objected to our conclusion that DOD has historically employed overly optimistic assumptions and noted that these statements do not reflect recent efforts to correct this problem. In August 2001, DOD established guidance that all major acquisition programs should be funded to the Cost Analysis Improvement Group estimates, which, according to DOD, have historically been far more accurate than Service estimates. However, as DOD acknowledges in its written comments, there is currently no auditable data available to document the effects of this guidance; therefore, we could not analyze this claim. Further, GAO reports issued after a draft of this report was sent to DOD - such as our March 2004 report on the Air Force's F/A- 22 program and our April 2004 testimony on DOD's Chemical Demilitarization program - continue to raise questions about DOD's planning assumptions. For example, in our F/A-22 report, we continued to observe that additional increases in development costs for the F/A-22 are likely and in our report on DOD's Chemical Demilitarization Program, we observed that the program continues to fall behind schedule milestones. Some of the examples listed above will have budgetary impacts beyond the 2009 end date of the 2004 FYDP. As the Congressional Budget Office (CBO) reported in January 2003, "programs to develop weapon systems often run for a decade or more before those systems are fielded, and other policy decisions have long-term implications; thus, decisions made today can influence the size and composition of the nation's armed forces for many years to come." In its February 2004 update to that report, CBO projected that if the programs represented in the 2004 FYDP were carried out as currently envisioned by DOD, demand for resources would grow from the current projection in 2009 of $439 billion to an average demand for resources of $458 billion a year between 2010 and 2022. When CBO assumed that costs for weapons programs and certain other activities would continue to grow as they have historically rather than as DOD currently projects, CBO's projections increased to an average of $473 billion a year through 2009 and an average of $533 billion between 2010 and 2022. The FYDP does not include future costs for ongoing operations when these operations are funded through supplemental appropriations. Since the attacks of September 11, 2001, DOD has received supplemental appropriations totaling $158 billion in constant 2004 dollars to support operations in Iraq, Afghanistan, and elsewhere, as well as to initially recover and respond to the terrorist attacks. This amount exceeds the $99 billion DOD received in supplemental appropriations throughout all of the 1990s and is more than what DOD requested for its entire Operation and Maintenance account for fiscal year 2004. Table 1 summarizes these supplemental appropriations. In presentations related to the 2005 President's budget submitted to Congress in early February 2004, DOD officials reported that the budget does not include funding for ongoing operations in Iraq and Afghanistan, and they expect another supplemental will be needed in January 2005 to finance incremental costs for these operations. Senior DOD officials indicated that operations in Iraq and Afghanistan will continue into fiscal year 2005, but the requirements and costs of these continued operations are difficult to estimate because of uncertainties surrounding the political situations in these regions. However, they noted that funding estimates will likely become clearer over the course of the year. For example, the Under Secretary of Defense (Comptroller) stated that by July 2004, the operations in Iraq and Afghanistan may be better defined and that having time to analyze expenditures will help in making more realistic projections. In addition, Service and DOD officials have already identified some requirements that have associated costs. For example, the Army has been authorized to temporarily increase its end strength by 30,000 soldiers. In briefings on the 2005 budget request, DOD and Army officials stated that they intended to partially fund this additional end strength with the supplemental appropriation anticipated for 2005. DOD, with congressional approval, has used different approaches in the past to fund operations. For example, in the former Yugoslavia, DOD funded operations begun in fiscal year 1996 through a combination of transfers between DOD accounts, absorbing costs within accounts, and supplemental appropriations. However, in 1997, Congress established the Overseas Contingency Operations Transfer Fund, which provided funding to DOD rather than directly to the individual military services, and allowed DOD to manage the funding of contingency operations among the military services more effectively and with some flexibility. In 2002, DOD determined that funding for operations in the former Yugoslavia were sufficiently stable to be included directly in appropriation account requests. GAO observed in a 1994 report that if an operation continued into a new fiscal year, it would seem appropriate that DOD would build the expected costs of that operation into its budget and allow Congress to expressly authorize and appropriate funds for its continuation. We continue to hold this view. The FYDP, as currently structured, does not contain a link to defense capabilities or the dimensions of the risk management framework, both important QDR initiatives, limiting the FYDP's usefulness and congressional visibility of the initiatives' implementation. Further, although DOD is considering how to link resources to these initiatives, it does not have specific plans to make these linkages in the FYDP. The Major Force Programs, initially developed as the fundamental framework of the FYDP, remain virtually unchanged and are not representative of DOD's capabilities-based approach. Furthermore, additional program aggregations that DOD created in the FYDP's structure do not capture information related to capabilities-based analysis or the risk management framework in part because these concepts have not been fully developed. DOD has modified the FYDP over time to create new categories of program elements; however, it currently does not include categorizations that are intended to relate to the QDR's initiatives regarding defense capabilities and the risk management framework. Major Force Programs, originally established to organize the FYDP into the major DOD missions, have remained virtually the same in the five decades since their introduction, do not reflect how DOD combat forces and their missions have changed over time, and do not organize the FYDP by major defense capabilities. For example, the Major Force Program of General Purpose Forces includes large numbers of programs with varied capabilities that would complicate comparisons needed for understanding defense capabilities and associated trade-off decisions inherent in risk management. General Purpose Forces include virtually all conventional forces within DOD and slightly over one-third of DOD funding is allocated to this broad category. Ground combat units, tactical air forces, and combatant ships are among the wide array of forces considered General Purpose Forces. Including forces with such diverse capabilities in the same category diminishes the Major Force Program's usefulness to DOD and Congress for identifying trade-offs among programs. Additionally, all available resources with comparable capabilities are not categorized in the same Major Force Program. For example, the Major Force Program structure identifies Guard and Reserve forces separately despite the fact that today Guard and Reserve forces are integrated into their respective Service's force structure, deploy and fight with the general forces, and have some of the same capabilities. Over time, as decision makers needed information not captured in the Major Force Programs, DOD created new aggregations of program elements and added attributes to the FYDP's structure. The most recent aggregation categorized the data by force and infrastructure categories, which were developed to relate every dollar, person, and piece of equipment in the FYDP to either forces or infrastructure. This model groups forces, the warfighting tools of the Combatant Commanders, into broad operational categories according to their intended use (such as homeland defense or intelligence operations), and groups infrastructure, the set of activities needed to create and sustain forces, based upon the type of support activity it performs (such as force installations or central logistics). DOD has also added attribute fields to the program elements for such activities as space and management headquarters in order to capture the resources associated with specific areas of interest. However, these new aggregations and attributes were not intended to relate the FYDP's resources to defense capabilities or the risk management framework. According to officials, DOD does not have specific plans to link capabilities and the risk management framework to the FYDP, in part, because these concepts have not been fully developed. For example, capability-based analysis is still under development. DOD officials describe this as a complex process--representing a fundamental shift in the basis of defense planning and requiring the participation of all DOD components. In the past, DOD focused on whom an adversary might be, whereas the current approach focuses on how future adversaries might fight. DOD's April 2003 Transformation Planning Guidance states that joint operating concepts will provide the construct for a new capabilities-based resource allocation process. To date, these joint operating concepts have not been formalized. According to DOD officials, while some concepts may be completed near-term, the overall initiative is expected to take 4 to 5 years to complete. Furthermore, although the risk management framework has been better defined than the capabilities have, it also has not been fully implemented because it has not been fully linked to resources. In December 2002, DOD instructed its components to begin displaying the linkage of plans, outputs, and resources in future budget justification material based upon the four dimensions of its risk management framework. According to DOD officials, in the fiscal year 2005 budget submission, DOD provided this linkage for 40 percent of its resources. DOD plans to complete this process by fiscal year 2007, but does not currently have plans to link the risk management framework to the FYDP as part of this process. DOD's 2003 Annual Report provided an example of how the FYDP could be linked to the risk management framework using the Force and Infrastructure categories. However, according to DOD officials, this example was intended to be a rough aggregation for a specific performance metric and is not officially recognized as the most appropriate way to show how DOD's resources link to the risk management framework. Therefore, this linkage has not been integrated into the FYDP's structure. It is important for DOD and congressional decision makers to have the most complete information possible on the costs of ongoing operations as they deliberate the budget. In a previous report, we observed that if an operation continues into a new fiscal year, it would seem appropriate that DOD would build the expected costs of that operation into its budget and allow Congress to expressly authorize and appropriate funds for its continuation. We recognize that defining those expected costs is challenging and that supplemental appropriations are sometimes necessary. Nonetheless, the consequences of not considering the expected costs of ongoing operations as part of larger budget deliberations will mean that neither the administration nor congressional decision makers will have the opportunity to fully examine budget implications of the global war on terrorism. Indeed, the FYDP could be a useful tool for weighing the costs of defense priorities such as the global war on terrorism and DOD's transformation efforts. However, as a reflection of the budget, the FYDP is weakened in this regard because it does not include known or likely costs of ongoing operations funded through supplemental appropriations. Without a clear understanding of such costs, members of Congress cannot make informed decisions about appropriations between competing priorities. Additionally, the FYDP as it is currently structured does not provide either DOD or Congress with full visibility over how resources are allocated according to key tenets of the defense strategy outlined in the QDR. As a result, resource allocations may not reflect the priorities of the defense strategy, including its new capabilities-based approach and the risk management framework. Yet, the current strategic environment and growing demand for resources require that DOD and Congress allocate resources according to the highest defense priorities. Indeed, as the common report that captures all components' future program and budget proposals, the FYDP provides DOD an option for linking resource plans to its risk management framework and capabilities assessment and providing that information to Congress. Furthermore, this linkage could provide a crosswalk between capabilities and the risk management framework such that assessments of capabilities could be made in terms of the risk management framework, which balances dimensions of risk, such as near term operational risk versus risks associated with mid- to long-term military challenges. In the interest of providing Congress greater visibility over projected defense spending, we recommend that the Secretary of Defense direct the Undersecretary of Defense (Comptroller) to take the following two actions: (1) provide Congress data on known or likely costs for ongoing operations that are expected to extend into fiscal year 2005 for consideration during its deliberation over DOD's fiscal year 2005 budget request and accompanying FYDP and (2) include known or likely projected costs of ongoing operations for the fiscal year 2006 and subsequent budget requests and accompanying FYDPs. To enhance the effectiveness of the FYDP as a tool for planning and analysis in the current strategic environment, the Secretary of Defense should direct the Office of Program Analysis and Evaluation to take the following two actions: (1) align the program elements in the FYDP to defense capabilities needed to meet the defense strategy, as these capabilities are identified and approved, and the dimensions of the risk management framework and include this alignment with the FYDP provided to Congress, and (2) report funding levels for defense capabilities and the dimensions of the risk framework in its summary FYDP report to Congress. In written comments on a draft of this report, DOD provided some general overarching comments concerning our characterization of the FYDP as a database, as well as other comments responding to our specific recommendations. First, DOD noted that it had redefined the FYDP as a report rather than a database, and stated that it maintains a variety of databases to support decision making that should not be confused with the FYDP itself. DOD stated that our characterization of the FYDP as a database resulted in a misinterpretation that pervades our draft report and results in incorrect assertions and conclusions. We have updated our report to refer to the FYDP as a report rather than a database in response to the definition change provided in DOD's April 2004 guidance - issued after our draft report was sent to DOD for comment. However, we disagree with the DOD statement that characterizing the FYDP as a flexible database structure leads to incorrect assertions and conclusions. Whether the FYDP is referred to as a database or a report, it is an existing tool used to inform analyses, as DOD acknowledged in its written comments, and it has been modified over time to capture resource information associated with special areas of interest. Although a variety of databases are maintained by DOD to support decision making, the FYDP is submitted annually to Congress, as required. Therefore, we believe that our recommendations that DOD provide Congress with greater information in fiscal year 2005 and beyond on known or likely costs of operations, and enhance the FYDP as a tool in the new strategic environment provide practical solutions for improving congressional visibility of DOD's allocation of resources, as discussed below. DOD neither concurred nor nonconcurred with the recommendations that the Undersecretary of Defense (Comptroller) provide Congress data on known or likely costs for ongoing operations that are expected to extend into fiscal year 2005 and beyond. DOD stated that it already provides this information to Congress as soon as it is sufficiently reliable and that, at this point in the war on terrorism, current operations are too fluid to permit an accurate determination of the amount of funding required a year in advance. In response to our statement that DOD does not include the costs of ongoing operations funded through supplemental appropriations, DOD further stated that items funded through supplemental appropriations are above and beyond resources budgeted and appropriated for peacetime operations and that funding requirements for wartime and contingency operations are driven by events and situations that DOD cannot anticipate. We are encouraged that DOD agrees with the principle of providing these data to Congress as soon as they are sufficiently reliable. As we reported, DOD indicated that operations in Iraq and Afghanistan will continue into fiscal year 2005; therefore, it is reasonable that DOD would anticipate some costs associated with these operations. However, DOD did not budget any funds for these operations in its fiscal year 2005 budget request or accompanying FYDP submitted to Congress. Based on statements by the Undersecretary of Defense (Comptroller) that cost data will become clearer as the year progresses, we expect that DOD will be able to provide such data to Congress for both the fiscal year 2005 and 2006 budget deliberations. In addition, some requirements that have associated costs, such as the Army's temporary increase in endstrength, have already been identified. We acknowledge in our report the challenges associated with estimating costs for ongoing operations. Although DOD states that including these estimates would unnecessarily complicate resource discussions and decisions, we maintain that the challenges of estimating costs for ongoing operations must be weighed against Congress's responsibility for balancing government-wide funding priorities using the best available data at the time of its budget deliberations. Lastly, DOD nonconcurred with our recommendations for the Office of Program Analysis and Evaluation to align the program elements in the FYDP with defense capabilities and the risk management framework and include this alignment with the FYDP provided to Congress. DOD stated that it does not use the FYDP as a tool to conduct analyses of capability or risk trade-offs between systems, as such a tool would be relatively uninformative and needlessly complex, though the FYDP does inform those analyses. DOD also said it does not intend to embed capabilities or the risk management framework in the FYDP, as these constructs are still being developed and may change significantly, but it is working to create decision-support tools that will link resource allocations to capability and performance metrics, and it may be able to report on those allocations as the tools and processes mature. We maintain our view that the FYDP is the ideal vehicle for providing information on these new concepts to Congress. First, since the FYDP already exists as a legally mandated reporting mechanism, it avoids the creation of any duplicative reporting. Second, because the FYDP cuts across all the services and agencies, it provides a macro picture of DOD resource allocations in terms of both missions and appropriations. Third, as we note in our report, because the FYDP is flexible, DOD has periodically built new categories of program elements into it to provide decision makers with resource information as needed. Currently, Congress cannot use the FYDP to identify the results of DOD's resource analyses of capabilities or risk trade-offs between programs because these relationships are not aligned with the program elements in the FYDP. We recognize that the FYDP is not the only tool available for defense resource decision making; however, we note, as DOD has stated in its written comments, that the FYDP informs analyses and reflects the resource implications of decisions. While we recognize that DOD is still working to define these concepts, we maintain our view that, once defined, reporting these relationships with the FYDP provided to Congress would improve congressional visibility of DOD resource allocations. DOD's comments are included in their entirety in appendix III. Annotated evaluations of DOD's comments are also included in appendix III. We are sending copies of this report to the Secretary of Defense; the Undersecretary of Defense (Comptroller); and the Director, Office of Management and Budget. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512-9619. Major contributors to this report are listed in appendix IV. We determined that the automated FYDP data was sufficiently reliable for use in meeting this report's objectives. DOD checks the FYDP data against its budget request sent to Congress at the appropriation category level. We also compared the FYDP data with published documents DOD provided to ensure that the automated data correctly represented DOD's budget request. Specifically, we compared total budget estimates, appropriation totals, military and civilian personnel levels, force structure levels, and some specific program information. Based on our and DOD's comparison, we were satisfied that the automated FYDP data and published data were in agreement. GAO has designated DOD's financial management area as high risk due to long-standing deficiencies in DOD's systems, processes, and internal controls. Since some of these systems provide the data used in the budgeting process, there are limitations to the FYDP's use. However, since we determined the FYDP accurately represents DOD's budget request, it is sufficiently reliable as used for this report. To determine whether the FYDP provides visibility over DOD funding priorities we compared DOD reports and Secretary of Defense congressional testimonies that supported the 2003 and 2004 budget submissions against FYDP data. We also analyzed resource data from the 2003 and 2004 FYDPs for fiscal years 2004 - 2007 to identify trends. We adjusted the current dollars to constant 2004 dollars using appropriate DOD Comptroller inflation indexes to eliminate the effects of inflation. To determine whether the FYDP provides visibility over likely future budget requests, we reviewed other related GAO, Congressional Research Service, and Congressional Budget Office reports and interviewed program and budget officials at the Office of the Secretary of Defense and service headquarters. In addition, we summarized documents related to supplemental appropriations and analyzed DOD officials' statements regarding plans for supplemental appropriations in 2005. To determine whether the FYDP is useful for implementing DOD's risk management framework and capabilities based planning, we interviewed appropriate officials at the Office of the Secretary of Defense, service headquarters, and the Institute for Defense Analyses-- the organization currently under contract to make improvements to the FYDP, and examined various DOD planning and budget documents including the 2001 Report of the Quadrennial Defense Review, DOD's 2003 Annual Report to the President and the Congress, and DOD's fiscal year 2003 and 2004 budget submissions. We also examined the structure of the FYDP to determine if it currently included, or was possible to include, a link to the risk management framework or defense capabilities. Our review was conducted between June 2003 and February 2004 in accordance with generally accepted government auditing standards. Other DOD programs include chemical agent and munitions destruction, the defense health program, drug interdiction and counter-drug activities, and the Office of the Inspector General. The following are GAO's comments on the Department of Defense's letter dated April 13, 2004. 1. DOD objected to our observation that DOD has historically employed overly optimistic planning assumptions in its budget formulations. In response to its comments, we acknowledged DOD guidance to reduce future resource shortfalls on page 11 of this report and noted the lack of auditable data to document the effects of this guidance. We also provided additional examples of GAO reports that continue to raise questions about DOD's planning assumptions. 2. DOD provided a rationale for growth in civilian personnel costs. We intended civilian personnel to be an example of costs not visible in the FYDP, as opposed to an example of cost growth. Therefore, we have clarified the language on page 2 of this report to reflect this point. Further, we are not proposing that civilian personnel costs be disassociated from programs, as suggested by DOD's comments. 3. DOD reiterated that it already provides Congress reliable information on the known costs for ongoing operations as soon as it is available. As we stated in our evaluation of agency comments on page 19 of this report, we are encouraged that DOD agrees with the principle of providing these data to Congress as soon as they are sufficiently reliable. However, we note that cost data is expected to become clearer as the year progresses and some requirements that have associated costs have already been identified. Therefore, we expect that DOD will be able to provide such data to Congress for their fiscal year 2005 and 2006 budget deliberations. 4. DOD noted that our report implied that the cost of increased Army force structure has been fully identified and asserted that, to the contrary, the work to define the particulars of this plan in sufficient detail to support budget development is still in progress. However, we note that in February 2004, the Undersecretary of Defense (Comptroller) outlined an Army force-restructuring plan that would be partially funded through the existing fiscal year 2004 supplemental appropriation. While DOD may not have fully defined the particulars of this plan, since it has identified a funding timeline, we believe that at least some of the cost of increased Army force structure can be estimated at this time. 5. Based on comments from the Air Force, DOD asked that we clarify that the reduction in the number of F/A-22 aircraft being purchased was not largely due to cost increases, and it referred to the role played by two Quadrennial Defense Reviews in the decision. Our report stated, however, that cost increases have been one factor in the Air Force's substantially decreasing the number of F/A-22 Raptors to be purchased - from 648 to 276. Moreover, development costs have increased dramatically and in a report that was issued after this draft was sent to DOD for comment, GAO continued to observe that additional increases in development costs for the F/A-22 are likely. We maintain our view that the F/A-22 program illustrates that DOD's funding needs in some areas exceed the estimates used in the FYDP. 6. Based on comments from the Air Force, DOD challenged our implication that the F/A-22 program will exceed mandated cost limitations if billions of dollars of cost offset initiatives are not achieved as planned. In February 2003, we reported that the Air Force has had some success in implementing cost reduction plans to offset cost growth. However, production improvement programs, also designed to offset costs, have faced recent funding cutbacks and therefore are unlikely to offset cost growth as planned. The Air Force stated that it has no intention of violating mandated cost limitations, but that it does intend to seek relief from them as part of the fiscal year 2006 President's budget. To the extent that the Air Force requests additional funds for the F/A-22, our view that the FYDP understates costs is further confirmed. In addition to the person named above, Patricia Lentini, Margaret Best, Barbara Gannon, Christine Fossett, Tom Mahalek, Betsy Morris, Ricardo Marquez, Jane Hunt, and Michael Zola also made major contributions to this report.
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Congress needs the best available data about DOD's resource tradeoffs between the dual priorities of transformation and fighting the global war on terrorism. To help shape its priorities, in 2001 DOD developed a capabilities-based approach focused on how future adversaries might fight, and a risk management framework to ensure that current defense needs are balanced against future requirements. Because the Future Years Defense Program (FYDP) is DOD's centralized report providing DOD and Congress data on current and planned resource allocations, GAO assessed the extent to which the FYDP provides Congress visibility over (1) projected defense spending and (2) implementation of DOD's capabilities-based defense strategy and risk management framework. The FYDP provides Congress with mixed visibility over DOD's projected spending for the current budget year and at least four succeeding years. On the one hand, it provides visibility over many programs that can be aggregated so decision makers can see DOD's broad funding priorities by showing shifts in appropriation categories. On the other hand, in some areas DOD likely understates the future costs of programs in the FYDP because it has historically employed overly optimistic planning assumptions in its budget formulations. As such, DOD has too many programs for the available dollars, which often leads to program instability, costly program stretchouts, and delayed program termination decisions. Also, the FYDP does not reflect costs of ongoing operations funded through supplemental appropriations. Since September 2001, DOD has received $158 billion in supplemental appropriations to support the global war on terrorism, and DOD expects to request another supplemental in January 2005 to cover operations in Iraq and Afghanistan. While DOD officials stated they are uncertain of the amount of the request, some requirements they intend to fund with the supplemental appropriation have already been identified, such as temporarily increasing the Army's force structure. Defining costs during ongoing operations is challenging and supplemental appropriations are sometimes necessary; however, not considering the known or likely costs of ongoing operations expected to continue into the new fiscal year as part of larger budget deliberations will preclude DOD and congressional decision makers from fully examining the budget implications of the global war on terrorism. The FYDP provides Congress limited visibility over important DOD initiatives. While DOD is considering how to link resources to defense capabilities and the risk management framework, it does not have specific plans to make these linkages in the FYDP, in part because the initiatives have not been fully defined or implemented. Because the FYDP lacks these linkages, decision makers cannot use it to determine how a proposed increase in capability would affect the risk management framework, which balances dimensions of risk, such as near term operational risk versus risks associated with mid- to long-term military challenges.
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VETS administers national programs intended to (1) ensure that veterans receive priority in employment and training opportunities from the employment service; (2) assist veterans, reservists, and National Guard members in securing employment; and (3) protect veterans' employment rights and benefits. The key elements of VETS' services include enforcing veterans' preference and reemployment rights and securing employment and training services. VETS' programs are among those federal programs whose services have been affected by WIA and other legislative changes aimed at streamlining services and holding programs accountable for their results. VETS carries out its responsibilities through a nationwide network that includes representation in each of the Department of Labor's 10 regions and staff in each state. The Office of the Assistant Secretary for Veterans' Employment and Training administers VETS' activities through regional administrators and a VETS director in each state. These federally paid VETS staff are the link between VETS and the states' employment service system, which is overseen by Labor's Employment and Training Administration (ETA). VETS funds two primary veterans' employment assistance grants to states--the Disabled Veterans' Outreach Program (DVOP) and the Local Veterans' Employment Representatives (LVER). Fiscal year 2001 appropriation for VETS was about $183 million, including $81.6 million for DVOP specialists (DVOPS) and $77.2 million for LVER staff. These funds paid for 1,327 DVOP positions and 1,206 LVER positions. The roles of the DVOPS and LVERs have been separately defined in two statutes. LVERs were first authorized under the original GI bill (the Servicemen's Readjustment Act of 1944) and DVOP specialists were authorized by the Veterans' Rehabilitation and Education Amendments of 1980. A key responsibility of a DVOP is to develop job and job training opportunities for veterans through contacts with employers, especially small- and medium-size private sector employers. LVERs are to provide program oversight of local employment service offices to ensure that veterans receive maximum employment and training opportunities from the entire local office staff. In addition, DVOPS and LVERs traditionally have provided services that include locating veterans who need services, networking in the community for employment and training programs, bringing together veterans looking for work and employers seeking to making referrals to support services, and providing case management for those veterans in need of more intensive services. Increasingly, however, veterans are accessing services on their own, through tools such as internet-based job listings or resume writing software. As part of the DVOP and LVER grant agreements, states must provide or ensure that veterans receive priority at every point where public employment and training services are available. The DVOP and LVER programs give priority to the needs of disabled veterans and veterans who served during the Vietnam era. States' employment service systems are expected to give priority to veterans over nonveterans. Generally, this means that local employment offices are to offer or provide all services to veterans before offering or providing those services to nonveterans. To monitor the states' programs, VETS has been using a set of measures that evaluates states' performance in five dimensions: (1) veterans placed in training, (2) those receiving counseling, (3) those receiving services, (4) those entering employment, and (5) those obtaining federal contractor jobs. These measures primarily count the number of services that veterans receive and compare the totals with similar services provided to nonveterans. To ensure priority service to veterans, VETS expects levels of performance for services provided to veterans to be higher than levels for nonveterans. For example, veterans and other eligibles must be placed in or obtain employment at a rate 15 percent higher than that achieved by nonveterans. (See table 1 for VETS' specific performance standards.) To report on performance, VETS currently relies on the Employment and Training Administration's 9002 system to aggregate data reported by states on veterans and nonveterans who register with state Employment Services (ES) offices, track the services provided to them (such as counseling or job referral), and gather information on their employment outcomes. The 9002 system also collects information such as the registrants' employment status, level of education (e.g., high school, postsecondary degree/certificate), and basic demographic information, such as age and race. Over the past several years, the Congress has taken steps to streamline and integrate services provided by federally funded employment and training programs. WIA, which the Congress passed in 1998, requires states and localities to use a one-stop center structure to provide access to most employment and training services in a single location. WIA requires about 17 categories of programs, including VETS and ES programs, to provide services through the one-stop center. However, because DVOP and LVER staff can provide assistance only to veterans, and because their roles in one-stop centers are not specifically addressed in WIA, it is unclear how they will function with regard to one-stop centers. According to VETS officials, this lack of clarity has been addressed. Agreements made with each state on planned services to veterans now include provisions on how DVOPS and LVERs will be integrated into the one-stop delivery system. In addition to changing the way services are provided, programs are now increasingly held accountable for their results. Through the Government Performance and Results Act of 1993 (GPRA), the Congress seeks to improve the efficiency, effectiveness, and public accountability of federal agencies as well as improve congressional decision making. GPRA does so, in part, by promoting a focus on what the program achieves rather than tracking program activities. GPRA outlines a series of steps in which agencies are required to identify their goals, measure performance, and report on the degree to which those goals were met. Executive branch agencies were required to submit the first of their strategic plans to the Office of Management and Budget and the Congress in September 1997. Although not required by GPRA, Labor's component agencies, such as VETS, have prepared their own strategic and performance plans at the direction of the Secretary of Labor. To address the goals of GPRA and in response to recommendations by us and other groups, such as the Congressional Commission on Servicemembers and Veterans Transition Assistance, VETS is currently developing a new system to measure the performance of its programs. Over the last several years, VETS conducted pilot programs in about eight states that tested some new performance measures and the use of new data to support these measures. VETS officials told us that they anticipate implementing their new performance measurement system in July 2001. VETS' proposed performance measures are a significant improvement over current measures, but certain aspects of these measures raise concerns that VETS may need to address. The proposed measures include an (1) entered-employment rate, (2) employment rate following staff- assisted services, (3) employment retention rate, and (4) increase in the number of federal contractor job openings listed. These measures are an improvement over current measures because they focus more on what the programs achieve and less on the number of services they provide, no longer use the level of services provided to nonveterans as the standard for services that must be provided to veterans, adjust expected state performance to economic conditions within establish two measures that are already collected for WIA-funded services and proposed for ES. However, even with these improvements, the proposed measures continue to send a mixed message to staff about where to place their service priorities. In addition, the proposed measures include a redefined measure for tracking federal contractor job openings, but the measure is process- oriented and outside the scope of the work of DVOPS and LVERs. The proposed performance measures improve accountability because they place more emphasis on employment-related outcomes by eliminating process-oriented measures--measures that simply track services provided to veterans. Current process measures that VETS eliminated from the proposed performance system include the number of veterans referred to counseling, the number placed in training, and the number receiving certain other services, such as job referrals. As we noted in past reports, these process-oriented measures are activity- and volume-driven and focus efforts on the number of services provided, not on the outcomes veterans achieve. These measures offer states little incentive to provide services to those veterans who are only marginally prepared for work and who may need more intensive services requiring more staff time. The VETS' proposal still includes one process-oriented measure that simply reflects the percentage increase in the number of federal contractor job openings listed with the public labor exchange but adds two outcome-oriented measures--job retention after 6 months and the employment rate following staff-assisted services. The VETS' proposal also retains an outcome measure that is in the current system--the entered-employment rate. (See table 2.) The proposed performance measures also improve the way VETS establishes the level of performance that states are expected to achieve. VETS no longer requires states to compare the level of services provided to veterans with those provided to nonveterans. In past reports, we have pointed out that the use of these relative standards results in states with poor levels of service to nonveterans being held to lower standards for service to veterans than states with better overall performance. For example, in program year 1999, Rhode Island reported an entered- employment rate of 5.49 percent for nonveterans. Because VETS requires states to ensure that they achieve an entered-employment rate for veterans that is 15 percent higher than that for nonveterans, Rhode Island's 1999 expected performance level was 6.32 percent of registered veterans entering employment-a low level of performance. Under the proposed system, VETS will negotiate performance levels annually with each state based on that state's past performance, using guidelines similar to those used for WIA. VETS will also be able to adjust these levels based on economic conditions within each state, such as the unemployment rate, the rate of job creation or loss, or other factors. The proposed performance measures are also similar to those established under WIA, making it easier for service providers to achieve WIA's goal of integrating and streamlining employment and training services. In the current environment, many of the programs that provide services through the one-stop centers have their own unique performance measures and program definitions, requiring multiple systems and multiple data collection efforts to track a single client. In the proposed system, VETS has made an effort to align its performance measures with those of WIA. In fact, two of the five proposed measures--entered-employment rate and employment retention--are nearly identical to WIA's and to those proposed for ES. If VETS aligns the measures with those of WIA and ES, local offices will be more readily able to establish integrated data systems that will minimize the data collection burden on service providers and clients. (See app. I for a comparison of the WIA performance measures with those proposed for VETS and ES.) While the proposed performance measures are an improvement over those currently in place, there are issues with these measures that VETS should address. First, a comparison of the performance measures with the strategic plan indicates that VETS is sending a mixed message to states about what services to provide and to whom. The strategic plan suggests that states focus their efforts on providing staff-assisted services to veterans, including case management. Yet, none of the proposed measures specifically gauges whether more staff-intensive services are helping veterans get jobs. VETS' proposal includes a measure that tracks employment outcomes following staff-assisted services. However, this measure is broadly defined, and the list of staff-assisted services includes nearly all services provided to veterans. This makes the outcomes achieved for the staff-assisted measure nearly identical to those reported for the more general "entered-employment rate." In addition, as VETS has defined it, staff-assisted services include many services that might not be considered "intensive," such as referral to a job and job search activities. Because the definition is so broadly defined, a veteran who only attended a job search workshop would be counted the same as a veteran who received more intensive services, such as testing and employability planning. Both would be counted in the more general entered-employment rate measure, as well as the staff-assisted service measure. A stricter definition for staff-assisted services that includes only those services that are generally considered staff-intensive would allow VETS to more accurately assess the success of those services and help to clarify the goals of the program. Second, VETS is sending a mixed message about which groups of veterans to target for services. As we noted in past reports and testimonies, VETS has inconsistently identified various "targeted" groups of veterans it plans to help. In its strategic plan, VETS identifies two broad veteran groups that should be targeted to receive special attention--(1) disabled veterans and (2) all veterans and other eligible persons. And consistent with this, VETS proposes that expected performance levels be negotiated separately for each of these same two groups. Yet, the strategic plan also suggests that, when providing services to all veterans, special attention should be given to meeting the needs of certain other target groups, some of which might require more intensive services to become employed. The groups targeted for special attention include (1) veterans who have significant barriers to employment, (2) veterans who served on active duty during a war (or campaign or expedition in which a campaign badge has been authorized), and (3) veterans recently separated from military service. In reviewing VETS' proposed measures and the plan for negotiating performance levels, staff may be confused as to where they should place their service priorities. It is unclear what steps VETS will take to ensure that DVOPS and LVERs are provided ample opportunity and encouragement to focus attention on the portion of the "all veterans" group who may require more staff time to be successful in getting a job. Last, VETS' proposal also continues to include a performance measure related to federal contractor job openings listed with the state's ES office. However, in its proposal, VETS has changed the measure. Under the current system, VETS tracks the number of Vietnam-era and special disabled veterans who were placed in jobs listed by federal contractors-- an outcome measure. Now, under the proposed system, VETS will track the increase in the number of federal contractor jobs listed with the state's ES office--a process-oriented measure. This new measure ultimately holds DVOPS and LVERs accountable for the number of federal contractors in a given state or local area, not for veteran placements with those contractors. The presence of federal contractors in a given state or local area is unpredictable and is determined by the federal agencies awarding contracts. Furthermore, according to state officials that we talked with, the federal contractor measure should be eliminated altogether because it is the responsibility of contractors to list their job openings. In addition, it is the Office of Federal Contract Compliance that is responsible for ensuring that all companies conducting business with the federal government list their jobs with state ES offices and take affirmative action to hire qualified veterans. The proposed data for the new measures will greatly improve the comparability and reliability of these measures, but this change will bring some challenges that VETS will need to address. Consistent with WIA and ES, VETS is proposing that all states use UI wage records to identify veterans who get jobs. UI wage records contain the earnings of each employee reported quarterly by employers to state UI agencies.Currently, the data VETS uses are not comparable across states, in part, because states use different data sources to report employment-related outcomes. Using a single, standardized source for collecting data will improve VETS' ability to compare performance across states. UI wage records will also provide state officials with a better means to identify veterans who get jobs than does the traditional follow-up method of telephoning veterans and/or employers to verify employment. However, states cannot readily access wage records from other states, wage records do not cover certain types of employment, and these data are not available until 3 to 9 months after an individual gets a job. Using a single data source will help to standardize the way in which states collect data on veterans, thereby making it easier to compare performance across states. Currently, states are using various data sources for performance-reporting purposes. While almost all of the states in our review used a combination of data sources to determine whether or not a veteran got a job, most of the states relied substantially on one data source, but that source differed among states. For example, in program year 1999 7 of the 15 states that we contacted relied to a large extent on wage record data to determine whether a veteran got a job or not; 7 others relied, for the most part, on telephone calls and letters to veterans and employers to determine a veteran's employment status; and one state relied primarily on its new hire database for employment data. In addition to making state data more comparable, we found evidence that states currently using wage records have been able to better identify those veterans who get jobs after receiving services. A recent study found that UI wage records more accurately identified how many veterans got jobs after receiving DVOP, LVER, or ES services. Using UI wage records, this study tracked veterans who registered with the Maryland Job Service during program year 1997 and found an entered-employment rate that ranged from 65 percent to 82 percent, depending on the way the study defined a registrant. In that same program year, Maryland reported to VETS an entered-employment rate of 31 percent, which was based on staff telephoning veterans and employers to verify employment. In addition, most states in our review that are now using UI wage records, either as their primary data source or to augment other data sources, reported higher employment rates in program year 1999 for veterans they served than that year's national average of 30 percent. (See app. II for a list of all states and their respective entered-employment rates for program years 1996-1999.) By comparison, all but one of the states that relied either on manual follow-up or the new hire database reported an employment rate below the national average. Another benefit of using UI wage records is that staff assisting veterans will be relying on data already available rather than collecting additional information from veterans or employers. Relying on these already reported data would require less staff time from DVOP, LVER, and ES staff, freeing them to focus more on providing job-related services to veterans. State officials told us that relying on manual follow-up, such as telephone calls, has been labor-intensive and has diverted staff attention away from providing appropriate assistance to veterans. While UI wage records offer advantages over the current data collection system, some challenges need to be addressed. First, states should find ways to identify interstate job placements. Because the UI wage record system resides within each state, states generally do not have access to wage records from other states, making it difficult to track individuals who receive services in one state but get a job in another. Currently, there is no national system in place that facilitates data sharing among states. However, in response to WIA requirements, states are developing an interstate UI wage record information sharing system, known as the Wage Record Interchange System (WRIS). The system is designed to minimize the burden on state unemployment insurance programs in responding to requests for wage record data, to ensure the security of the transactions involving individual wage records, and to produce the results at a low cost per record. In addition, some states have entered into agreements with neighboring states to share wage information in support of WIA. These efforts should help VETS as well. Second, states should find ways to identify those veterans finding jobs in categories not covered by UI wage records. UI wage records cover about 94 percent of wage and salary workers, but certain employment categories are not covered, such as self-employed persons, most independent contractors, military personnel, federal government workers, railroad employees, some part-time employees of nonprofit institutions, and employees of religious orders. Therefore, the UI system will not be able to track and count veterans who get these types of jobs. This is an issue for WIA as well, and states are beginning to assess the extent to which this issue will affect their ability to accurately determine the outcome of WIA- funded programs. There are other issues not related to the use of UI wage records that VETS should consider as it finalizes its performance-reporting requirements. VETS' proposed performance system does not standardize how states report veterans or nonveterans who use self-service activities, making it difficult to reliably assess nationwide performance. In an environment in which self-service is becoming more common, we found that states vary in whether they register veteran job seekers who access self-service tools, such as internet-based job listings or resume writing software. For example, some states allow job seekers greater access to job listings without requiring that they register, while others have more restrictions on who can access job lists. Table 3 shows how such differences can affect entered-employment rates. In this example, 100 veterans enter the employment service for assistance. In both cases, 40 veterans ultimately get jobs after receiving identical services. In one case, the placement rate is 40 percent and in the other, 50 percent--a 10 percentage point difference. This difference results from counting all job seekers in one case and only those requiring staff assistance in the other. As a result of the different ways states currently count veterans and report outcomes, the entered-employment rate measure is not consistently calculated across states, and nationwide comparisons are misleading. VETS' proposed performance system does not standardize how long a veteran or nonveteran remains registered after seeking services for performance-reporting purposes. We found that states differ in how long they keep veterans registered. This difference affects the calculation of the entered-employment rate (i.e., the number of veterans that get jobs), making performance comparisons across states less reliable. Many of the states we contacted count individuals as registered who have received a service in the last 6 months. However, two states only count those as registered who have received a service in the last 3 months, while two others count only those who received a service in the last 2 months. And in one state, anyone who has received a service from the state's employment office since 1998 is counted as a registrant when determining the entered- employment rate. States with shorter registration periods may be able to report a higher entered-employment rate than states with longer registration periods. VETS is improving its performance measurement system by proposing new measures that are more outcome-oriented than its current measures and by requiring that all states use wage record data to improve the comparability and reliability of reported program performance. While these changes move VETS a step closer to implementing an effective accountability system, they may not go far enough. VETS continues to send a mixed message to states about what services to provide and to whom. As presently defined, two of the proposed measures--the entered- employment rate and the employment rate following staff-assisted services--may provide nearly identical results, and neither helps VETS to monitor whether more intensive services are being provided to veterans or whether these services are successful. VETS also continues to inconsistently identify the groups of veterans that it wants states to help. In addition, VETS maintains a measure related to federal contractors--one that is beyond the control of DVOPS and LVERs. Furthermore, in its proposed system, VETS allows states to decide which veterans to include in its performance reports. This results in data inconsistencies that make state-to-state comparisons unreliable. Without clear and consistent direction from VETS' planning documents and performance measures, staff assisting veterans will be uncertain where to place their priorities. In addition, without stricter guidelines for how to count veterans, VETS will be unable to accurately assess program performance nationwide. Unless further modifications are made, VETS will be unable to fully determine whether its programs and services are fulfilling its mission. In order to establish a more effective performance management system, we recommend that the Secretary of Labor direct VETS to do the following: Redefine staff-assisted services to include only those that may be considered staff intensive, such as case management, so that VETS will be able to evaluate the success of intensive staff-assisted services. Clearly define target populations so that staff assisting veterans know where to place their priorities. If staff are to focus on assisting veterans who need more assistance, VETS should provide incentives and opportunities to do so through appropriate performance measures or negotiated levels of performance. Eliminate the measure related to federal contractor jobs so that staff are not held accountable for the number of federal contractors in a state or local area or for the failure of contractors to list their jobs with ES offices. Establish and communicate guidelines that standardize how to count veterans for performance-reporting purposes so that VETS will be able to assess program performance nationwide. We provided VETS with the opportunity to comment on a draft of this report. Formal comments from VETS appear in appendix III. In addition to the comments discussed below, VETS provided technical comments that we incorporated where appropriate. VETS generally agreed with our findings and two of our recommendations but disagreed with the other two recommendations. VETS acknowledged that its current strategic plan (Nov. 2000) sends a mixed message to the states about which groups of veterans staff should target for special attention. VETS noted that it is revising its strategic and annual plans to reflect a more consistent message about what services to provide and to whom. VETS also explained that it is developing new performance standards specific to DVOP and LVER staff that will clarify the role they play in providing services to veterans. According to VETS officials, states will have the option of using these specific standards or developing their own. When developing these standards, VETS will need to ensure that the specific standards developed for DVOPS and LVERs are consistent with the message in the revised strategic plan and that together they provide a coherent strategy as to where staff should place their service priorities. VETS disagreed with our recommendation for a revised definition of the performance measure related to staff-assisted services. VETS said that any veteran receiving staff-assisted services may require a multitude of the services cited in the definition--any one of which or combination thereof may require extensive staff time. We disagree that any one of these services necessarily requires extensive staff time. As noted in our report, a veteran may be counted as receiving staff-assisted services after receiving only a job referral or labor market information--services that by themselves would not involve extensive staff resources. Moreover, we continue to believe that the broadly defined staff-assisted service measure will likely not report outcomes substantially different from those reported for the more general entered-employment rate measure. As noted in our report, a stricter definition for staff-assisted services that includes only those services generally considered to be staff-intensive would allow VETS to more accurately assess outcomes associated with those services. VETS disagreed with our recommendation to discontinue the measure related to jobs listed by federal contractors. However, VETS agreed to reconsider the suitability of this specific measure after public comments have been received. As we noted in our report, the presence of federal contractors in a given state or local area is determined by the federal agencies awarding contracts. In addition, state officials told us that it is the responsibility of the contractors, not DVOP and LVER staff, to list their job openings with employment services. Current law requires the Secretary of Labor to report annually to the Congress on the number of federal contractor positions listed and the number of veterans receiving job priority through this program. This information could be collected in absence of a specific performance measure. With regard to our recommendation that VETS establish guidelines that standardize how states count veterans for performance-reporting purposes, VETS said that it will be working with ETA to determine how states can uniformly report veterans and nonveterans that use self-service activities. In addition, VETS noted that the revised ETA 9002 report will provide uniform instructions on how long individuals remain registered in the system. We are sending copies of this report to the Honorable Elaine L. Chao, Secretary of Labor; appropriate congressional committees; and other interested parties. We will also make copies available to others upon request. If you or your staff have questions about this report, please contact me on (202) 512-7215 or Dianne Blank on (202) 512-5654. Individuals making key contributions to this report include Elizabeth Morrison and Amanda Ahlstrand. Similar to Workforce Investment Act (WIA) programs, the Employment Service (ES) and the Veterans' Employment and Training Service (VETS) are proposing that their programs use Unemployment Insurance wage records to report on performance measures. Each calendar quarter, employers submit wage record data to their state's UI agency or some other state agency. The following table compares the proposed performance measures of VETS and ES and those used by WIA's adult and dislocated worker programs. ES proposed performance measures Entered-employment rate: The percentage of workers who got a job in the 1st or 2nd quarter after registration. WIA performance measures (adult and dislocated worker programs) Entered-employment rate: The percentage of workers who got a job by the end of the 1st quarter after exit. Employment retention rate: Of those who had a job in the 1st quarter after exit, the percentage of workers who have a job in the 3rd quarter after exit. Employer customer satisfaction: Average of three survey questions on employers' satisfaction with services received. Job seeker customer satisfaction: Average of three survey questions on job seekers' satisfaction with services received. Employer customer satisfaction: Average of three survey questions on employers' satisfaction with services received. Job seeker customer satisfaction: Average of three survey questions on job seekers' satisfaction with services received. WIA performance measures (adult and dislocated worker programs) Earnings change (adults only): The difference between total post-program earnings (from the 2nd and 3rd quarters after exiting the WIA program) and the total pre-program earnings (from the 2nd and 3rd quarters prior to entering the WIA program) divided by the number of participants leaving the program. Earnings replacement rate (dislocated workers only): Total post-program earnings (in the 2nd and 3rd quarters after exit) divided by pre- dislocation earnings (in the 2nd and 3rd quarters prior to dislocation). Staff-assisted services include: (a) referral to a job; (b) placement in training; (c) assessment services, including an assessment interview, testing, counseling and employability planning; (d) career guidance; (e) job search activities, including resume assistance, job search workshops, job finding clubs, specific labor market information and job search planning; (f) federal bonding program; (g) job development contacts; (h) tax credit eligibility determination; (i) referral to other services, including skills training, educational services and supportive services; and (j) any other service requiring expenditure of time. Application taking and/or registration services are not included as staff- assisted services.
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This report discusses the proposed performance measurement system at the Department of Labor's Veterans' Employment and Training Service (VETS). Specifically, GAO reviews (1) VETS' proposed performance measures, including possible concerns about the measures; (2) the proposed data source for the new system; and (3) other measurement issues that would effect the comparability of states' performance data. GAO found that VETS' proposed performance measures would improve performance accountability over the current system, but some aspects of the new measures raise concerns. VETS' strategic plan suggests that states focus their efforts on providing staff-assisted services to veterans, including case management. Yet none of the proposed measures specifically gauge the success of these services. In addition, VETS' proposal includes one measure--the number of federal contractor jobs listed with local employment offices--that is not only process-oriented but also focuses on outcomes that are beyond the control of staff serving veterans. VETS proposes that all states use a single data source--Unemployment Insurance wage records--to identify veterans who get jobs. Using these data will greatly improve the comparability and reliability of the new measures. Although using these data will improve some aspects of data collection, the data present some challenges. States generally do not have access to wage records from other states and, therefore, should find ways to track individuals who receive services in one state but get a job in another. Other issues that affect the comparability of states' performance-related data should be considered. For example, states vary in whether they register and count, for performance reporting purposes, job seekers who use only self-service tools, such as internet-based job listings.
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39 million beneficiaries and spends about $212 billion a year. Its benefits include hospital, physician, and other services such as home health and limited skilled nursing facility care. HCFA administers Medicare and regulates participating providers and health plans. Original, or traditional, Medicare reimburses private providers on a fee-for-service basis and allows Medicare beneficiaries to choose their own providers without restriction. A newer option within Medicare allows beneficiaries to choose among private, managed care health plans. Currently, 17 percent of beneficiaries use Medicare managed care. In original Medicare, beneficiaries must pay a share of the costs for various services. Most Medicare managed care plans have only modest beneficiary cost-sharing and many offer extra benefits, such as prescription drugs. DOD received an appropriation for military health care of almost $16 billion in fiscal year 1999. Of that, an estimated $1.2 billion is spent on the 1.3 million Medicare-eligible military retirees. Under its TRICARE program, DOD provides health benefits to active duty military, retirees, and their dependents, but most retirees 65 and over lose their eligibility for comprehensive, DOD-sponsored health coverage. DOD delivers most of the health care needed by active duty personnel and military retirees through its military hospitals and clinics. DOD gives priority for care to active duty personnel and their dependents, and to certain retirees under 65. Retirees who turn 65 and become eligible for Medicare can get military care if space is available (called space-available care)--that is, after other DOD beneficiaries are treated. Some military facilities have little or no space-available care. covers services of military physicians as well as civilian network providers by drawing on DOD's appropriated funds and premiums and copayments charged to some enrollees. In TRICARE Prime, DOD generally organizes the delivery of care on managed care principles--for example, an emphasis on a primary care manager for each enrollee. DOD has gained considerable experience with managed care, but it relies heavily on contractors to conduct marketing, build a network of providers, and perform other critical functions. The BBA established a 3-year demonstration of Medicare subvention, to start on January 1, 1998, and end on December 31, 2000. Within the BBA's guidelines, DOD and HCFA negotiated a Memorandum of Agreement (MOA). The MOA stated the ways in which HCFA would treat DOD like any other Medicare health plan and the ways in which HCFA would treat it differently. The MOA also spelled out the benefit package and the rules for Medicare's payments to DOD. After DOD and HCFA signed the MOA, they selected six demonstration sites. They would be able to serve about 30,000 of the 125,000 people eligible for both Medicare and military health benefits in these areas. The subvention demonstration made DOD responsible for creating a DOD-run Medicare managed care organization for elderly retirees. This pilot health plan, which DOD named Senior Prime, is built on DOD's existing managed care model. By enrolling in Senior Prime, Medicare-eligible military retirees obtain priority for services at military facilities--an advantage, compared to nonenrollees. Senior Prime's benefit package is "Medicare-plus"--the full Medicare benefits package supplemented by some other benefits, notably prescription drugs. only retain a portion of these payments if that year's costs for the six sites together exceed baseline LOE. VA provides a comprehensive array of health services to veterans with service-connected disabilities or low incomes. Since 1986, VA has also offered health care to higher-income veterans, who must however make copayments for services. Overall, VA serves over 13 percent of the total veteran population of 25 million, with the remaining veterans receiving their health care through private or employer health plans or other public programs. Many of the veterans whom VA serves also get part of their care from other sources, such as DOD, Medicaid, and private insurance. The administration has requested $17.3 billion for VA medical care in fiscal year 2000. To make up the differences between appropriated funds and projected costs, VA estimates that, by fiscal year 2002, it can derive almost 8 percent of the medical care budget from nonappropriated sources, including Medicare reimbursement. Since the early 1990s, VA has shifted its focus from inpatient to outpatient care. At the same time, it implemented managed care principles, emphasizing primary care. In 1995, VA accelerated this transformation by realigning its medical centers and outpatient clinics into 22 service delivery networks and empowering these networks to restructure the delivery of health services. In 1996, the Congress passed the Veterans' Health Care Eligibility Reform Act that established, for the first time, a system to enroll or register veterans. Enrollment is in effect a registration system for veterans who want to receive care. The law establishes seven priority groups, with Priority Group 1 the highest and Priority Group 7 the lowest. Priority Group 7 includes veterans whose incomes and assets exceed a specified level and (a) do not have a service-connected disability or (b) do not qualify for VA payments for those disabilities. Priority Group 7 veterans must agree to make copayments for health services. broad package that covers inpatient and outpatient care; rehabilitative care and services; preventive services; respite and hospice care; and pharmaceuticals, durable medical equipment, and prosthetics. Enrolled veterans remain free to get some or all of their care from other private or public sources, including Medicare. VA, on the other hand, is committed to serving all enrolled veterans. The structure of any VA subvention demonstration would depend upon the principles and directions that the Congress incorporates in authorizing legislation. We have found certain common elements in all demonstration proposals we reviewed. A VA subvention demonstration would serve certain higher-income, Medicare-eligible veterans (effectively, Priority Group 7 veterans): for a limited time period, such as 3 years; in a limited number of locations; and in compliance with Medicare rules that HCFA applies to the private sector, although HCFA could waive rules that were inappropriate or irrelevant to VA. direct VA to maintain reserves against the risk that appropriated funds would be needed to pay for the care of veterans enrolled in the subvention demonstration. Some proposals authorize VA to establish both fee-for-service and managed care subvention sites, while at least one only authorizes managed care. In implementing the subvention demonstration, DOD and HCFA completed numerous and substantial tasks. DOD sites had to gain familiarity with HCFA regulations and processes, prepare HCFA applications, prepare for and host a HCFA site visit to assess compliance with managed care plan requirements, develop and implement an enrollment process, market the program to potential enrollees, establish a provider network (for care that cannot be provided at the military treatment facilities), assign Primary Care Managers to all enrollees, conduct orientation sessions for new enrollees, and begin service. The national HCFA and DOD offices developed a Memorandum of Agreement, spelling out program guidelines in broad terms. They also developed payment mechanisms, and translated the BBA requirement that DOD maintain its historical LOE in serving dual eligibles into a reimbursement formula. HCFA accelerated review procedures and assigned additional staff so that timelines could be met. But these accomplishments were not without difficulties, and several issues remain that are likely to impact the demonstration's results. These include the extent to which payment rules can be made more understandable and workable, and the extent to which DOD can operate successfully and efficiently as a Medicare managed care organization. In view of the steep learning curve that DOD faced--it started without any Medicare experience--it is not surprising that the demonstration did not start on time. The BBA was enacted in August 1997 and authorized a demonstration beginning in January 1998. The first site started providing service in September 1998, and all sites were providing service by January 1999. Officials at all DOD sites emphasized to us that the process of establishing a Medicare managed care organization at their facility was far more complex than they had expected. They noted several issues that caused difficulty during this accelerated startup phase, including the following: Delayed notification to sites of their selection for the demonstration. Difficulties in learning and adapting to HCFA rules, procedures, and terms for managed care organizations. For example, DOD had to significantly rework grievance and appeals procedures to comply with HCFA requirements. Difficulties due to shifts in Medicare requirements. All sites started planning as HCFA was developing the new Medicare managed care regulations to replace the rules for the former risk contract managed care program. Consequently, the sites had to adapt to changed rules when they were published. Sites vary significantly in their capacity for caring for Medicare-eligible retirees, how close enrollment is to capacity, and what fraction of eligibles has enrolled. This variation suggests that potential demand for a subvention program is uncertain. Retirees' enrollment decisions reflect several factors, some that DOD may be able to influence but others--such as the extent of managed care presence in an area--outside its control. In establishing their enrollment capacity--which effectively became an enrollment target--some sites were more conservative than others. Sites' assessment of their resources focused on the availability of primary care managers--physicians and other clinicians who both provide primary care and serve as gatekeepers to specialist care. Additionally, the national TRICARE office developed a model to show how many enrollees a site would need to meet its LOE threshold and start receiving increased resources from subvention, and these results were made available to sites. Capacity varied from San Antonio, the largest site with four hospitals and a capacity of 12,700, to Dover, which provides only outpatient care in its military health facility and set its capacity at 1,500. Many DOD officials and other observers expected that sites would be deluged with applications and would rapidly reach capacity, but this did not happen. One site is currently at capacity, but only after several months. Other sites have enrolled between 44 percent and 91 percent of capacity as of the end of April 1999. 50 percent of dual eligibles are in private Medicare managed care plans--to two sites with higher percentages of enrollees (Keesler and Dover)--where no one is in managed care because no plans are available. The availability of military care varies. Several sites emphasized in their marketing that retirees who did not enroll could not count on receiving space-available care. This information might spur retirees who prefer military care to enroll in Senior Prime. At other sites, space-available care was less of an issue. At these sites, prospective enrollees who believe that they can continue to receive space-available care may not see an advantage in enrollment but rather a disadvantage--especially because enrolling in Senior Prime locks them out of other Medicare-paid care. Sites may differ in the amount of space-available care they have given in the past and in beneficiaries' satisfaction with that care. These factors could also affect the decision to enroll. Some retirees expressed reluctance to enroll because the demonstration is due to end in December 2000. They also noted that they did not get information about how, after the demonstration ends, enrollees would transition back to space-available care, traditional fee-for-service Medicare, or a Medicare managed care organization. The subvention demonstration for military retirees aged 65 and over is a new endeavor that highlights challenges for DOD to operate as a Medicare managed care organization. The first is operational--putting in place procedures, organization, and staff to deliver a managed care product to these seniors. The second is economic and organizational--creating the business culture that reconciles delivering services to this illness-prone population with cost-consciousness. DOD's reliance on contractors (like Foundation Health and Humana) has both enabled it to accomplish key managed care tasks and brought risks with it. DOD overcame obstacles in launching TRICARE Senior Prime as a managed care organization. Specifically, to establish and run a managed care plan requires infrastructure--the ability to market the plan, enroll members, and recruit, manage, and pay a provider network. In building Senior Prime organizations at the six sites, DOD has benefited from its TRICARE Prime experience, and from its contractors who help with or perform many of these tasks. Sites with well-established TRICARE Prime organizations that had worked with the same contractor for several years seemed to us to have a sizeable advantage in establishing Senior Prime. It is not yet known what effect DOD's extensive use of contractors will have on DOD costs for Senior Prime. But an expanded, permanent subvention program would require establishing and monitoring contractors at many new sites. That would make contractor quality, relationships, and costs a pivotal and uncertain feature of a potential DOD subvention program. get more military primary care doctors or to set up a new program with large up-front costs, even if these actions would promote longer-term efficiency. DOD and HCFA have devised payment rules to meet the statutory requirement that Medicare should pay DOD only after its spending on retirees' care reaches predemonstration levels--that is, after it has met its baseline, or LOE. These rules have added to the difficulty and the complexity of the demonstration. Furthermore, they have resulted in Medicare payments to DOD not being immediately distributed to the sites. As a result, DOD site managers tend to view DOD appropriations as the sole funding source for all Senior Prime care delivered at military health facilities; the managers are likely to consider Medicare subvention payments as irrelevant to their plans for dealing with capacity bottlenecks or other resource needs in TRICARE Senior Prime. The demonstration's payment system requires extensive cost and workload data--data that are often problematic and difficult to retrieve and audit. It also involves a complicated sequence of triggers and adjustments for interim and final payments from Medicare to DOD. Interim payments are made to DOD for care delivered at each site that is above a monthly LOE threshold. A reconciliation after the end of the year to determine final Medicare payments can result in DOD returning a portion of those interim payments if the LOE for all sites for the entire year is not reached. DOD would also return Medicare payments if data showed that the demonstration population was in better health than that allowed for in the Medicare payment rates, or if payments exceed the statutory cap ($50 million in the first year, $60 million in the second, and $65 million in the third). managed care payment system, in which payments are made at the beginning of the month to cover care delivered during the month. Based on experience to date with the demonstration, any payment approach for subvention must be even-handed (that is, it should favor neither HCFA nor DOD); straightforward and readily understandable; and prospective (DOD and its sites should receive payment in advance of delivering care to enrollees). The demonstration's payment mechanism, which relies on LOE, is functional in the short term--although the calculation of LOE has weaknesses. However, this payment mechanism may not be appropriate over the longer term for an extended or expanded subvention program. Moreover, a credible long-term payment system should start with a zero-based budgeting approach: first, determining the cost to DOD of providing TRICARE Senior Prime care to dual eligibles and then deciding how much care will be provided from DOD's appropriations and how much from Medicare reimbursement. One of the key issues for VA under the proposed demonstration would be how to market subvention and persuade veterans in subvention sites to enroll in the demonstration. This issue is complicated by VA's own enrollment process and the broad benefits package it offers to all priority groups. VA is committed, as a matter of policy, to serving all enrolled veterans in 1999 and has indicated a desire to do so next year. As a result, it has relatively few options if veterans in a subvention demonstration consume so many resources that they crowd out--or at least put pressure on VA's capacity for serving--other veterans. Two models are possible for the demonstration--fee for service and managed care. Although fee for service is, in principle, easier to implement and operate, VA's past difficulties with billing third-party payers raise concern. Proposals for a VA demonstration could be strengthened by taking account of DOD's difficulties in establishing a subvention demonstration. In particular, DOD experience shows that implementation is difficult and that enough time should be allowed to undertake the numerous operational steps needed to get a demonstration started. Furthermore, payment rules need to be as simple as possible, and data systems are key to managing and evaluating a subvention demonstration. they can currently receive from VA. Priority Group 7 veterans--the only ones eligible for subvention--can now get all services in VA's broad Uniform Benefits Package. Veterans who are eligible for Medicare can also get care from non-VA providers--either under fee-for-service or through a managed care plan. If it needed to make subvention benefits more attractive, VA could either reduce copayments or increase benefits. However, VA officials tell us that, due to resource constraints, VA may not serve Priority Group 7 veterans in the future. If this happens, these veterans could only get VA services through a subvention demonstration and hence would probably be more likely to enroll. (To make this exception possible, legislation would be required, as eligibility for VA enrollment is uniform nationally.) Some VA officials have suggested to us that, to give Priority Group 7 veterans a reason to enroll, it may be necessary to exclude them from VA services--except through the demonstration. The greatest risk in a VA subvention program is that subvention enrollees could consume so many services that VA patients in higher priority groups would be "crowded out." However, VA, according to its policy, cannot deny care to an enrolled veteran (that is, one who is registered with VA), even if it does not have sufficient capacity. In the short term, waiting times for appointments would probably increase, or care could be limited to certain facilities, which might be inconvenient for some veterans. VA could also reduce its benefits package, although that would require a change in regulations. In the longer term, some veterans could be denied all VA care if VA excludes one or more priority groups. This would be particularly serious for veterans who lack other insurance. Current proposals for a VA subvention demonstration permit both managed care and fee-for-service sites. Of the two, fee for service appears to be easier to implement, because it only requires submitting claims for covered services to HCFA for payment. However, in the past, VA has had difficulty in collecting from insurance companies because its bills have not had enough detail (for example, diagnosis, service, procedure, and individually identified provider). While VA is moving toward a billing system that will more closely approximate private sector counterparts, its success remains to be seen. Managed care, by definition, places VA at financial risk, and it is also, as DOD's experience demonstrates, difficult to implement. On the other hand, managed care is highly compatible with the direction in which VA is currently moving. Moreover, VA does not have the experience that DOD gained from TRICARE, and it does not have broad-based managed care contractors that appear to have greatly facilitated implementing and managing the DOD demonstration. If a VA subvention demonstration were to include both managed care and fee-for-service sites, a phased implementation, with one type of delivery system being successfully implemented before the other started, would allow both HCFA and VA to focus their resources. The requirements for Medicare fee for service and managed care differ considerably. As a result, implementing both types of sites simultaneously may place significant strains on both HCFA and VA staffs, particularly at the national level. We see three main lessons for VA in DOD's experience in establishing its subvention demonstration. Officials at every DOD site told us that establishing a Medicare managed care organization was more difficult and required more effort than they had expected. Months into the implementation, they continue to encounter new issues. Even though the sites took 13 to 17 months after the legislation was passed to establish Senior Prime, hindsight suggest that the goals to get it running earlier were unrealistic. If a VA demonstration is authorized, it should have 12 to 18 months to implement its plans for the demonstration; both VA headquarters and the sites will need that much time. The complexity of the LOE definition and Medicare payment rules, as well as ambiguity about what sites could earn and whether earnings would be distributed to the sites, were issues for DOD. These factors caused many site managers and physicians to largely disregard the potential changes in available financial resources and focus their attention primarily on implementation and patient care issues. As a result, the demonstration may not produce the cost savings and efficiencies that are expected from managed care. VA and HCFA have tentatively agreed to rules that are consistent with the DOD rules and still contain many of the elements that have made it difficult for DOD to manage the demonstration. In particular, payments would be retrospective and an annual reconciliation process could lead to VA returning money to HCFA. DOD's experience shows that data systems are a point of vulnerability for a successful and credible program. The extent to which data quality would pose an obstacle to a VA demonstration depends in part on how the payment rules are specified. Good data, consistent across sites, would also be needed to manage and evaluate the demonstration. Data quality problems would probably vary by site, with some sites having better data than others. The types of data systems needed would depend in part on the subvention model that is selected. For example, in a fee-for-service model, billing systems are critical. In addition, both DOD and VA will need to develop a strategy to inform and assist beneficiaries with their options in the postdemonstration period. Further, as Medicare enrollment in managed care plans is shifting to an annual open season, it would be desirable to coordinate enrollment in and termination of the demonstration with Medicare's open season. Subvention holds significant potential for giving military retirees and veterans an additional option for health care coverage, for giving DOD and VA additional funds, and for saving Medicare money. However, at this point--with little systematic data yet available--these outcomes are uncertain. This uncertainty underlines the value of demonstrations of subvention, such as the one that the BBA established for DOD. If a VA demonstration were authorized, VA would clearly need sufficient time to plan and initiate it. VA could also increase its chance of successfully establishing the demonstration if it took advantage of DOD's experience. Mr. Chairman, this concludes our prepared statement. We will be happy to answer any questions that 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. 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Pursuant to a congressional request, GAO discussed the Department of Defense's (DOD) Medicare subvention demonstration program, focusing on: (1) the early phases of implementing the DOD demonstration; (2) issues raised by that experience for DOD subvention; and (3) lessons from the DOD demonstration for a possible Department of Veterans Affairs (VA) demonstration. GAO noted that: (1) subvention holds the potential to benefit military retirees and veterans, DOD and VA, and Medicare; (2) although it got off to a slow start, DOD has initiated its subvention demonstration and is now serving Medicare-eligible military retirees at six sites; (3) several key operational issues remain; (4) these include development of more understandable payment rules, viable for the longer term, and development of data to manage the demonstration and support its evaluation; (5) most important, the demonstration's final results, in terms of access to health care, quality of patient care, and costs to DOD, Medicare, and retirees, will not be known until the evaluation is completed, several months after the end of the demonstration in December 2000; (6) DOD's early experience with subvention does offer insights if proposals are acted on to permit Medicare subvention for VA; (7) in particular, it would need to consider, in collaboration with the Health Care Financing Administration, how to determine its baseline costs and payment rules, as well as the need for good data for implementation, management, and controlling costs; (8) moreover, VA would need to make its regular enrollment of veterans who wish to use VA health care services interface smoothly with subvention demonstration enrollment; (9) VA would also need to be concerned about potential crowding-out of other, higher-priority veterans by subvention enrollees; and (10) GAO's early work on DOD subvention suggests that VA would have a greater chance of success if it has sufficient time to plan and establish the demonstration, and if the value and feasibility of implementing fee-for-service and managed care subvention models simultaneously were reconsidered.
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Millions of state and local government employees are supplementing their future retirement benefits by contributing to salary reduction plans called salary reduction or defined contribution arrangements. Such plans enable participants to defer part of their current salary for future use. The goal of these plans is to postpone federal income tax until the amounts deferred from an employee's salary and any earnings or losses thereon are received by the participant at separation or retirement. All salary reduction plans pose some risk of financial loss from poor investment performance. However, amounts in plans organized under Internal Revenue Code (IRC) section 457(b) (hereinafter referred to as 457 plans) bear additional risk because salary deferrals to 457 plans are assets of the sponsoring employer that may be used for nonplan purposes and which are subject in the event of bankruptcy to the claims of general creditors. For example, one municipality's recent bankruptcy could cause financial losses to employees who participated in its 457 plans. In addition, amounts earmarked to pay another county's 457 plan obligations could have been at risk when the county intended to use those amounts to meet payroll expenses. In that case, the county might not have had the funds available when the time came to pay out the amounts due the 457 plan participants. In both cases, county officials were entitled to use the money saved to pay 457 plan obligations for nonplan purposes. As a result, concerns have been raised about the security of deferrals that participants make from their salary under 457 plans. A state or local government may elect to offer its employees, among other retirement plans, a deferred compensation arrangement under IRC sections 403(b), 401(k), and 457(b). In all three types of plans, employees may voluntarily defer compensation through payroll deductions. Federal income tax is postponed until employees begin to receive their account balances, usually at retirement or when they are no longer employed by the plan's sponsor. These three salary reduction plans typically are intended to supplement an employer-sponsored qualified pension plan under IRC section 401(a). In general, 401(k) plans, sometimes referred to as cash or deferred arrangements, are qualified plans that allow employees to choose between receiving current compensation or having part of their compensation contributed to a qualified profit-sharing or stock bonus plan. A 403(b) plan, a qualified-type plan sometimes referred to as a tax-sheltered annuity, is a deferred compensation arrangement that may be sponsored only on behalf of employees of public educational systems and other specific tax-exempt organizations. Section 457(b) plans are nonqualified, unfunded deferred compensation plans that may cover all employees of a state or local government and certain highly compensated employees of a tax-exempt organization. Such plans permit these employees to defer limited amounts of compensation so that, under the principles of constructive receipt and economic benefit, tax will also be deferred on the amounts plus their earnings until some future event. Eligibility and the security of deferred amounts vary among the three plan types. Employees of public schools, colleges and universities, and some private institutions exempt from tax under IRC section 501(c)(3), such as hospitals, typically participate in 403(b) plans. Contributions to these plans are generally maintained as an annuity contract or custodial account, both of which are reserved for the sole benefit of the participant and his or her beneficiaries. Employee deferrals under section 401(k) plans are held in trust for the sole benefit of the participants and their beneficiaries. These participants are primarily employed in the private sector. However, some state and local governments established these plans in the late 1970s and early 1980s for their employees. With the enactment of the Tax Reform Act of 1986,state and local government employers who had not previously established 401(k) plans were prohibited from establishing new 401(k) plans, but existing plans could continue. Despite concerns raised by representatives of state and local governments, among others, the rationale for this exclusion was that allowing public employees to have access to both 401(k) plans and 457 plans would be "inappropriately duplicative." Only employees of and independent contractors providing service to state and local government and tax-exempt organizations may participate in 457 plans. Unlike 401(k) and 403(b) plans that are funded and must comply with the nondiscrimination and minimum participation rules, section 457 plans are unsecured promises of the employer to pay amounts in the future. A section 457 eligible, salary reduction plan requires that all deferred compensation and income shall remain solely the property of the employer and be subject to the claims of the employer's general creditors. In 1999, 401(k) and certain 403(b) plans must begin testing for nondiscrimination and minimum participation rules. Generally, the nondiscrimination rule requires that benefits or contributions provided under the plan do not discriminate in favor of highly compensated employees. The minimum participation rule requires that the plan benefit at least the lesser of 50 employees or 40 percent of all employees. The minimum coverage rule requires that the percentage of nonhighly compensated employees who benefit under the plan must be at least 70 percent of the highly compensated employees who benefit under the plan, or the nonhighly compensated employees in the workforce must receive benefits that on average are at least 70 percent of the benefits received by highly compensated employees. State and local government sponsors of these plans have expressed concern that required compliance with these rules will be burdensome and costly. Two tax principles, constructive receipt and economic benefit, are often intertwined in matters regarding nonqualified, unfunded deferred compensation. Under the principle of constructive receipt, income is taxable even when an employee has not actually received current compensation, if the compensation is credited to the employee's account, set apart for the employee, or otherwise made available to the employee. The principle of economic benefit, on the other hand, taxes assets that have been unconditionally and irrevocably transferred into a fund for the employee's sole benefit because he or she has received a benefit (that is, some deferred salary) that, although not readily convertible to cash, has an immediate value (that is, a fund for his or her benefit) that is secured from the employer's creditors. Section 401(k) and 403(b) plans are funded, qualified or qualified-type arrangements where the deferred amounts are placed in trust; that is, set aside for the exclusive benefit of the employees who participate in the plans, secured from an employer's creditors. So that such arrangements would not cause the participants to be taxed under the basic principles of constructive receipt and economic benefit, the Congress overrode these two principles by providing for income to be taxed only when it is distributed. Section 457 plans, on the other hand, are nonqualified, unfunded deferred compensation plans that follow the basic principles of constructive receipt and economic benefit. Participants are not in constructive receipt of their deferrals because the amounts are not set apart for or otherwise available to them at any time. Participants do not derive the economic benefit of their deferred compensation because the deferred amounts are the property of their employers and subject to the employers' general creditors. Instead, participants have bookkeeping accounts with balances that represent the amount that the employers promise to pay at some future time. These account balances are comprised of amounts deferred under the plan and any earnings or losses that would have accrued to those amounts if the account balances had been invested as stated under the plan. Although most employers sponsoring 457 plans invest amounts as necessary so that they will be able to provide the promised benefit when due, there is no requirement for them to do so. In 1972, IRS issued the first of a number of private letter rulings holding that tax may be deferred on employee contributions from salary to a nonqualified, unfunded deferred compensation plan where a state or local government was the employer. Nonqualified, unfunded deferred compensation plans of state and local governments and tax-exempt organizations were not subject at that time to certain restrictions placed on qualified plans: (1) they did not need to comply with nondiscrimination rules applicable to qualified plans; (2) there was no limit on the amount participants could contribute; and (3) participants in nonqualified, unfunded plans, unlike participants in qualified plans, could make tax-deductible contributions to individual retirement accounts (IRA). In 1977, however, IRS stopped issuing private letter rulings on the income tax treatment of amounts deferred under nonqualified, unfunded deferred compensation plans, pending formal review of its position. In 1978, IRS changed its position and published proposed regulations that would have subjected participants in nonqualified, unfunded deferred compensation arrangements to immediate taxation on deferred amounts. "cannot have any secured interest in the assets purchased with their deferred compensation and the assets may not be segregated for their benefit in any manner which would put them beyond the reach of the general creditors of the sponsoring entity." Section 401(k) plans must meet three federal requirements for employee participation to be considered qualified. First, the value of the benefits that highly compensated employees as a group may receive is limited by the value of the benefits the less well paid employees collectively receive; this is the nondiscrimination rule. Second, at least the lesser of 50 employees or 40 percent of all eligible employees must participate in the plan; this is the minimum participation rule. Third, the plan must benefit a percentage of nonhighly compensated employees that is at least 70 percent of the percentage of highly compensated employees benefiting under the plan or the nonhighly compensated employees in the workforce must receive benefits that, on average, are at least 70 percent of the benefits received by highly compensated employees; this is the minimum coverage requirement. Additionally, among many other requirements, sponsoring employers must meet certain nondiscrimination tests and report their annual levels of participation, current assets, and current liabilities. Tax-sheltered annuities under section 403(b) must meet nondiscrimination rules. Salary reduction deferrals to 403(b) plans must also meet special nondiscrimination rules that are deemed satisfied if all employees defer in excess of $200. Starting in 1997, section 403(b) plans that provide employer matching contributions will have to meet special nondiscrimination rules provided by section 401(m). Starting in 1999, section 403(b) plans that provide nonelective contributions (employer contributions that do not reduce a participant's salary) will be required to meet the nondiscrimination, minimum coverage, and minimum participation rules. For a 457(b) plan to be eligible for tax deferral treatment, the Congress limited the amount of compensation that may be deferred, but permitted participants to wait until after separation from employment to elect the time and method of payout. However, minimum participation, minimum coverage, and nondiscrimination rules that are a cornerstone for the tax-favored status of qualified, funded plans were not imposed. Little information is available on the number of 401(k) and 403(b) plans sponsored by state and local governments or the number of people participating in them. However, a 1993 study of over 400 state and local government general pension plans showed that about 8.4 percent of responding governments sponsored a 401(k) plan and 7.1 percent sponsored a 403(b) plan. In that study, 457 plans were the most frequently used salary reduction plans. About 90 percent of local governments and all 50 states provided their employees access to 457 plans. In 1994, an estimated 1,750,000 people participated in about 10,000 plans sponsored by government entities nationwide. Several bills have been introduced in the 104th Congress to redesign section 457 plans. For example, H.R. 2491, the omnibus budget reconciliation bill, contained provisions that would require all assets and income of a 457 plan to be held in trust for the exclusive benefit of participants and their beneficiaries. However, IRS officials told us that imposition of such a trust requirement would result in immediate taxation for deferrals to a 457 plan because of the requirements of IRC section 457(b)(6). With respect to section 401(k) plans, another provision of the reconciliation bill would have provided a simplified and less costly alternative method of testing for nondiscrimination requirements under IRC. In separate legislation, under section 14212 of H.R. 2517, which was incorporated into the reconciliation bill and then dropped, state and local governments and tax-exempt organizations would have been extended the eligibility to provide 401(k) plans to their employees. In response to concerns about financial losses to state and local government supplemental pension plans, the House Ways and Means Committee asked us to examine the nature and security of such plans. After discussions with Committee staff, we agreed to determine (1) whether amounts held in state and local government salary reduction plans or otherwise promised to participants inherently are at risk of financial loss to the participants and (2) how statutory provisions comparatively treat participants in these plans. To determine how the plan provisions affect financial risk, we interviewed representatives from IRS and Securities and Exchange Commission (SEC) staff. In addition, we discussed the risk of financial loss relative to plan provisions and whether the provisions treat participants comparably with representatives of the Government Finance Officers Association; the International City/County Managers Association-Retirement Corporation; the National Association of Counties; the National Council on Teacher Retirement; the National Association of Government Deferred Compensation Administrators; and the Nationwide Insurance Company and its subsidiary, the Public Employees Benefit Service Corporation. To determine how state and local government plans are generally administered, we contacted plan administrators in Alabama, California, Connecticut, Florida, Georgia, Michigan, Minnesota, Mississippi, Nebraska, New Jersey, Ohio, Oklahoma, Tennessee, Texas, and Wisconsin. We selected these states on the basis of information they reported on their 457 plans in the 1993 PENDAT database. We focused our review on 15 states and on eight counties in California. We selected these counties because of the Committee's concerns about the impact of the Orange County, California, bankruptcy on 457 plans sponsored by other California counties. We conducted our work from January 1995 through January 1996 in accordance with generally accepted government auditing standards. The statutory requirements that provide for tax deferral for 457 plans also place the assets held to pay participants' benefits at risk of loss from creditors of the government sponsor in the event of a bankruptcy and, unless the sponsor provides for a rabbi trust, from the government's using them for other than plan purposes. Two 457 plans in California illustrate these risks. In one case, a county filed for bankruptcy protection, which put amounts set aside to pay the county's obligations under its 457 plan at risk of being used to satisfy the county's creditors. Because participants in 457 plans have no greater rights of their employer than general, unsecured creditors, such actions could reduce the amount participants otherwise would receive from the plan. In the other case, a county government intended to use amounts it set aside for its 457 plan obligations to meet payroll expenses. However, if the amounts held for 457 plan purposes had been placed in a rabbi trust--as permitted for all nonqualified, unfunded deferred compensation plans--they may have been protected from use for nonplan purposes by the sponsor but not from a sponsor's creditors. Orange County kept its tax revenues in an investment pool managed by its treasurer and that permitted investments from cities, municipalities, and political instrumentalities outside Orange County. The county regularly contributed deferrals to the pool to assist it in meeting its obligations under this plan. The 457 plan provides that the experience of the investment pool will be used to determine the final amount due participants when they separate from service or retire. Thus, participants' bookkeeping accounts are credited at specified intervals with the interest, gains, and losses realized by the investment pool. From July to December 1994, the investment pool sustained heavy losses. This resulted in both the pool and Orange County filing for Chapter 9 bankruptcy on December 6, 1994. On May 2, 1995, the state Bankruptcy Court approved a comprehensive settlement of the pool's bankruptcy case. Under this court order, Orange County received amounts from the pool at a rate that was lower than 100 percent of its claims. No participant funds were used to pay pool creditors and the participants had no standing as claimants in the pool bankruptcy. The participants are general, unsecured creditors of Orange County only--not of the investment pool. However, Orange County's claim against the pool included a claim for amounts it invested there so that funds would be available as needed to pay its yet unmatured obligations under the 457 plan. Technically, because performance of the pool serves as a measure used to calculate returns for the 457 plan, the investment loss that occurred in the pool would normally affect the account balances of plan participants. As of March 1996, the bankruptcy in Orange County is still ongoing. It is possible that all creditors may eventually be paid 100 percent of their claims and that participants in the 457 plan that invested in the pool may have their account balances fully restored. Administrators of the 457 plan told us that the bookkeeping accounts for each participant would be credited with interest, but all accounts have been reduced 10 percent for losses on investments in the pool. In 1992, Los Angeles County intended to borrow $250 million of amounts deferred under its 457 plan to make payroll payments. SEC staff learned of Los Angeles County's intentions and questioned the proposed action as potentially impairing the status of the plan under the federal securities laws. The SEC staff asserted that borrowing amounts set aside to pay the county's obligations under its 457 plan for any reason other than satisfying obligations to the locality's general creditors would conflict with representations made earlier to the SEC staff. These representations had been made in connection with a request by the insurance company that operated the separate accounts for participants when it sought the SEC staff's no-action assurance that the separate accounts and the interests therein did not need to be registered under federal securities laws. The SEC raised concerns that the disposition of the assets needed to pay the county's obligations under the plan as proposed by Los Angeles County conflicted with the representations made in seeking the no-action letter. As a result of both SEC's questioning and media reports accusing local officials of wrongdoing, the county created a new investment option under its plan in the form of a loan fund, offering at least a 6-percent return over 15 years. A few participants agreed to have their deferrals treated as though invested in the fund and the county was able to raise $19 million of the $250 million it originally intended to borrow. We note, however, that SEC does not regulate 457 plans and its ability to influence the operation of 457 plans is limited to instances in which an unregistered collective trust or separate account seeks to rely on certain exemptions from federal securities laws in order to hold funds earmarked to pay a 457 plan obligation. Although the county chose not to do so, it could have simply used the assets without paying interest on their use because statutory provisions governing section 457 mandate that amounts deferred remain the property of the employer. There is no requirement that sponsoring governments actually invest amounts participants have deferred or credit their deferrals with interest earned. Instead, the governments are only responsible for making payments to participants under the terms of the plan, usually when they retire or change jobs. The terms of the plans usually provide that the amounts deferred will be treated as though they were invested in some identified asset or fund and that the benefit paid will include earnings that would have accrued on those amounts had they been so invested as well as any gains or losses that might have been experienced had the amounts been so invested. Although it is not required under section 457, sponsors and administrators normally make the actual investments referenced under the arrangement to insure that they will have the amounts necessary to meet their 457 plan obligations. Notwithstanding this normal administration of 457 plans, 457 plan deferrals can never be invested solely for the benefit of the participant. They must always be available to the general creditors of the employer. Also, unless amounts set aside by the employer to meet its obligations are placed in a rabbi trust, these assets may be used for nonplan purposes. Under IRC, 457 plans have a means to restrict a government's nonplan use of amounts deferred to 457 plans--the rabbi trust. Under such a trust, the plan sponsor typically has no access to the funds but in an insolvency or bankruptcy, such funds can be reached by the general creditors. If the deferrals held by Los Angeles County for its 457 plan had been placed in a rabbi trust, the county may not have been in a position to use them to meet its payroll. However, a rabbi trust arrangement would not have protected Orange County employees, because that government declared bankruptcy. Section 457 plans are substantially different from 401(k) and 403(b) plans. In addition to the differences discussed in chapter 1, these plans have limited portability and in some cases participants in 457(b) plans must irrevocably select a date to begin receiving their benefits. In addition, participants cannot defer as much as participants in 401(k) or 403(b) plans. Participants in 457 plans who leave their government employer before retirement are restricted in their ability to move the amounts in their 457 plan accounts to a funded tax-sheltered account. The plan accounts can only be transferred to another eligible 457 plan if the new government employer will accept the transfer. Amounts deferred under section 457 cannot be rolled over to an IRA and have tax deferred on the distribution as can 401(k) and 403(b) plan funds. Participants in 457 plans who leave government service and do not have another 457 plan that they can transfer their bookkeeping accounts to have only two options: (1) commence immediate payment of benefits and pay income tax on the distribution or (2) defer the commencement of benefits to any date in the future that is before they turn 70-1/2 years old. IRS officials told us that under current law, allowing nonqualified, unfunded deferred compensation amounts to be transferred to an IRA makes the amounts immediately taxable to the participant because any distribution, even to an IRA, results in the participant having an economic benefit in the funds and being in constructive receipt of the money. The mere promise of the employer to pay will have been fulfilled. Additionally, under the qualified plan rules, a transfer of nonqualified, unfunded plan amounts into a qualified, funded plan could disqualify the qualified plan and make funds in it immediately taxable to the participants. If a participant cannot transfer the deferred amounts to another 457 plan or chooses not to do so, he or she must, after leaving employment, select a date to begin receiving benefits. Selecting the date may be difficult because the employee's retirement date may be years in the future. Moreover, once selected, this date cannot be changed, except for emergencies. In contrast, separating participants in 401(k) and 403(b) plans are not required to declare a date for benefits to begin. These participants may begin collecting their benefits at any time after turning 59-1/2 years old. IRS officials said that the tax principle of constructive receipt would be compromised if participants in 457 plans were permitted to change the date previously selected for receiving benefits. The maximum annual amount that employees may defer and employers may contribute is lower for 457 plans than for the other two plan types. For example, the maximum allowable employee deferral to a 457 plan is $7,500, a limit that is about $2,000 lower than the limits of the other two tax-deferred plans. In 1995, the maximum employee deferral to a 401(k) plan was $9,240, and deferrals to a 403(b) plan could not exceed $9,500. Although employees can defer no more than $7,500 under a 457 plan, this does not include employer contributions to another plan, usually the employers' regular or basic pension plan. Employers sponsoring 401(k) or 403(b) plans can make annual contributions of no more than $30,000. Moreover, the tax-free deferral limit of a participant in 401(k) and 403(b) plans is reduced if the participant also defers any amounts under a 457 plan. The maximum total deferral a participant can make to a 401(k) or 403(b) plan is governed by the maximum deferral allowed under section 457 when a participant actually makes deferrals under a 457 plan. That is, total deferrals by participants contributing to both a 457 plan and one of the other two plan types cannot exceed $7,500. Thus, any deferrals, even if it is only $1, made to a 457 plan, limits the maximum annual deferral the participant can make to a 401(k) or 403(b) plan to $7,500. Additionally, any employer contribution to a 457 plan will limit the deferral the employee can make under a 401(k) or 403(b) plan to $7,500. When the Congress enacted IRC section 457 in 1978, it set the annual deferral limit at $7,500, an amount that exceeded the $7,000 deferral limit set for 401(k) plans in 1986. However, the 401(k) plan limit was indexed for inflation, and the 457 plan limit was not. In time, the 401(k) limit surpassed the 457 limit. Section 403(b) limits will be indexed for inflation when the 401(k) limit reaches $9,500, the current deferral limit for 403(b) plans. Over time, inflation will continue to reduce the section 457 deferral limit relative to earnings, and the maximum percentage of income participants will be able to defer will decrease. For example, using an average annual inflation rate of 4 percent, 10 years from now the deferral limits for employee contributions in the other two plans will be $13,677, $6,177 more than the current section 457 limit. IRS officials said that the limit on deferrals and the lack of a cost-of-living adjustment, as in sections 401(k) and 403(b), could be changed by the Congress without compromising either the nature of 457 plans as nonqualified, unfunded plans or the tax principles of constructive receipt and economic benefit. Any such changes to section 457(b) would, however, cause a tax revenue loss in the future if participants took advantage of higher deferral limits. With enactment of IRC section 457 in 1978, the Congress specifically authorized a tax-deferred, nonqualified, and unfunded compensation plan to enable employees of state and local governments to provide themselves with additional retirement income. The Congress' action had been prompted by proposed IRS regulations that would have subjected all nonqualified, unfunded deferred compensation amounts to immediate taxation. Eight years later, in the belief that 457 and 401(k) plans offered duplicative benefits, the Congress excluded state and local employers from establishing new 401(k) plans for their employees. As a nonqualified, unfunded deferred plan, however, section 457 provides significantly less protection for plan participants compared with qualified, funded deferred plans such as 401(k) and 403(b) plans. Until recently, there was little or no evidence that greater protections were needed; however, events in Orange and Los Angeles Counties have posed possible financial risks to participants' deferred amounts in 457 plans that suggest greater protections may be needed. Section 457 plan participants voluntarily forego current income in order to provide for themselves in their retirement years. Yet the money that these participants forego is at risk. This is because 457 plans are nonqualified, unfunded deferred plans that require that the amounts deferred may not be set aside for the exclusive benefit of the employee but must remain the property of the employer, subject to the claims of the employer's general creditors. To date, the use of the Orange County Investment Pool to calculate how amounts deferred under its 457 plan are to be treated as invested has resulted in financial paper losses that ultimately may affect county employees' retirement benefits. Los Angeles County intended to use funds of its plan to meet its payroll. Under current law, potential bankruptcies and financial difficulties of other state and local governments pose similar risks to the salary deferrals that employees have made under 457 plans. Apart from the greater risk to plan participants, as compared with other salary reduction plans, employees who participate in 457 plans are treated differently from those in 401(k) and 403(b) plans. For example, as a result of IRC provisions, the maximum annual amount that may be deferred under an eligible 457 plan is notably less than the maximum annual amount that may be contributed to 401(k) and 403(b) plans. Further, those deferred amount limits are not indexed for inflation. This is particularly noteworthy because a 457 plan is often the only deferred compensation plan available to most state and local employees to supplement their regular government pension. Other disadvantages occur because of differences between nonqualified, unfunded and qualified, funded plans. For example, participants who leave employment before retirement have limited portability for their funds. Participants transferring to another state or local government may transfer account balances in a 457 plan to another 457 plan only if their new employer will accept that transfer and their old employer permits transfers. In lieu of such a transfer, participants leaving state or local government who choose to withdraw their 457 plan amounts are subject to immediate taxation. No legal barrier exists under the principles of constructive receipt and economic benefit for raising the limits that participants could defer or for indexing the limits for inflation. However, changes to portability would not comport with these two principles. Given the risk of financial loss associated with deferrals under 457 plans, imposing a rabbi trust requirement, where a plan sponsor could not use such amounts for its own interest, would not be successful in fully assuring the security of these funds for plan participants. Such a trust requirement would not preclude a bankruptcy court from securing such funds for the general creditors of the state or local government employer. Moreover, a trust may not be successful in barring an employer's creditors access to these funds, for example, if an employer experiences a temporary liquidity shortfall or financial insolvency. Thus, the existence of a rabbi trust would not have eliminated the risks posed by events in Orange County and may not have eliminated risks of nonplan use in Los Angeles County. However, under the tax theories that drive section 457 and other nonqualified, unfunded deferred compensation plans, any trust that would not subject its assets to the claims of the employer's creditors and would provide the participant an unconditional and irrevocable right to receive the deferred amounts in it would create an immediate--not a deferred--tax liability for the employee. The complexity of IRC makes amending section 457 very difficult, as proposed in H.R. 2491, for example, because of the many ways section 457 dovetails with other provisions. SEC provided written comments on a draft of this report (see app. I). SEC found the report informative and said that it would serve as a reference for SEC staff as they consider section 457 issues. SEC said it agreed with our recommendation that the Congress amend IRC section 401(k) to permit state and local governments to establish 401(k) plans. We did not recommend that the Congress make such an amendment; rather we concluded that addressing all the problems with section 457 plans that we identified merely by amending IRC section 457 would be difficult. SEC added that if the Congress proceeds with legislation relating to public plans, it should consider statutory changes to clarify the status of 457 plans under federal securities laws. SEC said all qualified plans are now exempt from SEC regulation. Those governmental plans, as defined in IRC section 414(d), that are established for the employees' exclusive benefit and which cannot be used by the employer for other purposes (exclusivity and impossibility requirements) are exempt. SEC staff told us that they have received numerous inquiries with respect to whether 457 plans also may be considered exempt under federal securities laws, although IRC prevents 457 plans from meeting the exclusivity and impossibility requirements. SEC also noted some technical changes that we incorporated into our report where appropriate. IRS also provided written comments on a draft of this report (see app. II). IRS made several general comments primarily concerning technical terms. IRS pointed out the distinction between the tax-favored status of 401(k) plans and the tax-deferred status of 457 plans. We clarified these differences throughout the report. IRS emphasized the fact that 457 plan deferrals may be treated as invested in a certain way, but in fact there is no requirement to invest such amounts. As a result, if the sponsor becomes insolvent, the rights of participants in a 457 plan are no greater than other general, unsecured creditors. IRS also pointed out that most state and local governments have basic pension plans for employees and 457 plans are additional plans. We refer to them as supplemental plans to reflect this relationship. IRS suggested that we should clarify that only state and local governments can offer nonqualified plans to their rank-and-file employees, which we did. IRS clarified some features of rabbi trusts that we did not include in the report, though the major feature of a rabbi trust--the inability of the sponsor to have access to the assets therein--is the focus of chapter 3. IRS also made technical comments that we incorporated into our report where appropriate.
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Pursuant to a congressional request, GAO reviewed the status of public pension funding, focusing on how plans established under Internal Revenue Code (IRC) section 457 differ from plans created under IRC sections 401(k) and 403(b). GAO found that: (1) most state and local government employees are covered under section 457 plans because the Tax Reform Act of 1986 prohibited state and local governments from establishing plans under sections 401(k) and 403(b); (2) section 457 plan participants risk losses if sponsoring governments go bankrupt or the deferred monies are mismanaged or lost; (3) section 457 does not require sponsoring governments to maintain deferred monies to pay future benefits; (4) section 457 plan participants risk losses because sponsoring governments may view deferred monies as available for public use; (5) while funds enrolled in section 401(k) and 403(b) plans can be transferred to investment retirement accounts (IRA) when the employee leaves state or local government employment, amounts payable from section 457 plans can only be rolled over into other section 457 plans; (6) section 457 plan participants must declare a fixed date for when they will begin receiving their benefits shortly after retiring or leaving employment; (7) according to IRS, the transfer of section 457 plan deferrals into IRA or allowing plan participants to change their distribution dates would create a taxable event or be incompatible with the plan's tax deferred condition of government ownership; (8) section 457 plans allow a lower maximum annual employee deferral and employer contribution than section 401(k) and 403(b) plans, and are not indexed; and (9) new legislation could increase the section 457 plan deferral and contribution limit and index section 457 plans to inflation.
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Prior to AIR-21, which was signed into law on April 5, 2000, general aviation airports received AIP funding through funds apportioned to states by using geographic area and population-based formulas, as well as through discretionary funds. These airports also received funds through FAA's small airport fund. AIR-21 amended the general aviation state apportionment grant program, in part, by creating a special rule, which provides general aviation entitlement grants for any fiscal year in which the total amount of AIP funding is $3.2 billion or more. Under this rule, the amount available for state apportionments increases from 18.5 percent of total AIP funding to 20 percent when AIP's total funding is $3.2 billion or more. From the state apportionment, FAA computes and allocates the amount available for general aviation entitlements and the remaining funds are provided for "unassigned" state apportionment. The general aviation entitlement grant amount for any one airport represents one-fifth of the estimate of that airport's 5-year costs for its needs, as listed in the most recently published NPIAS, up to an annual maximum of $150,000. After the aggregate amount of general aviation entitlements has been determined, the remainder is provided for the same type of airports within a state on an unassigned basis, the allocation of which is determined by a state's area and population relative to all other states. To be eligible for a general aviation entitlement grant, an airport must be listed and have identified needs in the most recently published NPIAS; therefore, an airport's listed needs largely determine the size of an airport's annual grant. However, funding is not limited to the projects listed in the most recent NPIAS. The 1998-2002 NPIAS provided the basis for fiscal year 2001 and fiscal year 2002 grants. The 2001-2005 NPIAS, published in August 2002, provides the basis for fiscal year 2003 grants. A general aviation entitlement grant provides funding for 90 percent of an eligible project's total costs; the airport must finance the remaining 10 percent, although many states pay a share of this local matching requirement. FAA's regional and district offices work with state aviation officials and sponsors to find appropriate uses for these funds. Grant funds can be used on most airfield capital projects, such as runway, taxiway, and apron construction but generally not for terminals, hangers, and nonaviation development, such as parking lots. Some airfield maintenance and project planning costs are also allowed. Accepting a grant not only requires airport officials to pledge to continue operations and maintenance for 20 years but also precludes the airport from granting exclusive rights to those providing aeronautical services and allowing any activity that could interfere with its use as a general aviation airport. The number of general aviation airports that were apportioned general aviation entitlement funds is expected to increase from 2,100 in fiscal year 2001 to 2,493 in fiscal year 2003, as shown in figure 1. The expected 19 percent increase reflects the fact that more airports identified capital needs in the most recent NPIAS, which serves as the basis for fiscal year 2003 grants. FAA officials explained that before the NPIAS served as a basis for calculating entitlement grants, some FAA officials, sponsors, and state aviation officials did not always give high priority to keeping the general aviation portion of the NPIAS up to date. Thus, they added, the NPIAS used to calculate the fiscal years 2001 and 2002 general aviation entitlement might have understated airport development needs for these airports. In fiscal years 2001 and 2002, entitlement grants for general aviation airports were available because AIP funding levels were at least $3.2 billion. As the number of eligible airports or the value of development identified in the NPIAS for these airports increases, the funding for these grants also increases. However, this increase could result in a corresponding decrease in the amount of AIP funding available in that year for "unassigned" state apportionment grants. Since the latter amount is determined after subtracting the total general aviation entitlements from the total state apportionment, FAA estimates that general aviation entitlement grant funding will rise by about $70 million from $271 million in fiscal year 2002 to about $341 million for fiscal year 2003, as shown in figure 2. Over half of general aviation airports were apportioned the maximum amount of funding. For fiscal year 2001, of the 2,100 airports that were apportioned these entitlements, 71 percent were eligible for the maximum amount of $150,000. With the publication of the new NPIAS in August 2002, 83 percent of the 2,493 eligible airports were apportioned the maximum for fiscal year 2003. Working in collaboration with FAA's regional or airport district offices, general aviation airports identify projects that will be funded with entitlement grants. These projects are listed in FAA's Airports Capital Improvement Plan (ACIP), which includes only those projects that FAA has identified as candidates for AIP funding. After FAA has certified that the application materials are in order and all relevant AIP statutory, regulatory, and policy requirements have been satisfied, FAA then sends a grant offer to the airport sponsor or the state aviation agency representing the airport sponsor. The flowchart in figure 3 illustrates this process. When an airport elects not to accept its general aviation entitlement grant funds, the funds revert to AIP's discretionary fund to be awarded by FAA to another airport, as provided by statute. However, the funds remain available to this airport for up to 3 years. Therefore, in the third year that an airport has entitlement grant funds available, it could have as much as $450,000 available for a grant. In addition, an airport can use part of its general aviation entitlement grant in the first year and carry over the remainder for use later. For example, an airport might have a general aviation entitlement grant of $140,000, but the only AIP-eligible project it can implement during the fiscal year might require just $80,000 in AIP funds. FAA could issue the grant for $80,000 that fiscal year and include the remaining $60,000 of the airport's available funds in another grant for that airport at any time within the 3 years after the grant was first made available. For general aviation airports in the nine block grant states, the acceptance process for these entitlement grants works differently. Each block grant state is apportioned a lump sum equal to the total of these grants for airports in that state plus total unassigned state apportionment funds. FAA has distributed all general aviation entitlement grant funds to these states in the same year the funds were apportioned. The block grant states are then responsible for distributing the funds to individual general aviation airports according to FAA's requirements. According to FAA officials, states are required to offer eligible general aviation airports their entitlements in the fiscal year it is made available. If an airport does not accept the entitlement in the first year of its availability, the distribution of a general aviation entitlement grant must nonetheless be made to that airport by the end of 3 years. If an airport has not accepted the funding at the end of the 3-year period, the grant would be reduced by the amount of the funding not accepted. FAA officials explained that each block grant could be adjusted on an annual basis, but this approach is used to provide block grant states flexibility similar to the authority FAA has in managing AIP and general aviation entitlement grants. FAA officials added that the state assumes the risk if funds are used for another airport during the 3-year period. If funds have been expended at another airport and an unassigned state apportionment is not available to provide the general aviation entitlement funding to the original eligible airport, it would be necessary for the state to repay the federal funds with its own state- generated funds. As of October 1, 2002, about 75 percent of the total fiscal year 2001 general aviation entitlement grant funds had been accepted by the airports to which they were apportioned, and about 46 percent of the total fiscal year 2002 general aviation entitlement grant funds had been accepted. The percentage of the total funding accepted by airports for both fiscal years varied widely from state to state. Also, the percentage varied by size, with the larger general aviation airports having accepted 77 percent of their fiscal year 2001 entitlement funds compared to 65 percent for the smallest airports. As of October 1, 2002, $201 million (about 75 percent) of the $269 million in general aviation entitlement grant funding apportioned for 2001 had been accepted, as shown in figure 4. Of the $201 million accepted, $145 million (54 percent) was accepted in fiscal year 2001 and $56 million (21 percent) was accepted in fiscal year 2002. Almost $69 million of the fiscal year 2001 apportionments was carried over for possible future acceptance in fiscal year 2003. These grants were made to 1,599 (76 percent) of the 2,100 eligible airports. As shown in figure 5, airports had accepted $124 million of the $271 million in fiscal year 2002 general aviation entitlement grants (about 46 percent). Grants were made to 1,026 of the 2,108 eligible airports (49 percent). The remaining amount ($147 million) can be accepted in fiscal years 2003 or 2004. General aviation airports in some states accepted a larger percentage of funds in both fiscal years 2001 and 2002 than in other states. For fiscal year 2001 general aviation entitlement grant funds, the percentage of funds accepted ranged from about 48 percent to 100 percent. The acceptance rate for fiscal year 2002 general aviation entitlement grant funds varied from 11 percent to 99 percent. (See app. IV for a complete list of the percentage of funds that were accepted by state for fiscal years 2001 and 2002.) Larger general aviation airports (as measured by the number of based aircraft) have accepted more of their general aviation entitlement grant funding than the smallest airports, as shown in figure 6. Airports with more than 100 based aircraft had accepted 77 percent of their fiscal year 2001 general aviation entitlement grant funds. Similarly, general aviation airports with between 50 and 99 based aircraft had accepted about 81 percent of their general aviation entitlement funds. In contrast, 65 percent of the general aviation entitlement grant funds for fiscal year 2001 for airports with less than 20 based aircraft had been accepted. This pattern is similar for fiscal year 2002 funding. Airports with more than 100 based aircraft had accepted about 58 percent of their fiscal year 2002 grant funds, compared with 39 percent of the grant funds for airports with less than 20 based aircraft. According to the results of FAA's survey, general aviation airports most often used the funds from fiscal year 2001 entitlement grants to construct landing areas (e.g., runways, taxiways, and aprons). As shown in figure 7, of the 1,373 total projects reported in FAA's survey, 483 (35 percent) were designated as landing area construction projects. The next three categories of projects most frequently undertaken were as follows: Pavement maintenance (227): This category includes the general upkeep and maintenance of paved areas on airport land, such as filling and sealing cracks, grading pavement edges, and coating pavement with protective sealants. FAA's Great Lakes Region and New Jersey did not respond to the survey. systems, visual navigation aids, and electronic navigation and weather equipment, which help observe, detect, report, and communicate weather conditions at an airport. Planning projects (162): This category includes the costs associated with preparing the documents that are a necessary part of developing plans to address current and future airport needs. This includes the plans required for airport development (e.g., the master plan and airport capital improvement plan) and environmental assessments as well as the additional elements or costs that are needed to complete such plans. These four largest categories comprise over 75 percent of all projects funded with general aviation entitlement grants in fiscal year 2001. Almost all of the 50 state and 2 territorial aviation officials and the 56 selected general aviation airport managers that we interviewed indicated that these entitlement grants are useful and help meet the needs of general aviation airports. They also told us that airports have easily met the administrative requirements for receiving these grants. Over two-thirds of the selected airport managers said that the grants provided critical funding to undertake projects at their airports. Although positive about the grants, some state officials and airport managers suggested a variety of changes. While the most frequently suggested change was to increase grant funding to better meet the cost of larger projects, some state aviation officials expressed concern that this change would correspondingly decrease the funds available for state aviation apportionments and thus hamper their ability to address statewide aviation priorities. Other frequently mentioned suggestions included extending the time frames for fund use and broadening the categories of eligible projects. Five of the 52 state aviation officials and one airport manager commented that the NPIAS is not an up- to-date list of airport needs and recommended that it not be used to distribute these entitlement grant funds. Over two-thirds of the state aviation officials told us that FAA's requirements for receiving these entitlement grants are easy to fulfill. These requirements include completing required airport capital improvement and layout plans, submitting grant application forms, getting projects included in the NPIAS, and providing the 10 percent matching funds. Most general aviation airport managers we interviewed agreed with this view. FAA officials reported that they purposely simplified the grant processing paperwork requirements for the general aviation entitlement grants, knowing that many eligible airports would be first time recipients of FAA funding. In addition, FAA officials told us that the regional and district offices conducted extraordinary outreach efforts to ensure that qualifying airports were aware of these new grants. Almost 85 percent of the state aviation officials found entitlement grants useful by allowing general aviation airports to purchase needed equipment and undertake large projects, such as runway repairs. For example, one state aviation official told us that these grants were very important for maintaining safety and preserving runways at general aviation airports in his state. Over two-thirds of the selected general aviation airport managers said that they would not have been able to undertake or complete needed projects without these grant funds, and three-fourths of them said that the categories of projects eligible for funding include most of their capital needs. This means that they can use the funds for needed improvements, even for comparatively smaller projects such as lighting and fencing. Other state officials and airport managers added that the general aviation entitlement grants are important to the viability of general aviation airports. One state official said that the grants are helping to prevent the closure of general aviation airports, some of which provide medical access for small communities. Increasing the maximum amount of general aviation entitlement grants was the most frequent suggestion from state aviation officials to improve their usefulness. Some general aviation airport managers we surveyed supported this view. Almost two-thirds of the state aviation officials stated that the current annual maximum of $150,000 is not adequate to complete some major projects, while about one-third of the airport managers expressed this opinion. Other suggestions to improve the grants' usefulness included making all 3 years of funding available to airports in the first year and increasing the time frame for funding availability to beyond the current 3- year limit. Almost half of the state officials suggested increasing the annual amount of these grants to better enable general aviation airports to meet the cost of larger capital projects. Most state officials said that because the $150,000 annual amount is not adequate to complete some major projects, some airports rollover the funding to accumulate up to $450,000 of funding over 3 years to complete such projects. However, some state aviation officials and airport managers also expressed concern that even this 3-year total might not be sufficient to complete such expensive capital projects as repairing or improving runways and taxiways. Some state aviation officials, as well as some selected airport managers, reported undertaking comparatively smaller projects, such as fencing for security, lighting, and pavement maintenance. While emphasizing the importance of the grants to general aviation airports, many selected airport managers expressed more concern about the adequacy of funding than any other issue we discussed with them. Their most frequent suggestion to improve the grants was to increase funding amounts to better meet the cost of larger capital projects. Nine state aviation officials also suggested allowing more flexibility in the existing 3-year time frame to use the funds, which would enable airports to afford a broader range of projects. Two airport managers we interviewed also suggested increased flexibility. For example, three state aviation officials suggested making all 3 years of grant funding available to airports in the first year. One of these officials said that making the full 3-year grant amount available to airports during the first year of funding would help airports undertake critical projects earlier because they would not need to wait to accumulate sufficient funding. According to FAA officials, this suggestion would represent a significant departure from current practices for administering entitlement funds. Officials told us that while multiyear grants can be made to primary airports for multiyear projects,AIR-21 did not provide this authority for general aviation entitlement grants. Officials noted that this added flexibility could benefit some airports. Alternatively, other state aviation officials, as well as some of the selected airport managers, suggested extending the current 3-year time frame for using these funds to as much as 4 or 5 years. They expect this extension would allow them to accumulate sufficient funds to undertake a broader range of capital projects and allow some airports sufficient time to complete these projects. While state aviation officials and selected airport managers said that increased funding and time frames could help them complete larger projects, apportionment grants are also available to general aviation airports to help them complete many of these projects. Some state aviation officials reported that general aviation airports use entitlement grant funds in combination with apportionment funds to complete such larger projects as improving, extending, or constructing runways, taxiways, and aprons. Seven of the state aviation officials expressed concern that, as funding for general aviation entitlement grants increases, funding for unassigned apportionment grants could correspondingly decrease because the amount available for unassigned apportionment is determined by deducting the general aviation entitlement grant funding from a fixed percentage of AIP. Two state aviation officials told us that the reduction in aviation apportionment funding could hamper the states' abilities to address their aviation priorities. Some state aviation officials said that because they can better determine which projects within their states are high priorities, they are better able to distribute the funds to airports on a statewide basis. For example, a state aviation official said that because these entitlement grants have reduced funding for significant projects, the small projects general aviation airports have undertaken have had a minimal impact on that state's aviation system. FAA officials added that while the grants have been used for worthwhile projects, less unassigned apportionment grant funding could limit a state's ability to address its aviation priorities and provide access to the national aviation system from rural and nonmetropolitan areas. Because the entitlement funds come directly to general aviation airports, general aviation airport managers we interviewed were not concerned with the shift in funding source. One airport manager commented that projects requested by large airports are generally assigned a higher priority by states than projects requested by small airports. This manager added that, as a result, small airports usually do not receive apportionment funds from state aviation agencies. The manager told us that general aviation entitlement grants have allowed the airport to complete projects that would not have been selected by the state for apportionment funding. However, FAA officials stated that they determine the allocation of unassigned apportionment funds, except in block grant states. FAA officials added that project type and purpose receive more consideration than airport size in allocating these funds. While most officials said that the categories of projects eligible for entitlement grants generally covered the capital needs of general aviation airports, some of them suggested broadening the categories of eligible projects to include revenue-producing facilities. Under current program rules, revenue-producing facilities, such as hangars, terminals, and fueling stations, are not eligible for these grants. However, a few state officials told us that these facilities should be considered eligible for the grants because they would help produce the revenue necessary to allow small airports to supplement grant funding, complete needed projects, and, in some cases, become more self-sufficient and remain open. Many of the airport managers we interviewed supported this view. FAA officials indicated that expansion of eligibility warrants consideration but would require statutory changes. Five state aviation officials suggested that FAA use a more current list of airport projects to determine the amounts of future general aviation entitlement grants. One airport manager also made this suggestion. One state official was concerned that the list of projects in FAA's NPIAS was between 18 and 24 months old when FAA used it to calculate the entitlement grants for fiscal years 2001 and 2002. That official said that because FAA used an outdated list of airports' needs, the grant amounts some airports received were based on already completed projects. Another official added that some of these airports then used the grant funds for low- priority projects because higher priority projects had been completed. FAA officials disagreed with this criticism of the use of the NPIAS. They told us that the NPIAS is used only to calculate the amount of an airport's general aviation entitlement grant. Decisions on the projects to be funded are based on the airport's ACIP, which is kept up to date through regular consultation between FAA and the airport's sponsor or state aviation officials. Nevertheless, FAA officials acknowledged that use of the NPIAS added complexity and confusion to calculation of general aviation entitlement grants, and indicated that a simplified method warranted consideration. Since most eligible airports receive the maximum grant amount, an alternative approach might be to establish a uniform general aviation entitlement amount for each general aviation airport listed in the NPIAS. FAA officials pointed out that, under current formulas, care would be needed in selecting the uniform grant level under this approach. Setting the level too low would limit the usefulness of the general aviation entitlement grant to individual airports, but setting the level too high would reduce the amount of unassigned apportionment funding based on state and national priorities. We provided the Department of Transportation with a copy of the draft report for its review and comment. FAA officials agreed with information contained in this report and provided some clarifying and technical comments, which we have incorporated where appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Transportation, and the Administrator, FAA. This report is also available at no charge on GAO's Web site at http://www.gao.gov. Please contact me or Carol Anderson-Guthrie at (202) 512-2834 if you have any questions. Individuals making key contributions to this report are listed in appendix V. We were asked to review the general aviation entitlement grant funding that was available to eligible nonprimary airports--referred to as general aviation airports for simplicity in this report--including reliever, nonprimary commercial service, and other general aviation airports. Of the universe of 2,943 general aviation airports, we reviewed data for those that were eligible to receive these grants based on the requirements established by the Federal Aviation Administration (FAA). We reviewed data on the general aviation entitlement grant funding that was accepted by general aviation airports, both directly from FAA and through block grant states. To obtain information from block grant states, we asked block grant state aviation officials to provide information on general aviation entitlement grant obligations made by their state to individual airports. We also analyzed a survey conducted by FAA to determine the types of projects that had been undertaken with the general aviation entitlement grant funding. In addition, to determine the stakeholders' opinions concerning general aviation entitlement grants, we designed and administered a survey of all 52 state and territory aviation officials and 56 airport management officials. Initially, we conducted interviews with FAA and other relevant aviation industry officials to better understand the program and the scope of the issues. We gathered information on industry opinions about the general aviation entitlement program including its usefulness, its limitations, and possible changes to the program. The interviews provided an introductory view of the general aviation entitlement grant program. To establish a background context and understanding of the program's purpose, we also conducted research on the legislation, statutes, policies, procedures, and guidelines that govern the implementation and operation of the general aviation entitlement grant program. To determine the amount of general aviation entitlement grant funds that were accepted by airports, we received data from FAA's Airport Improvement Program (AIP) Grants Management Database, which contains all general aviation entitlement grants issued directly by FAA to airports and state sponsorship programs. This database also includes grants issued through October 1, 2002, using fiscal year 2001 and fiscal year 2002 general aviation entitlements. The database includes grants issued directly to airports and grants issued under state sponsorship outside of the block grant program. The database includes data on the aggregate amount of general aviation entitlement grant funding included in state block grants. However FAA's national database does not track distribution of block grant funds by the states, including general aviation entitlement grants to individual airports in the nine block grant states. After comparing these data with the 1998-2002 National Plan of Integrated Airport Systems (NPIAS), we found some discrepancies. In coordination with FAA officials, we resolved these discrepancies and they are reflected in our report. We classified all grants accepted through state sponsorship program grants as having been accepted directly by individual airports. We then deleted all state sponsorship program grants from the data. The total block grants accepted were removed to avoid overstating the amount that individual airports accepted. To obtain grant acceptance data for airports receiving grants through block grant states, we asked state aviation officials in those states to provide acceptance data as of October 1, 2002, on all the airports that were eligible for general aviation entitlement grants. This information was self-reported, and we did not verify the information provided by the states. After we discussed our methodology with FAA officials and reached agreement that the data from FAA and the individual block grant states were comparable, we aggregated the datasets. Funds not accepted were classified as "carry over/not yet accepted." We then merged these data with the 1998-2002 NPIAS file and categorized the results by airport size, as measured by the number of based aircraft and state, in order to identify possible trends in the data. Using FAA's guidance, we stratified airports into four size categories: less than 20 based aircraft, 20-49 based aircraft, 50-99 based aircraft, and 100 or more based aircraft. In order to ascertain the projects that have been undertaken by general aviation airports, we used FAA's survey of Airport Improvement Program FY2001 Non-Primary Entitlements. FAA surveyed its nine regions and the nine block grant states to gather data for several items, including the projects for which airports used the general aviation entitlement grant funds. FAA created 11 categories for the projects. We reviewed the results of its survey and met with FAA officials to discuss our interpretation. We did not verify the information provided by FAA. However, we raised questions about the overall design of FAA's data collection effort and the specific steps carried out to help ensure the quality of the collected data. We determined that the data quality was sufficient for the purpose of our review. To assess the usefulness of the general aviation entitlement grants and to identify the potential areas of change, we surveyed state aviation and airport management officials. We designed a computer-assisted telephone interview (CATI) instrument to collect their responses. We conducted a census of state aviation officials (50 states and 2 territories) who oversee the operations of airports and head their respective state aviation programs. All 52 of these aviation officials provided their opinions on the experiences of airports in their respective states and territories. To compare state and airport-level responses about the program, we also obtained the perspectives of 56 general aviation airport management officials to acquire their responses to the same questions and direct illustrations of their experience with the program. The small sample size was not designed to be projectable to the population of general aviation airports. However, measures were taken to help ensure that the airports chosen systematically cover and broadly represent the substantive criteria. Our selection approach was completed in three steps. First, we identified airports that accepted entitlement grant funds in either fiscal years 2001 or 2002. Second, we stratified these airports according to: size--the number of based aircraft--measured as small (less than 20 based aircraft), medium 1 (20-49), medium 2 (50-99), and large (100 or more); FAA regional location; and block grant status (whether the airport is located in a block grant state). We sought guidance from FAA in determining the airport size categories. The stratification process produced 56 exclusive groups (airports in block grant states are not located in each FAA region). Then, in the third step, we randomly selected one airport from each of the groups, which were joined to form the final sample of 56 airports. All of the airport management officials provided responses about their experiences with the program. The CATI consisted of closed- and open-ended questions that asked about an airport's experiences with and its ability to meet the requirements of the general aviation entitlement grant. Descriptive statistical analyses of close- ended survey data were performed to determine response patterns. Analyses of open-ended responses were conducted to detect broad themes and topics within those themes, summarizing state aviation and airport management responses on program improvements and projects undertaken using entitlement grants. We conducted our review from June 2002 through February 2003 in Easton, Maryland; Odenton, Maryland; Greenville, Texas; Mesquite, Texas; and Washington, D.C., in accordance with generally accepted government auditing standards. The collection of state aviation and airport management interview data was completed in September and November 2002, respectively. The Airport Improvement Program (AIP), which was created in 1982, is funded by the Airport and Airway Trust Fund. AIP distributes funds to airports through grants in a manner that reflects several national priorities and objectives including financing small state and community airports. The distribution system for AIP grants is complex. It is based on a combination of formula grants (also referred to as apportionments) and discretionary funds. Formula funds are apportioned by formula or percentage and may be used for any eligible airport or planning project. Through the AIP, the Federal Aviation Administration (FAA) apportions formula grants automatically to specific airports or types of airports including primary airports, cargo service airports, general aviation airports, and Alaska airports. In administering AIP, FAA must comply with various statutory provisions, formulas, and set-asides established by law, which specify how AIP grant funds are to be distributed among airports. Each year, FAA uses the statutory formulas to determine how much in apportionment funds are to be made available to each airport or state. After determining these amounts, FAA informs each airport or state of the amount of funding available for that year. However, these funds do not automatically go to an airport's sponsor. To receive the funds it is entitled to, an airport or state has to submit a valid grant application to FAA. In addition, under the act, individual airports and states do not have to use these funds in the year they are made available. The act gives most airports and states up to 3 years to use their apportionment funds. This carryover allows airports to accumulate a larger amount to pay for more costly projects. Once the apportionments have been determined, the remaining amount of AIP funds is deposited in that program's discretionary fund, which consists of set- asides that are established by statute and other distributions. AIP funds are usually limited to planning, designing, and constructing projects that improve aircraft operations, such as runways, taxiways, aprons, and land purchases, as well as to purchase security, safety, and emergency equipment. AIP funds are also available to plan for and implement programs to mitigate aircraft noise in the vicinity of airports. However, these grants are generally not eligible for projects related to commercial revenue-generating portions of terminals, such as shop concessions, commercial maintenance hangars, fuel farms, parking garages, and off- airport road construction. Outside the national system are many landing strips and smaller airports, most with fewer than 10 aircraft. These airports have at least 10 aircraft based at their locations and fewer than 2,500 scheduled enplanements. General aviation airports (which includes reliever airports) and non- primary commercial service airports may be eligible to receive general aviation entitlement grant funding. enplanements annually. Large hubs (31): at least 1 percent or more of all enplanements. Medium hubs (35): at least 0.25 percent, but less than 1 percent of all enplanements. Small hubs (71): at least 0.05 percent, but less than 0.25 percent of all enplanements. Nonhubs (282): more than 10,000 enplanements, but less than 0.05 percent of all enplanements. In addition to those named above, Jon Altshul, Nancy Boardman, Jeanine Brady, Kevin Jackson, Bert Japikse, Michael Mgebroff, Jeff Miller, George Quinn, and Don Watson made key contributions to this report. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO's Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. 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In 2000, Congress created general aviation entitlement grants to provide funding up to $150,000 per fiscal year to individual general aviation airports. These grants fund capital improvements and repair projects. GAO was asked to (1) assess the amount of funding airports used, (2) identify the types of projects undertaken, and (3) convey suggestions made by interested parties to improve the grants in preparation for the reauthorization of the legislation in 2003. By the end of fiscal year 2002, most fiscal year 2001 general aviation entitlement grant funds had been accepted by the airports to which they were apportioned. However, less than half of the fiscal year 2002 entitlement grant funds had been accepted by those airports at the end of fiscal year 2002. The remaining portions of unused entitlement funds for the 2 fiscal years were carried over to use in the following years--up to 3 years. In both fiscal years, the percentage of entitlement grant funds accepted varied widely by state. Larger general aviation airports accepted a greater percentage of their entitlement grants than small airports for both fiscal years. In fiscal 2001, general aviation airports used these funds primarily to undertake landing area construction projects--runways, taxiways, and aprons. In addition, the airports used the funds to undertake pavement maintenance; airfield lighting, weather observation systems, and navigational aids; and planning projects. These four categories constituted over 75 percent of all projects undertaken with these funds. While most state aviation officials, selected airport managers, and FAA officials we spoke with indicated these entitlement grants were useful, they also suggested some changes. The most common concerned the amount of funding. Several state aviation officials and some selected airport managers indicated that the $150,000 annual maximum amount per airport was not adequate to complete projects. However, state officials expressed concerns that increasing the entitlement amount could hinder the states' ability to address their own aviation priorities because any increase would proportionately decrease the states' apportionments. The majority of the selected airport managers indicated that, without these grants, their airports would have been unable to undertake the projects. Other suggestions concerned increasing the amount of time to use the grants, broadening the categories of eligible projects, and using an alternative to FAA's National Plan of Integrated Airports Systems as the basis for funding eligible projects.
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TANF was designed to give states the flexibility to create programs that meet four broad goals: Providing assistance to needy families so that children may be cared for in their own homes or in the homes of relatives; Ending the dependence of needy parents on government benefits by promoting job preparation, work, and marriage; Preventing and reducing the incidence of out-of-wedlock pregnancies; and Encouraging the formation and maintenance of two-parent families. The amount of the TANF block grant was determined based on pre- PRWORA spending on (1) AFDC, a program that provided monthly cash payments to needy families; (2) Job Opportunities and Basic Skills (JOBS), a program to prepare AFDC recipients for employment; and (3) Emergency Assistance, a program designed to aid needy families in crisis situations. To meet the MOE requirement, states must spend 80 percent or 75 percent of their pre-PRWORA share of spending on AFDC, JOBS, Emergency Assistance, and AFDC-related child care programs. States have considerable flexibility in what they spend TANF and MOE funds on. In addition to spending on cash benefits--that is, monthly cash assistance payments to families to meet their ongoing basic needs--states can spend TANF/MOE funds on services for cash assistance recipients or other low-income families. States are allowed to transfer up to 30 percent of their TANF funds to the Child Care and Development Fund (CCDF) and the Social Services Block Grant (SSBG). TANF regulations require states to report to HHS data on families receiving "assistance" under the TANF program. These reported families are referred to as the TANF or welfare caseload. Typically, these families are receiving monthly cash payments. Therefore, families who receive TANF/MOE-funded services but do not receive monthly cash payments are typically not included in the reported TANF caseload. The states' implementation of more work-based programs, undertaken under conditions of strong economic growth, has been accompanied by a dramatic decline in the number of families receiving cash welfare. The number of families receiving welfare remained steady during the 1980s and then rose rapidly during the early 1990s to a peak in March 1994. The caseload decline began in 1994 and accelerated after passage of PRWORA, with a 53 percent decline in the number of families receiving cash welfare--from 4.4 million families in August 1996 to 2.1 million families in July 2001. Caseload reductions occurred in all states, ranging from 16 percent in Indiana to 89 percent in Wyoming. Between July and September 2001, however, the nationwide welfare caseload increased 1 percent. Between July and December 2001, the welfare caseload in many states increased, with a 5 percent average increase across 18 of 23 surveyed states. While economic changes and state welfare reforms have been cited as key factors to explain nationwide caseload changes, there is no consensus about the extent to which each factor has contributed to these changes. Given the large decline in the number of families receiving cash assistance in recent years, attention has been focused on learning how these families are faring. Studies show that most adults who left welfare had at least some attachment to the workforce. Our 1999 review on the status of former welfare recipients based on studies from seven states found that from 61 to 71 percent of adults were employed at the time they were surveyed. Studies measuring whether an adult in a family had ever been employed since leaving welfare reported employment rates from 63 to 87 percent. A 2001 review of state and local-level studies conducted by the Congressional Research Service (CRS) shows similar patterns. In addition, the Urban Institute, using data from its 1999 National Survey of America's Families (NSAF)--a nationally representative sample--finds that 64 percent of former recipients who did not return to TANF reported that they were working at the time of follow-up, while another 11 percent reported working at some point since leaving welfare. Studies also show that not all families who leave welfare remain off the rolls. For example, the Urban Institute study using 1999 NSAF data reported that 22 percent of those who had left the rolls were again receiving benefits at time of the survey follow-up. Although most adults in former welfare families were employed at some time after leaving welfare, many worked at low-wage jobs. Of those who left welfare, former recipients in the seven states we reviewed had average quarterly earnings that generally ranged from $2,378 to $3,786 or from $9,512 to $15,144 annually. This estimated annual earned income is greater than the maximum annual amount of cash assistance and food stamps that a three-person family with no other income could have received in these states. However, if these earnings were the only source of income for families after they leave welfare, many of them would remain below the federal poverty level. On the basis of additional information from the NSAF, a 2001 Urban Institute study estimated that about 41 percent of those who left the welfare rolls were below the federal poverty level, after including an estimate of the earned income tax credit and the cash value of food stamps and subtracting an estimate of payroll taxes. While some former welfare recipients are no longer poor, others can be considered among the working poor. Nationwide, about 16 percent of the nonelderly population lives in families in which adults work, on average, at least half of the time yet have incomes below 200 percent of the federal poverty level. Prior to welfare reform, states focused their welfare spending on providing monthly cash payments. However, since welfare reform, states are spending a smaller proportion of welfare dollars on monthly cash payments and a larger share of welfare funds on services. Rather than emphasizing income maintenance among welfare families, under TANF, states are focusing their welfare spending on work support services that help both welfare families and other low-income families find and maintain employment. In addition to using welfare dollars to support work, the flexibility of TANF also allows states to use these funds to provide other services designed to promote self-sufficiency among low-income families. As shown in figure 1, in fiscal year 1995, spending on AFDC--a program that primarily provided monthly cash payments--totaled 71 percent of welfare spending. In contrast, in fiscal year 2000, spending on cash assistance totaled only 43 percent of welfare spending. During that same period, the percent of total welfare dollars spent on other benefits and services increased from 18 percent to 48 percent. Overall, welfare spending declined from fiscal year 1995 to fiscal year 2000, in part because (1) states chose to leave part of their TANF block grant allotments for fiscal year 2000 as unspent reserves in the U.S. Treasury, as allowed under PRWORA and (2) MOE requirements for states are only 80 percent or 75 percent of states' pre-PRWORA share of welfare spending. Child care (State share) Note 1: Categories shown for fiscal year 2001 but not for fiscal year 1995 (such as tax credits) could have existed in fiscal year 1995 but been paid for with nonwelfare dollars not included in this chart. Note 2: The chart does not include the $8,625,779,575 (36%) of available TANF funding that was left unspent at the end of fiscal year 2000. Note 3: TANF funds transferred to the CCDF and SSBG may not have been expended in fiscal year 2000; rather, these funds may have been reserved in the CCDF and SSBG for future use. Also indicative of the shift from cash to service spending is that in fiscal year 1995, no state spent more than 50 percent of its welfare dollars on services or benefits other than monthly cash payments, compared to fiscal year 2000 when 26 states used more than 50 percent of their TANF/MOE expenditures for services. Nationwide, child care was the noncash service for which the greatest proportion of TANF/MOE funds were used. Overall, in fiscal year 2000, states spent 19.2 percent of their TANF/MOE funds on child care. Among all of the welfare service categories, 32 states spent the greatest proportion of TANF/MOE funds on child care. Unlike AFDC, which focused on income maintenance for welfare families, federal and state welfare policies under TANF have focused on helping welfare families secure and maintain employment. To achieve this objective, states have expanded and intensified their provision of work support services. Officials in all five of the states we visited said their states are providing employment services to more welfare families under their current TANF programs than they were under pre-welfare reform employment programs. The types of work-support services that many states provide for their welfare recipients include job search, job placement, and job readiness services; intensive case management services to assess individual clients' barriers to work and provide referrals for support services aimed at removing those barriers; and services to help clients obtain and maintain employment, including subsidized child care, transportation, and short-term loans for work-related supplies. Prior to welfare reform, welfare spending was generally focused on families receiving monthly cash payments. Since welfare reform, states have more flexibility in how and on whom they spend welfare dollars. As a result, states are providing more services to low-income families who are not on welfare, including those who have recently left welfare. For example: Most of the surveyed states use TANF/MOE funds to provide child care subsidies to the general low-income population. Wisconsin uses TANF/MOE funds to provide employment, education, and training services to low-income families not receiving cash assistance. Pennsylvania uses TANF/MOE funds to provide job retention, advancement, and rapid reemployment services to persons not receiving TANF cash assistance. The flexibility of TANF/MOE funds has also allowed states to establish services aimed at protecting and developing children, strengthening families, and promoting self-sufficiency. For example: Orange County, California, uses TANF dollars to help fund centers that provide after school activities, literacy programs, domestic violence services, and substance abuse prevention programs. Indiana uses TANF/MOE funds for child development programs and to subsidize textbook rental fees for low-income children. Texas uses TANF funds to provide high-risk parents with intensive services, beginning prior to the birth of a child, to prevent low birth-weight and child abuse and to promote school completion for teen parents. While states are using TANF/MOE dollars to provide services to many families who do not receive monthly cash assistance payments, these families are not included in the reported TANF caseload, and the actual number of these families is unknown. Based on our survey of 25 states, we estimate that at least 46 percent more families than are in the reported TANF caseload are receiving TANF/MOE-funded services. Data available from most states give an incomplete picture of the number of families served with TANF/MOE dollars, and state officials raised concerns about the possibility of additional TANF reporting requirements being imposed to provide more complete data on these families. As shown in figure 2, we found that in addition to the approximately 1.8 million families counted in the TANF caseload for 25 surveyed states, at least another approximately 830,000 families were receiving a TANF/MOE-funded service but were not included in the reported TANF caseload. These approximately 830,000 families are not included in the reported TANF assistance caseload because they do not receive monthly cash assistance payments and the services they receive do not fall under the definition of assistance in the TANF regulations. Our estimate likely understates the number of families receiving TANF/MOE-funded services that are not part of the reported TANF caseload. For most states, our estimate only takes into consideration a single TANF/MOE-funded service being provided to low-income families who are not included in the TANF caseload. Usually, this single service is child care because states have extensive data on child care, and because child care is often the TANF/MOE-funded service that serves the most families not receiving cash assistance. Our estimate does not take into consideration many of the services offered by states to low-income families who are not in the TANF caseload because the states could not provide the type of data on those services that we needed to include them in our estimate. For additional information on how we developed our estimate and on data obtained from states, see appendixes I and II. Many of the families included in the counts of "other low-income families" in figure 2 are receiving a service that is only partially funded with TANF/MOE dollars. This is because states often mix TANF/MOE funds with funds from other sources to provide a single service. Although TANF/MOE dollars may not have paid for 100 percent of the cost of providing a service, the TANF/MOE portion of the cost can be significant. For example, for states included in our review, the TANF/MOE portion of monthly child care subsidies averaged approximately $266 per family out of a total average subsidy of $499 per family. The average child care subsidy per month per family compares to an average cash benefit per month per family of $407. Two of the 25 states we surveyed--Indiana and Wisconsin--had more comprehensive data than could be provided by other states on the number of low-income recipients being served with TANF/MOE dollars. Indiana and Wisconsin had these data because they have information systems that can sort through recipients of subsidized child care and other TANF/MOE-funded services to produce one unduplicated count of recipients across several services. As shown in figure 3, Indiana and Wisconsin found that at least 100 percent more families than are in the states' reported TANF caseloads received TANF/MOE-funded services. The data that are available from most states we surveyed give an incomplete picture of the number of families being served with TANF/MOE dollars. TANF reporting requirements have focused on families who are receiving monthly cash assistance, that is, families in the TANF caseload. Therefore, most states we surveyed have not developed data on families receiving TANF/MOE-funded services who are not in the TANF caseload. During our review, some state officials raised concerns about the possibility of additional TANF reporting requirements being imposed on states to collect information on families not included in the TANF caseload. These concerns included that (1) states lack the information systems that would be needed to fulfill additional requirements, (2) fulfilling additional requirements will increase administrative costs, (3) additional data collection requirements could deter states and service providers from offering services because they would not want the administrative burden associated with them, and (4) requiring all service recipients to provide personal identifying information for every service may deter some people from accessing services because of the stigma associated with welfare. Since the Congress passed welfare reform legislation in 1996, states have taken steps to implement a work-based, temporary assistance program for needy families. As cash assistance caseloads declined in recent years, freeing up resources for other uses, states used some of these funds to involve increasing numbers of welfare families in welfare-to-work activities and to provide services to other low-income families in keeping with the goals of TANF. The increased emphasis on work support and other services for recipients of cash assistance and those not receiving cash assistance represents a significant departure from previous welfare policy that focused on providing monthly cash payments. While the goals and target populations of welfare spending have changed, the key measure of the number of people served remains focused solely on families receiving monthly cash assistance. Although this measure provides important information for administrators and policymakers, it does not provide a complete picture of the number of people receiving benefits or services funded at least in part with TANF/MOE funds. While a more complete accounting of people receiving services could be helpful to understanding how states are using TANF/MOE dollars, requiring states to provide a more complete accounting raises concerns from state officials, including concerns about creating a reporting burden and discouraging people from accessing services. Mr. Chairman, this concludes my prepared statement. I will be happy to respond to any questions you or other Members of the Committee may have. For future contacts regarding this testimony, please call Cynthia M. Fagnoni at (202) 512-7215 or Gale Harris at (202) 512-7235. Individuals making key contributions to this testimony included Kathy Peyman, Kristy Brown, and Rachel Weber. To be included in our estimate of the number of low-income families receiving TANF/MOE-funded services who were not in the TANF caseload, a service or the data on the service had to meet each of the following criteria: Service had to be funded with at least 30 percent TANF/MOE dollars--If a service was funded with at least 30 percent TANF/MOE dollars (and the other criteria were met for our estimate), we included all service recipients not receiving monthly cash payments. Data could distinguish between cash and non-cash families--We only included counts of families who were not receiving monthly cash assistance payments and were not on the TANF caseload. Data represented an unduplicated count of recipients--If counts for different services could not be combined without ensuring that families receiving more than one service were only counted once, we used the count for the largest single service. If a state had information systems that could sort through recipients of various services and develop an unduplicated count of recipients across those services, we used that count for our estimate. Other aspects of our estimate include the following: Number of families--We used data on the average number of children per family receiving subsidized child care in each state to convert data on child care recipients into estimates of the number of families receiving subsidized child care. When services were determined to have only adult recipients, data for these services were treated as family counts. Time period--We used the most recent available data on service recipients from each state. These were either for a month in 2001 or a monthly average for 2001. For our comparison with TANF caseload, we used the TANF caseload count for the same time period covered by the data on service recipients. The surveyed states varied in their ability to provide data on low-income families receiving TANF/MOE-funded services. States were able to provide these data for families receiving subsidized child care. However, only 11 states were able to provide these data for at least one TANF/MOE-funded service other than child care. Figure 4 shows the data we obtained from states on child care. To show how the number of these families compares to the TANF caseload, each state's count is shown as a percentage of the state's TANF caseload. Although officials from all surveyed states said the states were providing TANF/MOE-funded services other than child care to low-income families who are not in the TANF caseload, they usually did not have data on the number of these families. Only 11 states were able to provide data on at least one service other than child care. Figure 5 shows the data we obtained from states. To show how the number of these families compares to the TANF caseload, each state's count is shown as a percentage of the state's TANF caseload. Table 2 shows the services included for each state in figure 5.
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The Temporary Assistance for Needy Families (TANF) block grant makes $16.5 billion available to states each year, regardless of changes in the number of people receiving benefits. To qualify for their full TANF allotments, states must spend a certain amount of state money, referred to as maintenance-of-effort funds. As states implemented work-focused reforms during the strong economy of the 1990s, welfare caseloads dropped by more than 50 percent. GAO found that most former welfare recipients were employed at some point after leaving welfare, typically with earnings that did not raise them above the poverty level. Under welfare reform, spending shifted from monthly cash payments to services, such as child care and transportation. This shift reflects two key features of reform. First, many states have increased spending to engage more welfare families in work-related activities and to provide more intensive services. Second, many states have increased their efforts to provide services to low-income families not receiving welfare. Services for these families include child care, case management, and job retention and advancement services for families who have recently left welfare for employment as well as other low-income working families. Although states have the flexibility under TANF to use their federal and state welfare-related funds to provide services to families not receiving monthly cash assistance, these families are not reflected in caseload data reported to the Department of Health and Human Services. As a result, caseload data do not provide a complete picture of the number of families receiving benefits and services through TANF.
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State accountability systems under ESSA include four key components: 1) determine long-term goals, 2) develop performance indicators, 3) differentiate schools, and 4) identify and assist low-performers (see fig. 1). ESSA requires states to submit state plans to the Secretary of Education to receive Title I funds. These funds support schools and districts with high concentrations of students from low-income families. ESSA requires that states develop these plans with "timely and meaningful consultation" with a variety of stakeholders, and also coordinate the plans with certain other federal programs. Education has developed a state plan template that states can use when formulating their consolidated state plans and procedures for submitting these plans. ESSA requires that state plans be peer reviewed and that the Secretary of Education approve them if they meet the requirements in the law. As of May 2017, 16 states and the District of Columbia had submitted their plans to Education for review; the remaining plans are due by September 18, 2017, according to Education's guidance. Both states we visited as part of our review intend to submit their plans by the September deadline. Representatives of all nine national stakeholder groups we spoke with saw ESSA's accountability provisions as somewhat flexible, with most indicating that ESSA strikes a good balance between flexibility and requirements. One stakeholder said, for example, that ESSA "threads the needle very well" between giving states flexibility in designing their accountability systems and placing requirements on states to help ensure that all children have an opportunity to get a good education. Most stakeholders also mentioned ESSA provisions related to developing performance indicators as an example of flexibility. One stakeholder, for example, saw, these provisions as flexible because they allow states to define the exact indicators they will use, including indicators that measure student growth in addition to student proficiency when assessing academic performance. Representatives of four national stakeholder groups that have worked directly with states to help them develop and revise their accountability systems told us that the extent to which states are revising their accountability systems varies because some states are satisfied with their current systems and others are using the flexibilities in the law to make significant overhauls. According to representatives of one stakeholder group, for example, many states already began revising their accountability systems as a result of waivers Education granted under the previous reauthorization, the No Child Left Behind Act of 2001 (NCLBA). They further said that ESSA is generally flexible enough for states to continue down the path they started in implementing their NCLBA waivers. In addition, representatives of several stakeholder groups mentioned that for states that see their current accountability systems as lacking in some way, or because consultation with state stakeholders has pointed to the need for significant change, ESSA provides room for them to consider innovative revisions. Ohio and California, the two states we visited, illustrate how different states are using the flexibilities in ESSA to develop accountability systems that are tailored to meet state needs as well as ESSA requirements for each of the four key components of state accountability systems: determine long-term goals, develop performance indicators, differentiate schools, and identify and assist low performers. (See sidebars for summaries of ESSA requirements for these components.) Highlights of Selected ESSA Requirements: Long-Term Goals ESSA requires states to design and establish ambitious long-term goals, including measurements of interim progress toward meeting them. For example, states are to set goals for all students, and separately for each subgroup of students, for improved academic achievement and high school graduation rates, among other things. Student subgroups include economically disadvantaged students, students from major racial and ethnic groups, children with disabilities, and English learners. Ohio officials told us that they chose a 10-year timeline for meeting their long-term goals to help address stakeholder concerns about providing schools and districts sufficient time to meet the new goals. For example, one of Ohio's proposed goals is that at least 80 percent of students score proficient or higher on Ohio's statewide assessments in English Language Arts and math within 10 years. Meeting this goal may be easier for some schools and groups of students than others, as some are further away from the goal than others. To close this "achievement gap," the state plans to set its proficiency goals for each student subgroup such that those groups furthest behind will be expected to make greater annual gains in an effort to catch up over the 10-year period. Further, in an effort to make the 10-year long-term goals achievable for lower- performing groups, the state's draft plan proposes to set the 10-year proficiency goals for them lower than the 10-year goals for higher- performing subgroups. Ohio state officials and stakeholders told us that some stakeholders were concerned about having different goals for different subgroups: Some find the annual or long-term goals for low performing subgroups too ambitious and others find it problematic that certain students would be held to different standards than others. State officials said to meet the ESSA requirement of having ambitious long-term goals, they designed their approach to significantly close the achievement gap over 10 years. At the time of our work, Ohio was still working on its final approach to address this issue. According to California's draft plan, California plans to achieve its goals within 5 to 7 years--a timeframe that coincides with regularly scheduled reviews of the performance indicators used in its accountability system. Unlike Ohio, California is proposing that schools and districts propose their own interim goals to close achievement gaps and that the same timeline for long-term goals (5 to 7 years) apply to all student subgroups. State officials mentioned that district interim goals must take into account the current performance of student subgroups and how far this performance is from the state's long-term goals. Highlights of Selected ESSA Requirements: Indicators States are required to annually measure, for all students and for student subgroups, four "academic" indicators. These indicators include academic achievement for all public schools, as measured by proficiency on the annual state assessments, and the four-year adjusted cohort graduation rate for public high schools, among other things. In addition, states are also required to have, for all public schools, at least one statewide indicator of school quality or student success that meets certain criteria. This indicator may include measures of student and educator engagement, student access to and completion of advanced coursework, postsecondary readiness, school climate and safety, or any other indicator the state chooses that meets the requirements in the law. Ohio officials told us that they plan to use their current indicators as the foundation for meeting ESSA's requirements for academic indicators, and make some revisions or refinements as needed. With regard to ESSA's required indicator of school quality or student success, state officials said they plan to include chronic absenteeism because studies show that school attendance is strongly correlated with successful student performance. Because the state already collects attendance data, the indicator also reduces the need for additional data collection. Ohio officials and stakeholders said that ESSA has prompted many substantive conversations about what to use for the school quality or student success indicator. For example, Ohio stakeholders and a school district official told us that they have concerns about using chronic absenteeism as a measure because schools and districts cannot control whether students come to school and that other indicators might be beneficial measures. State officials mentioned that in response to these concerns, Ohio's draft plan now includes a commitment to pilot a school climate survey for potential inclusion as an indicator of school quality or student success in future years. Although California's draft plan proposes using its existing indicators to meet ESSA's requirements for academic indicators, the state also plans to develop some new ones. For example, as an additional academic indicator, the state proposes to use chronic absenteeism. According to its draft plan, there is a strong correlation between strong academic performance and school attendance. For the school quality or student success indicator, California chose suspensions, with high rates indicating poor quality and failure, and low rates indicating success. State officials said that ESSA flexibilities allowed them to differentiate what was considered high and low rates of suspension by grade level (i.e., elementary, middle, and high school). They explained that this is important because it allows them to tailor the indicator for each level. Differentiate Schools (distinguishing between levels of performance) accountability system, including the four academic indicators, for all students and for each subgroup of students; and include differentiation of any school in which any subgroup of students is determined by the state to be consistently under-performing. Ohio officials told us that they propose to continue to use the state's current system of six indicators, with modifications, to assess school and student performance. Under the proposal, schools would receive a letter grade on each indicator. Some of the indicators, such as academic achievement, would measure current performance while other indicators, such as academic progress, would measure growth. Ohio state officials told us that they also intend to roll up indicator scores into an overall letter grade for schools in 2018. They said that reporting a letter grade on each indicator provides detailed information, while an overall letter grade provides an easily understandable overview of performance. Ohio stakeholders and school district officials expressed concerns about both the use of letter grades and rolling up grades on each indicator into an overall score. They explained that words, such as meets or exceeds expectations, could more accurately communicate performance than letter grades. California officials said they plan to distinguish performance of schools and student subgroups by using a dashboard in which school and student subgroup performance would be color-coded based on each of six state indicators. These officials said that each indicator measures current student performance as well as changes in performance over time. Unlike Ohio, California does not plan to aggregate the indicators into overall scores for schools and student subgroups. California officials told us that they chose their approach for two reasons. First, aggregating scores on indicators into an overall score can mask individual areas where a school may be struggling. In contrast, reporting individual indicators allows key distinctions to be maintained in performance across a variety of factors. Second, officials said that measuring performance in both the current year and over time on each indicator provides a more complete picture of performance. Ohio state officials told us that their processes for identifying low performing schools (known in Ohio as priority schools) and schools with underperforming subgroups (known in Ohio as focus schools) will be similar to the process they used under their NCLBA waiver and will include new indicators, such as chronic absenteeism as one indicator of school quality or student success. Furthermore, Ohio officials in one district discussed a requirement in ESSA that they believe will improve Ohio's system of intervening in low-performing schools and subgroups-- that states establish criteria for how schools can exit certain ESSA improvement categories. As part of meeting this requirement, these officials said that Ohio is developing benchmarks for graduation rates and student growth indicators, which they said should make it clear to districts when they can release schools from improvement categories. addition, states are to notify each school district about schools in which any subgroup of students is consistently underperforming, and ensure the district provides notification to these schools. For each school identified, the school or district is to develop and implement, in partnership with stakeholders, either a comprehensive support and improvement plan or a targeted support and improvement plan, as applicable, to improve student outcomes. These plans must be informed by all state indicators and include evidence- based interventions. States are to, among other things, establish statewide exit criteria for schools identified for comprehensive support and improvement and additional targeted support. California's draft state plan proposes to identify low-performing schools and student subgroups based on where they fall on its dashboard of color-coded performance indicators, and lists three options for how the state may do this. Regarding assisting low-performing schools and student subgroups, California state officials said they plan to give districts the authority to develop interventions. California officials in one district said that ESSA provides flexibility to reconsider how they provide school interventions. They said, for example, that they can now provide an intervention such as tutoring when they feel it will be most effective-- before, during, or after the school day--and that this was partly because of ESSA. Given current timelines, Education officials said that the department is currently focused on the review and approval process for state plans and providing assistance to states in developing their plans. Under ESSA, the Secretary of Education is responsible for establishing a peer-review process to assist in the review of state plans, and for approving state plans that meet the requirements of ESSA. Education officials told us that the peer reviewers will consider the technical, educational, and overall quality of specific portions of state plans when making their recommendations to the Secretary. According to guidance Education provided to peer reviewers, another goal is for reviewers to provide states with objective feedback on the technical, educational, and overall quality of their plans. Education officials told us that they are developing monitoring protocols that they will pilot with eight or nine states in early 2018. These protocols are intended to guide in-depth reviews of state activities related to ESSA implementation. The officials noted that they are piloting the protocols to ensure that they have an appropriate monitoring tool to obtain information on how states are implementing ESSA requirements. Officials told us that Education used similar in-depth state reviews when developing past monitoring protocols, reviewing a select number of states each year with the goal of reviewing all states within a 3- to 4-year cycle. Given that some states have submitted their state plans earlier than others for approval, officials also noted that they will pilot the monitoring protocol in states that progressed enough to warrant monitoring. To complement the in-depth monitoring, Education officials said they also plan to continue their past practice of maintaining regular contact with all states. Education officials also told us they are determining whether there is a need for additional guidance to states on aspects of ESSA implementation. Education has provided assistance to states in a number of ways. For example, the department hosted webinars on the state plan template that states may choose to use, and on the peer review process. Education has also implemented a technical assistance initiative called the State Support Network to support state and district school improvement efforts under ESSA. This network aims to connect states and districts with technical assistance providers and subject matter experts to develop strategies for supporting schools. According to the network's website, it aims to help states and districts learn from prior school improvement efforts, assess needs and assets to inform strategies, and build sustainable systems to support continuous improvement. During our review, representatives of most national stakeholder groups with whom we spoke told us that states could use guidance on a number of issues. One example of guidance that they told us states might consider useful is identification of appropriate evidence- based interventions. As part of its ongoing assistance to states, Education has addressed this topic in a number of ways, including non- regulatory guidance, resources via the State Support Network, and case studies. ESSA requires states and Education to report annually on specific aspects of ESSA implementation and states to submit significant changes to their plans to Education for review (see sidebar for a summary of these requirements). states to submit annual reports to the Secretary of Education. These annual reports must include information on student achievement based on the annual state assessments, including disaggregated results for student subgroups. The reports must also include certain information on English learners, schools identified for support and improvement, and teacher qualifications, among other things. Under Education's current reporting procedures, states submit information for each school year the following fall. Education officials said that they plan to continue this practice, so state submissions in fall 2018 would be the first to include information based on ESSA requirements, i.e., for school year 2017-2018. Annual report to Congress: ESSA also requires the Secretary of Education to submit an annual report to specified congressional committees that provides both national and state-level data on the information collected from the states' reports. that once a state plan is approved it remains in effect for the duration of the state's participation in Title I, though it also directs states to periodically review and revise plans as necessary to reflect any changes in state strategies or programs. If a state makes any significant changes to its state plan, such as adopting new academic assessments, the state must submit a revised plan or amendment to Education for review. On June 16, 2017 we provided a draft of this report to Education for comment. That same day, Education issued additional guidance for states on developing their state plans, including some guidance related to accountability systems. Education provided technical comments on our draft, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the U.S. Secretary of Education. In addition, the report will be available at no charge on the GAO website at http://gao.gov. If you or your staff have any questions about this report, please contact me at (617) 788-0580 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. In addition to the contact named above, Bill Keller (Assistant Director), Nancy Cosentino (Analyst-in-Charge), James Bennett, Deborah Bland, Mindy Bowman, Sarah Cornetto, Randolfo DeLeon, Anna Duncan, Holly Dye, Brian Egger, Sheila R. McCoy, and Monica Savoy made key contributions to this report.
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Federal, state, and local governments spent about $640 billion in 2015 to educate nearly 50 million public school children in the United States. ESSA, enacted in December 2015, reauthorized the Elementary and Secondary Education Act of 1965. To receive federal education funds for school districts with high concentrations of students from low-income families, ESSA requires states to have accountability systems that meet certain requirements, but gives states flexibility in how they design their systems. GAO was asked to review states' early experiences with ESSA. This report examines (1) selected stakeholders' and states' views of ESSA's flexibilities as states redesign accountability systems, and (2) Education's next steps in implementing ESSA. GAO interviewed representatives of nine prominent national education stakeholder groups, selected for their knowledge about state accountability systems; met with education officials in California and Ohio--states that were among those stakeholders cited as offering differing approaches to developing their systems; interviewed Department of Education officials; reviewed relevant federal laws and guidance; and reviewed accountability system guidance from California and Ohio and these states' draft state plans. GAO is not making recommendations in this report. The Department of Education provided technical comments on a draft of this report, which we incorporated as appropriate. According to most of the nine education stakeholder groups GAO interviewed and officials in the two states GAO visited, the Every Student Succeeds Act (ESSA) strikes a good balance between flexibility to meet state needs and ESSA requirements. Accountability systems measure student and school performance to identify and assist low-performers. States are currently developing plans for accountability systems under ESSA. According to stakeholders, some states are using ESSA's flexibilities to significantly change their accountability systems while others are making more limited changes. Changes stakeholders discussed pertained mostly to four key components (see figure). GAO visited California and Ohio and these two states reported using ESSA's flexibilities to distinguish between levels of school performance, among other things. For example, Ohio plans to assign letter grades to schools on each of six performance indicators. Under Ohio's proposal, schools will also receive overall letter grades beginning in 2018. California plans to distinguish performance with grades for performance on each of six state indicators. Their proposed system will not provide overall scores for schools. California officials said reporting on individual indicators will allow them to show key distinctions in performance that an overall score could mask. Four Key Components of Accountability Systems Under the Every Student Succeeds Act Education officials said next steps in implementing ESSA are the review and approval of ESSA-required state plans, and to continue to provide technical assistance to states. Officials also said that they are developing monitoring protocols for in-depth reviews of states' ESSA-related activities and will pilot them in early 2018. ESSA also includes certain reporting and review requirements, for example, (1) annual state reports to Education on student and school performance; (2) annual Education reports to Congress on state reported data; and (3) approval by the Secretary of Education of significant changes to state plans.
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The Homeland Security Act of 2002 established DHS and required the agency, among other things, to build a comprehensive national incident management system comprising all levels of government and to consolidate existing federal government emergency response plans into a single, coordinated national response plan. DHS developed the National Response Framework that identified core capabilities necessary to ensure national preparedness, such as operational planning at the federal and state level and emergency communications capabilities that enable emergency responders to effectively communicate with each other. States and localities provide the first response to any disaster and thus must plan and coordinate, across state lines, and with federal entities as well. States have developed plans and made efforts to coordinate in support of emergency communications. For example, state plans, called Statewide Communication Interoperability Plans, are intended to define the current and future direction for interoperable and emergency communications within the state. In addition to DHS, other federal agencies play a role in supporting emergency communications during disasters. Specifically, FCC manages the use of spectrum by non-federal entities, including commercial enterprises and state and local governments, and administers policies related to 911 and E911 services. The Department of Commerce's National Telecommunications and Information Administration (NTIA) is responsible for managing spectrum used by the federal government and can temporarily assign spectrum during an emergency to aid the response. Along with FCC, NTIA deploys personnel to support disasters in response to a mission assignment from DHS. Furthermore, the First Responder Network Authority (FirstNet), an independent authority within NTIA, is in the process of planning for the deployment of a high-speed, interoperable nationwide wireless broadband network for use by federal, state, tribal, and local public safety personnel. Congress passed PKEMRA in 2006 to address issues that arose during Hurricane Katrina, including emergency communications issues. PKEMRA contains 10 emergency communications provisions that, according to our 2008 report and updates we obtained from DHS, have all been implemented, as shown in table 1. In this report, we focus on the first three emergency communications provisions listed in the table, requirements that are related to planning and federal coordination. While all of these PKEMRA provisions have been addressed, DHS continues to meet the requirements of some provisions, for example: Grant program coordination: DHS, in conjunction with other agencies, coordinates grant guidance across the government annually through SAFECOM's Guidance on Emergency Communications Grants. The guidance provides grantees with directions on applying for funds to improve emergency communications and the current standards for grant award recipients. DHS developed the guidance to align with the first NECP and it now reflects the most recent NECP. Interoperability research and development: Since PKEMRA, DHS has conducted research and development to support emergency communications interoperability. Among other things, DHS is responsible for establishing research, development, testing, and evaluation programs for improving interoperable emergency communications. Assessments and reports: DHS intends to issues the next biennial progress report in November 2016. OEC has enhanced support of state and local planning and other emergency communications activities. OEC has taken a number of steps aimed at ensuring that federal, state, local, tribal, and territorial agencies have the plans, resources, and training they need to support interoperable emergency communications. After being established in 2007, OEC focused on enhancing the interoperability and continuity of land mobile radio systems. However, OEC's scope has expanded since then to include other technologies used to communicate and share information during emergencies, including devices that have advanced telecommunications capabilities, such as broadband access. OEC has developed policy and guidance supporting emergency communications across all levels of government and various types of technologies. Table 2 describes key guidance OEC has provided to state and local entities. In addition to developing policy and guidance, OEC has provided technical assistance in the form of training, tools, and online and on-site assistance for federal, state, local, and tribal emergency responders. According to OEC, the technical assistance is designed to support interoperable emergency communications by helping states develop and implement their statewide plans to enhance emergency communications, standard operating procedures, and communications unit training, among other things. All states responding to our survey reported receiving technical assistance provided by OEC, and almost all of those states were satisfied with the support they received from OEC. For example in response to our survey, one state commented that OEC had provided invaluable training for the state's first responders and assistance to the state's governing authority. According to DHS, the PKEMRA provision requiring the NECP has improved state and local emergency communications activities, including governance and planning. The NECP, first issued by DHS in 2008, served as the first national strategy aimed at improving emergency communications interoperability and provided a road map to improve emergency communications capabilities. For example, the 2008 NECP encouraged states to have standard operating procedures for specified events. To assist the states in this effort, OEC developed a toolkit that provides general guidance and tools for state communications planners in developing a plan for special events and made a variety of templates available online for states to use in developing standard operating procedures. In 2014, DHS released its second NECP, which contains the following five goals: Governance and leadership: Enhance decision making, coordination, and planning for emergency communications through strong governance structures and leadership. Planning and procedures: Update plans and procedures to improve emergency responder communications and readiness in a dynamic- operating environment. Training and exercises: Improve responders' ability to coordinate and communicate through training and exercise programs that use all available technologies and target gaps in emergency communications. Operational coordination: Ensure operational effectiveness through the coordination of communications capabilities, resources, and personnel from across the whole community. Research and development: Coordinate research, development, testing, and evaluation activities to develop innovative emergency communications capabilities that support the needs of emergency responders. DHS has taken various actions to support states' efforts to address these goals. For example, with respect to the first goal, DHS issued The Governance Guide for State, Local, Tribal, and Territorial Emergency Communications Officials. This guide identified challenges related to emergency communications governance, as well as best practices and recommendations to overcome these challenges. In addition, OEC completed the 911 Governance and Planning Case Study, which examined the governance, planning, and funding challenges that states are facing regarding 911 and made a number of recommendations for OEC to improve coordination. DHS has taken steps towards addressing the other NECP goals. For example, related to the planning and procedures goal, DHS has coordinated with the Department of Transportation to identify risks and mitigation strategies to enhance the continuity and operability of emergency communications. Among other things, DHS has also partnered with FirstNet to conduct an assessment of the potential cybersecurity challenges facing the public safety broadband network. According to DHS, it will provide information on additional progress on meeting the NECP goals in its biennial report to Congress scheduled to be completed in November 2016. The ECPC, the interagency collaborative group established by PKEMRA, provides a venue for coordinating federal emergency communications efforts. The ECPC works to improve coordination and information sharing among federal emergency communications programs. It does this by serving as the focal point for emergency communications issues across the federal agencies, supporting the coordination of federal programs, such as grant programs, and serving as a clearing house for emergency communications information, among other responsibilities. There are 14 member agencies of the ECPC that have staff on an Executive Committee responsible for setting the ECPC's priorities. In addition, the ECPC has a Steering Committee and focus groups that develop plans to address the priorities. Currently, there are three focus groups examining issues related to grants, research and development, and 911 issues. The focus groups report on their issues at Executive Committee and Steering Committee meetings and in the Annual Strategic Assessment. DHS serves as the administrative leader of the ECPC, organizes the ECPC quarterly and other meetings, and drafts the Annual Strategic Assessment and other documents. In a 2012 report, we examined interagency collaborative mechanisms, such as interagency groups, and identified certain key features and issues to consider when implementing these mechanisms. We reported that following leading collaboration practices can enhance and sustain collaboration among federal agencies. For this report, we compared the ECPC's collaboration efforts with six of these key features and issues to consider, as shown in table 3. We found the ECPC's efforts were consistent with the key features related to leadership, participants, resources, and written guidance and agreements. However, the ECPC's efforts were not completely consistent with the key features related to (1) outcomes and accountability, and (2) clarity of roles and responsibilities, as explained below. The ECPC has not documented its strategic goals and outcomes. We previously reported that establishing shared outcomes and goals that resonate with, and are agreed upon by all participants, is essential to achieving outcomes in interagency groups, but can also be challenging. Participants each bring different views, organizational cultures, missions, and ways of operating. Participants may even disagree on the nature of the problem or issue being addressed. Furthermore, agency officials involved in several of the interagency groups we previously reviewed cautioned that if agencies do not have a vested interest in the outcomes, and if outcomes are not aligned with agency objectives, participant agencies would not invest their limited time and resources. However, by establishing outcomes and strategic goals based on the group's shared interests, a collaborative group can shape its vision and define its own purpose, and when articulated and understood by the group, this shared purpose provides a reason to participate. Although DHS identified four long-term goals for the ECPC in response to our questions, these goals do not appear in the ECPC charter, program plan, or Annual Strategic Assessment. In May 2016, DHS officials told us the ECPC's Executive Committee agreed to develop a strategic plan to highlight the ECPC's goals and provide additional guidance for the focus groups. However, the DHS officials could not specify a time frame for completion. Without clearly defined strategic goals, the member agencies might not understand the ECPC's goals or have a chance to ensure that the goals align with their own agencies' purposes and goals. Furthermore, it remains unclear whether all member agencies have agreed on the ECPC's goals and outcomes. In fact, ECPC member agencies we spoke with were able to provide a general idea about the ECPC's purpose but could not articulate its specific goals. Also with respect to outcomes and accountability, the ECPC does not track or monitor its recommendations. The ECPC uses its Annual Strategic Assessment to: (1) provide information on federal coordination efforts, (2) define opportunities for improving federal emergency communications, and (3) report on progress implementing some of the focus groups' recommendations. For example, the ECPC grants focus group made nine recommendations for federal grant program managers, including that the managers should use the ECPC Financial Assistance Reference Guide when planning and developing grant documents, and should invest in standards-based equipment. According to DHS, the grants focus group conducts annual surveys of member agencies to assess whether the agencies had implemented any of these recommendations. However, recommendations made by the other ECPC focus groups are not tracked, and therefore it is unclear the extent to which the recommendations have been implemented by ECPC's member agencies. For example, the research and development focus group identified five recommendations in 2015 that were aimed at improving collaboration and information sharing around research and development for emergency communications. Specifically, one recommendation was for agencies to share technology profiles to prevent duplicative research. However, it is voluntary for member agencies to implement the focus group's recommendations, and it is unknown whether agencies are sharing their technology profiles or if duplicative research is being conducted. According to DHS officials, the ECPC does not have a mechanism to determine whether the focus groups' recommendations are implemented because it is up to the member agencies to decide if they will implement recommendations and if so, to track them on an individual basis. We have previously reported about the importance of federal agencies engaged in collaborative efforts to publicly report performance information as a tool for accountability. By having a mechanism to track the focus groups' recommendations, the ECPC would have the means to monitor progress in achieving them. The ECPC has not clearly defined the roles and responsibilities of its member agencies. We previously reported that clarifying the roles of all member agencies will help establish an understanding of who will do what in support of the collaborative group. In addition, member agencies' commitment to their defined roles helps the group overcome barriers to working in the collaborative group and can facilitate decision making within the group. The roles can be described in laws, policies, memorandums of understanding, or other documentation. As described in the ECPC charter, DHS is the administrator of the ECPC; however, it is unclear whether all member agencies have defined and agreed upon their respective roles and responsibilities. For example, the Department of Labor is a member of the ECPC, but according to DHS, it might not be clear to all members why the Department of Labor is a participating member. Similarly, officials from the General Services Administration told us they do not know the roles of the other ECPC members and could only speak to us about their own agency's role. DHS officials told us it would be beneficial to have member agencies' roles and responsibilities clearly defined but expressed concern that some members, who participate voluntarily, might not want defined responsibilities if such responsibilities would require additional staff time and resources. Nevertheless, lacking defined roles and responsibilities may result in member agencies' not knowing their roles and responsibilities or those of other members, which may create additional barriers to effectively working together. States, the District of Columbia, and territories (hereafter, states) responding to our survey reported that to better prepare for emergency communications during disasters, they have: (1) developed emergency communications plans, (2) established the Statewide Interoperability Coordinator (SWIC) positions, and (3) implemented governance structures to oversee emergency communications planning. States have made progress since PKEMRA in establishing emergency communications plans. Based on survey responses, prior to the enactment of PKEMRA in 2006, only a few states had emergency communications plans in place. In 2007, OEC began requiring states to have a Statewide Communications Interoperability Plan (SCIP) to be eligible for DHS's Interoperable Emergency Communications Grant Program. These state emergency communications plans are intended to be comprehensive strategic plans that outline the current and future emergency communications environment in a state. The NECP encourages states to align their plans with the emergency communications goals in the NECP to establish a link between national communications priorities and state emergency communications planning. Of the states responding to our survey, 51 reported having a SCIP, and 36 state plans were implemented after PKEMRA's enactment. In addition to the SCIP, 16 states reported having other planning documents that support operational plans for emergency communications in addition to the high-level strategic plan the SCIP represents. For example, some states reported using tactical documents such as the Tactical Interoperability Communications Plan as their primary emergency communications planning document. The 2014 NECP encouraged states to update their plans and procedures to enhance emergency communications during disasters, and 46 states responding to our survey reported that they had updated their plans. States reported updating their plans for various reasons, including reflecting routine review processes, technological advancement, and changes in state governance, among others. According to DHS, as of the end of fiscal year 2015, OEC worked with 53 states and territories to update their SCIPs to align with the 2014 NECP. In response to our survey, 50 states reported being satisfied with the level of support for emergency communications planning they received from OEC. Further, as shown in table 4, most of the states responding to our survey reported that they now have plans that contain the key elements of the SAFECOM Interoperability Continuum. The NECP considers the SAFECOM Interoperability Continuum as the essential foundation for achieving the NECP goals. According to the NECP, first responders' proficiency with communications equipment and their ability to execute policies, plans, and procedures can improve with training and exercises. In response to our survey, 40 states reported conducting training and exercises based on their emergency communications plans. Furthermore, the NECP notes that training and exercises helps emergency responders be properly prepared to respond to disasters and 43 states reported that they are likely to use their emergency communications plans when responding to future disasters. Since PKEMRA, states have made considerable progress in establishing a key coordinator position. The SWIC provides a single point of contact for statewide emergency communications activities. The NECP identifies the SWIC as a key stakeholder in emergency communications. In 2008, DHS noted that the lack of SWICs in each state was a primary obstacle to improving emergency communications and recommended that every state have a SWIC within 12 months. All but two states responding to our survey reported that they now have a SWIC. DHS officials stressed the importance of the SWIC position and told us that SWICs can contribute to emergency communications initiatives by supporting the development of governance structures, standard operating procedures, and high-level policy. In addition, SWICs can coordinate grants and other types of funding and training and exercises, and support implementation of the SCIPs. Although DHS has stressed the importance of the SWIC position, according to our survey, most SWICs now have responsibilities outside those of the SWIC role. In December 2009, according to DHS, 44 states had a full time SWIC, but most survey respondents reported that their SWICs now have other non-SWIC responsibilities. In particular, 37 states responding to our survey have SWICs with additional non-SWIC related responsibilities. For example, 21 SWICs are also the FirstNet Single Point of Contact. States funded the SWIC position in part by the Interoperable Emergency Communications Grant Program. According to DHS, funds were not appropriated for this grant program after 2010. Subsequently, funding dedicated to improving interoperability was used for other DHS grant programs that supported improving emergency preparedness, which included interoperable emergency communications. According to our survey results, 26 SWIC positions are funded by federal grants, state grants, or a combination of both federal and state grants. In April 2016, the House of Representatives acknowledged the importance of the SWIC position by passing the Promoting Resilience and Efficiency in Preparing for Attacks and Responding to Emergencies Act, which includes a provision that would require states to have a SWIC position or delegate the responsibilities to other individuals. Since PKEMRA, the NECP identified the need for formal governance structures to manage the systems of people, organizations, and technologies that need to collaborate to effectively plan for emergency communications during disasters, and most states responding to our survey reported that they have governance structures in place. According to DHS, governance structures should include key emergency communications stakeholders such as emergency communications leaders, multiple agencies, jurisdictions, disciplines, subject matter experts, and private sector entities, among others to enhance information sharing and ensure emergency communications needs are represented. Almost all of states (49) responding to our survey reported having governance structures in place that include key stakeholders. For example, 48 states reported that their governance bodies include emergency responders from local agencies while 33 states reported that non-government stakeholders, such as the Red Cross, are included. In response to our survey, 24 states reported that their governance bodies meet 3 to 7 times a year, and the governance bodies for 16 other states meet 8 to 12 times a year while the remaining states with governance structures meet less than 3 times a year. In our survey, we asked states about the challenges that affect their ability to ensure operable and continuous emergency communications during disasters and states identified a lack of funding as the primary challenge. In particular, 48 states responding to our survey indicated that a lack of funding sometimes or always affected their state's ability to ensure operable and continuous emergency communications during disasters. In written comments, 12 states specifically identified the need for dedicated funding for emergency communications including funds to support the role of the SWIC. For example, one state reported that when it no longer received federal funding for emergency communications, the state lost its full time SWIC position, support personnel, and governance group. In addition, 45 states responding to our survey mentioned that the lack of staffing sometimes or always presented a challenge for their states. In the written responses, one state indicated that the lack of staffing was difficult to address because of the funding issue, while another indicated the state was under a hiring freeze. In other written responses to our survey, states identified additional challenges. For example, six states mentioned issues with technology, such as challenges in learning to use different radio systems and understanding new and emerging technologies. We also asked the states if they have experienced interoperability difficulties when communicating or attempting to communicate with federal partners during disasters. In response, 23 states reported that they have experienced difficulties and noted in written comments that the issues included a lack of understanding by federal responders about the local radio systems, federal radios not configured to the interoperable channels or talk groups, and federal responders not using the statewide system. Furthermore, two states noted a lack of planning between federal and state entities prior to emergencies that led to federal responders trying to figure out the systems during the emergency. Some states responding to our survey reported that they have taken action to address challenges related to funding, technology, and interoperability concerns with federal partners. First, related to funding, some states reported pursuing state level funding and grants to continue emergency communications governance and planning, including funding the SWIC position and building statewide emergency communications systems. Second, some states reported addressing technology challenges through training and upgrading old communication systems. For example, one state reported that his state provides training to emergency responders on radio operations and how to effectively use talk groups. Another state reported his state is upgrading its 26-year old land mobile radio system so that emergency responders can more effectively communicate within the state and during emergencies. Lastly, some states reported that they are trying to address interoperability issues through training and the purchase of interoperable equipment. For example, the training can improve coordination with federal and other users that can result in improved interoperability during emergencies. In addition, by purchasing interoperable equipment, emergency personnel could have fewer issues connecting with emergency responders at all levels of government. One state indicated that his state provided information on interoperable equipment to local entities to promote the purchase of such equipment. According to DHS officials, they continue to provide training programs to the states to help improve interoperability. PKEMRA established the ECPC to improve coordination and information sharing among federal emergency communications programs. As a collaborative entity, we found that while the ECPC's efforts were consistent with most of the key features for effective collaboration, its efforts were not completely consistent with key features related to outcomes and accountability and clarity of roles and responsibilities. Regarding outcomes and accountability, the ECPC has not documented its strategic goals or established a mechanism to track the outcomes of the focus group's recommendations. DHS officials told us the ECPC has agreed to develop a strategic plan that would contain goals for the ECPC, but there is no firm timetable for such a plan to be completed. Lacking clearly defined strategic goals, the ECPC's member agencies might not understand the ECPC's goals or have a chance to ensure that the goals align with their own agencies' purposes and goals. Furthermore, the ECPC's focus groups have spent time and resources to make recommendations for improving emergency communications, but we found the focus groups' recommendations, such as those related to federal grant programs and research and development efforts, are implemented at the discretion of the member agencies. Without a mechanism to track the recommendations, it is unclear the extent to which the recommendations are being implemented by the member agencies, and the ECPC is missing an opportunity to monitor its efforts. Regarding clarity of roles and responsibilities, the ECPC has not defined the member agencies' roles and responsibilities, and some member agencies do not know the roles and responsibilities of other members, a situation that may create barriers to working together effectively. Clearly defining the members' respective roles and responsibilities would help to provide an understanding of who will do what to support the ECPC's efforts and facilitate decision making. To improve the effectiveness, transparency, and accountability of the ECPC's efforts, we recommend that the Secretary of Homeland Security, as the administrative leader of the ECPC, take the following actions: clearly document the ECPC's strategic goals; establish a mechanism to track progress by the ECPC's member agencies in implementing the ECPC's recommendations; and clearly define the roles and responsibilities of the ECPC's member agencies. We provided a draft of this report to DHS, Commerce, and FCC for their review and comment. In response, DHS provided written comments, which are reprinted in appendix III. In written comments, DHS concurred with our recommendations and provided an attachment describing the actions it would take to implement the recommendations. DHS noted that enhancing the communications capabilities for emergency responders is one of its top priorities and that DHS will use the recommendations provided in our report to enhance a DHS initiative aimed at remediating many of the foremost emergency communications challenges facing our nation. Separately, DHS, Commerce, and FCC provided technical comments that we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretaries of Homeland Security and Commerce, the Chairman of FCC, and appropriate congressional committees. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or members of your staff have any questions about this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix IV. This report focuses on three Post-Katrina Emergency Management Reform Act of 2006 (PKEMRA) emergency communications provisions related to planning and federal coordination: the Office of Emergency Communications (OEC), the National Emergency Communications Plan (NECP), and the Emergency Communications Preparedness Center (ECPC). Specifically, we examined (1) federal efforts to implement these PKEMRA emergency communications provisions and (2) how states' emergency communications planning has changed since PKEMRA and what challenges remain for the states. To determine federal efforts to implement the three PKEMRA emergency communications provisions, we reviewed our 2008 report and other relevant reports and documentation from the Department of Homeland Security (DHS), such as DHS's biennial reports to Congress on emergency communications, and reports from other agencies, such as the Federal Communications Commission's (FCC) 911 and Enhanced 911 services report. We also reviewed the NECP from 2008 and the subsequent reports on the progress meeting its goals, as well as the 2014 NECP. We interviewed officials from DHS, FCC, and the Department of Commerce (Commerce) to determine their roles and the progress implementing the provisions. We compiled information from the reports and interviews to assess how the provisions were implemented and if they were fully implemented. To understand the ECPC's collaborative practices, we reviewed the ECPC charter, program plan, and Annual Strategic Assessments prepared for Congress, and interviewed ECPC member agencies. Specifically, we interviewed 5 of 14 ECPC member agencies (DHS, FCC, Commerce, the Department of Transportation, and the General Services Administration) to determine their roles on the ECPC, their understanding of the ECPC goals, and the member agencies' responsibilities. We selected agencies to interview with a range of emergency communications experience, and the views we obtained do not necessarily represent the views of all ECPC member agencies. We assessed the ECPC's collaborative efforts against six of seven key considerations for implementing collaborative mechanisms that we identified in a September 2012 report. To understand how state emergency communications planning has changed since PKEMRA and the challenges states still face, we surveyed Statewide Interoperability Coordinators (SWIC) in 50 states, the District of Columbia, and 5 territories. The list of SWICs was obtained from DHS and confirmed via email. We conducted a web-based survey that addressed issues pertaining to state planning, governance, and challenges, specifically asking about the Statewide Communications Interoperability Plan (SCIP) and other emergency communications plans, and the role of the SWIC. To ensure the survey questions were clear and logical, we pretested the survey with three states: North Dakota, Texas, and Wyoming. These states were selected based on the types of disasters facing the states, the number of recent disasters, and geographic diversity. We administered our survey from February 2016 to April 2016 and received 52 responses for a 93 percent response rate. American Samoa, Massachusetts, the Northern Mariana Islands, and Puerto Rico did not respond to our survey. In addition, we interviewed selected SWICs from Kentucky and Wyoming to understand how the SCIPs and other emergency communications plans are used in preparing for emergencies. We selected these SWICs to interview based on geographic region, an occurrence of a recent disaster in the state, and because the Wyoming SWIC was the chair of the National Council of Statewide Interoperability Coordinators. We conducted semi-structured interviews with each SWIC to understand if they had a SCIP, how they used the SCIP, the governance structures the state uses to manage emergency communications, and the challenges their states encounter with emergency communications during disasters. The questions we asked in our survey of Statewide Interoperability Coordinators and the aggregate results of responses to the closed-ended questions are shown below. We do not provide results for the open-ended questions. We received 52 completed survey responses. However, all respondents did not have the opportunity to answer each question because of skip patterns, and some respondents decided not to respond to particular questions. For a more detailed discussion of our survey methodology see appendix I. 1. Does your state have a Statewide Communications Interoperability Plan (SCIP)? 1a. If no, why doesn't your state have a SCIP? (Written responses not included) 1b. Does your state have a primary planning document for ensuring operable and interoperable emergency communications during disasters in your state? 1c. Is your SCIP your primary plan to ensure operable and interoperable emergency communications during disasters in your state? 1d. If no, what, is your primary planning document for ensuring, operable, and interoperable emergency communications during disasters in your state? (Written responses not included) 2. What year was the emergency communications plan implemented? 3. Has your state used the emergency communications plan in response to disasters? 3a. If the emergency communications plan has never been used in response to disasters, why not? (Written responses not included) 4. Has your state used the emergency communications plan during training exercises? 4a. If the emergency communications plan has never been used during training exercises, why not? (Written responses not included) 5. Are you likely to use the emergency communications plan in response to disasters in the future? 6. Has the emergency communications plan been updated since it was initially implemented? 6a. When was the emergency communications plan last updated? 6b. Why was the emergency response plan updated? (Written responses not included) 6c. Do you think your plan needs to be updated? 6d. If yes, why hasn't the emergency response plan been updated? (Written responses not included) Elements of the Emergency Communications Plan 7. Does your emergency communications plan address the following elements? Planning (standard operating procedures, protocols) Technology (data and voice elements, common applications, base sharing, custom applications, swapping radios, gateways) Usage (how often interoperability communications are used in planned events, localized emergency incidents, regional incidents, and daily use) 8. Does your emergency communications plan address the following types of events? Significant events (i.e., terrorist attacks, major disaster, and other emergencies that pose the greatest risk to the state) Routine events (i.e., localized emergency incidents, regional emergency incidents, special events, large public gatherings, state and national exercise) If "Other standardized elements" is checked, what other elements are contained in your operating protocols and procedures? (Written responses not included) Planning and Standard Operating Procedures 9. Does your emergency communications plan contain the following standardized elements in your operating protocols and procedures? If "Other standardized elements" is checked, what other elements are contained in your operating protocols and procedures? (Written responses not included) 10. Does your state have a Statewide Interoperability Coordinator (SWIC)? 10a. What best describes the SWIC in your state? 10b. If "Other" is checked, what describes the SWIC in your state? (Written responses not included) 10c. How, if at all, have current SWIC responsibilities changed in the past 5 years? 10d. If "Other change" is checked, what other SWIC responsibilities have changed in the past 5 years? (Written responses not included) 10e. Does the SWIC also serve in the role of the FirstNet state Point of Contact (SPOC)? 10f. How is the SWIC position in your state funded? 10g. To what extent have the following factors contributed to your state NOT having a SWIC? If "Other factor" is checked, what other factors contributed to your state not having a SWIC? (Written responses not included) 11. Does your state have a governance body supporting emergency communications planning? 11a. Generally, how often does the governance body in your state meet to discuss planning efforts to ensure emergency communications during disasters? 11b. Are public safety representatives from the following categories represented in your governance body? International (states/territories near national boarders) Non-Government (i.e., American Red Cross, public safety association groups, etc.) 11c. If no, what entities and individuals are responsible for overseeing emergency communications in the state? (Written responses not included) 12. Generally, how involved are the public safety representatives from the following categories in the planning and coordinating efforts to ensure continuous operable emergency communications in your state? International (states/territories near national boarders) Non-Government (i.e., American Red Cross, public safety association groups, etc.) 13. In developing and/or maintaining your state's emergency communications plan, have you received technical assistance services offered by the Office of Emergency Communications (OEC) within the Department of Homeland Security? No (requested not received) No (not requested) 14. Overall, how satisfied or dissatisfied are you with the level of support for emergency communications planning from the OEC? 15. Have you experienced interoperability difficulties when communicating or attempting to communicate with federal partners during disasters? 15a. If yes, what interoperability difficulties did you experience when communicating or attempting to communicate with federal partners? (Written responses not included) 16. Since 2008, has your state received federal grant funding in support of emergency communications? 16a. What areas did the grant funding support? Planning (standard operating procedures, protocols) Technology (data and voice elements, common applications, base sharing, custom applications, swapping radios, gateways) Usage (how often interoperability communications are used in planned events, localized emergency incidents, regional incidents, and daily use) 17. How, if at all, has the federal grant funding your state received in support of emergency communications changed in the past 5 years? No change- (about the same) 18. What additional federal efforts, if any, are needed to help ensure operable, interoperable, and continuous emergency communications in your state during disasters? (Written responses not included) 19. Generally, how often, if at all, do the following challenges affect your state's ability to ensure operable and continuous emergency communications during disasters in your state? If "Other challenge" is checked, what other challenges affect your state's ability to ensure operable and continuous emergency communications during disasters? (Written responses not included) 20. What actions, if any, has your state taken to address the items you identified as challenges in question 19? (Written responses not included) 21. What actions, if any, can the federal government take to address the items you identified as challenges in question 19? (Written responses not included) 22. If you would like to expand upon any of your responses to the questions above, or have any other comments about your state's planning efforts to ensure operable and interoperable emergency communications, please enter them below. (Written responses not included) In addition to the individual named above, Sally Moino (Assistant Director), Enyinnaya David Aja, Cynae Derose, Eric Hudson, Cheryl Peterson, Kelly Rubin, Erik Shive, Andrew Stavisky, and Nancy Zearfoss made key contributions to this report.
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During emergency situations, reliable communications are critical to ensure a rapid and sufficient response. PKEMRA was enacted in 2006 to improve the federal government's preparation for and response to disasters, including emergency communications. Since that time, natural and man-made disasters continue to test the nation's emergency communications capabilities. Given that states and localities are the first line of response following a disaster, states' emergency communications planning is very important. GAO was asked to review the implementation of PKEMRA. This report examines (1) federal efforts to implement PKEMRA emergency communications provisions related to planning and federal coordination, and (2) how states' emergency communications planning has changed since PKEMRA. GAO reviewed relevant reports and documentation from DHS and other agencies; surveyed SWICs from 50 states, the District of Columbia, and 5 territories, receiving 52 responses; assessed the ECPC's collaborative efforts; and interviewed federal and state officials selected for their emergency communications experience. GAO plans to review the implementation of other PKEMRA emergency communications provisions in future work. Implementation of the Post-Katrina Emergency Management Reform Act of 2006 (PKEMRA) provisions related to emergency communications planning and federal coordination has enhanced federal support for state and local efforts; however, federal coordination could be improved. PKEMRA created within the Department of Homeland Security (DHS) the Office of Emergency Communications, which has taken a number of steps aimed at ensuring that state and local agencies have the plans, resources, and training they need to support reliable emergency communications. PKEMRA also directed DHS to develop the National Emergency Communications Plan (NECP). The NECP includes goals for improving emergency communications and encourages states to align their plans with these emergency communications goals. PKEMRA further established the Emergency Communications Preparedness Center (ECPC), comprising 14 member agencies, to improve coordination and information sharing among federal emergency communications programs. GAO previously identified key features and issues to consider when implementing collaborative mechanisms, including interagency groups like the ECPC. GAO found that the ECPC's collaborative efforts were consistent with most of these features, such as those related to leadership and resources, but were not fully consistent with others. For example, one of the key features calls for interagency groups to clearly define goals and track progress, yet the ECPC has not done so. As a result, the ECPC's member agencies might not understand the ECPC's goals or have a chance to ensure that the goals align with their own agencies' purposes and goals. Furthermore, the ECPC puts forth recommendations that could improve emergency communications. But the recommendations are implemented at the discretion of the ECPC's member agencies and are not tracked. Without a mechanism to track the ECPC's recommendations, it is unclear the extent to which the recommendations are being implemented and the ECPC is missing an opportunity to monitor its progress. Almost all of the Statewide Interoperability Coordinators (SWIC) responding to GAO's survey reported that to better plan for emergency communications during disasters, their states have taken the following steps since PKEMRA: (1) developed comprehensive strategic plans for emergency communications that align with the NECP; (2) established SWIC positions to support state emergency communications initiatives, such as developing high-level policy and coordinating training and exercises; and (3) implemented governance structures to manage the systems of people, organizations, and technologies that need to collaborate to effectively plan for emergencies. GAO did not independently verify state responses. In responding to GAO's survey, most SWICs reported not having a comprehensive emergency communications plans in place prior to PKEMRA's 2006 enactment. In particular, prior to the enactment of PKEMRA, only a few states had comprehensive emergency communications plans in place, but now all but one have such a plan. Most of the SWICs also reported that their statewide plans cover key elements, such as governance, standard operating procedures, and training and exercises, which are considered by DHS as the essential foundation for achieving the NECP goals. GAO is making recommendations to DHS aimed at improving the ECPC's collaborative efforts, including defining its goals and tracking its recommendations. DHS concurred with the recommendations.
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The National Defense Strategy is the foundation for DOD's direction to the military services on planning their respective force structures. This strategy calls for the U.S. armed forces to be able to simultaneously defend the homeland; conduct sustained, distributed counterterrorist operations; and deter aggression and assure allies in multiple regions through forward presence and engagement. If deterrence fails, U.S. forces should be able to defeat a regional adversary in a large-scale multi-phased campaign, and deny the objectives of--or impose unacceptable costs on--a second aggressor in another region. According to the Army's force development regulation, the Army seeks to develop a balanced and affordable force structure that can meet the requirements of the National Military Strategy and defense planning guidance tasks. The Defense Planning Guidance operationalizes the National Defense Strategy and provides guidance to the services on their use of approved scenarios, among other things, which serve as their starting point for making force structure decisions and assessing risk. These classified scenarios are used to illustrate the missions articulated in the National Defense Strategy, including the need to defeat one regional adversary while deterring a second adversary in another region, homeland defense, and forward presence. Drawing from the scenarios approved in the Defense Planning Guidance for 2017 through 2021, the Army derived a set of planning scenarios, arrayed across a timeline, that reflect these missions. Congress authorizes the number of personnel the Army is able to have in its active, Army National Guard, and Army Reserve components respectively. The Secretary of the Army--in consultation with the Director of the Army National Guard and the Chief of the Army Reserve-- approves how the Army will allocate that end strength within each of the Army's components. Between fiscal year 2011 and fiscal year 2018, the Army's planned end strength is projected to decline by 132,000 positions (12 percent), from about 1.11 million soldiers in fiscal year 2011 to 980,000 soldiers in fiscal year 2018, as shown in figure 1. By fiscal year 2018, the individual components expect to be at the following projected end strengths: active (450,000), Army National Guard (335,000), and Army Reserve (195,000). As a result, the reserve component--which includes both the Army National Guard and the U.S. Army Reserve--will make up 54 percent of the Army's planned end strength starting in fiscal year 2018; a proportion that is comparable to the size and allocation of Army forces across its components prior to the September 11, 2001, terrorist attacks. The Army implements its force development processes to make decisions about how to allocate end strength that has been authorized for each of its components, among other things. Taking into account resource constraints, the five-phase process entails determining organizational and materiel requirements and translating those requirements into a planned force structure of units and associated personnel, as illustrated in figure 2. During the fourth phase--the determination of organizational authorizations--the Army undertakes its annual Total Army Analysis (TAA) process, during which it determines how it will allocate its end strength among its units and manage risk. The TAA process is envisioned to help the Army allocate its end strength among its enabler units--those units that deploy to support combat forces--after initial decisions about the size of combat forces, other types of Army formations, and key enablers are made. The Army's TAA regulation states that the Army will use force guidance, such as the defense planning guidance, to identify the combat unit structure that will be used as an input to TAA's analysis of the Army's enabler unit requirements. The Army also uses the results from its most recently concluded TAA as the starting point for the next TAA. For example, Army officials stated that the planned force structure documented in its October 2015 Army Structure Memorandum was an input for the Army's ongoing TAA, examining force structure for fiscal years 2019 through 2023. The Army Structure Memorandum documents the force structure approved by the Secretary of the Army for resourcing and is an output of the Army's TAA process. Army officials said that the Army concluded the quantitative analysis phase for this TAA in December 2015 and they expect that the Army will complete the qualitative analysis phase by June 2016. Army officials said that they have modified the TAA process substantially since the Army last issued its regulation and that an updated regulation that will cover TAA is pending final approval. Last updated in 1995, the Army's TAA regulation describes the objectives and procedures of the TAA process, which includes documenting the Army's total planned force structure and any unresourced unit requirements. Army officials said that the Army no longer documents unresourced unit requirements because senior leadership at the time the Army stopped tracking these requirements determined that it was not useful for force planning purposes. Additionally, the Army has expanded the inputs to its TAA process beyond those specified in its regulation to include other segments of its force structure and some enabler units that were not eligible for reduction or reallocation. For example, the Army has identified a minimum number of positions for its generating force--which includes units that enable the Army to train and safeguard the health of its soldiers--and during recent TAAs did not evaluate some types of enabler units for reduction or reallocation that were considered to be in high demand (such as its Patriot Battalions) and units that are considered to be critical to early phases of a major contingency (such as those that provide port opening capabilities). The Army prioritized retaining combat units, as well as other segments of its force structure, when planning to reduce its end strength to 980,000 soldiers and as a result will take proportionately more position reductions from its enabler units. are responsible for fighting enemy forces in a contested environment and include the Army's Brigade Combat Teams (Armored, Infantry, and Stryker) and combat aviation brigades. to the Army's combat units when they are deployed. They often provide critical support in early deployment (such as port opening), as well as for long-term sustainment (such as those that transport supplies or establish bases from which combat units can operate). Combat units are dependent on enabler units for long-term sustainment in theater and the Army generally deploys both types of units to meet operational demands. The Army prioritized retaining combat units and incorporated other considerations when planning to reduce its end strength to 980,000 soldiers. Army officials said that the Army used its force planning process to evaluate how it can best implement planned end strength reductions. This process--which is intended to link strategy to force structure requirements given available resources--included robust modeling and incorporated senior leaders' professional military judgement. The Army incorporated its priorities at the beginning of this process, which influenced the planned force structure that the Secretary of the Army ultimately approved. Foremost, the Army sought to retain as many combat units as possible so that it could better meet the missions specified in DOD's defense planning guidance and the Army's classified scenarios as well as to account for near-term uncertainty. Additionally, the Army determined it needed to maintain a minimum number of positions in its generating force and its transients, trainees, holdees, and students accounts, based on separate analyses. Lastly, the Army sought to minimize the disruption to Army National Guard capabilities and reserve component unit readiness that resulted from reductions. Generating Force: Army organizations whose primary mission is to generate and sustain the operating force, including the Army's Training and Doctrine Command--which oversees the Army's recruiting, training, and capability development efforts--and Army Medical Command--which provides health and medical care for Army personnel. Trainees, Transients, Holdees, and Students: Active component soldiers not assigned to units are counted as part of the Army's end strength, separately from its operating force and generating force. Soldiers in these accounts include soldiers in training, cadets attending military academies, injured soldiers, or soldiers en route to a new permanent duty station. Retaining combat units. According to Army officials responsible for TAA, Army leaders determined that it was important that the Army retain as many combat units as possible when assessing how to implement end strength reductions. In 2013, the Secretary of Defense announced the conclusion of the department-wide Strategic Choices and Management Review. As part of this review, DOD examined ways to obtain cost savings by altering the Army's future force structure. According to Army officials, the Secretary of Defense's review had, at one point, considered whether the Army could reduce its end strength to 855,000, which would correspond with a force structure of 36 BCTs, including 18 in the regular Army and 18 in the reserve component. Army leaders, reacting to what they considered to be unacceptable reductions, commissioned analyses to determine the end strength and number of BCTs the Army needed to execute the missions specified in defense planning guidance. The analysis determined that the Army should retain a minimum of 52 BCTs, including 30 in the active component, in order to best meet the missions specified in defense planning guidance. Ultimately, Army senior leaders decided to retain 56 BCTs based in part on these analyses as well as their assessment of global events and the potential for increased demand for BCTs. In retaining 56 BCTs in its force structure, the Army took additional steps to redesign its force, reflecting its priority to retain combat capacity. Specifically, the Army plans to eliminate 17 BCTs from its force structure relative to its fiscal year 2011 force (a 23 percent reduction in the number of BCTs). However, because the Army decided to redesign its BCTs by increasing its composition from a two maneuver battalion to three battalion formation, the Army estimates that it will be able to retain 170 maneuver battalions in its force structure--a net reduction of 3 battalions compared to fiscal year 2011 (less than 2 percent), as shown in table 1. Maintain minimum number of positions in generating force units and the trainees, transients, holdees, and students accounts. According to Army officials responsible for TAA, the Army needs to maintain a minimum number of positions in the Army's generating force (in order to provide medical support and training to Army personnel) and its trainees, transients, holdees, and students accounts (in order to account for personnel that are not assigned to units). Specifically, the Army tasked the two largest organizations in its generating force (U.S. Army Medical Command and TRADOC) with evaluating their position requirements and concluded that the Army needs a minimum of 87,400 active component soldiers in the generating force for an end strength of 980,000 soldiers. Additionally, Army officials said that based on a review of historical levels, the Army assumed that 58,500 regular Army positions (13 percent of a 450,000 active component force) would be filled by trainees, transients, holdees, and students. Minimize the disruption to Army National Guard capabilities and reserve component unit readiness resulting from reductions. According to Army officials, the Army sought to minimize disruption to Army National Guard capabilities needed for state missions and reserve component unit readiness when implementing end strength reductions by relying on the components to develop recommendations for making those reductions. Army officials also told us that the reserve components have better visibility into their ability to recruit personnel into specific positions, or the potential impact that reductions would have on the Army National Guard's domestic missions. The Army plans to eliminate approximately 34,000 positions from its reserve component--of which nearly 27,000 will be from its non-combat formations. Army National Guard and Army Reserve officials agreed with the Army's assessment and said that they have developed their own processes for assessing where they can best reduce or reallocate positions within their respective components and still meet Army mission requirements. Given the focus on retaining combat units and the constraints senior leaders placed on changing the Army's generating force; its trainees, transients, holdees, and students accounts; and its reserve components, the Army will take proportionately more positions from its enabler units than from its combat units as it reduces end strength to 980,000 soldiers. Specifically, in fiscal year 2011 enabler unit positions constituted 42 percent of the Army's planned end strength (470,000 positions), but the Army intends for 44 percent of its reductions (58,000 positions) to come from its enablers. In contrast, the Army's combat units constitute 29 percent of the Army's end strength (319,000 positions), but will account for 22 percent of the planned reductions (29,000 positions). When evaluating enabler unit requirements, the Army focused its attention on those capabilities that were less utilized across a 13-year timeline covered by the Army's planning scenarios. The Army did not consider reductions for capabilities it determined were critical, such as its Patriot and field artillery units, and reduced the size of or eliminated enabler units that were judged less critical, such as military police, transportation, chemical, and explosive ordnance disposal units. Determining the appropriate amount of enabler capacity has been a persistent problem for the Army. We issued several reports during the 2000s reviewing Army plans and efforts to redesign its combat force, an effort known as "modularity." In those reports, we found that the Army persistently experienced shortfalls for both key enabler equipment and personnel as it restructured its combat units into brigade combat teams. Between 2005 and 2008 we made 20 recommendations addressing the Army's challenges in creating a results-oriented plan as it transformed its force, developing realistic cost estimates, and completing a comprehensive assessment of the force as it was being implemented. For example, in 2006, we made 2 recommendations that the Army develop a plan to identify authorized and projected personnel and equipment levels and that it assess the risks associated with any shortfalls. The Army generally agreed with both recommendations but ultimately did not implement them. In our 2014 report, we found that the Army's report to Congress assessing its implementation of modularity did not fully identify the risks of enabler shortfalls or report its mitigation strategies for those risks. Army officials told us that, based on senior leaders' professional military judgment, concentrating reductions in enabler units is more acceptable than further reducing the Army's combat units because combat unit shortfalls are more challenging to resolve than enabler unit shortfalls. Prior Army analysis showed that it would take a minimum of 32 months to build an Armored BCT and Army officials said that the Army cannot contract for combat capabilities in the event of a shortfall in BCTs. In contrast, officials said that some types of enabler units could be built in as few as 9 months. Additionally, a senior Army leader stated that the Army has successfully contracted for enabler capabilities during recent conflicts. The Army did not comprehensively assess mission risk (risk to the missions in DOD's defense planning guidance) associated with its planned force structure because it did not assess mission risk for its enabler units. As a result, the Army was not well positioned to develop and evaluate mitigation strategies for unit shortfalls. In assessing its requirements for aviation brigades and BCTs, the Army determined where combat units in its planned force structure would be unable to meet mission requirements given current Army practices in deploying forces to meet mission demands. Notably, the analysis assumed that sufficient enabler capability would be available. Using the Army's scenarios derived from defense planning guidance, the Army estimated how well different numbers of each type of unit would meet projected demands over time, which allowed it to compare how different aviation and BCT force structures would perform. As we reported in 2015, the Army analyzed the risk of its aviation brigades to meeting requirements based on the timing, scope and scale of missed demands, and made key decisions to reshape its aviation force structure based in part on this mission risk analysis. Risk Within the Context of Force Development Mission risk: mission risk is the ability of the Army to meet the demands of the National Defense Strategy as operationalized in DOD's defense planning guidance. Generally, mission risk can be measured by sufficiency (the ability of supply to meet demand) and effectiveness (the availability of the best unit to accomplish a mission). Risk to the force: risk to the health of the force caused by issues such as increased frequency of deployment with less time at home, or early and extended deployments. It is related but not equivalent to mission risk because it can impact morale and unit effectiveness. The Army used the same type of analysis to compare different quantities of BCTs. The Army analyzed how many, and what types, of BCTs would be needed to meet the mission demands of certain scenarios within the defense planning guidance. The Army's analysis focused on four different BCT levels, including a high of 60 BCTs at 1.045 million soldiers and the low Army officials said was considered by the Strategic Choices and Management Review of 36 BCTs at 855,000 soldiers. As it did when analyzing aviation requirements the Army assessed the timing, scope and scale of missed demands, given current DOD policies and practices governing the length and frequency of military deployments. The Army also assessed how it could mitigate risk to a major combat operation through strategies such as by changing the deployment schedule, or by temporarily reassigning units away from other non-contingency missions in near-east Asia, the Middle East, or elsewhere. According to Army officials, the Army's analysis enabled senior leaders to assess risks and tradeoffs for this portion of the force in meeting these demands. The Army did not complete a risk to force assessment for its combat units because officials prioritized retention of these combat units and as a result the Army's analysis was intended to determine the number and types of these units needed to meet mission requirements. In contrast to the mission risk assessment the Army conducted for its combat units (risk to the Army's ability to meet the missions in DOD's defense planning guidance), the Army assessed risk to the force for its enabler units in its most recent TAA (risk to the health of the Army's enabler units). Assessing risk to the force entails determining how frequently and for how long individual types of enabler units would need to deploy to meet the maximum amount of demands possible, given the previously identified combat force structure, and does not entail identifying missed mission demands or documenting unresourced unit requirements. The Army then determined the length of time at home for each type of enabler assessed, and compared the result with that for the Army as a whole, in order to determine the level of stress ("risk") on that type of unit. The Army's analysis necessitates making key assumptions about how enablers would be used, some of which contrasted from current DOD deployment practices. For example, the Army assumed active component enabler units could be deployed indefinitely, which may overstate their availability unless the Secretary of Defense authorizes indefinite operational deployment. Similarly, the Army assumed that it could deploy its reserve component enabler units more frequently than DOD's current policy allows. Army officials told us that assessing risk to the force for its enablers is useful because the Army can identify the units it would use the most and those that it would use least. Based on its analyses of the frequency and length of deployments for each type of enabler unit assessed, the Army developed and prioritized options to mitigate risk to the enabler force. These options included adding structure to more utilized units and taking reductions from or divesting less-utilized enabler units. For example, the Army's analyses showed that one type of engineer unit spent far less time at home than the Army's other units during a contingency, and so the Army added an additional engineer unit to its structure to mitigate this stress. In contrast, the Army determined that it had excess support maintenance companies in its force structure and decided to eliminate 6 of these units. Additionally, the Army analyzed its enabler units to identify which units would be needed during the first 75 days of a conflict. Army officials used war plans to identify the minimum number of each type of enabler unit that would be needed to execute the war plan and then compared that requirement to the number of those units that would be available to meet those requirements. Army officials told us that assessing early deployment requirements is useful because the Army can assess whether it needs to move units from its reserve component to its active component in order to ensure that early deployment requirements can be met. Assessing risk to the force and early deployment requirements does not identify potential mission shortfalls in the enabler inventory, however, and these shortfalls could lead to missed mission demands. When the Army has conducted mission risk assessments for its enabler units outside of TAA it has been able to identify and mitigate risk. In May 2014, the TRADOC Analysis Center completed mission risk assessments for certain types of artillery units, air and missile defense, and truck units, among other units. These analyses showed that some types of units were unable to meet projected mission demands and provided information needed for the Army to develop mitigation strategies. For example, the Army's assessment of artillery units identified unmitigated mission risk and determined that these units could meet only about 88 percent of demands during a major contingency. To address this risk, Army officials said that they recommended a change to the Army's deployment practices for these units to allow one type of unit to be substituted for another. This change would enable these units to meet approximately 94 percent of mission demands during a major contingency. Similarly, in another example, the Army's assessment of its truck units found that planned reductions could limit the Army's ability to transport troops around the battlefield, among other risks. The Army intends to add 4 medium truck companies to its force structure by the end of fiscal year 2019 in part to address this risk. In its January 2016 report, the National Commission on the Future of the Army identified enabler capabilities that in its view needed further risk assessment and risk mitigation. As previously discussed, Army leaders decided to reduce enabler units they judged less critical, such as military police, transportation, chemical, and explosive ordnance disposal units, in part to preserve the Army's combat force structure. However, the National Commission on the Future of the Army identified some of these same units as having shortfalls--including units that provide transportation, military police, and chemical capabilities. The Commission recommended that the Army complete a risk assessment and assess plans and associated costs of reducing or eliminating these shortfalls. Army guidance indicates that the Army's TAA process should assess mission risk for its combat and enabler force structure, but the Army did not complete a mission risk assessment during its most recent TAA. In addition, its TAA process is not being implemented in a manner that would routinely prepare such an assessment. According to the Army's force development regulation, the Army's TAA process is intended to determine the requirements for both the Army's combat and enabler force structure to meet the missions specified in defense planning guidance, document unresourced requirements, and analyze risk given resource constraints. When assessing risk, the Army's risk management guidance states that the Army should identify conditions that create the potential for harmful events and analyze how such conditions could cause mission failure. Within this context, Army officials told us that the TAA process should assess mission risk by assessing how the Army's combat and enabler force structure could lead to a failure to meet the missions specified in defense planning guidance. According to the Army's risk management guidance, once the Army identifies mission risk, it then should analyze and prioritize strategies to mitigate identified risk. In the near term, although the Army's guidance and risk management framework indicate the Army should complete a mission risk assessment for its combat and enabler force structure, the Army did not do so during its most recent TAA for its enabler units, instead assessing the risk to the force and early deployment requirements for these units. Army officials stated that they did not complete this assessment because the Army assessed how ongoing demands affected the health of the Army's force and not the mission risk associated with shortfalls. However, our review found that the Army's guidance does not require that the Army complete an assessment of the risk to force. Army officials are currently revising the Army regulation that documents its force development processes, but the draft does not currently include a requirement that the TAA process assess mission risk for the Army's combat and enabler force structure. Without an assessment of the mission risk associated with the planned enabler force structure documented in the Army's October 2015 Army Structure Memorandum, the Army has an incomplete understanding of the risks that may arise from the potential shortfalls in its enabler inventory. Accordingly, the Army is not well positioned to develop strategies to mitigate these risks. Army officials told us the next opportunity to complete this mission risk assessment and develop mitigation strategies would be as part of its ongoing TAA for fiscal years 2019 through 2023. Furthermore, the Army is required to complete TAA every year and as currently implemented its TAA process does not include the modeling and analyses needed to routinely prepare a mission risk assessment for its combat and enabler force structure. Army officials told us that they recognize a need to expand TAA to include mission risk assessments for a set of the Army's enabler units, consider potential strategies to mitigate this risk, and implement such strategies; but have not revised TAA to include these elements. Without expanding the TAA process to routinely require a mission risk assessment for the Army's combat and enabler force structure as part of future iterations of TAA, the Army will continue to not be well positioned to identify mission risk and develop mitigation strategies when making future force structure decisions. Facing end strength reductions, the Army made a decision to retain combat capabilities to provide maximum warfighting capability and flexibility. However, the Army's planned force structure is based on an incomplete assessment of mission risk across its combat and enabler force structure because it did not assess this type of risk for its enabler units. As a result the Army did not comprehensively assess whether its force structure will be able to meet the missions specified in defense planning guidance and, in the absence of that risk assessment, was not well positioned to assess mitigation options when making recent force structure decisions. The Army has an opportunity to more fully assess its recommended force structure's ability to meet mission demands, identify capability shortfalls, and develop mitigation strategies to address identified shortfalls before it implements its planned force structure. Unless the Army completes this type of assessment, it will lack reasonable assurance that it has identified and mitigated risk that will prevent it from executing the missions specified in defense planning guidance. Additionally, by completing a mission risk assessment for its planned force before completing its ongoing TAA for fiscal years 2019 through 2023, the Army will be better positioned to identify improvements to its TAA process so that it can complete such assessments on a recurring basis moving forward. Unless the Army changes its approach to routinely complete this type of risk assessment as part of its TAA process, it may not be able to identify and mitigate risk associated with changes to its force structure in the future. To identify and mitigate risk associated with the Army's planned force structure and improve future decision making, we recommend that the Secretary of Defense direct the Secretary of the Army to take the following two actions: 1. Conduct a mission risk assessment of the Army's planned enabler force structure and assess mitigation strategies for identified mission risk before Total Army Analysis for Fiscal Years 2019 through 2023 is concluded and implement those mitigation strategies as needed. 2. Expand the Army's Total Army Analysis process to routinely require a mission risk assessment for the Army's combat and enabler force structure and an assessment of mitigation strategies for identified risk prior to finalizing future force structure decisions. In written comments on a draft of this report, DOD concurred with both of our recommendations and identified the steps it plans to take to address them. DOD's comments are printed in their entirety in appendix I. DOD also provided technical comments, which we incorporated into the report as appropriate. In response to our first recommendation that the Army conduct a mission risk assessment and assess mitigation strategies for its planned enabler force structure before Total Army Analysis for Fiscal Years 2019 through 2023 is concluded, the Army stated that it recognizes the need to conduct these types of assessments and that it has modified its Total Army Analysis process to include them. As we stated in our report, at the time of our review the Army had not yet incorporated these assessments into its TAA process. Should the Army complete these assessments prior to finalizing its ongoing TAA, it would be better positioned to identify and mitigate the risk associated with its planned enabler force structure and it will have taken the steps needed to satisfy our recommendation. With respect to our second recommendation that the Army expand its TAA process to routinely require a mission risk assessment and an assessment of mitigation strategies for its combat and enabler force structure, the Army stated that it recognizes the need to routinely conduct these types of assessments. The Army stated that it intends to formalize inclusion of these types of assessments in its process by publishing a Department of the Army pamphlet that is currently under development. Should the Army modify its guidance to require these assessments, and implement its TAA process in accordance with its revised guidance, the Army would be better positioned to identify mission risk and develop mitigation strategies when making force structure decisions. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, and the Secretary of the Army. 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 major contributions to this report are listed in appendix II. John H. Pendleton, (202) 512-3489 or [email protected]. In addition to the contact named above, Kevin O'Neill, Assistant Director; Tracy Barnes; Katherine Blair; Erin Butkowski; Martin De Alteriis; Amie Lesser; Ricardo A. Marquez; Erik Wilkins-McKee; and Alex Winograd made key contributions to this report.
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The Army plans to reduce its end strength to 980,000 active and reserve soldiers by fiscal year 2018, a reduction of nearly 12 percent since fiscal year 2011. According to the Army, this reduction will require reductions of both combat and supporting units. Army leaders reported that reducing the Army to such levels creates significant but manageable risk to executing the U.S. military strategy and that further reductions would result in unacceptable risk. The Senate report accompanying a bill for the National Defense Authorization Act for Fiscal Year 2015 included a provision that GAO examine the factors that the Army considers and uses when it determines the size and structure of its forces. This report (1) describes the Army's priorities and planned force structure reductions and (2) evaluates the extent to which the Army comprehensively assessed mission risk associated with its planned combat and enabler force structure. GAO examined the Army's force development regulations and process, DOD and Army guidance, and Army analysis and conclusions; and interviewed DOD and Army officials. The Army prioritized retaining combat units, such as brigade combat teams (BCT) and combat aviation brigades, when planning to reduce its end strength to 980,000 soldiers, and as a result plans to eliminate proportionately more positions from its support (or "enabler") units, such as military police and transportation units. The Army's force planning process seeks to link strategy to force structure given available resources through quantitative and qualitative analyses. The Army completed analyses showing that it could reduce its BCTs from 73 in fiscal year 2011 to a minimum of 52 in fiscal year 2017; however, the Army plans to retain 56 BCTs. Moreover, by redesigning its combat units, the Army plans to retain 170 combat battalions (units that fight the enemy)--3 fewer battalions than in fiscal year 2011. Given the focus on retaining combat units, and senior Army leaders' assessment that shortfalls in combat units are more challenging to resolve than shortfalls in enabler units, the Army plans to reduce proportionately more positions from its enabler units than from its combat units. GAO found that the Army performed considerable analysis of its force structure requirements, but did not assess mission risk for its enabler units. Combat Forces: The Army's analysis of BCT requirements entailed an assessment of mission risk--risk resulting from units being unable to meet the missions specified in Department of Defense (DOD) planning guidance. The mission risk assessment used current Army deployment practices and assumed that sufficient enabler forces would be available to sustain combat units over a multi-year scenario. The result of this analysis, and a similar analysis of the Army's aviation brigades, showed that the Army's proposed combat force structure would be sufficient to meet most mission demands. Enabler Forces: The Army's analysis of its enabler units entailed an assessment of risk to the force--how frequently and for how long units need to deploy to meet as many demands as possible. Army officials said this analysis is useful because it enables the Army to identify the units it would use the most. However, the analysis overstated the availability of the Army's enabler units because it assumed they could deploy more frequently and for longer duration than DOD's policies allow. The Army did not identify enabler unit shortfalls, or the risk those shortfalls pose to meeting mission requirements. According to Army guidance, the Army's planning process should assess mission risk for both combat and enabler units. The Army did not complete this type of assessment for its enabler units during its most recent force planning process because the Army assessed the risk operational demands pose to the health of the Army's force, not mission risk. Without a mission risk assessment for both the Army's planned combat and enabler force structure, the Army has an incomplete understanding of mission risk and is not well-positioned to develop mitigation strategies. Furthermore, as currently implemented, its process does not include analyses needed for the Army to routinely prepare a mission risk assessment for both its combat and enabler force structure. Without expanding its force planning process to routinely require a mission risk assessment for the Army's combat and enabler force structure as part of future planning processes, the Army will not be well-positioned to comprehensively assess risk and develop mitigation strategies. GAO recommends that the Army complete a mission risk assessment of its planned enabler force structure, and revise its process to routinely require a mission risk assessment for its combat and enabler force structure. The Army agreed with GAO's recommendations.
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The IG Act created independent IG offices at 30 major departments and agencies with IGs appointed by the President, confirmed by the Senate, and who may be removed only by the President with advance notice to the Congress stating the reasons. (A listing of these 30 departments and agencies with presidential IG offices is provided in app. I.) In 1988, the IG Act was amended to establish additional IG offices located in 33 DFEs defined by the act. (A listing of the DFEs with IGs is provided in app. II.) Generally, the DFE IGs have the same authorities and responsibilities as those IGs originally established by the IG Act, but with the distinction that they are appointed and may be removed by their agency heads rather than by the President and are not subject to Senate confirmation. Although not in the scope of our review, there are 10 IGs established by other statutes with provisions similar to those in the IG Act. (A listing of the IGs established under other statutes is provided in app. III.) The IGs appointed by the President are generally located in the largest departments and agencies of the government; the DFEs have smaller budgets and their IGs have correspondingly smaller budgets and fewer staff. The presidentially appointed IGs and the DFE IGs reported to us total budget authority for fiscal year 2010 of about $2.2 billion with approximately 13,652 authorized full-time equivalent staff and 13,390 staff on board at the end of fiscal year 2010. The presidentially appointed IGs' budget authority constituted about 84 percent (about $1.8 billion) of the total, and they had about 86 percent (11,564) of the total staff on board. The budgets of the DFE IGs made up about 16 percent (about $352 million) of the total budget authority for IGs, and they had about 14 percent (1,826) of the total staff on board at the end of fiscal year 2010. The IG Reform Act of 2008 (Reform Act) amended the IG Act by adding requirements related to IG independence and effectiveness. Among other provisions, the Reform Act requires the rate of basic pay of the IGs appointed by the President to be at a specified level, and for the DFE IGs, at or above a majority of other senior-level executives at their entities. The Reform Act also requires an IG to obtain legal advice from his or her own counsel or to obtain counsel from another IG's office or from the Council of the Inspectors General on Integrity and Efficiency (IG Council). The IG Act also provides protections to the independence of the IGs while keeping both their agency heads and the Congress fully and currently informed about particularly flagrant problems and deficiencies within their agencies through a 7-day process specified by the act. In addition, the Dodd-Frank Act amended the IG Act with provisions to enhance the independence of IGs in DFEs with boards or commissions. Specifically, the Dodd-Frank Act changed who would be considered the head of the DFE for purposes of IG appointment, general supervision, and reporting under the IG Act. If the DFE has a board or commission the amendments would now require each of these IGs to report organizationally to the entire board or commission as the head of the DFE rather than an individual chairman. In addition, the Dodd-Frank Act requires the written concurrence of a two-thirds majority of the board or commission to remove an IG. Prior to this protection, most DFE IGs reported to, and were subject to removal by, the individual serving as head of the DFE. The Reform Act also included a provision intended to provide additional IG independence through the transparent reporting of their budgets. Specifically, the Reform Act requires the President's budget submission to the Congress to have the IGs' requested budget amounts identified separately within their respective agency budgets, along with any comments provided by the IGs on the sufficiency of their budgets. The American Recovery and Reinvestment Act of 2009 (Recovery Act) is one of the federal government's key efforts to stimulate the economy in response to the most serious economic crisis since the Great Depression. The Recovery Act provided for IG oversight of the funds by creating the Recovery Accountability and Transparency Board (Recovery Board), which has an IG Chairman and 12 additional IG board members to prevent and detect fraud, waste, and abuse in the stimulus-funded programs. Altogether, there are 30 IGs involved with the oversight of Recovery Act funds. (A listing of the IGs providing oversight of Recovery Act funds is provided in app. IV). Also, the IG Act includes a provision addressing the qualifications and expertise of the IGs by specifying that each IG appointment is to be without regard to political affiliation and solely on the basis of integrity and demonstrated ability in accounting, auditing, financial analysis, law, management analysis, public administration, or investigation. The fields in which an IG can have experience are intended to be sufficiently diverse so that many qualified people could be considered, but also limited to areas relevant to the tasks considered necessary. The IG Act Amendments of 1988 created DFE IGs but did not specify that these IG appointments made by agency heads were to be without regard to political affiliation and on the basis of demonstrated ability in specified fields. The Reform Act addressed the differences in criteria for IG appointment by providing the same provisions for both the DFE IGs and the IGs appointed by the President. We addressed our reporting objectives through our summary of responses to a survey sent to the federal statutory IGs established by the IG Act regarding their activities for fiscal year 2010, and additional analysis. We obtained and analyzed survey responses from 62 IGs established by the IG Act: including 30 IGs who were appointed by the President and confirmed by the Senate, and 32 DFE IGs. We augmented the survey data with information obtained from prior GAO reports, the President's budget submission to the Congress for fiscal year 2011, and the IGs' semiannual reports to the Congress. For our discussion of the independence of the IGs, we summarized information from the responses to our survey questions about the implementation of selected provisions in the Reform Act, the IG Act, and the Dodd-Frank Act that are intended to enhance IG independence. Specifically, we asked all of the 62 IGs about the implementation of Reform Act provisions intended to keep IG pay and salaries at a specified level for IGs appointed by the President and consistent with other senior- level executives for the DFE IGs, and about the IGs' sources of legal counsel. Our survey also obtained information about the extent to which the IGs found it necessary to communicate particularly flagrant problems to their agency heads and the Congress within 7 days as prescribed by the IG Act. These IG reports are commonly referred to as 7-day letters. Regarding the effect of Dodd-Frank Act provisions to enhance independence, we obtained the views of the 26 DFE IGs with boards or commissions on whether their independence was enhanced by these provisions designating their boards and commissions as DFE heads rather than individual chairmen, and the requirement for the concurrence of a two-thirds majority of the board or commission for removal of an IG. We also obtained information from the President's budget submission to the Congress for fiscal year 2011, to determine whether the IG budget amounts were separately identified along with any comments by the IGs regarding the sufficiency of their budgets. To address the effectiveness of the IGs, we obtained information on the accomplishments of the IGs as reported to the IG Council for fiscal year 2009, in preparation for their annual report to the President. We also obtained information reported by the Recovery Board on its mission and accomplishments in providing oversight of Recovery Act funds. In addition, our survey questionnaire obtained information for fiscal year 2010 on management challenges identified by the IGs reporting under requirements of the Reports Consolidation Act of 2000. To identify the extent of oversight provided by the IGs, we summarized the reported management challenges to identify the major focus of these issues and obtained IG reports relevant to these issues provided by the IGs to our survey and from our review of the IGs' semiannual reports to the Congress. To address the IGs' qualifications and expertise we summarized the 62 IGs' survey information provided on the background of each IG, including professional experience, academic degrees, and professional certifications obtained prior to being appointed to an IG position. We compared this information to the areas of demonstrated ability specified by the IG Act and summarized the number of IGs in each area. We conducted our work from November 2010 to September 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. We requested comments on a draft of this report from the IG Council. Written comments from the IG Council are reprinted in appendix V and summarized in the "Agency Comments" section of this report. We also received and incorporated as appropriate technical comments from several IG offices. Our survey obtained information from 62 federal IGs appointed under the IG Act on actions taken concerning legislative provisions in the Reform Act and the IG Act intended to enhance IG independence. The IGs reported pay that was at the specified levels required by the Reform Act for IGs appointed by the President and consistent with those of other senior- level officials as required for DFE IGs, thus helping to maintain IG independence and enhance their relative stature within their agencies by increasing their fixed compensation and eliminating discretionary compensation that could create a conflict of interest; having access to independent legal counsel reporting to an IG instead of an agency management official, thus helping to ensure the independence of legal advice available to the IG; and rarely using 7-day letters as a way to independently inform agency heads and the Congress of serious problems concerning agency operations because such issues were resolved without the need for such a letter. We also surveyed the 26 DFE IGs affected by the Dodd-Frank Act provisions intended to enhance IG independence for those IGs reporting to boards or commissions. Just over half of these IGs responded that the change of agency head to the full board or commission increased their independence and most responded that the requirements for a two- thirds concurrence among the board or commission members prior to an IG's removal increased their independence. In addition, based on our review of the President's fiscal year 2011 budget submission to the Congress, the IGs' budget amounts were not always separately identified as required by the Reform Act. To the extent the IGs' budgets are separately identified, the added transparency of these amounts to the Congress can help increase IG independence. After we informed the IG Council about the results of our review concerning the IGs' budgets, they agreed to review and assess the matter. The Reform Act addressed the compensation of IGs and requires that IGs appointed by the President have their pay adjusted from Executive Schedule IV to Executive Schedule III plus 3 percent. In addition, the Reform Act requires that the grade, level, or rank designation for the DFE IGs be set at or above that of a majority of the senior-level executives of the agency, such as the general counsel, chief acquisition officer, chief information officer, chief financial officer, and the chief human capital officer at that agency. In addition, the DFE IG pay cannot be less than the average total compensation (including bonuses) of the senior-level executives at that agency calculated on an annual basis. Of the 30 IGs appointed by the President, 27 reported being at or even above the required pay level; with the remaining 3 IGs reporting that they were in acting positions and the requirement was not currently applicable to them. Of the 32 DFE IGs who responded to our survey, 29 reported that their pay and salaries were consistent with those of the senior-level executives of their agencies. Of the remaining 3 DFE IGs, 1 was newly established in fiscal year 2011 and had not yet determined an amount of pay consistent with senior-level executives, 1 IG reported having the correct salary but not the corresponding grade level, and 1 IG was in an acting capacity and reported the requirement was not currently applicable. The Reform Act also requires that each IG established by the IG Act have his or her own legal counsel or obtain necessary legal counsel from another IG office or from the IG Council. In a March 1995 report, we reported that the IG community expressed concerns that IGs with attorneys located organizationally in their agencies' offices of general counsel would not always receive independent legal advice and that the IGs' own independence could be compromised. The results from our survey show that all the IGs established by the IG Act reported having access to a legal counsel that is organizationally independent, and none of the IGs rely on the general counsel offices of their agencies. For the 30 IGs appointed by the President, 29 employ their own legal counsel while 1 IG uses the legal services of another IG. All 32 DFE IGs who responded to our survey indicated that they obtain independent legal counsel, with 26 employing their own counsel, 5 using the legal counsels of other IGs' offices, and 1 using the legal resources of the IG Council. The IG Act provides a reporting tool that can protect the independence of the IGs who report immediately to the agency head particularly serious or flagrant problems, abuses, or deficiencies relating the administration of programs or operations. The IG Act requires the agency head in turn to transmit the IG report, with the agency head's comments, to the appropriate committees or subcommittees of the Congress within 7 calendar days. We asked whether any of the 62 IGs we surveyed had used the 7-day letter at any time during fiscal years 2008, 2009, and 2010. Only one, a presidentially appointed IG, had used the 7-day letter during this time frame. Specifically, on May 6, 2009, the IG delivered a report to the acting head under the IG Act provisions for a 7-day letter, in which the IG disagreed with the terms of a settlement reached by the agency with a grantee. The acting head provided the IG's report to the chairmen of numerous congressional committees on May 12, 2009, which was within the 7-day time frame. The IG's report gained the interest of congressional members and the issues were resolved by the President. Generally, issues have been resolved more informally before getting to the point of using a 7-day letter. In 1999 we reported that no IGs had used the 7-day letter during the period of January 1990 through April 1998. In addition, we reported that a 10-year review of the IG Act by the House Committee on Government Operations in 1988 found that the IGs viewed the use of the 7-day letter as a last resort to attempt to force appropriate action by the agency. Provisions of the Dodd-Frank Act amending the IG Act are intended to provide an additional degree of independence to those IGs in DFEs with boards or commissions. Specifically, the Dodd-Frank Act provides that the head of the DFE with a board or commission will be the board or commission and consequently, the IG appointment is no longer subject to the judgment of a single individual. In addition, the Dodd-Frank Act requires the written concurrence of two-thirds of the members of these DFE boards and commissions for the removal or transfer of their IGs. Twenty-six of the 33 DFE IGs are in DFEs with boards and commissions. Of these 26 DFE IGs, 14 reported that the act's provision designating the boards and commissions as the DFE heads enhances their independence, and 20 responded that their independence is enhanced by requiring a two-thirds majority for their removal. A smaller number of affected IGs stated that these provisions had no effect on their independence, with 10 stating that the provision specifying the board or commission as the head had no effect and 5 reporting that the removal provision had no effect. One DFE IG affected by the provisions did not respond to these survey questions. Also, a former DFE IG stated that reporting to his commission would reduce his independence because the commission has both federal and state members. However, the current IG who took office during our review stated that the primary concern is how nonfederal members would exercise their authority over a federal IG. The Reform Act amended the IG Act to require that IG budget requests include certain information and be separately identified in the President's budget submission to the Congress. In addition, along with the separately identified IG budgets, the IGs may include comments with respect to the budget if the amount of the IG budget submitted by the agency or the President would substantially inhibit the IG from performing the duties of the office. These budget provisions are intended to help ensure adequate funding and additional independence of IG budgets by providing the Congress with transparency into the funding of each agency's IG while not interfering with the agency head's or the President's right to formulate and transmit their own budget amounts for the IG. The fiscal year 2011 budget included amounts for 28 of the 30 presidentially appointed IGs. One presidentially appointed IG office was newly established and not included in the full fiscal year 2011 budget process. However another IG subject to these requirements did not have a specific budget amount separately disclosed in the President's budget. Of the 28 presidential IGs with budget amounts separately disclosed in the President's budget, 1 included comments indicating that the IG's fiscal year 2011 budget would substantially inhibit the IG from performing the duties of the office. Regarding the DFE IGs, the President's budget had specific budget amounts for only 7 of the 33 DFE IGs. There were four newly established DFE IGs that were not part of the full fiscal year 2011 budget process. The President's budget did not contain specified budget amounts for the 22 remaining DFE IGs subject to these requirements. We notified the IG Council that most of the DFE IGs and one presidentially appointed IG did not have separate budget amounts included in the President's budget submission to the Congress. The IG Council has responded that it will review and assess this matter and, if necessary, work with congressional and administration officials to resolve this issue. The IGs' effectiveness was reflected in a range of reported accomplishments, such as potential dollars to be saved by the government through the results of federal IG audits, investigations, and other reports. In addition, IG effectiveness was demonstrated in their efforts to help prevent fraud, waste, and abuse. For example, IGs in agencies receiving Recovery Act funds have reported providing oversight in the areas of establishing and maintaining controls to help ensure the funds are used properly. Also, the IGs' effectiveness was demonstrated by their reporting on oversight of management challenges identified at their agencies. In their annual report to the President, the IGs established by the IG Act identified billions of dollars in savings and cost recoveries and other accomplishments resulting from their work in fiscal year 2009. As part of this report for fiscal year 2009, these IGs identified $43.3 billion in potential savings from audits and investigations; and reported over 5,900 criminal actions, 1,100 civil actions, 4,460 suspensions or debarments, and over 6,100 indictments resulted from their work. Based on this information, the potential dollar savings reported by these IGs represent a return on investment of approximately $18 for every IG dollar spent when compared to total IG fiscal year 2009 budget appropriations of $2.3 billion. In addition to measurable accomplishments, IGs also reported actions taken to prevent problems within their agencies, although these outcomes are more difficult to measure. For example, the IGs assisted in the oversight of expenditures authorized by the Recovery Act by reporting on preventive measures taken to help reduce the vulnerability of Recovery Act disbursements to fraud, waste, and abuse. The Recovery Act requires IG reviews of concerns raised by the public about investments of stimulus funds and provides IGs the authority to examine records and interview Recovery Act fund contractors and grantees. The Recovery Act established the Recovery Board whose members include 12 IGs and an additional IG as the chair, to coordinate and conduct oversight of funds distributed under the act in order to prevent fraud, waste, and abuse. In addition, the board is charged under the act with establishing and maintaining a user friendly website to foster greater accountability and transparency in the use of Recovery Act funds. To help prevent fraud and other potential wrongdoing, the IGs offered training to federal, state, and local employees, as well as contractors, private entities, and award recipients. The IGs' training was intended to improve awareness of the legal and administrative requirements of the Recovery Act programs. As of June 2011, the Recovery Board reported that the IGs received over 7,000 complaints of wrongdoing associated with Recovery funds, opened over 1,500 investigations, and completed over 1,400 reviews of activities intended to improve the use of Recovery Act funds. In addition, the Recovery Board reported that IGs have provided over 2,000 training sessions to almost 139,000 individuals on the requirements of Recovery Act programs, how to prevent and report fraud, and how to manage grant and contract programs to meet legal and administrative requirements. The management challenges reported annually by federal agencies in their performance and accountability reports along with relevant IG reports to address these challenges are key to focusing on effective IG oversight. The identification of management challenges by the IGs began in 1997 when congressional leaders asked the IGs to identify the 10 most serious management problems in their respective agencies. This request began a yearly process that continues as a result of the Reports Consolidation Act of 2000. This act calls for executive agencies to include their IGs' lists of significant management challenges in their annual performance and accountability reports to the President, the Office of Management and Budget, and the Congress. Not all agencies with IGs have requirements to report management challenges. Fifty-four of the IGs we surveyed reported having certain responsibilities for identifying management challenges in their agencies for fiscal year 2010. Through our survey, 27 of the IGs appointed by the President and 27 of the DFE IGs reported their agencies' management challenges and provided examples of audit reports that addressed about 90 percent of those challenges reported. The responses from the IGs appointed by the President show that most of the 203 management challenges they reported for fiscal year 2010 focused on issues specific to their agencies' missions and performance management. (See fig. 1.) For example, the National Aeronautics and Space Administration's IG reported that major changes to the direction of the nation's space program present several management challenges, and the Department of Health and Human Services IG cited the management challenges associated with delivery of the nation's health care. The other management challenges addressed by the IGs relate to information technology, procurement, financial management, and human resources. In addition, to provide oversight coverage of management challenges, the presidential IGs issued reports that addressed about 93 percent of the management challenges identified. These reports contained recommendations for improving the weaknesses specified by the management challenges. For example, the Federal Deposit Insurance Corporation IG recommended strengthening specific controls over managing the closing process for failed financial institutions which is a key aspect of FDIC's mission regarding insured depository institutions. Also, the Social Security Administration IG identified transparency and accountability issues as an agency management challenge and provided report recommendations for improved performance in this area. The DFE IGs reported 124 management challenges for fiscal year 2010, with a focus on their agencies' missions, information technology, and performance management. (See fig. 2.) For example, the Farm Credit Administration's IG reported management challenges related to the safety, soundness, and mission accomplishment of the Farm Credit System. In addition, information technology, including information security, was often identified as a management challenge. For example, the Federal Maritime Commission's IG and the National Labor Relations Board's IG identified challenges in upgrading their agencies' management systems. The performance management issues the DFE IGs identified as management challenges included timely implementation of IG recommendations by the Peace Corps and expanding public access at the National Archives and Records Administration. The management challenges included in the "other" category included concerns over internal controls, improper payments, and the security of federal property. In addition, the DFE IGs issued reports that addressed almost 90 percent of the management challenges identified and contained recommendations for corrective actions. For example, the Farm Credit Administration IG assessed the agency's readiness to take enforcement actions related to its mission. In another example, the Postal Service IG provided recommendations to improve the efficiency of postal operations related to performance management in sorting the mail. The 62 federal IGs responding to our survey reported information on their expertise and qualifications including the backgrounds, academic degrees, and professional certifications. The IGs' information showed a wide range of backgrounds, skills, and professional certifications relevant to their work consistent with the areas of demonstrated experience specified by the IG Act. Figure 3 summarizes the background experiences of the 62 IGs who responded to our survey. Most of the IGs appointed by the President reported that they had a background in criminal justice, investigations, law enforcement, and public administration, while most of the DFE IGs had backgrounds in inspections and evaluations, criminal justice, investigations, law enforcement, accounting and auditing, and financial analysis. As summarized in figure 4, we also obtained information on the academic degrees obtained by the 62 IGs. Most of the IGs reported having degrees in areas that are relevant to performing in an IG position and in areas of demonstrated experience specified by the IG Act. To illustrate, 15 (about half of the IGs appointed by the President) had law degrees and 1 presidential IG had a degree in an accounting and auditing area. Twelve DFE IGs had law degrees and an equal number of DFE IGs had degrees in accounting and auditing related areas. Additional degrees were reported by both presidential and DFE IGs in areas of criminal justice, investigations, law enforcement; management analysis; and public administration. Other academic degrees reported by presidential and DFE IGs included mathematics, science, sociology, education, psychology, and English. With respect to professional certifications, 6 IGs appointed by the President reported having professional certifications and 28 DFE IGs reported they possessed at least one professional certification related to their IG responsibilities. For the presidential IGs, 2 were certified fraud examiners, 1 reported being a certified internal auditor, 1 reported being a certified government financial manager, and 2 had certifications in additional separate areas. Of the DFE IGs, 6 reported they are certified public accountants and 6 reported that they are certified internal auditors. Additional certifications reported by the DFE IGs include 6 certified government financial managers, 4 fraud examiners, 3 certified information systems auditors, and 7 with other certifications such as a certified government auditing professional, certified information security manager, certified information officer, and certified inspector general. (See fig. 5.) We received comments from the IG Council (reprinted in app. V), on September 13, 2011. The council commented that the draft provided useful information on the independence, activities, and accomplishments of the federal inspectors general and, as such, will contribute to a greater understanding of the work of the IGs in providing oversight to a wide range of government programs. We also received, and incorporated as appropriate, technical comments from several IG offices. We will send copies of this report to members of the IG Council, including the Office of Management and Budget's Deputy Director for Management, the Chairperson, the Vice Chairperson, and the IGs who participated in our survey. We will also send copies of the report to the Chairman and the Ranking Member of the Senate Committee on Finance. If you have any questions or would like to discuss this report, please contact me at (202) 512-8486 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. IGs established by the IG Act of 1978, as amended, with appointment by the President and Senate confirmation. IGs established by the IG Act of 1978, as amended, with appointment by the agency head. In addition, the Department of State IG provides oversight of the Broadcasting Board of Governors, which is a designed federal entity. The IG is a member of the Recovery Accountability and Transparency Board. In addition to the contact named above, Jackson W. Hufnagle, Assistant Director; Jacquelyn Hamilton; Werner F. Miranda Hernandez; Rebecca Shea; and Clarence A. Whitt made key contributions to this report.
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The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) required GAO to report on the relative independence, effectiveness, and expertise of the inspectors general (IG) established by the IG Act of 1978, as amended (IG Act), including IGs appointed by the President with Senate confirmation and those appointed by their agency heads in designated federal entities (DFE). GAO was also required to report on the effect that provisions in the Dodd-Frank Act have on IG independence. The objectives of this report are to provide information as reported by the IGs on (1) the implementation of provisions intended to enhance their independence in the IG Reform Act of 2008 (Reform Act), the IG Act, and the Dodd-Frank Act; (2) their measures of effectiveness, including oversight of American Recovery and Reinvestment Act of 2009 (Recovery Act) funds; and (3) their expertise and qualifications in areas specified by the IG Act. GAO relied primarily on responses to its survey received from 62 IGs established by the IG Act. GAO also obtained information from the President's fiscal year 2011 budget, the IGs' annual report to the President for fiscal year 2009, and the IGs' semiannual reports to the Congress. GAO is not making any recommendations in this report. In comments on a draft of this report, the Council of the Inspectors General on Integrity and Efficiency (IG Council) stated the report contributes to a greater understanding of the work of the IGs in providing oversight to a wide range of government programs.. Information from the 62 IGs in offices established by the IG Act and GAO's analysis showed that the IGs had (1) taken actions to implement statutory provisions intended to enhance their independence; (2) reported billions of dollars in potential savings and other measures of effectiveness, including actions taken to help prevent fraud in the distribution of Recovery Act funds; and (3) a range of expertise and qualifications in the areas specified by the IG Act. With respect to independence, the IGs reported that (1) statutory provisions regarding IG compensation have been implemented where applicable, thereby maintaining the independence of their work and enhancing their relative stature within their agencies; (2) they had access to independent legal counsel who reports to an IG instead of an agency management official; (3) only one IG used a statutory provision for IGs to report particularly flagrant problems through the agency head to the Congress in 7 days because issues are generally resolved before the report is needed; and (4) of the affected 26 DFE IGs, 14 responded that their independence was enhanced by the Dodd-Frank Act provision that changed the designation of agency head from the chair to the entire board or commission, and 20 responded that their independence was enhanced by the provision requiring a two-thirds majority vote for IG removal. Also, the IGs' budgets were not always identified separately in the President's fiscal year 2011 budget submission as required by the Reform Act provision intended to enhance the IGs' budget independence through transparent reporting. The IG Council is currently reviewing the matter. The IGs reported various measures of effectiveness. The IGs reported potential savings of about $43.3 billion resulting from their fiscal year 2009 audits and investigations. Given the IGs' fiscal year 2009 budget authority of about $2.3 billion, these potential savings represent about an $18 return on every dollar invested in the IGs. The IGs also reported about 5,900 criminal actions, 1,100 civil actions, 4,400 suspensions and debarments, and 6,100 indictments as a result of their work. In addition, the IGs reported enhanced effectiveness through additional actions taken to help prevent fraud in their agencies. For example, in fiscal year 2009 the Recovery Act created a requirement for the IGs to provide oversight of the economic stimulus funds disbursed by their agencies, and established the Recovery Accountability and Transparency Board of IG members to help carry out this oversight. As of June 2011, the IGs reported over 1,500 investigations opened, over 1,400 reviews completed, and over 2,000 training sessions provided to detect and prevent fraud, waste, abuse, and mismanagement in the use of Recovery Act funds. With respect to expertise, the IGs reported having backgrounds, academic degrees, and certifications in a range of areas related to their statutory responsibilities. The IGs reported backgrounds and academic degrees in accounting, auditing, financial analysis, law, management analysis, public administration, and investigations. In addition, the IGs, particularly the DFE IGs, reported numerous professional certifications related to their responsibilities.
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In the aftermath of the terrorist attacks of September 11, 2001, responding to potential and real threats to homeland security became one of the federal government's most significant challenges. To address this challenge, the Congress passed, and the President signed, the Homeland Security Act of 2002, which merged 22 federal agencies and organizations into DHS, making it the department with the third largest budget in the federal government, about $40 billion for fiscal year 2005. In January 2003, we designated implementation and transformation of the new Department of Homeland Security as high risk based on three factors: (1) the implementation and transformation of DHS is an enormous undertaking that will take time to achieve in an effective and efficient manner, (2) components to be merged into DHS already face a wide array of existing challenges, and (3) failure to effectively carry out its mission would potentially expose the nation to very serious consequences. As we previously reported, one of the department's key challenges is integrating the components' respective financial management systems, many of which were outdated and had limited functionality, as well as addressing weaknesses from the inherited components. The Homeland Security Act of 2002 states that DHS's missions include, among other things, preventing terrorist attacks within the United States, reducing America's vulnerability to terrorism, minimizing subsequent damage, and assisting in the recovery from attacks that do occur. To help accomplish this integrated homeland security mission, the various mission areas and associated programs of 22 federal agencies were merged, in whole or in part, into DHS. The department's organizational structure consists of eight major components--the U.S. Coast Guard (Coast Guard), the U.S. Secret Service, the Bureau of Citizenship and Immigration Services (CIS), and five directorates, each of which is headed by an Under Secretary: Information Analysis and Infrastructure Protection, Science and Technology, Border and Transportation Security, Emergency Preparedness and Response, and Management. Within the Management Directorate is DHS's Office of the Chief Financial Officer (OCFO), which is assigned primary responsibility for functions, such as budget, finance and accounting, strategic planning and evaluation, and financial systems for the department. OCFO is also charged with ongoing integration of these functions within the department. The CFO Act requires the agency's CFO to develop and maintain an integrated accounting and financial management system that provides for complete, reliable, and timely financial information that facilitates the systematic measurement of performance at the agency, the development and reporting of cost information, and the integration of accounting and budget information. The act also requires that the agency's CFO be qualified, presidentially appointed, approved by the Senate, and report to the head of the agency. FFMIA requires that CFO Act agencies implement and maintain financial management systems that substantially comply with federal financial management systems requirements, applicable accounting standards, and the U.S. Government Standard General Ledger at the transaction level. It also requires auditors to report whether the agency's financial management systems substantially comply with the three requirements of FFMIA. While not required to comply with provisions of the CFO Act or FFMIA, the Accountability of Tax Dollars Act of 2002, requires DHS to prepare and have audited financial statements annually. The Accountability of Tax Dollars Act of 2002, however, does not require compliance with the CFO Act or FFMIA. In identifying improved financial performance as one of its five governmentwide initiatives, the President's Management Agenda recognized that an unqualified financial audit opinion is a basic prescription for any well-managed organization and that without sound internal control and accurate and timely financial information, it is not possible to accomplish the agenda and secure the best performance and highest measure of accountability for the American people. In addition, the Joint Financial Management Improvement Program (JFMIP) Principals have defined certain measures, in addition to receiving an unqualified financial statement opinion, for achieving financial management success. These additional measures include being able to routinely provide timely, accurate, and useful financial and performance information, having neither material internal control weaknesses nor material noncompliance with laws and regulations, and meeting the requirements of FFMIA. DHS obtained a consolidated financial audit for the 7-month period from March 1, 2003, to September 30, 2003, and received a qualified opinion from its independent auditors on its consolidated balance sheet as of September 30, 2003, and the related statement of custodial activity for the 7 months ending September 30, 2003. Auditors were unable to opine on the consolidated statements of net costs and changes in net position, combined statement of budgetary resources, and consolidated statement of financing. The auditors reported 14 reportable conditions on internal control, 7 of which were considered to be material weaknesses. When DHS was created in March 2003 and merged with 22 diverse agencies, there were many known financial management weaknesses and vulnerabilities in the inherited agencies. For 5 of the agencies that transferred to DHS--Customs Service (Customs), Transportation Security Administration (TSA), Immigration and Naturalization Service (INS), Federal Emergency Management Agency (FEMA), and Federal Law Enforcement Training Center (FLETC)--auditors had reported 30 reportable conditions, 18 of which were considered material internal control weaknesses. Further, of the four component agencies--Customs, TSA, INS, and FEMA--that had previously been subject to stand-alone audits, all four agencies' systems were found not to be in substantial compliance with the requirements of FFMIA. Most of the 22 components that transferred to DHS had not been subjected to significant financial statement audit scrutiny prior to their transfer, so the extent to which additional significant internal control deficiencies existed was unknown. For example, conditions at the Coast Guard have surfaced because of its greater relative size and increased audit scrutiny at DHS as compared to its former legacy agency, the Department of Transportation (DOT). As part of DOT's financial statement audit, the Coast Guard had no specifically attributable reported weaknesses identified. However, newly identified weaknesses related to the Coast Guard were one of the main reasons that independent auditors issued a qualified opinion on DHS's consolidated balance sheet and why they were unable to provide an opinion on other financial statements for the 7 months ending September 30, 2003. For fiscal year 2002 and prior to its transfer to DHS, Customs' auditors reported nine internal control weaknesses, including weaknesses in its ability to monitor the effectiveness of its internal controls over entry duties and taxes, controls over drawback claims, security issues in information technology (IT) systems, and issues concerning the strength of its core financial systems. These weaknesses can result in inaccurate reporting of certain material elements of Customs' financial situation, system security weaknesses that could leave Customs' information vulnerable to unauthorized access, and the necessity of extensive manual procedures and analyses to process routine transactions. Finally, these weaknesses contributed to Customs' systems inability to substantially comply with the requirements of FFMIA. Although TSA is a relatively new agency formed after the September 11, 2001, terror attacks, its auditors reported six internal control weaknesses, including weaknesses in the hiring of qualified personnel, financial reporting and systems, property accounting and financial reporting, financial management policies, administration of screener contracts, and maintenance of adequate information in its personnel files. These weaknesses can result in uncontrolled spending of taxpayer dollars, misplaced or unaccounted for property, and challenges in producing financial statements. In its first year audit ending September 30, 2002, TSA obtained an unqualified audit opinion on its financial statements. However, TSA's systems did not substantially comply with the requirements of FFMIA. INS's auditors reported four internal control weaknesses as of February 28, 2003, including weaknesses in the functionality of its financial systems; recording accounts payable and related accruals; financial reporting; and controls over its financial management system. Weaknesses such as these have existed for several years and contribute to INS's systems continuing inability to substantially comply with the requirements of FFMIA. Although the weaknesses did not interfere with the agency's ability to obtain an unqualified opinion on its financial statement audit, they did result in the need for extensive manual effort to prepare reliable financial information and record basic financial transactions to aid management in decision making. FEMA's auditors reported seven internal control weaknesses for fiscal year 2002, including weaknesses in information security controls over its financial systems environment; financial system functionality; financial reporting process; real and personal property system processes; account reconciliation processes; accounts receivable processes; and the lack of a process to evaluate the accuracy of a new claims estimation methodology. These weaknesses resulted in the need for extensive manual effort to compile financial information because FEMA's financial systems were unable to perform certain basic accounting functions efficiently. Further, FEMA's systems were unable to accurately track basic accounting information, such as real and personal property and accounts receivable. Many of these weaknesses specifically contributed to FEMA's systems' failure to substantially comply with the requirements of FFMIA. Finally, FLETC's auditors reported four internal control weaknesses for fiscal year 2002. These weaknesses resulted from FLETC not having adequate policies and procedures in place to ensure that funds obligated were proper and that costs for construction in progress were recorded properly. Further, auditors found that FLETC was not taking the steps necessary to be in compliance with certain Office of Management and Budget requirements. Many of these weaknesses lead to FLETC's systems' inability to substantially comply with the requirements of FFMIA. DHS has made some progress in addressing the internal control weaknesses it inherited from component agencies. Nine of the 30 internal control weaknesses identified in prior component financial statement audits have been closed as of September 30, 2003. The remaining 21 issues represent continuing weaknesses that have been reported in DHS's first Performance and Accountability Report. Nine of these were combined and reported as 3 material weaknesses, while 5 were reported as reportable conditions. The department's independent auditors classified the remaining 7 weaknesses as lower level observations and recommendations. Table 1 summarizes the status of the 30 weaknesses DHS inherited from component agencies as of September 30, 2003. Auditors reported 6 additional weaknesses as of September 30, 2003, bringing the total number of reportable conditions for DHS to 14 for fiscal year 2003, 7 of which were considered to be material weaknesses. A description of these weaknesses can be found in appendix II. As mentioned previously, several of the departmentwide weaknesses resulted from combining previously identified weaknesses or reclassifying them, rather than from resolving the underlying internal control weaknesses. For example, in fiscal year 2003, DHS's auditors reported a departmentwide material weakness related to financial systems functionality and technology. This weakness resulted from combining what accounted for 7 of the inherited weaknesses--3 from Customs, 2 from FEMA, 1 from INS, and 1 from TSA. Appendix III provides detailed information on the status of each of the 30 inherited weaknesses, including how they were reported in DHS's Performance and Accountability Report. Component agencies took various steps to resolve nine of the previously identified weaknesses inherited from component agencies. For example, Customs had a previously identified weakness related to the effectiveness of its internal controls over accurate reporting of entry duties and taxes. This weakness was resolved by reinstituting a program that Customs had in place prior to the terrorist attacks of September 11, 2001, which allows for more accurate reporting of these taxes and duties. Another weakness DHS inherited relates to FEMA's inability to identify and record certain accounts receivable in a timely manner. FEMA's accounts receivable processes were strengthened to ensure that accounts receivable are determined and recorded on a timely basis. In order to resolve several weaknesses at FLETC and TSA, various policies and procedures were implemented at these components to ensure that financial information was recorded and properly approved. Further, TSA has hired additional staff, thereby resolving its weaknesses of not having a sufficient number of qualified accounting personnel. In addition to the 7 material weaknesses and 7 reportable conditions reported in DHS's 2003 financial statement audit, DHS reported 12 additional weaknesses that affect the department's full compliance with certain objectives of 31 U.S.C. 3512(c), (d) (commonly known as the Federal Managers' Financial Integrity Act of 1982 (FMFIA)). FMFIA requires that management ensure that it has an organizational structure that supports the planning, directing, and controlling of operations to meet agency objectives; clearly defines key areas of authority and responsibility; and provides for appropriate lines of reporting. The standards also define internal control as a key component necessary to ensure that financial reporting information is reliable. Examples of the FMFIA weaknesses reported by DHS included deficient controls over laws and regulations regarding the border entry process, nonconformance related to system security, and lack of oversight and administration of major contracts at TSA. Of the seven departmentwide material weaknesses reported by DHS's auditors for fiscal year 2003, four were newly identified and contributed to the auditors' inability to render an opinion on all of DHS's financial statements. Newly identified weaknesses included the lack of procedures at DHS to verify the accuracy and completeness of balances transferred on March 1, 2003, and significant weaknesses with the number of qualified financial management personnel employed by the department. DHS's auditors also found significant deficiencies at the Coast Guard and Secret Service, preventing them from being able to express an opinion on certain financial statements. In addition to the internal control weaknesses cited in its 2003 financial statement audit, there were other weaknesses that, while not material to DHS on a departmentwide basis, are still important weaknesses that need to be addressed. FEMA, Customs, and TSA each had weaknesses at the time of their transfer to DHS. However, in the 2003 audit report, these weaknesses were classified as observations and recommendations, a much less serious classification. Lower classification within DHS does not mean that the issues are now somehow less severe, it merely refers to the materiality of a component within DHS. Considered against operations or assets of the stand-alone entity, these issues by themselves were relatively more significant than when considered in the context of the much larger consolidated operations of DHS as a whole. Resolving all previously reported internal control weaknesses, regardless of the current designation at DHS, is key to DHS's ability to produce relevant and reliable financial information. DHS's CFO testified that the department is committed to resolving the remaining weaknesses and has developed a plan to do so. According to the CFO's plans, corrective actions will be developed by each applicable bureau or directorate and submitted to the OCFO. Currently, DHS's OCFO has compiled a summary document with the corrective action plans as submitted by the applicable bureau or directorate. According to this document, corrective action plans of varying levels of detail are in place to address 12 of the 14 internal control weaknesses, some of which are scheduled to be completed by the end of fiscal year 2004. However, 2 material internal control weaknesses--Financial Systems Functionality and Technology and Transfer of Funds, Assets, and Liabilities to DHS--do not currently have any planned corrective actions in place. Along with developing corrective action plans, the CFO testified that DHS plans to implement a departmentwide tracking system to monitor the status of corrective actions. DHS has begun working with a contractor to design and implement a tracking system for outstanding weaknesses identified during the department's independent financial audits. While this system is still being developed by the OCFO, with assistance from contractors, it is not yet fully functional and does not include information on all reported weaknesses. Until such time that it does, it will provide limited oversight and information on the status of corrective actions to address weaknesses at DHS. While progress has been made to address the known material weaknesses, much work still remains. Follow-through with planned corrective actions is paramount. The support of top officials at the department will be key in ensuring that the necessary resources are available to address the weaknesses and to ensure that they are resolved in a timely manner. DHS intends to acquire and deploy an integrated financial enterprise solution and reports that it has reduced the number of its legacy financial systems. DHS has established the Resource Management Transformation Office (RMTO) within the Management Directorate to manage its financial enterprise solution project. However, the acquisition is in the early stages, and continued focus and follow through, among other things, will be necessary for it to be successful. RMTO has termed its financial enterprise solution project "electronically Managing enterprise resources for government effectiveness and efficiency" (eMerge), which according to the RMTO's Strategic Framework, "establishes the strategic direction for migration, modernization, and integration of DHS financial, accounting, procurement, personnel, asset management and travel systems, processes, and policies." DHS expects the acquisition and implementation of the financial enterprise solution to take place over a 3-year time period and cost approximately $146 million. According to the strategic framework DHS provided to us, the development of an integrated financial enterprise solution will be accomplished in three phases. Phase I includes defining, acquiring, and testing the planned solution. Phase II involves implementing the solution throughout DHS, and Phase III is ongoing maintenance of the solution. According to DHS, the eMergevendor selection to occur in April or May of 2004. However, vendor proposal requests were issued in June 2004 and selection is to be completed in July 2004. Concurrent with eMerge, DHS has issued a request for quotation (RFQ) for an interim project--the Business Automation Initiative--to be developed by contractors during 2004. The RFQ requested system proposals to automate purchase requests for the department and to streamline the employee entry/exit process. Another interim initiative was considered by the department to integrate data mining and warehousing, improve grants visibility (beginning with first responder grants), and streamline financial statement consolidation. However, instead of pursuing this interim solution, DHS plans to include it in the requirements of the eMerge initiative and obtained approval of the requirements from various high-level DHS officials. Additionally, a request for proposal (RFP) was issued by DHS for the eMerge initiative. However, these documents were not provided to us until after we completed our fieldwork. Thus, we are not providing description, analysis, or evaluation of such information in this report, and we are unable to determine if DHS, through the RMTO, is developing a financial enterprise solution that will be in alignment with departmentwide information technology plans, many of which are still under development. Nevertheless, we have found that similar projects have proven challenging and costly for other federal agencies. For example, we have reported on the efforts of National Aeronautics and Space Administration (NASA), and the District of Columbia Courts (DC Courts) to acquire new information systems. NASA is on its third attempt in 12 years to modernize its financial management process and systems, and has spent about $180 million on its two prior failed efforts. DC Courts began its system acquisition in 1998 and has struggled in its implementation. One of the key impediments to the success of integration efforts at NASA was the failure to involve key stakeholders in the implementation or evaluation of system improvements. As a result, new systems failed to meet the needs of key stakeholders. DC Courts struggled in developing requirements that contained the necessary specificity to ensure the system developed would meet its users' needs. To avoid similar problems, it is important, among other things, that DHS ensure commitment and extensive involvement from top management and users in eMergeAlthough we did not perform audit procedures to determine the impact of these reductions, reduction of service providers prematurely, without considering the provider's reliability, or without an overall consolidation plan, could be negative if it interferes with the enterprise approach or causes significant short-term inefficiencies for agencies that must quickly adapt to other systems. It is too early to tell whether DHS's planned financial enterprise solution will be able to meet the requirements of relevant financial management improvement laws--those currently applicable to DHS (such as FMFIA), as well as some not applicable that are subject to pending legislation. DHS is currently subject to most financial management improvement laws except for the CFO Act and FFMIA. The goals of the CFO Act and FFMIA are to provide the Congress and agency management with reliable financial information for managing and making day-to-day decisions and to improve financial management systems and controls to properly safeguard the government's assets. Further, the CFO Act requires certain agencies to have a qualified, presidentially appointed, Senate-confirmed CFO who reports to the head of the agency. FFMIA requires major departments and agencies covered by the CFO Act to implement and maintain financial management systems that comply substantially with (1) federal financial management systems requirements, (2) applicable federal accounting standards, and (3) the U.S. Government Standard General Ledger at the transaction level. Although DHS is not currently subject to FFMIA, its auditors disclosed systems deficiencies in its financial management information systems, the application of accounting standards, and recording of financial transactions, all of which relate to the requirements of FFMIA. Based on these weaknesses it is likely that DHS's systems would not have been in substantial compliance with the requirements of FFMIA. Table 3 lists relevant financial management laws and describes their relationship to DHS. DHS is currently required to have annual audits under the Accountability of Tax Dollars Act and to report on its internal controls under FMFIA. Although DHS's CFO has testified that DHS complies with the audit provisions of the CFO Act and will continue to do so, we believe DHS should be a CFO Act agency and be subject to the requirements of FFMIA. DHS should not be the only cabinet-level department not covered by what is the cornerstone for pursuing and achieving the requisite financial management systems and capabilities in the federal government. Given its early implementation, it is too early to tell whether DHS's planned financial enterprise solution will meet the requirements of financial management laws it is currently not subject to. While DHS systems must meet the requirements of laws they are currently subject to, it is also important that DHS be proactive and incorporate the requirements of the CFO Act and FFMIA. It would certainly make good business sense to do so given DHS's size and mission. DHS has implemented a commercial-off-the-shelf tool called Dynamic Object Oriented Requirements System (DOORS) to track the requirements of various laws, regulations, and circulars place on the development of an integrated financial system. DOORS is intended to be DHS's repository of all applicable system, process, technological, data, or other requirements. DHS estimated that several thousand compliance requirements will be tracked using DOORS once analysis is completed. After the repository is complete, requirements reports are to be printed directly from DOORS and attached to future RFPs to ensure that contractors are aware of the legislative requirements of the systems to be developed. A system to record, track, and link all legislative requirements as a financial management system is being developed is important. Also important is that DHS be statutorily required to comply with the CFO Act and FFMIA and that the systems DHS acquires are capable of meeting the requirements of those laws, as well as ones currently applicable. Meeting these financial management improvement requirements will help produce timely and useful financial and business information. Since its inception in March 2003, DHS has been faced with many challenges, including how to integrate its financial management processes and systems. Steps have been taken to address the 30 internal control weaknesses it inherited from its component agencies. However, to ensure financial accountability and establish an effective financial environment, DHS must address all outstanding inherited weaknesses, as well as address the newly identified department-level weaknesses. Through the eMerge initiative, DHS has plans to integrate and consolidate its financial and business systems. But without such things as continued active oversight from top-level management and systematic approaches to this integration, DHS could find itself in the same position as other federal departments-- producing an ineffective and costly financial management system that does not provide the information needed by management or meet the requirements of financial management laws. Finally, we believe that it is of critical importance that DHS be statutorily required to comply with the important financial management reforms legislated in the CFO Act and FFMIA. The financial management improvements of FFMIA build on the CFO Act by emphasizing the need for agencies to have systems that can generate reliable, useful, and timely information with which to make fully informed decisions and to ensure accountability on an ongoing basis. This issue is still of foremost importance, especially as DHS continues its financial management system integration and development. In view of the size of DHS and the importance of the CFO Act and FFMIA in improving financial management and its applicability to all other cabinet departments, the Congress may wish to consider the following action: Enact legislation to designate DHS as a CFO Act agency. We are making eight recommendations for executive action at DHS that will improve financial management at the department. Specifically, we recommend that the Secretary of Homeland Security direct the Under Secretary for Management to do the following: Continue to maintain strong involvement of key stakeholders and top management throughout the acquisition and implementation of the eMerge Maintain a tracking system of all auditor-identified and management- identified control weaknesses. We obtained written comments on a draft of this report from DHS's Chief Financial Officer. The comments DHS provided to us are reprinted in appendix IV. In commenting on a draft of this report, DHS generally agreed with the overall findings and recommendations. However, in response to our recommendation to incorporate all internal control weaknesses in the tracking system DHS is currently developing, DHS felt the recommendation was too broad and suggested that we change the language to reflect tracking of all auditor-identified and management-identified internal control weaknesses. The original intent of our recommendation was to encourage DHS to track and resolve all auditor reported material weaknesses, reportable conditions, and observations and recommendations, similar to those discussed throughout this report. We fully support DHS including all management-identified control weaknesses as well, and have updated our recommendation accordingly. Additionally, DHS commented on its commitment to full adherence to the CFO Act and FFMIA. We applaud the current leadership at DHS for voluntarily complying with some audit provisions of the CFO Act, however, we continue to strongly support passage of legislation that would statutorily make DHS a CFO Act agency, and thus guarantee future requirements to adhere to important financial management legislation. 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 of this report to interested congressional committees and subcommittees. 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 or wish to discuss it further, please contact me at (202) 512-6906 or Casey Keplinger, Assistant Director, at (202) 512-9323. In addition, Heather Dunahoo and Scott Wrightson made key contributions to this report. To identify what were the existing weaknesses in the Department of Homeland Security's (DHS) component agencies' financial management systems, we reviewed relevant DHS Office of Inspector General (OIG) reports and our January 2003 report on major management challenges at DHS and looked at how such challenges are being addressed. We also reviewed DHS's Performance and Accountability Report for the 7 months ending September 30, 2003. We reviewed prior-period component agency annual financial statement audit reports when available; Immigration and Naturalization Service's (INS) financial statement audit report for the 5 months ending February 28, 2003; and Performance and Accountability Reports for the Federal Emergency Management Agency (FEMA) and the Departments of Transportation, Justice, and Treasury. We reviewed testimony of DHS's current and former Chief Financial Officer (CFO) and DHS's OIG reports related to financial management at the department. Finally, we interviewed officials from the OIG and the Office of the Chief Financial Officer (OCFO). To determine whether DHS was addressing the problems that existed in the financial management systems DHS acquired from its component agencies, we met with officials from the OCFO's Office of Financial Management and OIG staff. In addition to items already mentioned, we reviewed planned corrective actions developed by the department to address its fiscal years 2002 and 2003 material weaknesses and reportable conditions. We also reviewed testimony of DHS's CFO related to this issue. Further, we conducted a walk-through to review the system DHS is developing to track planned corrective actions. To determine what plans DHS has to integrate its financial management systems, we met with the Director of the Resource Management Transformation Office (RMTO) and other staff in this office. We also reviewed testimony of DHS's current and former CFO and DHS's OIG related to financial management at the department. We reviewed documentation detailing the reduction of financial service providers, but we did not complete audit procedures to determine if these reductions were positive or negative for the department. Finally, we reviewed the RMTO's strategic framework. However, substantial documentation related to the eMerge initiative was not provided to us until after we completed our fieldwork. Thus, we did not include analysis or evaluation of such information in this report. To determine whether the planned systems that DHS is developing will be able to meet the requirements of relevant financial management improvement laws, we reviewed relevant laws and regulations, and relevant guidance related to financial management, financial reporting, systems implementation, and requirements. We also interviewed the Director of the RMTO and other officials. Further, we reviewed testimony relevant to this issue by DHS's current and former CFO and DHS's OIG. We have not reviewed system requirements or other recently developed plans because these were completed and obtained after our fieldwork was completed. We requested comments on this report from the Secretary of Homeland Security or his designee. Written comments were received from the department's Chief Financial Officer and are reprinted in appendix IV. We performed our review from October 2003 through June 2004 in Washington, D.C., in accordance with U.S. generally accepted government auditing standards. Financial management and personnel: DHS's OCFO needs to establish financial reporting roles and responsibilities, assess critical needs, and establish standard operating procedures (SOP) for the department. These conditions were not unexpected for a newly created organization, especially one as large and complex as DHS. The Coast Guard and the Strategic National Stockpile had weaknesses in financial oversight that have led to reporting problems. Financial reporting: Key controls to ensure reporting integrity were not in place, and inefficiencies made the process more error prone. At the Coast Guard, the financial reporting process was complex and labor-intensive. Several DHS bureaus lacked clearly documented procedures, making them vulnerable if key people leave the organization. Financial systems functionality and technology: The auditors found weaknesses across DHS in its entitywide security program management and in controls over system access, application software development, system software, segregation of duties, and service continuity. Many bureau systems lacked certain functionality to support the financial reporting requirements. Property, plant, and equipment (PP&E): The Coast Guard was unable to support the recorded value of $2.9 billion in PP&E due to insufficient documentation provided prior to the completion of audit procedures, including documentation to support its estimation methodology. The Transportation Security Administration (TSA) lacked a comprehensive property management system and adequate policies and procedures to ensure the accuracy of its PP&E records. Operating materials and supplies (OM&S): Internal controls over physical counts of OM&S were not effective at the Coast Guard. As a result, the auditors were unable to verify the recorded value of $497 million in OM&S. The Coast Guard also had not recently reviewed its OM&S capitalization policy, leading to a material adjustment to its records when an analysis was performed. Actuarial liabilities: The Secret Service did not record the pension liability for certain of its employees and retirees, and when corrected, the auditors had insufficient time to audit the amount recorded. The Coast Guard also was unable to provide, prior to the completion of audit procedures, sufficient documentation to support the recorded value of $201 million in post-service benefit liabilities. Transfers of funds, assets, and liabilities to DHS: DHS lacked controls to verify that monthly financial reports and transferred balances from legacy agencies were accurate and complete. Drawback claims on duties, taxes, and fees: The Bureau of Customs and Border Protection's (CBP) accounting system lacked automated controls to detect and prevent excessive drawback claims and payments. Import entry in-bond: CBP did not have a reliable process of monitoring the movement of "in-bond" shipments--i.e., merchandise traveling through the U.S. that is not subject to duties, taxes, and fees until it reaches a port of destination. CBP lacked an effective compliance measurement program to compute an estimate of underpayment of related duties, taxes, and fees. Acceptance and adjudication of immigration and naturalization applications: The Bureau of Citizenship and Immigration Services' (CIS) process for tracking and reporting the status of applications and related information was inconsistent and inefficient. Also, CIS did not perform cycle counts of its work in process that would facilitate the accurate calculation of deferred revenue and reporting of related operational information. Fund balance with Treasury (FBWT): The Coast Guard did not perform required reconciliations for FBWT accounts and lacked written standard operating procedures (SOP) to guide the process, primarily as the result of a new financial system that substantially increased the number of reconciling differences. Intragovernmental balances: Several large DHS bureaus had not developed and adopted effective SOPs or established systems to track, confirm, and reconcile intragovernmental balances and transactions with their trading partners. Strategic National Stockpile (SNS): The SNS accounting process was fragmented and disconnected, largely due to operational challenges caused by the laws governing SNS. A $485 million upwards adjustment had to be made to value SNS in DHS's records properly. Accounts payable and undelivered orders: CIS and the Bureau of Immigration and Customs Enforcement (ICE), TSA, and the Coast Guard had weaknesses in their processes for accruing accounts payable or reporting accurate balances for undelivered orders. Reportable Condition (Drawback Claims on Duties, Taxes, and Fees) Material Weakness (Financial Systems Functionality and Technology) Material Weakness (Financial Systems Functionality and Technology) Observation & Recommendations to Management Reportable Condition (In-bond Movement of Imported Goods) Observation & Recommendations to Management Material Weakness (Financial Systems Functionality and Technology) Immigration and Naturalization Service (as of February 28, 2003) Reportable Condition (Acceptance and Adjudication of Immigration and Naturalization Applications) Reportable Condition (Accounts Payable and Undelivered Orders) Observation & Recommendations to Management Material Weakness (Financial Systems Functionality and Technology) Material Weakness (Financial Systems Functionality and Technology) Material Weakness (Financial Systems Functionality and Technology) Material Weakness (Financial Reporting) Observation & Recommendations to Management Reportable Condition (Intragovernmental Balances) Agency and Condition Reported in 2002 Federal Law Enforcement Training Center 22. Laws and Regulations (OMB Circular A-127) 24. Laws and Regulations (OMB Circular A-11) Material Weaknesses (Financial Reporting; Financial Systems Functionality and Technology) Material Weakness (Property, Plant, and Equipment) 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). 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When the Department of Homeland Security (DHS) began operations in March 2003, it faced the daunting task of bringing together 22 diverse agencies. This transformation poses significant management and leadership challenges, including integrating a myriad of redundant financial management systems and addressing the existing weaknesses in the inherited components, as well as newly identified weaknesses. This review was performed to (1) identify the financial management systems' weaknesses DHS inherited from the 22 component agencies, (2) assess DHS's progress in addressing those weaknesses, (3) identify plans DHS has to integrate its financial management systems, and (4) review whether the planned systems DHS is developing will meet the requirements of relevant financial management improvement laws. DHS inherited 30 reportable internal control weaknesses identified in prior component financial audits with 18 so severe they were considered material weaknesses. These weaknesses include insufficient internal controls, system security deficiencies, and incomplete policies and procedures necessary to complete basic financial information. Of the four inherited component agencies that had previously been subject to stand-alone audits, all four agencies' systems were found not to be in substantial compliance with the requirements of the Federal Financial Management Improvement Act (FFMIA), an indicator of whether a federal entity can produce reliable data for management and reporting purposes. Component agencies took varied actions to resolve 9 of the 30 inherited internal control weaknesses. The remaining 21 weaknesses were combined and reported as material weaknesses or reportable conditions in DHS's first Performance and Accountability Report, or were reclassified by independent auditors as lower-level observations and recommendations. Combining or reclassifying weaknesses does not resolve the underlying internal control weakness, or mean that challenges to address them are less than they would have been prior to the establishment of DHS. DHS is in the early stages of acquiring a financial enterprise solution to consolidate and integrate its business functions. Initiated in August 2003, DHS expects the financial enterprise solution to be fully deployed and operational in 2006 at an estimated cost of $146 million. Other agencies have failed in attempts to develop financial management systems with fewer diverse operations. Success will depend on a number of variables, including having an effective strategic management framework, sustained management oversight, and user acceptance of the efforts. It is too early to tell whether DHS's planned financial enterprise solution will be able to meet the requirements of relevant financial management improvement laws. As of June 2004, DHS is not subject to the CFO Act and thus FFMIA, which is applicable only to agencies subject to the CFO Act. While DHS is currently not required to report on compliance with FFMIA, its auditors disclosed systems deficiencies that would have likely resulted in noncompliance issues.
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The Postal Service, an independent establishment of the executive branch of the U.S. government, is the largest federal civilian agency, consisting of more than 38,000 post offices, branches, and stations and 350 major mail-processing and distribution facilities. As part of its strategy for better managing its procurement of goods and services, the Postal Service has centralized the procurement of commodities that were previously decentralized. For example, all office supply procurements are now managed by the Office Products and Utilities Category Management Center in Windsor, Connecticut, which is responsible for administering the national contract. Previously, office supply procurement was decentralized, with each area managing its own procurements. To demonstrate its commitment to reaching SMW businesses, the Postal Service has developed a 5-year supplier diversity plan. The plan focuses on maintaining a strong supplier base that includes SMW businesses. While it does not set specific dollar goals, the plan is intended to ensure that the Postal Service spends an increasing amount of its procurement dollars on goods and services from diverse businesses through fiscal year 2003. To monitor its progress, the Postal Service measures its prime and subcontracting spending achievements with SMW businesses. During fiscal years 1999 through 2001, Postal Service procurement of goods and services (which includes office supplies) decreased from $3.5 billion to $2.6 billion. For the same time period, office supply procurement grew from $107 million to $125 million. Postal Service officials explained that this increase does not necessarily indicate an actual increase in office supply spending, but rather it reflects improvements in the procurement system's ability to track spending. The officials indicated that the data provided, while not perfect, are the best available information. In October 1999, the Postal Service issued a solicitation for a national-level office supply contract. Four vendors submitted proposals. The solicitation provided that the award would be made to the vendor that offered the best overall value to the government, considering nonprice and price factors. The proposals were evaluated based on several factors, including the vendors' demonstrated understanding of the solicitation's (1) technical requirements, including the ability to implement and maintain a Web-based procurement system, and (2) business requirements. As part of their business plan, vendors were required to demonstrate their ability to deliver items within 24 hours of receiving an order, which is considered industry standard. Other factors on which the proposals were evaluated, in descending order of importance, were the inclusion of a subcontracting plan demonstrating the vendor's commitment to use SMW businesses, the ability to address environmental and energy conservation efforts. An explanation of the price discounts on items offered to the Postal Service, the ability to provide financial and purchasing reports that are integrated with the Postal Service's system, and the ability to provide Postal Service items, other than office supplies, that are used in an office setting. Additional evaluation factors included past performance and Javits-Wagner-O'Day Act (JWOD) compliance. The Postal Service awarded the contract to Boise with a start date of April 3, 2000. The contract is a firm, fixed-price modified requirements contract for a 3-year base period, with up to three 2-year options. The contract requires, with a few exceptions, that the Postal Service order from Boise all of the approximately 13,000 items in Boise's Postal Service office supply catalog. Exceptions to the mandatory requirement are where (1) the item can be found at a lower price (and it is not a JWOD item) or (2) the requirement is urgent and the supplier cannot meet the required delivery date. The Postal Service has since exercised the first 2-year option. The JWOD Act requires the Postal Service to comply with its requirements. According to Postal Service and Boise officials, Boise has ensured through its ordering process that this compliance occurs. When Postal Service employees place an order with Boise for an item that is also on the JWOD procurement list, Boise substitutes the ordered item with a JWOD item that is essentially the same. The Postal Service has not been successful in implementing its national-level contract to purchase most office supplies from Boise. As shown in figure 1, during fiscal year 2001 less than 40 percent of the $125 million in office supplies was purchased from the contract. The Postal Service has not taken sufficient actions to ensure that the contract would be used as anticipated. While fiscal year 2001 data show an improvement over the 6 months that the contract was used in fiscal year 2000, when about 75 percent of office supplies were purchased outside the contract, the Postal Service is concerned that its employees continue to spend a significant percentage of office supply dollars outside the contract. Anticipated savings were based on the assumption that almost all supplies would be purchased from the national contract. The fact that this has not occurred, together with the absence of a benchmark against which to measure savings, has contributed to the Postal Service's failure to realize estimated savings from its supply chain initiative. Although the Postal Service conducted market research that supported the implementation of a national-level contract for office supplies, it did not take sufficient actions to ensure that the contract would be used as anticipated. Figure 2 shows that Postal Service employees buy office supplies through three mechanisms: contracts (including Boise and non-Boise contracts), purchase cards, and other methods such as cash and money orders. Postal Service officials stated that the increase in contract dollars from fiscal year 1999 to 2001 indicates that the national contract is being used more extensively. However, they have not determined why employees continue to buy their supplies outside the contract. Postal Service officials did not expect immediate compliance with the contract; they anticipated that some purchasing would occur outside the national contract during the implementation period because the cultural environment of the Postal Service has allowed local buyers to make purchases independently. However, they were unaware of the extent to which the contract is not being used because they did not sufficiently plan its implementation, nor have they adequately tracked and monitored office supply purchases. There are several indications that the Postal Service did not take sufficient action to ensure that the contract was properly implemented. First, the Postal Service continues to maintain a number of non-Boise office supply contracts. Although the number of vendors on these other contracts declined from 49 to 33 from fiscal years 1999 through 2001, the dollar value of supplies bought from these contracts has grown, as shown in figure 3. The Postal Service did not undertake a systematic review of all office supply contracts when it implemented the national contract. Such an assessment would have provided an indication of which non-Boise contracts should have been continued and which phased out. In fact, some of the items purchased under non-Boise contracts in fiscal year 2001--such as binders, paper, and measuring tape--should have been purchased from Boise, according to the terms of the national contract. According to Postal Service officials, other items--such as printed envelopes and some types of rubber bands--are purchased under separate contracts because the items are not part of the Boise catalog or they are unique and purchased in volume. Postal Service officials told us that the improved oversight they expect as a result of centralized office supply procurement will allow them to phase out some of the existing office supply contracts. Second, Postal Service employees continue to use purchase cards to buy office supplies outside the contract. Because the purchase card cannot be used to order from the Boise contract, none of the $16.8 million spent on office supplies through purchase cards in fiscal year 2001 was spent under the contract. Postal Service officials have not tracked or monitored purchase card procurements to determine why these employees are not using the contract. Postal Service managers indicated that they are able to use quarterly purchase card spending reports to identify errant purchases--office supplies that should have been purchased from the national contract. However, they acknowledge that these reports are not used consistently to monitor employee purchases of office supplies. Finally, Postal Service employees continue to use cash and money orders to buy supplies from local vendors. As with the purchase cards, cash and money orders cannot be used to buy supplies from the Boise contract. Because the Postal Service has limited information about cash and money order purchases, it was unaware that 33 percent of office supply spending in fiscal year 2001 occurred through these methods. Postal Service officials remarked that they are encouraged by the decrease (from about $66 million in fiscal year 1999 to $41 million in fiscal year 2001) in office supply purchasing using cash and money orders. However, until the Postal Service is able to better track and monitor local office spending, it will lack the information it needs to ensure that the national contract is being used as intended. Postal Service officials explained that their ability to track office supply spending--enabling them to better target those employees who are not using the contract--should improve as Boise contract use increases because the contract requires Postal Service employees to use a Web-based purchasing system referred to as e-buy. The Postal Service's expectation is that information about e-buy purchases will be systematically and consistently collected. However, use of the contract is not being enforced, and employees continue to use other methods--such as contracts outside the national contract, purchase cards, cash, and money orders--to buy office supplies. The Postal Service's decision to award a national-level contract to a single supplier was based, in part, on an expectation of saving up to $28 million annually. These savings would result from (1) purchasing a large quantity of items from a single supplier, thereby reducing item costs, and (2) implementing the e-buy purchasing process, which would reduce overall transaction costs. To realize the maximum benefits and cost savings under the Postal Service's acquisition strategy, almost all office supplies must be purchased from Boise. However, the fact that employees continue to buy supplies outside the contract, combined with the lack of an established benchmark to measure savings, prevents the Postal Service from determining whether it is achieving its savings goals. The Postal Service's reported savings are calculated using a formula established in 1999. The formula is based on market research, Postal Service Annual Report data from 1998, and spending on an office supply contract in existence at that time. This methodology predicted transaction cost savings of up to 70 percent and item price savings of up to 10 percent on a $50 million contract. The Postal Service claimed savings of up to $28 million for fiscal year 2001 using these estimates. However, when we asked for evidence of actual savings to date, the Postal Service could provide documentation for only about $1 million. This amount reflects rebates that Boise agreed to give the Postal Service on all new business and reduced prices negotiated as part of the contract. Boise and the Postal Service have not paid sufficient attention to the subcontracting goals under the national office supply contract. The subcontracting plan was carelessly constructed, and it contains obvious ambiguities. In fact, Postal Service and Boise officials do not agree on the basic subcontracting goals. Notwithstanding this disagreement, for the purposes of this report we have used the Postal Service's position that the goal is to award 30 percent of annual revenues to SMW businesses. Boise has fallen far short of achieving the 30 percent goal. In fiscal year 2001, Boise reported achievements of only 2.6 percent. Boise has also fallen short of its specific goals for minority and woman-owned businesses. Boise and the Postal Service provided several reasons why Boise is not achieving the subcontracting goals and they have identified actions that they believe will improve performance. However, these actions will not be sufficient to enable Boise to reach its subcontracting plan goals. When Boise initially submitted its proposal, its subcontracting goal was to provide 12 percent of its Postal Service business to SMW subcontractors. This proposed subcontracting plan included 4 percent goals for minority- and woman-owned businesses. However, after Boise was selected as the intended awardee--but before the contract was awarded--the goal for SMW businesses was increased to 30 percent based on negotiations with the Postal Service. At the same time, Boise increased its goals for minority- and woman-owned business from 4 to 6 percent. The subcontracting plan contains obvious ambiguities that should have been addressed prior to contract award. For example, because the plan is not clearly written, Postal Service and Boise officials disagree on the overall SMW subcontracting goal. Postal Service officials maintain that the goal is 30 percent of overall revenue for the contract, a figure confirmed in a preaward email from Boise. A Boise official, however, asserts that there is both an overall 30 percent goal and a fixed dollar value goal of $3,300,000. Despite this disagreement, neither Boise nor Postal Service officials have taken steps to revise the plan. Further, the subcontracting plan misstates two of the three reporting categories for which there is a contractual goal. The language in the plan includes goals for "small, disadvantaged businesses" and "small, woman-owned businesses." In practice, however, the Postal Service and Boise report achievements for "minority" and "woman-owned" firms, which may be small or large. There is no clear linkage between the categories of SMW businesses as stated in the plan and the way Boise is reporting its achievements. A Boise official explained that the subcontracting plan reflects the categories the firm typically uses when contracting with federal agencies, and it did not revise the reporting categories to reflect the Postal Service's supplier diversity categories. In responding to our questions, the Postal Service officials acknowledged that the plan is inconsistent with the way Boise's achievements are measured and that it needs to be revised. Despite its disagreement with the Postal Service about the subcontracting goals, Boise reports the dollars and percentages that went to SMW businesses based on the annual total revenues under the contract. Table 1 reflects reported achievements for fiscal year 2001. Postal Service and Boise officials stated that 30 percent was a stretch goal to demonstrate the Postal Service's commitment to supplier diversity. A Boise representative stated that Boise agreed to the 30 percent goal because Boise understood the goal to be negotiable. Even though the Postal Service has no plans to renegotiate the goal before the end of the initial contract performance period of 3 years, Boise and the Postal Service have started discussions to renegotiate the subcontracting goal in the event that the Postal Service decides to exercise an option to extend the contract. Postal Service officials noted that they realize, in hindsight, that the 30 percent goal may have been unreasonable. Boise and Postal Service officials provided several reasons why the subcontracting goals have not been achieved. First, a Boise official said that Boise agreed to the 30 percent goal based on its earlier achievements under the General Services Administration's Federal Supply Schedules program. In fiscal years 1999 and 2000, Boise awarded small businesses 24.6 percent of its Schedules program sales. In retrospect, Boise and Postal Service officials explained that the Schedules program was not a reliable source for an estimate because Boise's contract under the Schedules program included 1,800 items, compared to about 13,000 items in the Postal Service contract. Moreover, the total dollar sales in Boise's Schedules contract--$14.3 million in fiscal year 2000--were considerably lower than the total sales on the Postal Service contract--$47 million in fiscal year 2001. Second, while Boise has a corporate supplier diversity strategy, a Boise official stated that the company's ability to achieve the subcontracting plan goals has been hampered by the fact that the Postal Service does not require its employees to target SMW businesses when ordering from the catalog. In fact, officials at one district we visited had the impression that by simply purchasing from the contract they were complying with the Postal Service's SMW business initiatives. At another district we visited, employees were not aware that the Postal Service had SMW subcontracting goals in the contract. All of the district officials we spoke with stated that they base their purchasing decisions on the lowest available price and do not search the catalog for SMW businesses. Third, one of the primary reasons Boise and Postal Service officials offered for the low subcontracting achievements was that compliance with the JWOD Act is taking away dollars from small businesses. However, Boise records show that of the 47 Boise vendors whose items were replaced with JWOD items in fiscal year 2001, only 7 were small businesses. These 7 vendors supply 26 out of the 404 Postal Service office supply items that are subject to the automatic JWOD replacement. Moreover, financial data from Boise show that in calendar year 2000, while total sales on JWOD items were just over $3 million, the impact of JWOD compliance on these 7 vendors was relatively small. These vendors potentially lost $167,629 in business due to the automatic substitution of JWOD items for their items. In calendar year 2001 (representing one full year of contract sales), these 7 vendors potentially lost $297,036 of sales, while the total sales on JWOD items for the year doubled to almost $6 million. This trend continued in the first 6 months of 2002. Finally, Postal Service officials also explained that Boise could not reach its goal because it had planned to subcontract with a woman-owned enterprise that provided cash register tapes, a technology that the Postal Service decided to phase out. They stated that although Boise had relied on this business to reach its subcontracting goal, a change in technology resulted in significantly less business with this vendor than was expected. However, neither Postal Service nor Boise officials could provide us with specific estimates of expected sales. In fact, sales to this woman-owned firm increased in 2001 and 2002. Boise records show a growth in sales of the cash register tapes from this business of approximately $283,000 in 2000 to $455,000 in 2001. Sales for the first half of 2002 indicate a dollar amount in sales similar to the total sales in 2001. Moreover, Boise was notified of the changes to the new technology as far back as 1998; therefore, this was not new information received during the negotiations regarding the subcontracting goals. The Postal Service and Boise recognize that the performance on the subcontracting plan is not satisfactory and have started to take some actions to improve Boise's achievements under the current contract. While Boise is responsible for its contract performance, the coordinated actions of the Postal Service and Boise can assist Boise's ability to achieve the subcontracting plan goals. Although the following steps are being taken to improve performance, it is highly unlikely that these actions will enable Boise to reach its 30 percent subcontracting goal. Boise is working with the Postal Service to include additional SMW businesses as subcontractors. For example, Boise continues to work with the Postal Service to identify small business suppliers of recycled toner cartridges, who in many cases provide their products at half the price of new toner cartridges. District officials received a listing of small businesses supplying recycled toner cartridges in October 2001. However, neither the Postal Service nor Boise has determined the extent to which this information will increase Boise's subcontracting achievements. Boise is working with the Postal Service to reflect indirect services provided to Boise by small businesses in its reporting of subcontracting plan achievements, as it is allowed to do under the Postal Service contract. Indirect services include data entry and information management services, such as invoicing and tracking sales information. However, Boise estimates that including indirect services provided by SMW businesses will have minimal impact on subcontracting plan achievements. Currently, there is no time frame for implementing this change in Boise's reporting of its subcontracting achievements. In October 2001, the Postal Service and Boise teamed up to design a quarterly report that tracks SMW business purchases at the Postal Service districts. The Postal Service expects to finalize and distribute these reports in January 2003. The Postal Service and Boise are expanding the education of Postal Service employees on the benefits of seeking out SMW suppliers when they order office supplies from the national contract. Since initial office supply contract training was provided in the fall of 2000, Postal Service efforts to educate employees about SMW suppliers have been through informal channels, such as e-mail. Boise's educational efforts focus on providing more information to the Boise sales representatives that work with the Postal Service. While Boise expects some improvements in its subcontracting achievements as a result of the educational efforts, their impact is unknown. Postal Service data show that office supply purchases made directly from SMW businesses--using contracts and purchase cards--decreased from about 50 to 18 percent from fiscal year 1999 through 2001. However, the extent to which the Postal Service is buying office supplies from SMW businesses is unclear because its purchase card information is unreliable and because the Postal Service has not tracked purchases by employees using mechanisms such as money orders and cash. Our review, as well as a report by the Postal Service Inspector General, found that incomplete and unreliable diversity statistics on suppliers resulted in the Postal Service overstating or incorrectly classifying dollars awarded to SMW businesses. The Inspector General's report made nine recommendations to correct the reporting of diversity statistics. Table 2 shows the decline in the percentage of SMW purchases from fiscal years 1999 through 2001, based on Postal Service data. During the same 3-year period, SMW business participation has decreased as a percentage of contract spending (excluding spending through purchase cards, cash, and money orders), while the overall dollar value of office supplies purchased through contracts increased from $14.5 million to almost $67 million. In addition, the number of SMW vendors selling office supplies to the Postal Service decreased during this period. Postal Service district officials told us that they are no longer attempting outreach to local SMW businesses--such as participating in small business conferences or trade shows to attract new vendors--because of the emphasis on buying office supplies only through the Boise contract. Table 3 shows the decline in contract activity with small businesses from fiscal years 1999 through 2001. Similarly, the Postal Service reports that office supply procurements from SMW businesses through purchase cards decreased from fiscal years 1999 through 2001. Table 4 shows the decline in the percentage of purchases from SMW businesses using purchase cards from fiscal year 1999 through 2001. Despite the Postal Service's reported statistics, we could not determine the extent to which the Postal Service is buying from SMW businesses. First, because the Postal Service does not track or report socioeconomic data when payments are made to vendors using cash or money orders, it is not possible to assess SMW business achievements when those payment methods are used. Second, the Postal Service, like other federal agencies, relies on reports from banks for annual purchase card transaction and vendor information. This information is ambiguous and contains numerous errors because socioeconomic categories are often inaccurate. For example, the Postal Service's purchase card data for fiscal years 1999 through 2001 included over $40 million dollars in office supply purchases from businesses that were identified as both small and large. The Postal Service is aware of the problems with the purchase card transaction information and has been working with Visa Corporation to improve the data. Because banks and payment card associations, such as Visa, control the transaction databases, the Postal Service must rely on the information provided by these institutions. We recently reported on the issue of unreliable and incomplete socioeconomic data on purchase card merchants. The Postal Service has not achieved its goal of using a single supplier for office supplies and, as a result, has not achieved its anticipated savings. Because the Postal Service has not analyzed how its employees buy office supplies, it does not know why the national contract is not being used as extensively as planned. In fact, the Postal Service has no assurance that the national strategy is effective because it has not adequately tracked its employees' office supply purchases. Implementing a national-level office supply contract through a single supplier makes the realistic development and measurement of Boise's subcontracting goals and achievements critical to the Postal Service's efforts to achieve its supplier diversity objectives. The failure to establish an effective subcontracting plan and the lack of oversight and enforcement has created an environment where participation by SMW businesses is minimal. The fact that the Postal Service and Boise cannot agree on the levels of SMW participation established in the contract is evidence of the lack of attention Boise and the Postal Service have paid to this issue. While Boise and the Postal Service have taken some actions to address SMW achievement, it is highly unlikely that Boise will be able to reach its subcontracting goal. We recommend that the Postmaster General of the United States determine why the national contract is not being used as a mandatory source of office supplies; reassess the cost effectiveness of a national office supply contract and measure actual savings from using the contract rather than applying the outdated estimating formulas initially established; develop mechanisms to track employees' compliance with the mandatory use of the contract, if analysis indicates that the national-level contract is beneficial; and direct that the contract be modified to include a revised subcontracting plan that accurately and clearly reflects realistic goals for small, minority, and woman-owned businesses, consistent with the Postal Service's supplier diversity program. In written comments on a draft of this report, the Postal Service agreed with our recommendations and indicated that our report will help it develop and enforce policies aimed at improving performance under the national office supply contract. Recognizing that the success of a contract such as this requires continuous management, the Postal Service has established a new supply management organization that will use our findings and recommendations to determine why the contract is not being used as fully as anticipated. The Postal Service indicated that it will continue to seek cost-effective ways to expand its oversight efforts and expects that increased use of the Web-based purchasing system will assist in these efforts. Regarding the savings from the contract, the Postal Service stated that its internal analysis has validated $5.3 million in cost reductions during fiscal year 2002. This analysis was not shared with us during our review. Finally, the Postal Service stated that it has corrected the ambiguities in the subcontracting plan and is working with Boise to establish more realistic subcontracting goals. The Postal Service's letter appears in appendix I. We also received a written statement from Boise expressing its opinion on federal subcontracting involving SMW businesses and offering several comments on our findings. Boise stated that actual sales under the contract (approximately $50 million) far exceeded its expected contract amount of $11 million. Boise uses this information as a rationale for its failure to achieve its subcontracting goals, which it asserts were based on the $11 million expected contract amount. However, the contract did not guarantee a minimum or maximum level of sales to Boise and, as noted in our report, a 30 percent goal was confirmed by Boise in a pre-award e-mail. Further, the Postal Service based its projected savings on an estimated contract amount of $50 million. Boise also noted that sales to SMW businesses with the Postal Service increased from fiscal year 1999 to fiscal year 2001. However, Boise's analysis relies on a comparison of sales data from a previously existing Postal Service office supply contract, for 200 high-use items, to the sales data from the current contract, which covers almost 13,000 items. Because Boise is comparing sales data from two different contracts, we do not believe that this is a legitimate comparison. Boise indicated that it is working with the Postal Service to correct the inconsistencies we noted in the subcontracting plan. In addition, Boise believes that JWOD items block sales to SMW businesses; however, Boise did not provide sufficient evidence to support this claim. As noted in our report, the potential lost sales to SMW businesses due to JWOD item replacements were relatively small. Boise also commented that because sales of a cash register tape made by a woman-owned business did not increase at the expected rate, its SMW achievements were affected. However, as discussed in our report, neither Boise nor the Postal Service could provide us with documentation on the expected sales of the IRT tapes. Finally, Boise was concerned about our selection of field sites because it was not based on a random sample. We targeted locations that, according to Boise's data, were low users of the contract. The objective of our field visits was not to identify overall awareness of the contract. Rather, our intent was to gain an understanding of why certain locations were not using the contract as a mandatory source of office supplies. Boise's letter appears in appendix II. To meet our objectives, we reviewed the Postal Service's office supply spending and the related SMW achievements during fiscal years 1999 through 2001. To examine the status of the Postal Service's implementation of its national office supply contract with Boise, we reviewed the acquisition planning, contract formation, and contract administration documentation, including market research results, the solicitation, and the contract. Total office supply spending was identified using information from the Postal Service purchasing and materials data warehouse. We determined office supply spending for fiscal years 1999 through 2001 by using the same account codes that the Postal Service used to conduct its market research to justify the national office supply contract. We reviewed the Postal Service's total office supply spending details for all contract, purchase card, money order, and cash transactions. We did not independently verify the accuracy of the reported spending. We interviewed and obtained information from the Postal Service's contracting officer and contract administrator. In addition, we interviewed and obtained information from three area offices and three district offices based on data that indicated these locations were not using the national office supply contract. We interviewed purchasing specialists, administrative services managers, financial system coordinators, and administrative personnel with office supply purchasing responsibility. We also held discussions with and acquired information from Boise's federal business manager. To determine Boise's achievement of its SMW subcontracting plan, we reviewed the contract's subcontracting plan and Boise's quarterly reports on its SMW achievements. We interviewed and obtained information from the Postal Service's contracting officer, area finance officials, and district finance and purchasing officials. We also held discussions with and acquired information from Boise's federal business manager, its minority- and woman-owned business development and supplier diversity manager, and two minority-owned subcontractors. To assess the extent to which the Postal Service is buying office supplies directly from SMW businesses, we reviewed Postal Service supplier diversity policy and guidance. We examined the Postal Service's reported socioeconomic statistics, including the dollar amount and type of vendor for fiscal years 1999 through 2001. We interviewed and obtained information from Postal Service officials in the offices of supplier development and diversity, purchasing and materials, and the Postal Service Inspector General. We determined that the reported purchase card data were unreliable; however, we did not attempt to correct the errors in the data provided. Additionally, we met with representatives from the National Office Products Association and a small, woman-owned business to gain a better understanding of their views with regard to the national contract. We conducted our review from March 2002 to November 2002 in accordance with generally accepted government auditing standards. We are sending copies of this report to other interested congressional committees; the Postmaster General of the United States; and the Senior Vice President and Federal Business Manager, Boise Office Solutions. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841 or Michele Mackin at (202) 512-4309 if you have any questions regarding this report. Other major contributors to this report were Penny Berrier, Art L. James Jr., Judy T. Lasley, Sylvia Schatz, and Tatiana Winger.
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Over the past 2 years, the Postal Service has experienced growing financial difficulties. In an effort to transform the organization to reduce costs and increase productivity, the Postal Service awarded a national-level office supply contract to Boise Corporation. In addition, the Postal Service required Boise to submit a subcontracting plan, which outlines how small, minority-, and woman-owned businesses will be reached through the contract. GAO was asked to assess the status of the Postal Service's implementation of the Boise contract and Boise's achievement of its subcontracting plan. GAO also reviewed the extent to which the Postal Service is buying office supplies directly from small, minority-, and woman-owned businesses. The Postal Service has not been successful in implementing its national-level contract to purchase most office supplies from Boise. Although the national contract was intended to be a mandatory source of office supplies, the Postal Service purchased less than 40 percent of its office supplies from Boise in 2001. GAO found that the Postal Service did not perform as planned under the contract because it did not take sufficient actions to ensure that the contract would be used. As a result, the Postal Service has not been able to realize its estimated annual savings of $28 million. In fact, it was only able to provide documentation for $1 million in savings for 2001. Boise and the Postal Service have not paid sufficient attention to the subcontracting plan. The plan contains obvious ambiguities, and, in fact, Postal Service and Boise officials disagree on its goals. The Postal Service maintains that the goal is 30 percent of Boise's annual revenue from the contract. Boise has fallen far short of this goal, reporting that only 2.6 percent of subcontracting dollars were awarded to small, minority-, and woman-owned businesses in fiscal year 2001. Postal Service and Boise officials recognize that the performance on the subcontracting plan is not satisfactory and are taking a number of steps to achieve the plan's goals. Nevertheless, it is highly unlikely that the current subcontracting goals will be met. The Postal Service reported that its small, minority-, and woman-owned business achievements have declined from fiscal years 1999 to 2001. Despite the Postal Service's reported statistics, we could not determine the extent to which it is buying directly from these businesses because the data are unreliable.
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DOD and the military services invest in ground radars and air-to-ground precision guided munitions. Ground radars are ground-based sensor systems used by the Army, Air Force, and Marine Corps to detect and track a variety of targets. These radars perform missions such as air surveillance, air defense, and counterfire target acquisition, among others. Ground radars that can perform multiple missions one at a time are called multi-role radars, and radars that can perform multiple missions simultaneously are called multi-mission radars. We focused on ground radars that perform the following missions, which are notionally depicted in figure 1: Air surveillance--search, detect, and track cruise missiles, fixed and rotary wing aircraft, and unmanned aircraft systems. Air defense--provide radar data that enables other weapon systems, such as air and missile defense or aircraft, to take offensive or defense actions against enemy cruise missiles, fixed and rotary wing aircraft, and unmanned aircraft systems. Counterfire target acquisition--detect and track enemy rockets, artillery, and mortars to determine enemy firing positions and impact areas for incoming fire. The military services have several active ground radar acquisition programs performing air surveillance, air defense, and counterfire target acquisition missions. These programs and their missions are presented in table 1. Appendix II provides additional information on the capabilities of these radar programs. The House Armed Services Committee has previously raised questions about potential overlap in the ground radar area. For example, in 2012, House report 112-479 accompanying the National Defense Authorization Act for Fiscal Year 2013 noted overlap with the Army and Marine Corps ground radar programs' missions and encouraged the Army and Marine Corps to collaborate and identify overlapping requirements and determine if they could procure a single system rather than having each service procuring and maintaining separate systems. Air-to-ground precision guided munitions are weapons launched from Army, Navy, Air Force, and Marine Corps aircraft that are intended to accurately engage and destroy enemy targets on the ground. These munitions include missiles, guided rockets, and laser guided bombs. Precision guided munitions contain a seeker, warhead, and fuze. The seeker detects electromagnetic energy reflected from a target and provides commands to a control system that guides the weapon to the target. Different seekers provide targeting capabilities for different environments, such as for clear weather only or all weather. Some precision-guided munitions are made up of a guidance kit attached to an unguided or "dumb" munition. Munitions are also made up of varying warheads with different capabilities and weights that make them optimized for different types of targets. The military services' active air-to- ground precision guided munitions are presented in table 2. DOD's requirements and acquisition policies contain provisions to help avoid redundancy and consider existing alternatives before starting new acquisition programs. DOD's Joint Capabilities Integration and Development System (JCIDS) guidance states that when validating key requirements documents, the chair of the group responsible for that capability area is also certifying that the proposed requirements and capabilities are not unnecessarily redundant to existing capabilities in the joint force. In some cases, redundancy may be advisable for operational reasons. The validation authority for a requirements document depends on factors such as the potential dollar value of a program, and determines the level of oversight a requirement document receives. The Joint Requirements Oversight Council (JROC) is the validation authority for documents with a "JROC Interest" designation. A military service can be the validation authority for lower level designations. DOD's Instruction 5000.02, which establishes policies for the management of all acquisition programs, requires the military services to complete an analysis of alternatives (AOA) to assess potential materiel solutions, including existing and planned programs, which could satisfy validated capability requirements. DOD's Office of Cost Assessment and Program Evaluation (CAPE) approves study guidance, which provides direction on what the AOA must include, for acquisition category I programs. Under DOD's Interim Instruction 5000.02, which was effective as of November 2013, CAPE also develops and approves study guidance for programs for which the JROC is the validation authority, regardless of It also states that the Milestone the acquisition category of the program. Decision Authority can designate non-major defense acquisition programs as "special interest." A "special interest" program is a program that meets certain criteria, such as being a potential joint acquisition program, and as a result, receives higher level oversight. The Under Secretary of Defense for Acquisition, Logistics, and Technology serves as Milestone Decision Authority for "special interest" programs. Our analysis of DOD's active ground radar programs found evidence of overlapping performance requirements and potential duplication in certain mission areas. However, the JROC and Joint Staff have determined that any redundancies across the programs they reviewed were necessary. The JROC did not review one of the programs in our analysis. The military services pursued separate ground radar acquisition programs for several reasons: other programs did not fully meet their performance requirements; the timelines for other programs did not align with their needs; and they made different decisions on whether to pursue multi-role or single role radars. DOD has taken steps to encourage collaboration in the ground radar area by asking the services to consider joint acquisition programs, developing joint requirements, and requiring the services to include existing radar programs in their AOAs, with mixed success. Based on our analysis of program requirements documents, we found that the Marine Corps' Ground/Air Task Oriented Radar (G/ATOR) Block I and Air Force's Three-Dimensional Expeditionary Long-Range Radar (3DELRR) acquisition programs have some key overlapping requirements and provide similar capabilities in their air surveillance and air defense roles. However, the JROC ultimately determined that any redundancy between requirements was necessary. During the JROC validation process, the proposed performance requirements for the 3DELRR program were reduced in several areas, including range. These reductions brought the 3DELRR requirements closer to the G/ATOR Block I requirements, thus increasing the extent of overlap across the programs' requirements and the risk of potential duplication. In other areas, 3DELRR requirements still exceeded those for G/ATOR Block I. The JROC validated the 3DELRR requirements document in 2013. The JROC approved the latest G/ATOR Block I requirements document in 2012. Lockheed Martin and Northrop Grumman also competed for this contract. Air Force's long-range radar requirements. According to Air Force officials, each of these studies confirmed that no other existing radar could meet all of the 3DELRR requirements, and supported the decision to start a new development program. One of these studies was an AOA update that considered reductions in the 3DELRR range requirements and both studies considered the introduction of a more capable gallium Our review nitride semiconductor technology into the G/ATOR program.of these studies and a related CAPE analysis showed that G/ATOR could be capable of meeting some key 3DELRR performance requirements. In addition, a CAPE official, who reviews radar programs, stated the Air Force could use about 90 percent of the work the Marine Corps has already done to develop G/ATOR for 3DELRR and that additional research and development would primarily be required to develop software for the system. Based on our analysis of program requirements documents, we found that the Army's AN/TPQ-53 Counterfire Radar and the Marine Corps' G/ATOR Block II have some overlapping requirements. Both radar systems detect, track, classify, and locate the origin of enemy projectiles, including mortar, artillery, and rocket systems and are to replace existing Army and Marine Corps Firefinder radars that perform counterfire target acquisition missions. However, while many of the requirements overlap, the AN/TPQ-53 does not meet the G/ATOR Block II detection range requirements for multiple target types. In addition to some unique requirements, urgent operational needs and different acquisition approaches led the Army and Marine Corps to establish separate acquisition programs for counterfire target acquisition radars. The Army's AN/TPQ-53 started in 2006 as an upgrade program to increase the capabilities of existing radar to meet urgent needs that had been identified in overseas operations. According to Army and Marine Corps officials, the Army's timeframes required it to field its new capability before the G/ATOR development program would transition to production. After the Army met its urgent needs with an initial procurement of upgraded radars, the program continued through the traditional or non- urgent needs acquisition process and held a new production decision review in 2012. However, by this point, the Army and the Marine Corps had adopted different acquisition approaches for meeting their ground radar needs. The Army moved from a strategy of developing one multi- mission radar for air surveillance, air defense, and counterfire target acquisition to a strategy of buying the AN/TPQ-53 and upgrading other radars as needed. The Marine Corps, on the other hand, is developing G/ATOR as a multi-role and potentially a multi-mission radar. Despite these different approaches, the Army and Marine Corps have cooperated in certain areas related to these acquisitions. For example, according to Army and Marine Corps officials, the Army and Marine Corps have discussed using common software for the AN/TPQ-53 and G/ATOR Block II counterfire target acquisition capabilities. The JROC did not review whether the capabilities of the Army's AN/TPQ- 53 and the Marine Corps' G/ATOR Block II were unnecessarily redundant or duplicative as part of the requirements validation process. The JROC did not validate the Army's AN/TPQ-53 performance requirements because it was initially an urgent wartime need and did not meet acquisition category I dollar thresholds. However, at the point the JROC could have reviewed the AN/TPQ-53 requirements, the program had transitioned to the more traditional acquisition process. Instead, the Joint Staff delegated the validation authority for the AN/TPQ-53 requirements to the Army, which validated them in 2010. The JROC had previously validated the G/ATOR Block II requirements documents in 2005, prior to the Army starting the AN/TPQ-53 program. Because the Joint Staff delegated the validation authority for the AN/TPQ-53 to the Army, the JROC may have missed an opportunity to review whether the capabilities of the AN/TPQ-53 and G/ATOR Block II were unnecessarily redundant or duplicative, or to encourage additional areas of cooperation between the Army and the Marine Corps. The Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics and CAPE has taken steps to encourage the military services to collaborate on ground radar programs with mixed success. None of the efforts resulted in a joint acquisition program, primarily due to service funding decisions, but they have led to the development of joint requirements and broader analyses of acquisition alternatives. For example: In 2009, the Under Secretary of Defense for Acquisition, Technology, and Logistics designated the Air Force's 3DELRR program and the TPS-59 Product Improvement Program for the Marine Corps' long- range air surveillance radar as special interest programs and encouraged both services to collaborate on a single system that addressed their long-range radar requirements. According to Air Force officials, this resulted in a 3DELRR requirements document that was developed jointly, and which still shares many of the Marine Corps' requirements. The Marine Corps decided to discontinue the TPS-59 Product Improvement Program due to budget constraints, but DOD officials said that 3DELRR may still be able to meet the Marine Corps' needs when it eventually decides to replace the TPS-59 ground radar. In 2009, the Under Secretary of Defense for Acquisition, Technology, and Logistics designated G/ATOR as a special interest program, and directed the Marine Corps to collaborate with the Joint Staff and Army to work towards a joint capability to meet the services' multi-mission radar requirements. The Army later decided not to fund the Multi- Mission Radar and has instead pursued the AN/TPQ-53 radar and other radar upgrades to meet its needs. In 2011, CAPE issued AOA study guidance that required the Air Force to update a prior 3DELRR AOA and consider a broader range of alternatives, including other ground radar systems, such as G/ATOR. Because 3DELRR was proposed to address Air Force and Marine Corps long-range radar requirements, the study guidance required Marine Corps participation in the development and review of the AOA. The AOA concluded that a new radar program was the optimum solution to meet 3DELRR requirements. The Army is looking to upgrade the radar system that supports the Patriot missile system. A CAPE official responsible for reviewing radar programs said that CAPE is working with the Army to develop its AOA study guidance for the radar upgrade effort and asked the Army to include systems, such as 3DELRR and G/ATOR in the analysis. Our analysis of DOD's active air-to-ground precision guided munitions found some munitions shared some capabilities, but after taking into consideration characteristics such as the aircraft that can launch them, we found the systems were not duplicative. To the extent overlapping capabilities exist, DOD officials said these capabilities provided needed flexibility for different military operations. However, there is potential for future duplication in the Army's and Navy's air-to-ground guided rocket acquisitions. While the Army and Navy have similar needs, the services' potential procurement strategies could lead to them procuring the same or very similar systems using different programs and contracts. Based on our analysis of the target sets of DOD's air-to-ground precision guided munitions, the seeker capabilities, the aircraft platforms that can launch them, and cost, we did not find evidence that DOD's capabilities in this area were duplicative. Additionally, none of the DOD or military service requirements and acquisition organizations we spoke to identified unnecessary redundancy or duplication within air-to-ground precision guided munitions. In general, DOD officials described the air-to-ground precision guided munitions area as efficient in terms of the investments DOD has made. Appendix III provides a comparison of air-to-ground precision guided munition air platforms, seeker capabilities, and target sets. Our analysis of DOD's active air-to-ground precision guided munitions found evidence of overlapping target sets among the munitions, but unique factors such as what type of aircraft a munition can be launched from, the munition's seeker capability in varying weather conditions, and the cost of the munition for the desired effect clearly distinguish them from one another. In addition, where some overlap was found, DOD officials explained the overlap was necessary to provide flexibility for military operations. We found three illustrative examples of how platform, seeker capability, and the cost of the munition weigh into how air-to-ground precision guided munitions are used and how their capabilities complement one another: Air-to-ground precision guided munitions are suitable for different types of aircraft platforms, or behave differently when fired from different types of platforms; therefore, the method of delivery, such as from a fixed wing fighter aircraft versus a rotary wing helicopter platform, can be critical to the operation. For example, the Joint Air-to- Ground Missile (JAGM) and the Joint Standoff Weapon (JSOW) are both missiles optimized to hit moving and stationary targets. When JAGM replaces the Hellfire missile, it will, like Hellfire, be capable of launching from rotary helicopters and unmanned aircraft systems, whereas JSOW is a glide weapon with no motor, that must be launched from bomber and fighter aircraft. The JSOW also has a penetrating warhead that allows it to target deeply buried targets. Differing seeker capabilities allow for flexibility in different operating environments. An all weather seeker capability allows a munition to reach its target regardless of weather conditions or other obscurants, such as smoke. For example, the Direct Attack Moving Target Capability was developed to hit moving targets, but it does not have the all weather seeker capability that would allow it to hit all moving targets in all weather conditions. The JAGM and the Small Diameter Bomb II munitions will have the capability to address moving targets in all weather conditions. This all-weather capability requires a more expensive seeker technology. The unit cost of precision guided munitions varies and may be a determining factor in when they are used. For example, the Hellfire II Romeo missile and Advanced Precision Kill Weapon System II (APKWS), which is a guided rocket, both have the ability to hit unarmored and unhardened targets. However, the Hellfire II Romeo costs approximately $93,000 per unit and is optimized to hit armored and hardened targets, whereas the APKWS costs approximately $31,000 per unit and is only optimized for unarmored and unhardened targets. According to DOD officials, while the Hellfire II missile is effective against both armored and unarmored targets, it could be more optimal, depending on the range of the target, to use the smaller and less expensive APKWS system against unarmored targets. One of the reasons for the lack of duplication in air-to-ground precision guided munitions programs is that the military services cooperated on multiple systems and leveraged each other's investments. Three of the seven munitions programs we reviewed are joint development programs between at least two of the military services. In other cases, the military services procured each other's munitions systems. For example, all of the military services procure Hellfire missiles from the Army. There is potential for future overlap or duplication in the Army's and Navy's procurement of air-to-ground guided rockets, which could result in DOD not fully leveraging its buying power. Specifically, both the Army and Navy have validated requirements for air-to-ground guided rockets. The general requirement is for a guidance kit that attaches to the existing family of unguided Hydra-70 rockets. While the Army and Navy have similar needs, the services' current procurement strategies could lead to them procuring the same or very similar systems using different programs and contracts. APKWS is currently the only guided rocket system that has been integrated and fully qualified for use on a DOD platform. Defense contractors have developed other guided rocket systems, and there is at least one other system that the Army is considering to meet its future guided rocket needs. Both the Army and the Navy plan to buy APKWS through fiscal year 2015 to meet their guided rocket needs, but starting in fiscal year 2016, they may pursue separate, potentially duplicative, efforts to meet their requirements. The Army plans to introduce competition for its Hydra-70 rocket guidance kit and consider other qualified systems besides APKWS. DOD acquisition policy and Better Buying Power initiatives to increase the efficiency of defense spending both emphasize the importance of sustaining a competitive environment at every stage in the acquisition process as a means to control and reduce cost.the Army is exploring various options to introduce competition for guided rockets to include an option that requires the Hydra-70 rocket prime contractor to competitively procure guidance kits and fully integrate them with Hydra-70 before delivering complete systems to the Army, which is different than the Navy's current approach. Alternatively, the Army could still jointly buy APKWS with the Navy. The Navy procures APKWS and Hydra-70 separately and integrates the components themselves in order to, among other things, allow for the flexibility to use the different combinations of rocket components based on mission needs. The Navy's current contract for APKWS, which was awarded on a sole source basis, expires in 2016. At that point, the Navy plans to negotiate another sole source contract because it does not believe that introducing competition to APKWS would be worth the investment of integrating and qualifying another Hydra-70 guided rocket on Marine Corps' H-1 helicopters.develop, integrate, and qualify APKWS on the H-1. According to the Army program officials, introducing competition for the Hydra guidance kit could reduce its current cost by as much as one-third. There are costs and benefits associated with both the Army and Navy's acquisition approaches; however, if the Army and Navy fulfill their guided rocket needs separately instead of through a single solution with a cooperative contracting strategy, it could result in the inefficient use of weapon system investment dollars and a loss of buying power. DOD will likely be at some risk for overlap and duplication in its weapon system acquisition programs, given the breadth and magnitude of its investments. While some overlap and duplication may provide necessary redundancy for military operations, in other cases, it is driven by the military services generating unique system requirements that meet similar needs, their authority to independently make resource allocation decisions, and the timing of acquisition programs. The 3DELRR program appears to be a case where the Air Force was focused on what made its requirements unique, instead of looking for ways to leverage the Marine Corps' development program for G/ATOR. We found these programs to be potentially duplicative. DOD currently relies on its requirements and acquisition processes and decision makers to ensure that capabilities and programs are not unnecessarily redundant or duplicative. Its experiences with ground radar programs suggest ways to make these processes more effective in the future. For example, DOD may have missed an opportunity to review whether the capabilities of the Army's AN/TPQ-53 Counterfire Radar and the Marine Corps' G/ATOR Block II were unnecessarily redundant or duplicative because the requirements document for the AN/TPQ-53 was validated by the Army, rather than the JROC, which has a broader perspective on DOD's capability needs. In another case, DOD was better positioned to encourage cooperation for Patriot radar upgrades. Because CAPE had visibility into the program, it was able to shape the Army's AOA to make sure existing radars, such as 3DELRR and G/ATOR, were considered. There may be other opportunities for increased service cooperation to meet future ground radar needs, but, in order for key decision makers such as the JROC, CAPE, and the Under Secretary of Defense for Acquisition, Technology, and Logistics to take advantage of them, it is important for them to have insight into ground radar programs, including upgrade programs and programs that do not meet the dollar thresholds that trigger a "JROC Interest" designation and automatic review. A "JROC Interest" designation provides the JROC the opportunity to review ground radar performance requirements and capabilities for potential duplication and CAPE with the opportunity to develop broad AOA guidance. This type of visibility would put DOD in a better position to take the actions necessary to make the most efficient use of its resources. Unlike the ground radar programs we examined, most of the air-to-ground precision guided munitions programs were already being developed and procured jointly. This cooperation has helped DOD leverage its buying power. As new areas of potential cooperation emerge, the services should look to leverage those opportunities. Specifically, when the Army revalidated its air-to-ground guided rocket requirement, it opened up the possibility of cooperating with the Navy on jointly buying APKWS or holding a competition to find a system that can meet both services' needs when the Navy's current sole source contract expires in 2016. Either option seems preferable to the Army and Navy potentially procuring the same or similar systems to fill the same requirement under different program and contracts, which could lead to duplicative procurement activities in both services and a degradation in buying power. We recommend that DOD take the following two actions: To provide the JROC the opportunity to review all ground radar programs for potential duplication and CAPE with the opportunity to develop broad analysis of alternative guidance, the Vice Chairman of the Joint Chiefs of Staff should direct the Joint Staff to assign all new ground radar capability requirement documents with a Joint Staff designation of "JROC Interest." To address potential overlap or duplication in the acquisition of Hydra- 70 rocket guidance kits, the Under Secretary of Defense for Acquisition, Technology, and Logistics should require the Army and Navy to assess whether a single solution and cooperative, preferably competitive, contracting strategy offers the most cost effective way to meet both services' needs. We provided a draft of this report to DOD for review and comment. In its written comments, which are reprinted in full in appendix IV, DOD partially concurred with our first recommendation and concurred with our second recommendation. DOD also provided technical comments that were incorporated as appropriate. DOD partially concurred with our recommendation to assign all new ground radar capability requirement documents with a Joint Staff designation of "JROC Interest." DOD responded that although it is likely that new ground radar capability would be given the Joint Staffing Designator of "JROC Interest," the "JROC Interest" designation should not be a required designation because it ignores the tiered Joint Staff designation system process. DOD also noted that it would lessen the impact and importance of the Functional Capabilities Boards and their role to ensure minimization of duplication across the portfolio. We acknowledge that the Joint Staff has a process for determining Joint Staff designations and for minimizing duplication across portfolios. However, as we point out in our report, DOD missed an opportunity to review whether the capabilities of the Army's AN/TPQ-53 Counterfire Radar and the Marine Corps' G/ATOR Block II were unnecessarily redundant or duplicative because the requirements document for the AN/TPQ-53 was given a lower-level designation. The way to ensure this does not occur in the future is to make the "JROC Interest" designation mandatory for all new ground radar programs. Hence, we still believe without this designation for all new ground radar programs, the JROC and CAPE may not have the opportunity to review programs that do not meet the dollar threshold for an automatic "JROC Interest" designation and may miss additional opportunities to encourage collaboration across the military services. DOD concurred with our second recommendation to require the Army and Navy to assess whether a single solution and cooperative, preferably competitive, contracting strategy offers the most cost effective way to meet both services' needs if both services continue to pursue the acquisition of Hydra-70 rocket guidance kits. DOD noted that it has a process to consider redundancies across the services' programs, but it was unclear what actions it planned to take to assess if the services could use a single contracting strategy to meet its guided rocket needs. We continue to believe that DOD should assess this option as part of its consideration of potential redundancies. We are sending copies of this report to appropriate congressional committees; the Secretary of Defense; the Under Secretary of Defense for Acquisition, Technology, and Logistics; the Vice Chairman of the Joint Chiefs of Staff; and the Secretaries of the Army, Navy, and Air Force, and the Commandant of the Marine Corps. In addition, this report also is 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) 512-4841 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 V. To determine the extent of potential overlap or duplication across (1) ground radar and (2) air-to-ground precision guided munitions programs, we reviewed acquisition programs currently in development or production, which does not include systems only being developed or produced for foreign military sales. We reviewed and analyzed documentation on system requirements, capabilities, and other distinguishing factors to determine if potential overlap or duplication exists. We interviewed Department of Defense (DOD) officials in the Joint Staff; Offices of the Under Secretary of Defense for Acquisition Technology, and Logistics and Director, Cost Assessment and Program Evaluation; and the Army, Navy, Air Force, and Marine Corps to discuss ground radar and air-to- ground precision guided munition programs as appropriate. We also reviewed DOD analysis and interviewed DOD officials to identify instances in which DOD found potential overlap or duplication during acquisition and requirements reviews and what actions DOD took, if any, in response to any identified potential overlap or duplication. For ground radar programs, we reviewed the mission, acquisition life cycle, and basic system characteristics of the military services' active ground radar programs, to determine which programs may have overlapping or duplicative requirements and capabilities. We focused on ground radar programs used in land operations with primarily air surveillance, air defense, and counterfire target acquisition missions. Our scope included two air surveillance and air defense ground radar systems--the Air Force's Three-Dimensional Expeditionary Long-Range Radar (3DELRR) and the Marine Corps' AN/TPS-80 Ground/Air Task Oriented Radar (G/ATOR) Block I Radar--and two counterfire target acquisition ground radar programs--the Army's AN/TPQ-53 Counterfire Radar and the Marine Corps' AN/TPS-80 G/ATOR Block II. We excluded the Army's AN/TPQ-50, which is in production, from our analysis because unlike the other radar system we reviewed, it is a lightweight, man portable radar. We also excluded Sentinel and Patriot from our analysis because these programs are fielded systems undergoing modification. Within our scope, we compared the common Key Performance Parameters (KPP) and Key System Attributes (KSA) found in the program requirements documents across the radars primarily performing air surveillance and air defense and counterfire target acquisition missions. KPPs are the performance attributes of a system considered critical to the development of an effective military capability. KSAs are the attributes or characteristics considered to be essential, but not critical enough to be designated a KPP. The KPPs and KSAs included range, probability of detection, search volume, reliability, availability, maintainability, and transportability/mobility, as appropriate. For air-to-ground precision guided munitions, we reviewed the type, acquisition life cycle, and select system characteristics of the military services' active air-to-ground precision guided munitions programs, to determine which programs may have overlapping or duplicative requirements and capabilities. We did not review munitions in certain specialized categories, such as anti-ship, anti-radiation, ballistic, or cruise missiles. Our scope included Advanced Precision Kill Weapon System II (APKWS), Direct Attack Moving Target Capability, Hellfire II Romeo variant, Joint Air-to-Ground Missile (JAGM), Joint Standoff Weapon (JSOW) C-1 variant, Maverick Laser variant, and Small Diameter Bomb II. Within our scope, we conducted an analysis comparing the precision guided munitions characteristics that we determined, in consultation with DOD subject matter experts, were most critical to assessing the system's capabilities. Based on information we gathered and corroborated with the military services, we compared munitions' air platforms, unit cost, all weather capability, and target sets: moving and stationary; armored and unarmored; hardened and unhardened. We conducted this performance audit from June 2014 to December 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Description of capabilities Highly mobile ground based radar set that automatically detects, classifies, tracks, and locates the point of origin of projectiles fired from rocket, artillery and mortar systems. The radar provides increased range and accuracy throughout a 90 degree search sector (stare mode) as well as 360 degree coverage (rotating) for locating firing positions. Three-Dimensional Expeditionary Long-Range Radar (3DELRR) Long-range, three-dimensional, ground-based radar for detecting, identifying, tracking, and reporting aerial targets. Responds to operational need to detect and report highly maneuverable, small radar cross section targets to enable battlefield awareness. AN/TPS-80 Ground/Air Task Oriented Radar (G/ATOR) Expeditionary, three-dimensional, high-mobility, short/medium range multi-role radar designed to detect cruise missiles, air breathing targets, rockets, mortars, and artillery. Provides expeditionary, day/night, adverse weather radar coverage and tracks aerial objects. Provides the baseline system for the Marine Corps short and medium range radar requirement. G/ATOR Ground Weapons Locating Radar - Block II Detects indirect fire from rockets, artillery, and mortar systems at greater range and provides greater accuracy, classification and deployability to support counterfire and counter battery missions. The Marine Corps' G/ATOR is a multi-role radar. The Marine Corps is using an incremental approach to fielding G/ATOR capabilities. G/ATOR Block I is to develop the basic hardware for the radar in all of its potential roles. G/ATOR Block II is to be a software upgrade to provide counterfire target acquisition capabilities. JAGM is also expected to be used on unmanned aircraft systems, but this is not a threshold requirement. Michael J. Sullivan, (202) 512-4841 or [email protected]. In addition to the contact named above, the following individuals made key contributions to this report: Ronald E. Schwenn, Assistant Director; Danielle Greene; Laura Holliday; Heather Krause; John Krump; Zina Merritt; Paige Muegenburg; Erin Preston; Sylvia Schatz; Roxanna Sun; Hai Tran; and Oziel Trevino.
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Over the past five years, GAO has found potential overlap or duplication in DOD weapon system investments. Overlap occurs when multiple agencies or programs are engaged in similar activities. Duplication occurs when two or more agencies or programs are engaged in the same activities. Senate Report 113-44 accompanying the fiscal year 2014 National Defense Authorization Act mandated that GAO examine the military services' ground radar and air-to-ground precision guided munitions programs for potential duplication. Ground radars are sensors used to detect and track targets, and precision guided munitions are weapons intended to accurately engage and destroy enemy targets. This report examines the extent to which potential overlap or duplication exists across the military services' (1) ground radar and (2) air-to-ground precision guided munitions programs. GAO analyzed program documentation on system performance requirements and capabilities and interviewed DOD officials about potential duplication. Several of the Department of Defense's (DOD) active ground radar programs have overlapping performance requirements and two are potentially duplicative. In these instances, the military service pursued separate acquisition programs because other programs did not fully meet their performance requirements, among other reasons. Specifically, GAO found: The Marine Corps' Ground/Air Task Oriented Radar (G/ATOR) Block I and the Air Force's Three-Dimensional Expeditionary Long-Range Radar (3DELRR) have some overlapping key requirements, such as range, and are potentially duplicative. The Joint Requirements Oversight Council (JROC), which validates requirements for DOD's largest acquisition programs, did not find unnecessary redundancy, and Air Force officials stated that G/ATOR could not meet all of the 3DELRR's requirements. The Army's AN/TPQ-53 Counterfire Radar and the Marine Corps' G/ATOR Block II have some overlapping requirements, but the AN/TPQ-53 does not meet certain key G/ATOR Block II requirements, therefore reducing the risk that the programs are duplicative. In this case, urgent operational needs and different acquisition approaches also led the Army and Marine Corps to establish separate acquisition programs. As a result of reviews conducted by the JROC and DOD's Office of Cost Assessment and Program Evaluation (CAPE), which develops guidance for analyzing alternative ways to fulfill capability needs, the Air Force made positive changes to the 3DELRR program, such as reducing some requirements to improve program affordability. CAPE also expanded the alternatives considered on acquisition programs to minimize potential duplication. DOD missed an opportunity to assess whether the capabilities of the AN/TPQ-53 and G/ATOR Block II were unnecessarily redundant. The JROC did not review the AN/TPQ-53 requirements because it was initially fielded to meet an urgent need and did not meet the dollar threshold to automatically trigger a review. However, the AN/TPQ-53 transitioned to the traditional, non-urgent needs acquisition process at which point the JROC could have reviewed it. Ensuring that the JROC and CAPE review new ground radar acquisitions could help DOD avoid duplication. DOD's active air-to-ground precision guided munitions programs are not duplicative, but potential for duplication exists in the future. The active programs share some capabilities, but characteristics such as the aircraft that can launch them distinguish them from one another. To the extent that overlapping capabilities exist, DOD officials said these capabilities provided needed flexibility for military operations. Cooperation among the military services contributed to the current lack of duplication. GAO found one example of potential future duplication. Both the Army and the Navy plan to buy the Advanced Precision Kill Weapon System through fiscal year 2015 to meet their guided rocket needs, but starting in fiscal year 2016, they may pursue separate, potentially duplicative, efforts. There are costs and benefits associated with both the Army and Navy's acquisition approaches; however, if the Army and Navy fulfill their guided rocket needs separately instead of cooperatively, it could result in the inefficient use of weapon system investment dollars and a loss of buying power. To address potential duplication, GAO recommends that DOD ensure that new ground radar acquisitions are reviewed by the JROC and CAPE and require the Army and Navy to jointly assess the possibility of using a single solution and a cooperative, preferably competitive, contracting strategy to meet their guided rocket needs. DOD partially agreed with GAO's first recommendation, but stated it should not be mandatory. GAO believes the recommendation remains valid as discussed in its report. DOD agreed with the second recommendation.
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Interior's ongoing reorganization of bureaus with oil and gas functions will require time and resources, and undertaking such an endeavor while continuing to meet ongoing responsibilities may pose new challenges. Interior has begun implementing its restructuring effort, transferring offshore oversight responsibilities to the newly created BOEMRE and revenue collection to ONRR. Interior plans to continue restructuring BOEMRE to establish two additional separate bureaus--the Bureau of Ocean Energy Management, which will focus on leasing and environmental reviews, and the Bureau of Safety and Environmental Enforcement, which will focus on permitting and inspection functions. While this reorganization may eventually lead to more effective operations, we have reported that organizational transformations are not simple endeavors and require the concentrated efforts of both leaders and employees to realize intended synergies and accomplish new organizational goals. In that report, we stated that for effective organizational transformation, top leaders must balance continued delivery of services with transformational activities. Given that as of December 2010 Interior had not implemented many recommendations we made to address numerous weaknesses and challenges, we are concerned about Interior's ability to undertake this reorganization while (1) providing reasonable assurance that billions of dollars of revenues owed to the public are being properly assessed and collected and (2) maintaining focus on its oil and gas oversight responsibilities. We have reported that Interior has experienced several challenges in meeting its obligations to make federal oil and gas resources available for leasing and development while simultaneously meeting its responsibilities for managing public lands for other uses, including wildlife habitat, recreation, and wilderness. In January 2010, we reported that while BLM requires oil and gas operators to reclaim the land they disturb and post a bond to help ensure they do so, not all operators perform such reclamation. In general, the goal is to plug the well and reclaim the site so that it matches the surrounding natural environment to the extent possible, allowing the land to be used for purposes other than oil and gas production, such as wildlife habitat. If the bond is not sufficient to cover well plugging and surface reclamation, and there are no responsible or liable parties, the well is considered "orphaned," and BLM uses federal dollars to fund reclamation. For fiscal years 1988 through 2009, BLM spent about $3.8 million to reclaim 295 orphaned wells, and BLM has identified another 144 wells yet to be reclaimed. In addition, in a July 2010 report on federal oil and gas lease sale decisions in the Mountain West, we found that the extent to which BLM tracked and made available to the public information related to protests filed during the leasing process varied by state and was generally limited in scope. We also found that stakeholders--including environmental and hunting interests, and state and local governments protesting BLM lease offerings--wanted additional time to participate in the leasing process and more information from BLM about its leasing decisions. Moreover, we found that BLM had been unable to manage an increased workload associated with public protests and had missed deadlines for issuing leases. In May 2010, the Secretary of the Interior announced several departmentwide leasing reforms that are to take place at BLM that may address these concerns, such as providing additional public review and comment opportunity during the leasing process. Further, in March 2010, we reported that Interior faced challenges in ensuring consistent implementation of environmental requirements, both within and across MMS's regional offices, leaving it vulnerable with regard to litigation and allegations of scientific misconduct. We recommended that Interior develop comprehensive environmental guidance materials for MMS staff. Interior concurred with this recommendation and is currently developing such guidance. Finally, in September 2009, we reported that BLM's use of categorical exclusions under Section 390 of the Energy Policy Act of 2005--which authorized BLM, for certain oil and gas activities, to approve projects without preparing new environmental analyses that would normally be required in accordance with the National Environmental Policy Act--was frequently out of compliance with the law and BLM's internal guidance. As a result, we recommended that BLM take steps to improve the implementation of Section 390 categorical exclusions through clarification of its guidance, standardizing decision documents, and increasing oversight. Since 2009, BLM has taken steps to address our recommendations, but it has not yet completed implementing all of our recommendations. We have reported that BLM and MMS have encountered persistent problems in hiring, training, and retaining sufficient staff to meet Interior's oversight and management responsibilities for oil and gas operations on federal lands and waters. For example, in March 2010, we reported that BLM and MMS experienced high turnover rates in key oil and gas inspection and engineering positions responsible for production verification activities. As a result, Interior faces challenges meeting its responsibilities to oversee oil and gas development on federal leases, potentially placing both the environment and royalties at risk. We made a number of recommendations to address these issues. While Interior's reorganization of MMS includes plans to hire additional staff with expertise in oil and gas inspections and engineering, these plans have not been fully implemented, and it remains unclear whether Interior will be fully successful in hiring, training, and retaining these additional staff. Moreover, the human capital issues we identified with BLM's management of onshore oil and gas continue, and these issues have not yet been addressed in Interior's reorganization plans. Federal oil and gas resources generate billions of dollars annually in revenues that are shared among federal, state, and tribal governments; however, 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 deep water of the U.S. Gulf of Mexico than all but 11 of 104 oil and gas resource owners whose revenue collection systems were evaluated in a comprehensive industry study--these resource owners included other countries as well as some states. However, despite significant changes in the oil and gas industry over the past several decades, we found that Interior had not systematically re-examined how the U.S. government is compensated for extraction of oil and gas for over 25 years. GAO recommended Interior conduct a comprehensive review of the federal oil and gas 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 system for collecting oil and gas revenue. More recently, in response to our recommendation, Interior has commissioned a study that will include such a reassessment, which, according to Interior officials, the department expects will be complete in 2011. The results of the study may reveal the potential for greater revenues to the federal government. We also reported in March 2010 that Interior was not taking the steps needed to ensure that oil and gas produced from federal lands was accurately measured. For example, we found that neither BLM nor MMS had consistently met their agency goals for oil and gas production verification inspections. Without such verification, Interior cannot provide reasonable assurance that the public is collecting its share of revenue from oil and gas development on federal lands and waters. As a result of this work, we identified 19 recommendations for specific improvements to oversight of production verification activities. Interior generally agreed with our recommendations and has begun implementing some of them. Additionally, we reported in October 2010 that Interior's data likely underestimated the amount of natural gas produced on federal leases, because some unquantified amount of gas is released directly to the atmosphere (vented) or is burned (flared). This vented and flared gas contributes to greenhouse gases and represents lost royalties. 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 initial steps to implement these recommendations. Furthermore, we reported in July 2009 on numerous problems with Interior's efforts to collect data on oil and gas produced on federal lands, 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 Interior's lack of consistent and reliable data on the production and sale of oil and gas from federal lands, 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 is working to implement many of them, but these efforts are not complete, and it is uncertain at this time if the efforts will fully address our concerns. In October 2008, we reported that Interior could do more do encourage the development of existing oil and gas leases and proposed a recommendation. Our review of Interior oil and gas leasing data from 1987 through 2006 found that the number of leases issued had generally increased toward the end of this period but that offshore and onshore leasing had followed different historical patterns. Offshore leases issued peaked in 1988 and in 1997 and generally rose from 1999 through 2006. Onshore leases issued peaked in 1988, then rapidly declined until about 1992, and remained at a consistently low level until about 2003, when they began to increase moderately. We also analyzed 55,000 offshore and onshore leases issued from 1987 through 1996 to determine how development occurred on leases that had expired or been extended beyond their primary terms. Our analysis identified three key findings. First, a majority of leases expired without being drilled or reaching production. Second, shorter leases were generally developed more quickly than longer leases but not necessarily at comparable rates. Third, a substantial percentage of leases were drilled after the initial primary term following a lease extension or suspension. We also compared Interior's efforts to encourage development of federal oil and gas leases to states' and private landowners' efforts. We found that Interior does less to encourage development of federal leases than some states and private landowners. Federal leases contain one provision-- increasing rental rates over time for offshore 5-year leases and onshore leases--to encourage development. In addition to using increasing rental rates, some states undertake additional efforts to encourage lessees to develop oil and gas leases more quickly, including shorter lease terms and graduated royalty rates--royalty rates that rise over the life of the lease. In addition, compared to limited federal efforts, some states do more to structure leases to reflect the likelihood of oil and gas production, which may also encourage faster development. Based on the limited information available on private leases, private landowners also use tools similar to states to encourage development. Accordingly, we recommended that the Secretary of the Interior develop a strategy to evaluate options to encourage faster development of oil and gas leases on federal lands. Recently, Interior has stated its intent to pursue legislation establishing a per acre fee on non-producing leases to encourage development of federal leases. In conclusion, Interior's oversight of federal oil and gas resources is in transition. Our past work has found a wide range of material weaknesses in Interior's oversight of federal oil and gas resources. These findings and related recommendations were the results of years of intensive evaluation of how Interior oversaw the oil and gas development functions. While Interior may shift responsibilities around, many of these weaknesses remain key challenges to address as Interior works through the implementation of its reorganization. For the reorganization to be most effective, it is important that Interior remains focused on efforts to implement our past recommendations and incorporate them into the new oversight bureaus. We remain hopeful that the structural changes made to Interior's bureaus, coupled with a concerted effort to implement the many recommendations we have made should provide greater assurance of effective oversight of federal oil and gas resources. Chairman Issa, Ranking Member Cummings, and Members of the Committee, this concludes our prepared statement. We would be pleased to answer any questions that you or other Members of the Committee may have at this time. For further information on this statement, please contact Frank Rusco at (202) 512-3841 or [email protected]. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. Other staff that made key contributions to this testimony include, Glenn C. Fischer, Jon Ludwigson, Kristen Massey, Alison O'Neill, Kiki Theodoropoulos, 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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The Department of the Interior oversees oil and gas activities on leased federal lands and waters. Revenue generated from federal oil and gas production is one of the largest nontax sources of federal government funds, accounting for about $9 billion in fiscal year 2009. Since the April 2010 explosion on board the Deepwater Horizon, Interior has been in the midst of restructuring the bureaus that oversee oil and gas development. Specifically, Interior's Bureau of Land Management (BLM) oversees onshore federal oil and gas activities; the Bureau of Ocean Energy Management, Regulation, and Enforcement (BOEMRE)--created in May 2010--oversees offshore oil and gas activities; and the newly established Office of Natural Resources Revenue (ONRR) is responsible for collecting royalties on oil and gas produced from both onshore and offshore federal leases. Prior to BOEMRE, the Minerals Management Service's (MMS) Offshore Energy and Minerals Management Office oversaw offshore oil and gas activities and revenue collection. In 2011, GAO identified Interior's management of oil and gas resources as a high risk issue. GAO's work in this area identified challenges in five areas: (1) reorganization, (2) balancing responsibilities, (3) human capital, (4) revenue collection, and (5) development of existing leases. Reorganization: Interior's reorganization of activities previously overseen by MMS, which Interior expects to be completed in October 2011, will require time and resources and may pose new challenges. While this reorganization may eventually lead to more effective operations, GAO has reported that organizational transformations are not simple endeavors. GAO is concerned with Interior's ability to undertake this reorganization while meeting its revenue collection and oil and gas oversight responsibilities. Balancing Responsibilities: GAO has reported that Interior has experienced several challenges with meeting its responsibilities for providing for the development of oil and gas resources while managing public lands for other uses, including wildlife habitat. For example, in September 2009, GAO reported that BLM's use of categorical exclusions under Section 390 of the Energy Policy Act of 2005 was frequently out of compliance with the law and BLM's internal guidance. As a result, GAO recommended that BLM take steps to improve the implementation of Section 390. BLM has taken steps to address these recommendations, but it has not yet implemented all of them. Human Capital: GAO has reported that BLM and MMS have encountered persistent problems in hiring, training, and retaining sufficient staff to meet their oversight and management responsibilities for oil and gas operations. For example, in March 2010, GAO reported that BLM and MMS experienced high turnover rates in key oil and gas inspection and engineering positions responsible for production verification activities. As a result, Interior faces challenges meeting its responsibilities to oversee oil and gas development on federal leases, potentially placing both the environment and royalties at risk. Revenue Collection: While federal oil and gas resources generate billions of dollars in annual revenues, past GAO work has found that Interior may not be properly assessing and collecting these 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 whose revenue collection systems were evaluated in a comprehensive industry study. As GAO recommended, Interior is undertaking a comprehensive assessment of its revenue collection policies and processes--the first in over 25 years. Interior expects to complete this study later this year. Development of Existing Leases: In October 2008, GAO reported that Interior could do more to encourage the development of existing oil and gas leases. Federal leases contain one provision--increasing rental rates over time for offshore 5-year leases and onshore leases--to encourage development. In addition to escalating rental rates, states undertake additional efforts to encourage lessees to develop oil and gas leases more quickly, including shorter lease terms and graduated royalty rates. Recently, Interior has stated its intent to pursue legislation establishing a per acre fee on non-producing leases to encourage development of federal leases.
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Chief Acquisition Officers provide a focal point for acquisition in agency operations. The SARA legislation requires that CAOs: be noncareer employees; have acquisition management as their primary duty; and have the agency's Senior Procurement Executive (SPE) report directly to them without intervening authority, or serve as both CAO and SPE. The SARA legislation outlined seven acquisition management functions CAOs are expected to perform within their agencies. Subsequent to the enactment of SARA, governmentwide directives and guidance have assigned CAOs responsibility for additional functions, such as internal control reviews of the acquisition function under OMB Circular A-123 and ensuring the quality of federal procurement data. The key functions of the CAO we reviewed are listed below; additional information on these functions is also available in appendix II: monitoring and evaluating agency acquisition activities; increasing the use of full and open competition; increasing performance-based contracting; making acquisition decisions; managing agency acquisition policy; acquisition career management; acquisition resources planning; and conducting acquisition assessments under OMB Circular A-123. The SARA legislation also established a Chief Acquisition Officers Council that is chaired by OMB's Deputy Director for Management, and whose activities are led by the OFPP Administrator.principal interagency forum for monitoring and improving the federal acquisition system. Its activities include developing recommendations for the Director of OMB on acquisition policies and requirements; sharing best practices; and helping to address the hiring, training, and professional development needs of the acquisition workforce. Our prior work has emphasized the need for strong, effective leadership and the appropriate placement of the acquisition function within agencies among many key factors needed in order to facilitate efficient, effective, and accountable acquisition processes. Clear, strong, and ethical executive leadership, including a CAO, is key to obtaining and maintaining organizational support for executing the acquisition function. Most of the agencies required to appoint a CAO spend a substantial amount of funding each year through contracts to acquire goods and services in support of their missions, as shown below in table 1. Yet, acquisition management challenges persist among many of these agencies. Among the 16 agencies, 11 had acquisition-related issues identified as a major management challenge by their respective Inspector General (IG) in its most recent report on agency management challenges. Additionally, our high-risk list includes a number of areas related to acquisition management. GAO, Framework for Assessing the Acquisition Function at Federal Agencies, GAO-05-218G (Washington, D.C.: Sept. 2005). The agencies within the scope of our review generally have established CAOs in a way that satisfies two of three key aspects of the legislation. The CAOs in place at these agencies are generally political appointees situated at top levels in their organization, and at most agencies, the Senior Procurement Executive reports directly to the CAO. However, very few agency CAOs have acquisition management as their primary duty, the third key requirement of the SARA legislation. Most of these CAOs have other significant management responsibilities within their agencies, such as serving as the Chief Financial Officer (CFO). Additionally, some CAOs and acquisition officials said it was a challenge in determining how to fill the position within their agency, because the SARA legislation did not provide an additional leadership slot specifically for the CAO position. Tenure in the CAO position also has been relatively short, as the average CAO tenure was about 2 years, and several agencies have had frequent turnover in CAOs. As shown below in figure 1, most agency CAOs are political appointees and have the Senior Procurement Executives report directly to them, but few have acquisition management as their primary duty. Twelve of the 16 agencies had a permanent CAO in place at the time we administered our questionnaire. Three agencies (Education, Department of Veterans Affairs (VA) and Department of Housing and Urban Development (HUD)) had an acting CAO, and the position was vacant at Energy, which is currently relying on the Senior Procurement Executive as its lead acquisition official. All 12 permanent CAOs were political appointees, and 1 of the 3 acting CAOs was a political appointee. At 13 agencies, the Senior Procurement Executive reports directly to the Chief Acquisition Officer without intervening authority. The Senior Procurement Executive does not report directly to the CAO at 2 agencies--HHS and NASA. Officials at these agencies told us there is an informal reporting relationship between the two positions. HHS also noted that despite the indirect organizational relationship between the two positions, the CAO and Senior Procurement Executive communicate frequently on the department's acquisition policies, priorities, and programs. Only 3 of the CAOs in place during our review (DHS, GSA, and VA) reported that acquisition management was their primary duty, another requirement of the SARA legislation. When asked to estimate the amount of time spent on their CAO duties relative to their other responsibilities, the average among the 14 agencies that provided a response was about 27 percent. Furthermore, only 3 of the 12 permanent CAOs in place during our review had prior experience in acquisition or procurement prior to serving as CAO. Although SARA does not require the CAO to have a background in acquisition, this is one of many factors that could affect the CAO's success in the position. As shown below in table 2, almost all of the CAOs in our review had additional management responsibilities and few had an official title of Chief Acquisition Officer. For example, at the Departments of State, Agriculture, and Commerce, the Assistant Secretary for Administration serves as the CAO. These officials' additional areas of responsibility, among other things, include financial management, information management, equal employment opportunity, and emergency preparedness. Although acquisition management is supposed to be a CAO's primary duty, several CAOs we met with told us that having responsibility for additional management functions was not a detriment and often helped them positively influence acquisition management across their agency: At half of the 16 agencies, the Chief Acquisition Officer also serves in at least one additional "Chief" officer position. Similar to the SARA legislation, the legislation that created the Chief Human Capital Officer (CHCO) and Chief Information Officer (CIO) positions required that those respective functions be the primary duty of each position. We have raised concerns in prior work about those positions having additional significant responsibilities and whether an individual serving in these positions can deal effectively with an agency's management challenges. Although this could be a concern with respect to CAOs who do not have acquisition management as their primary duty, the Office of Federal Procurement Policy noted that an agency's Senior Procurement Executive provides high-level attention to the management of the acquisition function. Some CAOs and acquisition officials also pointed out that the SARA legislation did not provide agencies an additional position specifically for the CAO, which created a challenge for agencies to determine how to fill the CAO position. For example, the NASA CAO noted in her questionnaire response that the agency has a low allocation of politically appointed positions. As a result, NASA gave the CAO duties to the CFO. NASA's CAO stated that because the agency spends such a large amount of its budget through obligations on contracts, her role as the CFO is closely connected with her additional role as the CAO to effectively conduct acquisition management at NASA. Furthermore, the NASA CAO thought that having these two functions integrated was a positive aspect of her current position and helped her be an effective CAO, as opposed to having acquisition operate in a separate stovepipe. The CAO at Commerce emphasized the positive aspects of the agency's organizational structure and approach to implementation of the CAO position. At Commerce, one individual serves in a number of roles that includes the CFO, CHCO, and Chief Performance Officer as well as the CAO. The CAO noted that this structure gave him the ability to integrate planning, budgeting, risk management, human resources, as well as acquisition to achieve the agency's mission. As the individual who ties these functional areas together, he indicated he has the authority to get other groups within Commerce to work together. The Commerce CAO also stated that while he oversees the department's budget as the CFO, he uses his CAO role to look at whether components have demonstrated a sound acquisition management approach in evaluating their budget requests. He also stated that if he were only the agency CAO he would not have as much authority in other functional areas to effectively manage the agency's acquisition function. Likewise, the CAO at DHS said that he has oversight of many different management functions such as finance, budgeting, human resources, as well as acquisition. While this arrangement may appear to be in conflict with the statutory requirement that acquisition management be the CAO's primary duty, he stated that having a larger area of responsibility gives him a fuller view of the entire acquisition cycle from requirements development and contract funding to service delivery. As a result, he reports that he spends a majority of his time on acquisition management issues because integrating the different management functions has a positive impact on the CAO's ability to effectively manage acquisitions across DHS. While the SARA legislation does not specify where CAOs should be located within their agency's organization, as shown below in figure 2, we found that almost all of the 16 CAOs were positioned at their agency's top management levels, reporting to either to the agency head or to an official one level removed from the agency head. The CAO at Energy reports to the Director of the Office of Management, who is more than one level removed from the agency head. The location of CAOs at high levels within their agencies may be by virtue of their official titles described above in table 2 rather than being specifically related to the CAO position. Nevertheless, several CAOs and acquisition officials we met with stressed the value of the CAO position in having access to agency leadership and other peers in ensuring that acquisition issues are being considered at top levels within the agency. Fourteen CAOs reported that they had at least sufficient access to their agency head, and that the CAO position was appropriately located for ensuring proper authority over their agency's acquisition activities. Acquisition officials at the Department of Energy, where the CAO position has been vacant for several years, and whose questionnaire response noted that the CAO had neither sufficient nor insufficient access to the agency head, said that it would have been helpful to have a political appointee in the CAO role who could have high level interactions with agency leadership, better communicate acquisition related issues, and build effective working relationships with the CFO, CIO, and other senior agency officials. Additionally, acquisition officials with the Department of the Interior noted that as a political appointee, the CAO can work closely with other assistant secretaries in the department as well as with peers at other agencies and OMB. They added that with the CAO placed at the assistant secretary level, the position can be more focused on strategic decisions, and can make final decisions on how resources will be deployed to achieve goals. Similarly, the HHS CAO said that by virtue of her position, she is able to interact as a peer with the leaders of the agency's operating divisions and communicate the acquisition priorities of the agency and administration. She added that being CAO affords her a "seat at the table" to discuss acquisition issues when the agency is making mission decisions. Twelve of the agencies have had a CAO serving in a permanent capacity more than two-thirds of the time since enactment of SARA, as shown below in figure 3. Education and VA have had a CAO serving in a permanent capacity less than 50 percent of the time. The remaining time the CAO position has been vacant or held by an official in an acting capacity. Despite most agencies' ability to fill the position with a permanent CAO, turnover in the CAO position varied among agencies, as evidenced by the number of acting and permanent CAOs in place since SARA's enactment. Half of the agencies have had four or fewer CAOs in place, while other agencies have had higher turnover in the CAO position. For example, GSA and Treasury have each had nine CAOs in place since creation of the CAO requirement. The high turnover at GSA and Treasury equate to an average tenure for each CAO of about 10 months at GSA and about 11 months at Treasury since late 2003. In contrast, Commerce and HHS have had only two CAOs over the same timeframe, with an average CAO tenure at each agency of more than 3.5 years. Since enactment of SARA, the average tenure of permanent CAOs has been 2.1 years. This is fairly consistent with a recent GAO review that found an average tenure of about 2.6 years for CIOs at 30 federal departments and agencies. While short tenures in the CAO position may be expected given the political nature of the position, this may work against an individual CAO's ability to effectively implement needed changes in the acquisition function or new acquisition initiatives: Our prior work has noted that it can take 5 to 7 years to fully implement major change initiatives in large public and private sector organizations and to transform cultures in a sustainable manner, yet frequent turnover of political leadership in the federal government can make it difficult to obtain sustained attention to make needed changes. Among the 76 permanent and acting CAOs that have been in place since the enactment of SARA, only 3 served in the position for 5 years or more. CAOs reported they have differing levels of involvement in the management of their agency's acquisition activities. For example, most CAOs indicated they were extremely or very involved in managing acquisition policy, but only somewhat or not at all involved in making acquisition decisions or conducting acquisition assessments. Generally, CAOs saw their role as providing high-level oversight of the acquisition function as opposed to day-to-day management, for which they typically relied on the Senior Procurement Executive and other senior procurement officials. Many CAOs told us that the amount of their involvement is related to several factors, such as the nature of goods and services that the agency buys and the extent the agency has a centralized or decentralized acquisition function. For example, in some agencies, CAOs are less involved because agency units and bureaus operate more autonomously with respect to acquisition management. Our review of acquisition regulations and policies found that the roles and responsibilities of the CAO position are not described in detail across all the 16 agencies within the scope of our review. Without clearly defined roles and responsibilities within each federal agency, it will be challenging for these agencies to more permanently institutionalize the CAO position within their organizational structure and realize the benefits from the added attention it brings to acquisition management. The SARA legislation broadly outlined acquisition management functions for CAOs and left it up to each agency how to implement them. Overall, CAOs reported varying levels of involvement in the various acquisition management functions we reviewed, as shown below in figure 4: CAOs reported being most involved in managing the direction of acquisition policy and least involved in two activities--making acquisition decisions and conducting assessments of the acquisition function under OMB Circular A-123. Only three CAOs (Agriculture, Labor, and DHS) reported being extremely or very involved in all eight acquisition management functions. In contrast, officials at four agencies (Education, Energy, HUD, and State) who were either serving as the acting CAO, recently appointed as the new permanent CAO, or serving as the senior procurement official while the CAO position was vacant, reported being somewhat or not at all involved in seven or more of the acquisition management functions. Many CAOs see their role as providing high-level acquisition oversight rather than the day-to-day acquisition management that is more typically provided by other career procurement officials such as the Senior Procurement Executive and heads of contracting activities. As shown below in figure 5, a majority of CAOs reported that they delegate day-to- day responsibility for all eight CAO acquisition management functions to the Senior Procurement Executive and/or other senior procurement officials such as heads of contracting activities and competition advocates. The SARA legislation does not preclude CAOs from delegating these functions, and it is not surprising that there is a high degree of delegation given that CAOs have other significant management responsibilities and few had extensive prior experience in acquisition management. Several CAOs we met with stated that they delegated acquisition management functions to others to ensure that these duties are performed by highly experienced procurement officials. Additionally, they could focus on other acquisition issues such as program management and rely on the agencies' acquisition professionals to manage the agency's contract award process and acquisition workforce. For example, the DHS CAO reported delegating seven of the eight CAO acquisition management functions to the Senior Procurement Executive and others, and said that he must take a larger view of the acquisition function that includes program management while the Senior Procurement Executive is more focused on the contract award process and management of contracting officers and contracting specialists. CAOs' delegation of their responsibilities may also be expected given the roles of other agency officials in acquisition management. The Senior Procurement Executive position had been in place at federal agencies for many years before the CAO position was established. This position is typically filled by a career employee who is responsible for the management direction of the agency's procurement system, including implementation of agency unique procurement policies, regulations, and standards. In addition, while increasing the use of full and open competition is one of the CAO responsibilities outlined in SARA, each executive agency is also required to designate a competition advocate who is responsible for promoting full and open competition, among other things. Similarly, CAOs are responsible for acquisition career management, but the Office of Federal Procurement Policy also requires civilian executive agencies to designate an acquisition career manager who is responsible for, among other things, managing the development and identification of the acquisition workforce and providing input regarding short term and long term human capital strategic planning for the acquisition workforce. CAOs we spoke with stated there is no "one-size fits all" solution for how best to structure the CAO position and integrate the acquisition management responsibilities outlined by SARA. Many CAOs emphasized that the level of acquisition management oversight they provide is based upon several factors, which include the nature of the goods and services that the agency buys and the amount of decentralization in the agency's acquisition function. For example, the CAO at HHS said that she is very involved in acquisition policy issues but the oversight of day-to-day acquisition management issues is handled by other officials because much of what HHS buys through contracts is done to support their operating divisions rather than acquisitions of major systems. The CAOs at both HHS and Interior reported that their agencies have a decentralized acquisition management structure where heads of operating divisions and bureaus execute most acquisition authority within their two agencies. HHS also stated that although the CAO does not approve acquisition decisions, acquisition management is achieved through the CAO's roles in financial management, performance measurement, and acquisition and grants policy and accountability. In comparison, several CAOs at other agencies play a greater role in the acquisition process. These agencies also tended to have major acquisition programs and projects. The CAO at DHS reported having approval authority for individual acquisitions and since assuming the position in 2010 has revised the acquisition oversight structure. The CAO stated that these changes in the oversight structure at DHS are intended to decrease acquisition program risk and provide better insight into budget, schedule and performance information for approximately 135 major acquisition programs for which the CAO serves as the Acquisition Decision Authority. CAOs at other agencies who said they are more involved in acquisition management also reported having some form of decision authority over certain acquisitions. For example, the CAO at Commerce serves as co-chair of the agency's Investment Reviews, which provide oversight, review, and advice to the Secretary and Deputy Secretary on both information technology (IT) and non-IT investments that meet certain criteria. This advice includes recommendations for approval or disapproval of funding for new systems and investments, or major modifications to existing systems or investments. Similarly, at the Department of Labor, a Procurement Review Board recommends to the CAO approval or disapproval of various acquisition decisions that meet certain thresholds or conditions and serves as a senior-level clearinghouse to review proposed noncompetitive acquisitions. At many agencies, the CAO position was not clearly defined in documents that would form the basis for more permanently institutionalizing the CAO within their organizational leadership structure. Clearly defined roles and responsibilities for each stakeholder in the acquisition process is a key element of an effective acquisition function, as outlined in GAO's framework for assessing the acquisition function within federal agencies. We found that the amount of detail on a CAO's agency-specific authorities and responsibilities varies greatly based on the agency's Federal Acquisition Regulation (FAR) supplement and other policy documentation we collected. As shown in table 3, at some agencies, the CAO position is described in detail while for others the only information about the CAO's authorities and acquisition management responsibilities under SARA is a passing reference to the legislation that established the position. For example, the CAO position is defined or designated in FAR supplements or acquisition manuals by just 6 of the agencies. Detail on the CAO's specific acquisition management responsibilities was listed in other policy documentation for only 6 of the agencies. At 7 agencies, the CAO position is not defined in their FAR Supplement or acquisition manual, nor are the acquisition management responsibilities listed in other policy documentation. Additionally, we found that agencies varied in how their acquisition policy guidance delegates authority for procurement matters with respect to the CAO. At half of the agencies, authority for procurement matters is delegated from the agency head through the CAO position to other agency officials. In contrast, at the other 8 agencies, this authority is delegated from the agency head directly to other agency officials such as the Senior Procurement Executive and/or bureau heads, bypassing the CAO. This may be due to agencies neglecting to update their acquisition policies and regulations since creation of the CAO position or to reflect a more recent organizational change. For example, the GSA Organizational Manual still refers to an Office of the CAO that reports to the Administrator, which, according to the CAO in place during our review, did not reflect the organizational reporting structure in the agency. This lack of fully defined CAO roles and responsibilities, and at some agencies, outdated policies, may be an obstacle to ensuring that the CAO position is more permanently institutionalized within the agencies' acquisition management and senior leadership structures. CAOs at the 16 agencies generally did not report facing significant challenges related to the CAO position, such as the level of influence they have in their agency's acquisition process, amount of control over acquisition budget resources, and access to agency leadership. However, most CAOs reported that not having enough staff to manage acquisitions was moderately to extremely challenging. As GAO and others have reported in recent years, the capacity and capability of the federal government's acquisition workforce to oversee and manage contracts has been a challenge. Most CAOs did not believe any changes were needed to improve their effectiveness and also felt that they had the appropriate degree of authority to effectively fulfill their acquisition management functions. We asked agency CAOs to indicate how much six management and resource issues that we identified challenged them in carrying out their responsibilities. As shown below in figure 6, CAOs generally answered that most areas we identified were not challenges for them. No CAOs reported being very or extremely challenged by their employment status (career official versus political appointee) in fulfilling their acquisition management functions or in having sufficient access to agency leadership. The CAOs at DHS, HHS, and State reported five of these areas as being not at all challenging. In contrast, the CAO at GSA and the career acquisition official at Energy reported being moderately to extremely challenged in most of the areas. Despite the lack of challenges reported by CAOs related to most areas, 11 CAOs reported the sufficiency of staff to manage acquisitions as a moderate to extreme challenge. These responses echo concerns from our prior work that the capacity and the capability of the federal government's acquisition workforce to oversee and manage contracts have not kept pace with increased spending for increasingly complex purchases. Additionally, 6 of the 16 agencies' IGs have identified the acquisition workforce as a source of serious management challenge in their most recent management challenge reports issued during 2011. However, none of the CAOs at these 6 agencies reported the sufficiency of acquisition staff as extremely or very challenging. When asked if any other changes were needed to improve their effectiveness, 10 out of 16 CAOs reported that no changes were needed. Six CAOs did provide some suggestions. For example, Energy's response to our questionnaire stated that the CAO position needs improved resource support and full engagement with the agency's senior leadership team. At EPA, the CAO responded that it would be helpful if there were a better understanding of the contracting process by agency management. The GSA CAO, who left the position during our review, believed that returning the CAO position to a direct report to the GSA Administrator would improve the position's effectiveness at her agency. Following the completion of our CAO questionnaire, GSA appointed an Acting CAO who reports to the Acting GSA Administrator. CAOs at Transportation, Interior, and HUD reported that more budgetary resources and acquisition workforce staff are needed to improve their effectiveness. Despite these responses and other issues raised in our report, almost all the CAOs believed that they had the appropriate authority to fulfill their acquisition management responsibilities. More than 8 years after the enactment of the SARA legislation, there is wide variation in how agencies have implemented the CAO position. On one hand, agencies have generally filled the CAO position with political appointees who sit at relatively high levels within their agencies in a position to ensure that acquisition is receiving attention from agency leadership. Many CAOs and acquisition officials we met with cited this as a key benefit of the CAO position. On the other hand, there are inconsistencies in the implementation of the law across agencies, with very few CAOs having acquisition management as their primary responsibility, although many CAOs cited the benefits to integrating acquisition management with their additional responsibilities. The CAO position is only one factor of many in an efficient, effective, and accountable acquisition function in agencies. Having an experienced Senior Procurement Executive is another. There is no one-size-fits-all approach to how to organize an effective acquisition function, and a CAO's role should be suited to the nature and volume of an agency's acquisition activities. Yet, agencies should ensure that they are maximizing their chances for success by having CAOs that are in a position to influence agency leadership and serve as a strong advocate for acquisition management, which includes having clearly defined roles and responsibilities for the CAO. Not all agencies have these, however, and may be missing an opportunity to ensure that the CAO position is fully institutionalized within agencies' acquisition management and senior leadership structures. Given CAOs' short tenures, a lack of defined roles and responsibilities could hinder a CAO's ability to maximize time in the position and serve as an effective advocate for acquisition management. To strengthen the functions of CAOs in acquisition management, we recommend that the Administrator of the Office of Federal Procurement Policy, working with the CAO Council, issue guidance to agencies directing them to ensure that CAO roles and responsibilities are more clearly defined in accordance with law and regulations, tailored to suit the agency's acquisition activities, and documented as appropriate. We sent copies of a draft of this report to OMB and the 16 agencies within the scope of our review. OMB's Office of Federal Procurement Policy provided comments via e-mail, in which it concurred with our recommendation. The office also suggested that the report further highlight the role of the Senior Procurement Executive in providing day-to- day leadership of an agency's acquisition function. We considered this suggestion and made changes to the report as appropriate. We received communications from each of the 16 agencies, with 15 providing no substantive comments. HHS provided additional information on the roles and responsibilities of the CAO, which we incorporated into the draft. HHS's written comments are reproduced in appendix III. We are sending copies of this report to other interested congressional committees, the Director of the Office of Management and Budget, and the Secretaries of Agriculture, Commerce, Education, Energy, Health and Human Services, Homeland Security, Housing and Urban Development, the Interior, Labor, State, Transportation, the Treasury, and Veterans Affairs; the administrators of the Environmental Protection Agency and the National Aeronautics and Space Administration, and the Acting Administrator of General Services. In addition, this report will 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 are on the last page of this report. Key contributors to this report are listed in appendix IV. Our objectives were to assess: (1) how agencies have filled the Chief Acquisition Officer (CAO) position; (2) the extent to which CAOs are involved in performing the acquisition management functions set forth in the Services Acquisition Reform Act of 2003 (SARA) legislation and Office of Management and Budget (OMB) guidance, and (3) what challenges, if any, agency CAOs report in fulfilling their responsibilities for acquisition management. Our review did not assess the effectiveness of individual CAOs or individual agencies' acquisition functions. To address our objectives, we reviewed the SARA legislation and directives from OMB's Office of Federal Procurement Policy to identify the key roles and responsibilities of the CAO position. We also reviewed previous GAO work on assessing the acquisition function and the implementation of other chief officer positions in the federal government. To learn more about CAOs' characteristics, as well as CAOs' involvement in acquisition management functions and challenges faced in fulfilling their responsibilities, we developed and administered a questionnaire by e-mail in an attached Microsoft Word form to the 16 civilian agencies within the scope of our review. We pretested the questionnaire to ensure that the questions were relevant, clearly stated, and easy to understand. We also solicited comments on the draft questionnaire from members of the Chief Acquisition Officers Council. The questionnaire requested information on, among other things, the CAOs' reporting relationships, involvement in acquisition management functions within the agency, the extent to which the CAO had delegated their acquisition management responsibilities to other officials, and challenges identified by GAO that CAOs may have experienced in fulfilling their responsibilities. We sent the questionnaire to agencies in November 2011. All questionnaires were returned by March 2012. We received responses from all 16 agencies, though not all agencies provided responses to each question. To provide additional information on CAOs' characteristics, involvement in acquisition management functions and challenges faced, as well as to corroborate information provided in the questionnaire responses, we collected and reviewed agencies' organizational charts that showed the CAO's position relative to the head of the agency and other senior officials; letters of delegation or other documents that formally designate the appointment of the CAO, the CAO's resume or curriculum vitae describing their qualifications and experience related to the CAO position; applicable policies, guidance, position descriptions or functional statements for both the CAO and Senior Procurement Executive positions; applicable policies or orders that delegate the CAO's responsibilities to other acquisition officials; agency acquisition function assessments performed under OMB Circular A-123; Acquisition Human Capital Plans or similar documents; agency strategic plans and performance reports; agency-specific acquisition regulations and acquisition manuals; and descriptions of acquisition metrics or performance measures the agency tracks. We also asked each agency to supply the name, time in office, and circumstances (whether they were in an acting or permanent position and whether they were a career employee or political appointee) of each of the individuals who had served as agency CAO and Senior Procurement Executive since enactment of the SARA legislation in November 2003. To complement information gathered through the questionnaire and agency documentation, we conducted follow-up interviews to discuss the CAO's roles and responsibilities with CAOs and acquisition officials at seven agencies: Commerce, Department of Homeland Security (DHS), Department of Health and Human Services (HHS), Interior, Energy, GSA, and the National Aeronautics and Space Administration (NASA). We used a nongeneralizable sample of agencies based upon the following criteria: review of the questionnaire responses, the amount of procurement spending as a portion of the agency's fiscal year 2010 budget, and whether the agency's Inspector General had identified acquisition-related issues as a major management challenge. We also met with officials from OMB's Office of Federal Procurement Policy to discuss the roles and responsibilities of agency CAOs. We conducted this performance audit from October 2011 to July 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Description Monitoring the performance of acquisition activities and acquisition programs of the executive agency, evaluating the performance of those programs on the basis of applicable performance measurements, and advising the head of the executive agency regarding the appropriate business strategy to achieve the mission of the executive agency Increasing the use of full and open competition in the acquisition of property and services by the executive agency by establishing policies, procedures, and practices that ensure that the executive agency receives a sufficient number of sealed bids or competitive proposals from responsible sources to fulfill the Government's requirements at the lowest cost or best value considering the nature of the property or service procured. Increasing appropriate use of performance-based contracting and performance specifications Making acquisition decisions consistent with all applicable laws and establishing clear lines of authority, accountability, and responsibility for acquisition decision-making within the executive agency Managing the direction of acquisition policy for the executive agency, including implementation of the unique acquisition policies, regulations, and standards of the executive agency Developing and maintaining an acquisition career management program in the executive agency to ensure that there is an adequate professional workforce As part of the strategic planning and performance evaluation process, assessing the requirements established for agency personnel regarding knowledge and skill in acquisition resources management and the adequacy of such requirements for facilitating the achievement of the performance goals established for acquisition management; developing strategies and specific plans for hiring, training and professional development to rectify any deficiency in meeting such requirements; and reporting to the head of the executive agency on the progress made in improving acquisition management capability. In addition to the contact named above, John Oppenheim (Assistant Director); Matthew Drerup; Kristine Hassinger; Lauren Heft; Jean McSween; Roxanna Sun; and Robert Swierczek made key contributions to this report.
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Federal agencies spent more than half a trillion dollars in fiscal year 2011 through contracts to acquire goods and services in support of their missions, but have historically faced significant acquisition management challenges preventing them from getting the best return on their investments. The SARA legislation requires 16 federal civilian agencies to appoint a Chief Acquisition Officer to advise and assist agency leadership to help ensure that the agency's mission is achieved through the management of its acquisition activities. GAO was asked to examine: (1) how agencies have filled the CAO position; (2) the extent to which CAOs are involved in performing the acquisition management functions set forth in the SARA legislation and Office of Management and Budget (OMB) guidance; and (3) what challenges, if any, agency CAOs report in fulfilling their responsibilities. GAO administered a questionnaire to 16 CAOs, reviewed documentation on CAOs' roles and responsibilities, organizational placement, and backgrounds, and interviewed a number of CAOs and other acquisition officials. Most agencies have appointed Chief Acquisition Officers (CAO) in accordancewith two of the three key requirements in the Services Acquisition Reform Act of2003 (SARA): that the CAOs be political appointees and have agency SeniorProcurement Executives report directly to them. However, few CAOs haveacquisition management as their primary duty; other areas of responsibilityincluded financial, information, and human capital management. Several CAOs noted that their additional responsibilities were not a detriment. Rather, they believe that performing multiple roles helps them positively influence acquisition management across their agencies. For example, the CAO at the Department of Commerce stated that his additional responsibilities gave him the ability to integrate planning, budgeting, risk management, human resources, and acquisition to achieve the agency's mission. CAOs reported varying levels of involvement in the acquisition management functions for which they are responsible. Generally, CAOs see their role as providing high-level oversight of the acquisition function as opposed to day-today management, which they typically delegated to the Senior Procurement Executive or other officials as permitted by the legislation. Many CAOs said that the amount of their involvement is related to several factors, such as the nature of goods and services that the agency buys and whether the agency has a centralized or decentralized acquisition function. Having clearly defined roles and responsibilities of stakeholders in the acquisition process is a key element of an effective acquisition function. Yet at many agencies, the statutory roles and responsibilities of the CAO position are not described in detail in acquisition regulations, policies, or other documentation. These agencies may be missing an opportunity to fully institutionalize the CAO position within their senior leadership structures. CAOs at the 16 agencies generally did not report facing significant challenges related to the CAO position, such as the level of influence they have in their agency's acquisition process, amount of control over acquisition budget resources, and access to agency leadership. Consistent with our prior work on the acquisition workforce, however, most CAOs reported that not having enough staff to manage acquisitions was moderately to extremely challenging. GAO recommends that the Administrator of OMB's Office of Federal Procurement Policy work with the CAO Council to issue guidance directing agencies to more clearly define CAOs' roles and responsibilities. The Administrator agreed with the recommendation.
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DI and SSI are the two largest federal programs providing cash assistance to people with disabilities. Established in 1956, DI provides monthly payments to workers with disabilities (and their dependents or survivors) under the age of 65 who have enough work experience to be qualified for disability benefits. Created in 1972, SSI is a means-tested income assistance program that provides monthly payments to adults or children who are blind or who have other disabilities and whose income and assets fall bellow a certain level. To be considered eligible for either program as an adult, a person must be unable to perform any substantial gainful activity by reason of a medically determinable physical or mental impairment that is expected to result in death or that has lasted or can be expected to last for a continuous period of at least 12 months. Work activity is generally considered substantial and gainful if the person's earnings exceed a particular level established by statute and regulations.In calendar year 2001, about 6.1 million working age individuals (age 18- 64) received about $59.6 billion in DI benefits, and about 3.8 million working-age individuals received about $19 billion in SSI federal benefits. To obtain disability benefits, a claimant must file an application at any of SSA's offices or other designated places. If the claimant meets the nonmedical eligibility criteria, the field office staff forwards the claim to the appropriate state DDS office. DDS staff--generally a team comprised of disability examiners and medical consultants--review medical and other evidence provided by the claimant, obtaining additional evidence as needed to assess whether the claimant satisfies the program requirements, and make the initial disability determination. If the claimant is not satisfied with the DDS determination, the claimant may request a reconsideration within the same DDS. Another DDS team will review the documentation in the case file, as well as any new evidence the claimant may submit, and determine whether the claimant meets SSA's definition of disability. In 2001, the DDSs made 2.1 million initial disability determinations and over 514,000 reconsiderations. If the claimant is not satisfied with the reconsideration, the claimant may request a hearing by an ALJ. Within SSA's OHA, there are approximately 1,100 ALJs who are located in 140 hearing offices across the country. The ALJ conducts a new review of the claimant's file, including any additional evidence the claimant submitted since the DDS decision. The ALJ may also hear testimony from medical or vocational experts and the claimant regarding the claimant's medical condition and ability to work. The hearings are recorded, and claimants are usually represented at these hearings. In fiscal year 2001, ALJs made over 347,000 disability decisions. SSA is required to administer its disability programs in a fair and unbiased manner. However, in our 1992 report, we found that, among ALJ decisions at the hearings level, the racial difference in allowance rates was larger than at the DDS level and did not appear to be related to severity or type of impairment, age or other demographic characteristics, appeal rate, or attorney representation. We recommended, and SSA agreed, to further investigate the reasons for the racial differences at the hearings level and act to correct or prevent any unwarranted disparities. Following our report, SSA undertook an extensive effort to study racial disparities in ALJ decisions at the hearings level, but weaknesses in available documentation preclude conclusions from being drawn. The study involved 4 years of data collection, outside consultants, and many staff who collected and analyzed data from over 15,000 case files. Although the results were not published, SSA officials told us that their statistical analyses of these data revealed no evidence of racial disparities. On the basis of our review of SSA's internal working papers and other available information, we identified several weaknesses in sampling and statistical methods. Presently, SSA has no further plans to study racial disparities but, if it did, its ability to do so would likely be hampered by data limitations. In response to our 1992 report, SSA initiated a study of racial disparities at the ALJ level that involved several components of the agency. SSA obtained help in designing and conducting the study from staff in its Office of Quality Assurance and Performance Assessment; the Office of Research, Evaluation and Statistics; and the Office of Hearings and Appeals. SSA also created a new division within the Office of Quality Assurance--the Division of Disability Hearings Quality--to spearhead the collection of data needed to study racial disparities and to oversee ongoing quality assurance reviews of ALJ decisions. Data collection for this study was a large and lengthy effort. In order to construct a representative sample of cases to determine whether race significantly influenced disability decisions, SSA selected a random sample each month from the universe of ALJ decisions, stratifying by race, region, and decisional outcome (allowance or denial). This sample of over 65,000 cases was drawn over a 4-year period--from 1992 to 1996. Then, for each ALJ decision that was selected to be in the sample, SSA requested the case file and a recording of the hearing proceedings from hearing offices and storage facilities across the country. Obtaining this documentation was complicated by the fact that files were stored in different locations, depending on whether the case involved an SSI or DI claim, and whether the ALJ decision was an allowance or denial. In addition to obtaining files and tapes, the data collection effort included a systematic review of each case--the results of which SSA used, in part, for its analysis of racial disparities. Specifically, each case used in the analysis received three reviews: a peer review by an ALJ, a medical evaluation performed by one or more medical consultants (depending on the number and type of impairments alleged by the claimant), and a general review of the documentation and decisions by a disability examiner. In total, a panel of 10 to 12 ALJs, whose composition changed every 4 months, worked full-time to review cases. In addition, over a 4-year period, 37 to 55 staff, including disability examiners, worked full- time reviewing case files that were used for this study. Ultimately, about 15,000 cases received all three reviews necessary for inclusion in this study. During and after the 4-year data collection effort, SSA worked with consultants to analyze the data in order to determine the effect of race on ALJ decisions. SSA used descriptive statistics to show that overall application and allowance rates of African Americans differed from whites. In addition, SSA used multivariate analyses to examine the effect of race on ALJ decisions while controlling for other factors that influence decisions. One of SSA's consultants--a law professor and recognized expert in disability issues--reviewed SSA's analytical approach and evaluated initial results. In his report to SSA, this consultant expressed overall approval of SSA's data collection methods, but made several recommendations on how the analysis could be improved--some of which SSA incorporated into later versions of its analysis. SSA subsequently hired two consulting statisticians to review later versions of the analysis. These statisticians expressed concerns about SSA's methods and offered several suggestions. According to SSA officials, these suggestions were not incorporated into the analysis because they were perceived to be labor intensive and SSA was not sure the effort would result in more definitive conclusions. According to SSA officials, the agency's final analysis of the data revealed no evidence of racial disparities, but the results were considered to be not definitive enough to warrant publication. Specifically, SSA officials told us that, by 1998, they found no evidence that race significantly affected ALJ decisions for any of the regions. However, these officials also told us that, due to general limitations of statistical analysis, especially as applied to such complex processes as ALJ decision making, they believed that they could not definitively conclude that no racial bias existed. Given the complexity of the results and the topic's sensitive nature, SSA officials told us the agency decided not to publish the conclusions of this study. From our review of SSA's internal working papers pertaining to the study, and information provided verbally by SSA officials, we identified several weaknesses in SSA's study of racial disparities. These weaknesses include: using a potentially nonrepresentative final sample of cases in their multivariate analyses, performing only limited analyses to test the representativeness of the final sample, and using certain statistical techniques that could lead to inaccurate or misleading results. Although SSA started with an appropriate sampling design, its final sample included only a small percentage of the case files in its initial sample in part because staff were unable to obtain many of the associated case files or hearing tapes. SSA was not able to obtain many files and tapes because they were missing (i.e., lost or misplaced) or they were in use and were not made available for the study. For example, according to SSA officials, files for cases involving appeals of ALJ decisions to SSA's Appeals Council--about half of ALJ denials--were in use and, therefore, excluded from the study. In addition, SSA officials told us that, due to resource constraints, not all of the obtained files underwent all three reviews, which were necessary for inclusion in SSA's analysis of racial disparities. In the end, less than one-fourth of the cases that were selected to be in the initial sample were actually included in SSA's final sample. With less than one-fourth of the sampled cases included in the final sample, SSA took steps to determine whether the final sample of cases was still representative of all ALJ decisions. While the investigation SSA undertook revealed no clear differences between cases that were and were not included in the final sample, we found no evidence that SSA performed certain analyses that could have provided more assurance of the sample's representativeness. For example, SSA made some basic comparisons between claimants who were included in the final sample and those that were in the initial sample but not the final sample. SSA's results indicate that these two groups were fairly similar in key characteristics such as racial composition, years of education, and years of work experience. However, we found no indication in the documentation provided to us that SSA tested whether slight differences between the two groups were or were not statistically significant. Further, we found no indication that SSA compared the allowance rates of these two groups. This is an important test because, in order to be statistically representative, claimants in the final sample should not have had significantly different allowance rates from claimants who were not included in the final sample. In addition, although children were not included in SSA's analysis of racial disparities, SSA's tests to determine the representativeness of the final sample included children in one group and excluded children from the other. By including children in one of the comparison groups, SSA could not assess whether characteristics of the adults in the two groups were similar. Another weakness, as documented in internal working papers available for our review, was the inclusion of certain variables in the multivariate analyses of ALJ decisions, which could lead to biased results. SSA guidelines clearly define the information that should be considered in the ALJ decision, and SSA appropriately included many variables that capture this information in its multivariate analysis. However, SSA also included several variables developed during the review process that reflected the reviewer's evaluation of the hearing proceedings. For example, SSA included a variable that assessed whether the ALJ, in the hearing decision, appropriately documented the basis for his or her decision in the case file. This variable did not influence the ALJ's decision, but evaluated the ALJ's compliance with SSA procedures and should not have been included in the multivariate analysis. This and other variables that reflected a posthearing evaluation of ALJ decisions were included in SSA's multivariate analysis. If these variables are associated with race or somehow reflect racial bias in ALJ decision making, including such variables in multivariate analysis will reduce the explanatory power of race as a variable in that analysis. For example, if a model includes a variable that may reflect racial bias--such as one that indicates the reviewer believed that the original ALJ decision was unfair or not supported--then that variable, rather than the race of the claimant, could show up as a significant factor in the model. The statisticians hired by SSA as outside consultants also expressed concern about the inclusion of these variables in SSA's analyses. Finally, in its internal working papers, SSA used a statistical technique-- stepwise regression--that was not appropriate given the characteristics of its analysis. Specifically, SSA researchers first identified a set of variables for potential use in their multivariate analysis--variables drawn mostly from data developed during the case file review process. Then, to select the final set of variables, SSA used stepwise regression. Stepwise regression is an iterative computational technique that determines which variables should be included in an analysis by systematically eliminating variables from the starting variable set that are not statistically significant. Using the results from this analysis, SSA constructed a different model for each of SSA's 10 regions, which were used in SSA's multivariate analysis to test whether African Americans were treated differently than whites in each region. Stepwise regression may be appropriate to use when there is no existing theory on which to build a model. However, social science standards hold that when there is existing theory, stepwise regression is not an appropriate way to choose variables. In the case of SSA's study, statutes, regulations, rulings and SSA guidance establish the factors that ALJs should consider in determining eligibility, and thus indicate which variables should be included in a model. By using the results of stepwise regression, SSA's regional models included variables that were statistically significant but reflected the reviewer's evaluation of the hearing proceedings--which an ALJ would not consider in a hearing--and therefore were not appropriate. As mentioned earlier, including these variables may have reduced the explanatory power of other variables-- such as race; this, in conjunction with the use of stepwise regression, may explain why race did not show up as statistically significant in the regional models. Had SSA chosen the variables for its model on the basis of theory and its own guidelines, race may have been statistically significant. The statisticians hired by SSA as consultants also noted this as a concern. According to an SSA official, the analysts directly responsible for or involved in the study conducted other analyses that were not reflected in the documentation currently available and provided to us. For example, this SSA official told us that the analysts involved in the study would have tested the statistical significance of slight differences between the cases included and not included in the final sample. This official also said that the analysts used multiple techniques in addition to stepwise regression-- and ran the models with and without variables that reflected posthearing evaluations--and still found no evidence of racial bias. However, due to the lack of available documentation, we were unable to review these analyses or corroborate that they were performed. Since the conclusion of its study of racial disparities, SSA no longer analyzes race as part of its ongoing quality review of ALJ decisions, and SSA officials told us they have no plans to do so in the future. SSA still samples and reviews ALJ decisions for quality assurance purposes. However, since 1997, SSA no longer stratifies ALJ decisions by race before identifying a random sample of cases--a practice that had helped to ensure that SSA had a sufficient number of cases in each region to analyze decisions by race. Although the dataset used for SSA's ongoing quality assurance review of ALJ decisions still includes information on race, SSA no longer analyzes these data to identify patterns of racial disparities. Even if SSA decided to resume its analysis of racial disparities in ALJ decisions, it would encounter two difficulties. First, SSA collects files for only about 50 percent of sampled cases in its ongoing review of ALJ decisions for quality assurance purposes, such that its final samples may be nonrepresentative of the universe of ALJ decisions. SSA uses this review data to produce annual and biennial reports on ALJ decision making. Data in these reports are also used to calculate the accuracy of ALJ decisions--a key performance indicator used in SSA's 2000-03 performance plans pursuant to the Government Performance and Results Act. The reasons for obtaining only half of the files are the same, potentially biasing reasons as for the racial disparities study--files are either missing or not made available if the cases are in use for appeals or pending decisions. However, SSA's annual and biennial reports do not cite the number or percentage of case files not obtained for specific reasons. In addition, SSA officials told us that they do not conduct ongoing analyses to test the representativeness of samples used for quality assurance purposes, and SSA's annual and biennial reports do not address whether the final sample used for quality assurance purposes and for calculating the performance indicator for ALJ accuracy is representative of the universe of ALJ decisions. In addition to not obtaining about 50 percent of the case files, SSA officials told us that medical consultants and disability examiners only review a portion of cases for which a file was obtained due to limited resources. Second, future analyses of racial disparities at either the DDS or hearings level is becoming increasingly problematic because, since 1990, SSA no longer systematically collects race data as part of its process in assigning Social Security Numbers (SSN). For many years, SSA has requested information on race and ethnicity from individuals who complete a form to request a Social Security card. Although this process is still in place, since 1990 SSA has been assigning SSNs to newborns through its Enumeration at Birth (EAB) program, and SSA does not collect race data through the EAB program. Under current procedures, SSA is unlikely to subsequently obtain information on race or ethnicity for individuals assigned SSNs at birth unless those individuals apply for a new or replacement SSN (due to change in name or lost card). As of 1998, SSA did not have data on race or ethnicity for 42 percent of SSI beneficiaries under the age of 9. As future generations obtain their SSNs through the EAB program, this number is likely to increase. Concurrent with SSA's study of racial disparities, SSA's Office of Hearings and Appeals took several steps to address possible racial bias in disability decision making at the hearings level. These steps included providing diversity training, increasing recruitment efforts for minority ALJs, and administering a new complaint process for the hearings level to help ensure fair and impartial hearings. The complaint process was intended, in part, to help identify patterns of possible racial and ethnic bias and other misconduct; however, this process lacks mechanisms to help OHA easily identify patterns of possible racial or ethnic bias for further investigation or corrective action. SSA's OHA adopted a mandatory diversity sensitivity program in 1992. All of SSA's incumbent ALJs were required to attend a 2- or 1-1/2-day course immediately after its development. In addition, the course (now 1 day in length) is included in a 3-week orientation for newly hired ALJs. The course was designed and is conducted by an outside contractor. The course addresses topics such as cultural diversity, geographic diversity, unconscious bias, and gender dynamics through a series of exercises designed to help the ALJs understand how their thought processes, beliefs, and past experiences with people influence their decision-making process. OHA also increased its efforts to recruit minorities for ALJ and other legal positions, although the impact of these efforts on the racial/ethnic mix of SSA's ALJ workforce has been limited. According to OHA officials, OHA has attended conferences held by several minority bar organizations, to raise awareness about the opportunities available at SSA to become an ALJ. In addition to having information booths and distributing information on legal careers at OHA, OHA presented a workshop called "How to Become an Administrative Law Judge at OHA," at each conference. Despite these efforts, there have not been significant changes in the racial/ethnic profile of SSA ALJs. In addition to these efforts, in 1993 SSA instituted a complaint process under the direction of OHA that provides claimants and their representatives with a new mechanism for voicing complaints specifically about bias or misconduct by ALJs. The ALJ complaint process supplements and is coordinated with the normal appeals process. All SSA claimants have the right to appeal the ALJ decision to the Appeals Council and, in doing so, may allege unfair treatment or misconduct. According to OHA officials, the vast majority of allegations of unfair hearings are submitted by claimants or their representatives in connection with a request for Appeals Council review. Under the 1993 process, claimants or their representatives may also file a complaint at any SSA office, send it by mail, or call it into SSA's 800 number service. Any complaints where there is a request for Appeals Council review are referred to the Appeals Council for its consideration as part of its normal review. For complaints where the complainant did not request an Appeals Council review, the complaint is reviewed by the appropriate Regional Chief ALJ, and the findings are reported to the Chief ALJ. Regardless of how the complaint was filed or which office reviewed the complaint, OHA's Special Counsel Staff is notified of all claims and any findings from either the Appeals Council or the Regional Chief ALJ. On the basis of these findings, OHA may decide to take remedial actions against the ALJ, such as a counseling letter, additional training, mentoring or monitoring, an official reprimand, or some other adverse action. OHA's Special Counsel Staff may also decide to conduct a further investigation. Regardless of which office handles the complaint, OHA acknowledges the receipt of each complaint in writing, notifies the complainant that there will be a review or investigation (unless to do so would disrupt a pending hearing or decision), and notifies the complainant concerning the results of the investigation. Officials from the Special Counsel Staff told us OHA receives about 700 to 1,000 complaints (out of 400,000 to 500,000 hearings) per year. About 90 percent of these are notifications from the Appeals Council that involve an allegation of bias or misconduct. Officials from the Special Counsel Staff also said that few complaints are related to race. For example, officials noted that, in response to a special request, Special Counsel Staff reviewed all 372 complaints filed during the first 6 months of 2001, and found that only 19 (5.1 percent) were in some way related to race. While the ALJ complaint process provides a mechanism for claimants to allege discrimination, it lacks useful mechanisms for detecting patterns of possible racial discrimination. In SSA's public notice on the creation of this process, it was stated that SSA's Special Counsel would "collect and analyze data concerning the complaints, which will assist in the detection of recurring incidences of bias or misconduct and patterns of improper behavior which may require further review and action." However, OHA's methods of collecting, documenting, and filing complaints make this difficult to do. For example, in its instructions to the public, SSA directs complainants to describe, in their own words, how they believe they were treated unfairly. This flexible format for filing complaints may make it difficult for OHA to readily identify a claim alleging racial bias. In contrast, SSA's Office of General Counsel's complaint form specifically asks complainants to categorize their claim as being related to such factors as race or sex. Similarly, OHA does not use a standardized internal cover-sheet to summarize key aspects of the review, such as whether the complaint involved racial or some other type of bias or misconduct, and whether the complaint had merit and what action, if any, was taken. The lack of a cover-sheet makes it difficult to quickly identify patterns of allegations involving race that have merit. In order to determine whether patterns exist, OHA staff would have to reread each complaint. Additionally, OHA staff do not record key information about complaints-- such as the nature of the complaint--in an electronic database so that patterns of bias can be easily identified. OHA's Special Counsel Staff files complaints and related documents manually, and in chronological order by hearing office. According to OHA officials, this filing system was developed in 1993 when the process was created and complaint workloads were much lower. Today, SSA receives and reviews 700 to 1,000 complaints a year. In order to identify patterns of bias, Special Counsel Staff must not only reread each file, it must tabulate patterns by hand--a time-consuming process that it does not perform on a routine basis. Finally, OHA does not currently obtain demographic information (such as race, ethnicity, and sex) on complainants, which are important in identifying patterns of bias. These data are important for identifying patterns of possible racial bias because complainants--aware only of their own circumstances and lacking a basis for comparison--may not specifically allege racial bias when they file a complaint about unfair treatment. Without demographic data, it is impossible to discern whether certain types of allegations are disproportionately reported by one race (or sex) and whether further investigative or corrective action is warranted. Although SSA is currently obtaining less race data in its process of assigning SSNs, OHA staff could still obtain data on race and sex for most complainants from the agency's administrative data. The steps SSA has taken over the last decade have not appreciably improved the agency's understanding of whether or not, or to what extent, racial bias exists in its disability decision-making process. SSA's attempt to study racial disparities was a step in the right direction, but methodological weaknesses evident in SSA's remaining working papers prevent our concluding, as SSA did, that there is no evidence of racial bias in ALJ decision making. SSA does not have an ongoing effort to demonstrate the race neutrality of its disability programs. Moreover, the continuing methodological weaknesses in SSA's ongoing quality assurance reviews of ALJ decisions hamper not only its ability to ensure the accuracy of those reviews but also its ability to conduct future studies to help ensure the race neutrality of its programs. Furthermore, in the longer term, SSA's ability to analyze racial differences in its decision making will diminish due to a lack of data on race and ethnicity. Finally, SSA's complaint process for ALJs lacks mechanisms--such as summaries of key information on each complaint, an electronic filing system, and information on the race and ethnicity of complainants--that could help identify patterns of possible bias. SSA is not legally required to collect and monitor data to identify patterns of racial disparities, although doing so would help SSA to demonstrate the race neutrality of its programs and, if a pattern of racial bias is detected, develop a plan of action. To address shortcomings in SSA's ongoing quality assurance process for ALJs--which would improve SSA's assessment of ALJ decision-making accuracy--we recommend the agency take the following steps: conduct ongoing analyses to assess the representativeness of the sample used in its quality assurance review of ALJ decisions, including testing the statistical significance of differences in key characteristics of the cases included in the final sample with those that were not obtained; include the results of this analysis in SSA's annual and biennial reports on ALJ decision making; and use the results to make appropriate changes, if needed, to its data collection or sampling design to ensure a representative sample. To more readily identify patterns of misconduct, including racial bias, in complaints against ALJs, we also recommend that SSA's Office of Hearing and Appeals: adopt a form or some other method for summarizing key information on each ALJ complaint, including type of allegation; use internal, administrative data, where available, to identify and document the race and/or ethnicity of complainants; and place the complaint information in an electronic format, periodically analyze this information and report the results to the Commissioner, and develop action plans, if needed. We provided a draft of this report to SSA for comment. SSA concurred fully with our recommendations and agreed to take steps to implement them. In its general comments, SSA expressed concern that the title of the report might foster the perception that its disability decision making, particularly at the OHA level, is suspect. Although we believe the draft report's title accurately reflected the report's content and recommendations, we have modified the title to ensure clarity. SSA also cited a number of reasons for the low percentage of cases included in its final sample, as well as steps it took to ensure the representativeness of its final sample. Nevertheless, we continue to believe that SSA could have performed additional analyses to provide more assurance of the sample's representativeness. SSA also provided technical comments and clarifications, which we incorporated in the report, as appropriate. SSA's general comments and our response are printed in appendix I. We are sending copies of this report to the Social Security Administration, appropriate congressional committees, and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please call me or Carol Dawn Petersen, Assistant Director, at (202) 512-7215. Staff acknowledgments are listed in appendix II. 1. Although we believe the draft report's title accurately reflected the content of our report and recommendations, we have modified the title to ensure clarity. This report and its recommendations are not restricted to a discussion of only two races. Although we referred to race and ethnicity in the second objective and the conclusion section of the draft reviewed by Social Security Administration (SSA), we added the word "ethnicity" to the recommendations and the body of the report to further clarify this issue. 2. We added language to a note in the report regarding the litigation SSA mentions and that SSA has increased the number of Regional Chief Administrative Law Judges (ALJs) who are members of a racial minority group from 1 to 3 since 1992. 3. We agree with SSA that the low proportion of cases included in the final sample is due to several factors. In our report, we cited several reasons for cases not being included in the final sample that are significant in terms of the number of affected cases and that we believe have the potential for being nonrandom in nature. On the basis of a subsequent discussion with SSA officials, we added a note in our report that a small proportion of cases were excluded because they were later identified as being cases that were not intended to be included in the sample. 4. Although SSA noted that it used "holdout samples and cross modeling" to ensure that the group of cases sampled for this study was essentially free of sampling bias, SSA officials explained to us that these techniques were not used to test for the representativeness of the final sample. 5. We agree with SSA that, with large sample sizes, even small differences generally are statistically significant, and that such statistically significant differences are not always substantively significant. We do not believe, however, that a large sample is sufficient reason to forego significance tests. Moreover, our report cited additional analyses that SSA could have performed to provide more assurance of the sample's representativeness. Another approach that we do not cite in the report--but which SSA may wish to consider--is multivariate analysis of nonresponse. SSA performed bivariate comparisons of samples to determine whether they contained different proportions of cases with various characteristics. However, two samples can have very similar percentages of, for example, women and African Americans, but be very different with respect to the percentage of African American women. In contrast, multivariate analysis would allow SSA to look systematically and rigorously at different characteristics simultaneously. In addition to those named above, the following individuals made significant contributions to this report: Erin Godtland, Michele Grgich, Stephen Langley, and Ann T. Walker, Education, Workforce and Income Security Issues; Doug Sloane and Shana Wallace, Applied Research and Methods; and Jessica Botsford and Richard Burkard, General Counsel.
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The Social Security Administration (SSA) is responsible for administering the Social Security Disability Insurance and the Supplemental Security Insurance programs--the nation's two largest disability programs. SSA is required to administer its disability programs in a fair and unbiased manner. Nevertheless, the proportion of African American applicants allowed benefits has been historically lower than the proportion of white applicants. These allowances rate differences have occurred with respect to disability determinations made by state Disability Determination Service offices and in decisions made at the hearings level by Administrative Law Judges (ALJ). In response to GAO's 1992 report, SSA initiated an extensive study of racial disparities in ALJ decisions, but methodological weaknesses preclude conclusions being drawn from it. The study--the results of which were not published--set out to analyze a representative sample of cases to determine whether race significantly influenced disability decisions, while simultaneously controlling for other factors. SSA officials told GAO that, by 1998, they found no evidence that race significantly influenced ALJ decisions. However, GAO was unable to draw these same conclusions due to weaknesses in sampling and statistical methods evident in the limited documentation still available for GAO's review. Concurrent with SSA's study of racial disparities, SSA's Office of Hearings and Appeals (OHA) took some limited steps at the hearings level to address possible racial bias in ALJ decision-making. OHA instituted a mandatory diversity sensitivity training course for ALJs. Additionally, OHA increased its efforts to recruit minorities for ALJ and other legal positions by attending conferences for minority bar associations, where SSA distributed information and gave seminars on how to become an ALJ. Finally, in keeping with its commitment to provide fair and impartial hearings, SSA established a new process under the direction of OHA for the review, investigation, and resolution of claimant complaints about alleged bias or misconduct by ALJs.
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Title insurance is designed to guarantee clear ownership of a property that is being sold. The policy is designed to compensate either the lender (through a lender's policy) or the buyer (through an owner's policy) up to the amount of the loan or the purchase price, respectively. Title insurance is sold primarily through title agents who check the history of a title by examining public records. The title policy insures the policyholder against any claims that existed at the time of purchase but were not in the public record. Title insurance premiums are paid only once during a purchase, refinancing, or, in some cases, home equity loan transaction. The title agent receives a portion of the premium as a fee for the title search and examination work and its commission. The party responsible for paying for the title policies varies by state. In many areas, the seller pays for the owner's policy and the buyer pays for the lender's policy, but the buyer may also pay for both policies--or split some, or all, of the costs with the seller. According to a recent nationwide survey, the average cost for simultaneously issuing lender's and owner's policies on a $180,000 loan (plus other associated title costs) was approximately $925, or about 34 percent of the average total loan origination and closing fees. We identified several important items for further study, including the way policy premiums are determined, the role played by title agents, the way that title insurance is marketed, the growth of affiliated business arrangements, and the involvement of and coordination among the regulators of the multiple types of entities involved in the marketing and sale of title insurance. For several reasons, the extent to which title insurance premium rates reflect insurers' underlying costs is not always clear. First, the largest cost for title insurers is not losses from claims--as it is for most types of insurers--but expenses related to title searches and agent commissions (see fig. 1). However, most state regulators do not consider title search expenses to be part of the premium, and do not include them in regulatory reviews that seek to determine whether premium rates accurately reflect insurers' costs. Second, many insurers provide discounted premiums on refinance transactions because the title search covers a relatively short period, but the extent of such discounts and their use is unclear. Third, the extent to which premium rates increase as loan amounts or purchase prices increase is also unclear. Costs for title search and examination work do not appear to rise as loan or purchase amounts increase, and such costs are insurers' largest expense. If premium rates reflected the underlying costs, total premiums could reasonably be expected to increase at a relatively slow rate as loan or purchase amounts increased, however, it is not clear that they do so. Title agents play a more significant role in the title insurance industry than agents do in most other types of insurance, performing most underwriting tasks as well as the title search and examination work. However, the amount of attention they receive from state regulators is not clear. For example, according to data compiled by the American Land Title Association (ALTA), while most states require title agents to be licensed, 3 states plus the District of Columbia do not; 18 states and the District of Columbia do not require agents to pass a licensing exam. Although NAIC has produced model legislation that states can use in their regulatory efforts, according to NAIC, as of October 2005 only three states had passed the model law or similar legislation. For several reasons, the competitiveness of the title insurance market has been questioned. First, while consumers pay for title insurance, they generally do not know how to "shop around" for the best deal and may not even know that they can. Instead, they often rely on the advice of a real estate or mortgage professional in choosing a title insurer. As a result, title insurers and agents normally market their products exclusively to these types of professionals, who in some cases may recommend not the least expensive or most reputable title insurer or agent but the one that represents the professional's best interests. Second, the title industry is highly concentrated. ATLA data show that in 2004 the five largest title insurers and their subsidiary companies accounted for over 90 percent of the total premiums written. Finally, the low level of losses title insurers generally suffer--and large increases in operating revenue in recent years--could create the impression of excessive profits, one potential sign of a lack of competition. The use of affiliated business arrangements involving title agents and others, such as lenders, real estate brokers, or builders has grown over the past several years. Within the title insurance industry, the term "affiliated business arrangements" generally refers to some level of joint ownership among a title insurer, title agent, real estate broker, mortgage broker, lender, and builder (see fig. 2). For example, a mortgage lender and a title agent might form a new jointly owned title agency, or a lender might buy a portion of an existing title agency. Such arrangements, which may provide consumers with "one-stop shopping" and lower costs, can also can also be abused, presenting conflicts of interest when they are used as conduits for giving referral fees back to the referring entity or when the profits from the title agency are significant to the referring entity. Several types of entities besides insurers and their agents are involved in the sale of title insurance, and the degree of involvement of and the extent of coordination among the regulators of these entities appears to vary. These entities include real estate brokers and agents, mortgage brokers, lenders, and builders, all of which may refer clients to particular agencies and insurers. These entities are generally overseen by a variety of state regulators, including insurance departments, real estate commissions, and state banking regulators, that interact to varying degrees. For example, one state insurance regulator with whom we spoke told us that the agency coordinated to some extent with the state real estate commission and at the federal level with HUD, but only informally. Another regulator said that it had tried to coordinate its efforts with other regulators in the state, but that the other regulators had generally not been interested. HUD, which is responsible for implementing RESPA, has conducted some investigations in conjunction with insurance regulators in some states. Some of these investigations of the marketing of title insurance by title insurers and agents, real estate brokers, and builders have turned up allegedly illegal activities. Federal and state investigations have identified two primary types of potentially illegal activities in the sale of title insurance, but the extent to which such activities occur in the title insurance industry is unknown. The first involves allegations of kickbacks-that is, fees that title agents or insurers may give to home builders, real estate agents and brokers, or lenders in return for referrals. Kickbacks are generally illegal. In several states, state insurance regulators identified captive reinsurance arrangements that title insurers and agents were allegedly using to inappropriately compensate others, such as builders or lenders, for referrals. State and federal investigators have also alleged the existence of inappropriate or fraudulent affiliated business arrangements. These involve a "shell" title agency that generally has no physical location, employees, or assets, and does not actually perform title and settlement business. Investigators alleged that the primary purpose of these shell companies was to provide kickbacks for business referrals. Investigators have also looked at the various types of alleged kickbacks that title agents have provided, including gifts, entertainment, business support services, training, and printing costs. Second, investigators have uncovered instances of alleged misappropriation or mishandling of customers' premiums by title agents. For example, one licensed title insurance agent who was the owner (or partial owner) of more than 10 title agencies allegedly failed to remit approximately $500,000 in premiums to the title insurer. As a result, the insurer allegedly did not issue 6,400 title policies to consumers who had paid for them. In response to the investigations, insurers and industry associations say they have begun to address some concerns raised by affiliated businesses, but that clearer regulations and stronger enforcement are needed. One title insurance industry association told us that recent federal and state enforcement actions had motivated title insurers to address potential kickbacks and rebates through, for example, increased oversight of title agents. In addition, the insurers and associations said that competition from companies that break the rules hurt companies that were operating legally and that these businesses welcome greater enforcement efforts. Several associations also told us that clearer regulations regarding referral fees and affiliated business arrangements would aid the industry's compliance efforts. Specifically, we were told that regulations need to be more transparent about the types of discounts and fees that are prohibited and the types that are allowed. Over the past several years, regulators and others have suggested changes to regulations that would affect the way title insurance is sold, and further study of the issues raised by these potential changes could be beneficial. In 2002, in order to simplify and improve the process of obtaining a home mortgage and to reduce settlement costs for consumers, HUD proposed revisions to the regulations that implement RESPA. But HUD later withdrew the proposal in response to considerable comments from the title industry, consumers, and other federal agencies. In June 2005, HUD announced that it was again considering revisions to the regulations. In addition, NAIC officials told us that the organization was considering changes to the model title insurance and agent laws to address current issues such as the growth of affiliated business arrangements and to more closely mirror RESPA's provisions on referral fees and sanctions for violators. Finally, some consumer advocates have suggested that requiring lenders to pay for the title policies from which they benefit might increase competition and ultimately lower costs for consumers, because lenders could then use their market power to force title insurers to compete for business based on price. The issues identified today raise a number of questions that we plan to address as part of our ongoing work. We look forward to the continued cooperation of the title industry, state regulators, and HUD as we continue this work. Mr. Chairman, this completes my prepared statement. I would be pleased to answer any questions that you or Members of the Subcommittee may have. For further information about this testimony, please contact Orice Williams on (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributors to this testimony include Larry Cluff (Assistant Director), Tania Calhoun, Emily Chalmers, Nina Horowitz, Marc Molino, Donald Porteous, Melvin Thomas, and Patrick Ward. 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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Title insurance is a required element of almost all real estate purchases and is not an insignificant cost for consumers. However, consumers generally do not have the knowledge needed to "shop around" for title insurance and usually rely on professionals involved in real estate--such as lenders, real estate agents, and attorneys--for advice in selecting a title insurer. Recent state and federal investigations into title insurance sales have identified practices that may have benefited these professionals and title insurance providers at the expense of consumers. At the request of the House Financial Services Committee, GAO currently has work under way studying the title insurance industry, including pricing, competition, the size of the market, the roles of the various participants in the market, and how the industry is regulated. This testimony discusses the preliminary results of GAO's work to date and identifies issues for further study. In so doing, this testimony focuses on: (1) the reasonableness of cost structures and agent practices common to the title insurance market that are not typical of other insurance markets; (2) the implications of activities identified in recent state and federal investigations that may have benefited real estate professionals rather than consumers; and (3) the potential need for regulatory changes that would affect the way that title insurance is sold. Some cost structures and agent practices that are common to the title insurance market are not typical of other lines of insurance and merit further study. First, the extent to which premium rates reflect underlying costs is not always clear. For example, most states do not consider title search and examination costs--insurers' largest expense--to be part of the premium, and do not review these costs. Second, while title agents play a key role in the underwriting process, the extent to which state insurance regulators review agents is not clear. Few states collect information on agents, and three states do not license them. Third, the extent to which a competitive environment exists within the title insurance market that benefits consumers is also not clear. Consumers generally lack the knowledge necessary to "shop around" for a title insurer and therefore often rely on the advice of real estate and mortgage professionals. As a result, title agents normally market their business to these professionals, creating a form of competition from which the benefit to consumers is not always clear. Fourth, real estate brokers and lenders are increasingly becoming full or part owners of title agencies, which may benefit consumers by allowing one-stop shopping, but may also create conflicts of interest. Finally, multiple regulators oversee the different entities involved in the title insurance industry, but the extent of involvement and coordination among these entities is not clear. Recent state and federal investigations have identified potentially illegal activities--mainly involving alleged kickbacks--that also merit further study. The investigations alleged instances of real estate agents, mortgage brokers, and lenders receiving referral fees or other inducements in return for steering business to title insurers or agents, activities that may have violated federal or state anti-kickback laws. Participants allegedly used several methods to convey the inducements, including captive reinsurance agreements, fraudulent business arrangements, and discounted business services. For example, investigators identified several "shell" title agencies created by a title agent and a real estate or mortgage broker that had no physical location or employees and did not perform any title business, allegedly serving only to obscure referral payments. Insurers and industry associations with whom we spoke said that they had begun to address such alleged activities but also said that current regulations needed clarification. In the past several years, regulators, industry groups, and others have suggested changes to the way title insurance is sold, and further study of these suggestions could be beneficial. For example, the Department of Housing and Urban Development announced in June 2005 that it was considering revisions to the regulations implementing the Real Estate Settlement Procedures Act. In addition, the National Association of Insurance Commissioners is considering changes to model laws for title insurers and title agents. Finally, at least one consumer advocate has suggested that requiring lenders to pay for the title policies from which they benefit might increase competition and ultimately lower consumers' costs.
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Over the past decade, the federal government has expanded financial assistance to a wide array of public and private stakeholders for preparedness activities through various grant programs administered by DHS through its component agency, FEMA. Through these grant programs, DHS has sought to enhance the capacity of states, localities, and other entities, such as ports or transit agencies, to prevent, respond to, and recover from a natural or manmade disaster, including terrorist incidents. Four of the largest preparedness grant programs are the Port Security Grant Program, the State Homeland Security Program, the Transit Security Grant Program, and the Urban Areas Security Initiative. The Port Security Grant Program provides federal assistance to strengthen the security of the nation's ports against risks associated with potential terrorist attacks by supporting increased portwide risk management, enhanced domain awareness, training and exercises, and expanded port recovery capabilities. The State Homeland Security Program provides funding to support states' implementation of homeland security strategies to address the identified planning, organization, equipment, training, and exercise needs at the state and local levels to prevent, protect against, respond to, and recover from acts of terrorism and other catastrophic events. The Transit Security Grant Program provides funds to owners and operators of transit systems (which include intracity bus, commuter bus, ferries, and all forms of passenger rail) to protect critical surface transportation infrastructure and the traveling public from acts of terrorism and to increase the resilience of transit infrastructure. The Urban Areas Security Initiative provides federal assistance to address the unique needs of high-threat, high-density urban areas, and assists the areas in building an enhanced and sustainable capacity to prevent, protect, respond to, and recover from acts of terrorism. Since its creation in April 2007, FEMA's GPD has been responsible for managing DHS's preparedness grants. GPD consolidated the grant business operations, systems, training, policy, and oversight of all FEMA grants and the program management of preparedness grants into a single entity. In February 2012, we identified multiple factors that contributed to the risk of FEMA potentially funding unnecessarily duplicative projects across four of the largest grant programs--the Port Security Grant Program, the State Homeland Security Program, the Transit Security Grant Program, and the Urban Areas Security Initiative. These factors include overlap among grant recipients, goals, and geographic locations, combined with differing levels of information that FEMA had available regarding grant projects and recipients. Specifically, we found that FEMA made award decisions with differing levels of information and lacked a process to coordinate application reviews. To better identify potential unnecessary duplication, we recommended that FEMA (1) take steps to ensure that it collects project information at the level of detail needed to better position the agency to identify any potential unnecessary duplication within and across the four grant programs, and (2) explore opportunities to enhance FEMA's internal coordination and administration of the programs. DHS agreed with the recommendations and identified planned actions to improve visibility and coordination across programs and projects. We also suggested that Congress consider requiring DHS to report on the results of its efforts to identify and prevent duplication within and across the four grant programs, and consider these results when making future funding decisions for these programs. Since we issued our February 2012 report, FEMA officials have identified actions they believe will enhance management of the four grant programs we analyzed; however, FEMA still faces challenges to enhancing preparedness grant management. First, the fiscal year 2013 President's Budget outlined a plan to consolidate most of FEMA's preparedness grants programs, and FEMA officials expect this action would reduce or eliminate the potential for unnecessary duplication. The fiscal year 2013 President's Budget proposed the establishment of the National Preparedness Grant Program (NPGP), a consolidation of 16 grant programs (including the 4 grants we analyzed in our February 2012 report) into a comprehensive single program. According to FEMA officials, the NPGP would eliminate redundancies and requirements placed on both the federal government and grantees resulting from the existing system of multiple individual, and often disconnected, grant programs. For example, FEMA officials said that the number of applications a state would need to submit and the federal government's resources required to administer the applications would both decrease under the consolidated program. However, Members of Congress have expressed concern about the consolidation of the 16 grant programs and Congress has not yet approved the proposal. In October 2012, FEMA officials told us that Members of Congress had asked FEMA to refine the NPGP proposal to address concerns raised by stakeholders, such as how local officials will be involved in a state-administered grant program. As of March 2013, FEMA officials reported that the agency was drafting guidance for the execution of the NPGP based on stakeholder feedback and direction from Congress pending the fiscal year 2013 appropriations bill. If the NPGP is not authorized in fiscal year 2013, FEMA officials stated that the agency plans to resubmit the request for the fiscal year 2014 budgetary cycle. If approved, and depending on its final form and execution, the consolidated NPGP could help reduce redundancies and mitigate the potential for unnecessary duplication, and may address the recommendation in our February 2012 report to enhance FEMA's internal coordination and administration of the programs. Second, in March 2013, FEMA officials reported that the agency intends to start collecting and analyzing project-level data from grantees in fiscal year 2014; however, FEMA has not yet finalized specific data requirements and has not fully established the vehicle to collect these data--a new data system called the Non-Disaster Grants Management System (ND Grants). As of March 2013, FEMA officials expect to develop system enhancements for ND Grants to collect and use project-level data by the end of fiscal year 2013. FEMA officials stated that FEMA has formed a working group to develop the functional requirements for collecting and using project-level data and plans to obtain input from stakeholders and consider the cost effectiveness of potential data requirements. In alignment with data requirement recommendations from a May 2011 FEMA report, the agency anticipates utilizing the new project- level data in the grant application process starting in fiscal year 2014. Collecting appropriate data and implementing ND Grants with project- level enhancements as planned, and as recommended in our February 2012 report, would better position FEMA to identify potentially unnecessary duplication within and across grant programs. Third, in December 2012, FEMA officials stated that there are additional efforts underway to improve internal administration of different grant programs. For example, officials stated that a FEMA task force has been evaluating grants management processes and developing a series of recommendations to improve efficiencies, address gaps, and increase collaboration across regional and headquarters counterparts and financial and programmatic counterparts. These activities represent positive steps to improve overall grants management, but they do not include any mechanisms to identify potentially duplicative projects across grant programs administered by different FEMA entities. According to DHS and FEMA strategic documents, national preparedness is the shared responsibility of the "whole community," which requires the contribution of a broad range of stakeholders, including federal, state, and local governments, to develop preparedness capabilities to effectively prevent, protect against, mitigate the effects of, respond to, and recover from a major disaster. Figure 1 provides an illustration of how federal, state, and local resources provide preparedness capabilities for different levels of government and at various levels of incident effect (i.e., the extent of damage caused by a natural or manmade disaster). The greater the level of incident effect, the more likely state and local resources are to be overwhelmed. We have previously reported on and made recommendations related to DHS's and FEMA's efforts to develop a national assessment of preparedness, which would assist DHS and FEMA in effectively prioritizing investments to develop preparedness capabilities at all levels of government, including through its preparedness grant programs. Such an assessment would identify the critical elements at all levels of government necessary to effectively prevent, protect against, mitigate the effects of, respond to, and recover from a major disaster (i.e., preparedness capabilities), such as the ability to provide lifesaving medical treatment via emergency medical services following a major disaster; develop a way to measure those elements (i.e., capability performance measures); and assess the difference between the amount of preparedness needed at all levels of government (i.e., capability requirements) and the current level of preparedness (i.e. capability level) to identify gaps (i.e., capability gaps). The identification of capability gaps is necessary to effectively prioritize preparedness grant funding. However, we have previously found that DHS and FEMA have faced challenges in developing and implementing such an assessment. Most recently, in March 2011, we reported that FEMA's efforts to develop and implement a comprehensive, measurable, national preparedness assessment were not yet complete. Accordingly, we recommended that FEMA complete a national preparedness assessment and that such an assessment should assess capability gaps at each level of government based on capability requirements to enable prioritization of grant funding. We also suggested that Congress consider limiting preparedness grant funding until FEMA completes a national preparedness assessment. In April 2011, Congress passed the fiscal year 2011 appropriations act for DHS, which reduced funding for FEMA preparedness grants by $875 million from the amount requested in the President's fiscal year 2011 budget. The consolidated appropriations act for fiscal year 2012 appropriated $1.7 billion for FEMA Preparedness grants, $1.28 billion less than requested. The House committee report accompanying the DHS appropriations bill for fiscal year 2012 stated that FEMA could not demonstrate how the use of the grants had enhanced disaster preparedness. In March 2011, the White House issued Presidential Policy Directive 8 on National Preparedness (PPD-8), which called for the development of a national preparedness system that includes a comprehensive approach to assess national preparedness. According to PPD-8, the approach should use a consistent methodology to assess national preparedness capabilities--with clear, objective, and quantifiable performance measures. PPD-8 also called for the development of a national preparedness goal, as well as annual preparedness reports (both of which were previously required under the Post-Katrina Act). To address PPD-8 provisions, FEMA issued the National Preparedness Goal in September 2011, which established a list of preparedness capabilities for each of five mission areas (prevention, protection, mitigation, response, and recovery) that are to serve as the basis for preparedness activities within FEMA, throughout the federal government, and at the state and local levels. In November 2011, FEMA issued the National Preparedness System, which described an approach and cycle to build, sustain, and deliver the preparedness capabilities described in the National Preparedness Goal. The system contains six components to support decision making, resource allocation, and progress measurement, including identifying and assessing risk and estimating capability requirements. According to the system, measuring progress toward achieving the National Preparedness Goal is intended to provide the means to decide how and where to allocate scarce resources and prioritize preparedness. Finally, in March 2012, FEMA issued the first National Preparedness Report, designed to identify progress made toward building, sustaining, and delivering the preparedness capabilities described in the National Preparedness Goal. According to FEMA officials, the National Preparedness Report also identifies what they consider to be national-level capability gaps. While FEMA issued the first National Preparedness Report, the agency has not yet established clear, objective, and quantifiable capability requirements and performance measures that are needed to identify capability gaps in a national preparedness assessment, as recommended in our March 2011 report. As previously noted, such requirements and measures would help FEMA identify capability gaps at all levels of government, which would assist FEMA in targeting preparedness grant program funding to address the highest-priority capability gaps. According to the National Preparedness Report, FEMA collaborated with federal interagency partners to identify existing quantitative and qualitative performance and assessment data for each of the preparedness capabilities. In addition, FEMA integrated data from the 2011 State Preparedness Reports, which are statewide survey-based self- assessments of capability levels and requirements submitted by all 56 U.S. states and territories. Finally, FEMA conducted research to identify independent evaluations, surveys, and other supporting data related to preparedness capabilities. However, limitations associated with some of the data used in the National Preparedness Report may reduce the report's usefulness in assessing national preparedness. First, in October 2010, we reported that data in the State Preparedness Reports--one of the key data sources for the National Preparedness Report--could be limited because FEMA relies on states to self-report such data, which makes it difficult to ensure data are consistent and accurate. Second, at the time the National Preparedness Report was issued, in March 2012, states were still in the process of updating their efforts to collect, analyze, and report preparedness progress according to the new preparedness capabilities issued along with the National Preparedness Goal in September 2011. As a result, the report states that assessment processes, methodologies, and data will need to evolve for future iterations of the report. Third, the report's final finding notes that while many programs exist to build and sustain preparedness capabilities across all mission areas, challenges remain in measuring progress over time. According to the report, in many cases, measures do not yet exist to gauge performance, either quantitatively or qualitatively. Therefore, while programs may exist that are designed to address a given capability gap, the nation has little way of knowing whether and to what extent those programs have been successful. Thus, as of March 2013, FEMA has not yet completed a national preparedness assessment, as we recommended in our March 2011 report, which could assist FEMA in prioritizing grant funding. However, FEMA officials stated that they have efforts under way to assess regional, state, and local capabilities to provide a framework for completing a national preparedness assessment. For example, in April 2012, FEMA issued guidance on developing Threat and Hazard Identification and Risk Assessments (THIRA), which were initially required to be completed by state and local governments receiving homeland security funding by December 31, 2012. Guidance issued for development of the THIRAs describes a process for assessing the various threats and hazards facing a community, the vulnerability of the community, as well as the consequences associated with those threats and hazards. For example, using the THIRA process, a jurisdiction may identify tornadoes as a hazard and asses its vulnerabilities to and the consequences of a tornado striking the jurisdiction, as well as the capabilities necessary for an effective response. Using the THIRA results, a jurisdiction may then develop a strategy to allocate resources effectively to achieve self- determined capability requirements by closing capability gaps. According to FEMA officials in March 2013, the THIRAs are to be used by state, regional, and federal entities for future planning efforts. At the state level, FEMA guidance notes that state officials are to use the capability requirements they identified in their respective 2012 THIRAs in their future State Preparedness Reports. FEMA officials stated that they planned to use both the THIRAs and the State Preparedness Reports to identify states' (self-reported) capability gaps based on capability requirements established by the state. At the regional level, each of the 10 FEMA regions is to analyze the local and state THIRAs to develop regional THIRAs. At the national level, the local, state, and regional THIRAs are collectively intended to provide FEMA with data that it can analyze to assist in the identification of national funding priorities for closing capability gaps. The outcome of the THIRA process is intended to be a set of national capability performance requirements and measures, which FEMA officials stated they intend to incorporate into future National Preparedness Reports. As of March 2013, FEMA officials are working to coordinate their review and analysis of the various THIRAs through a THIRA Analysis and Review Team. The team plans to conduct ongoing meetings to discuss common themes and findings from the THIRAs and intends to develop an initial proposed list of national preparedness grant funding priorities by summer 2013. Depending on how the THIRA process is implemented and incorporated into future National Preparedness Reports, such an approach could be a positive step toward addressing our March 2011 recommendation to FEMA to develop a national preparedness assessment of existing capabilities levels against capability requirements. Such a national preparedness assessment may help FEMA to (1) identify the potential costs for developing and maintaining required capabilities at each level of government, and (2) determine what capabilities federal agencies should be prepared to provide. While the recently completed THIRAs and 2012 National Preparedness Report are positive steps in the initial efforts to assess preparedness capabilities across the nation, capability requirements and performance measures for each level of government that are clear, objective, and quantifiable have not yet been developed. As a result, it is unclear what capability gaps currently exist, including at the federal level, and what level of resources will be needed to close such gaps through prioritized preparedness grant funding. We will continue to monitor FEMA's efforts to develop capability requirements and performance measures. Chairman Brooks, Ranking Member Payne, and Members of the subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. For further information about this statement, please contact David C. Maurer, Director, Homeland Security and Justice Issues, at (202) 512- 9627 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. In addition to the contact named above, the following individuals also made major contributions to this testimony: Chris Keisling, Assistant Director; Tracey King; Dan Klabunde; Katherine Lee; David Lutter; David Lysy; Lara Miklozek; and Erin O'Brien. 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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From fiscal years 2002 through 2012, the Congress appropriated about $39 billion to a variety of DHS preparedness grant programs to enhance the capabilities of state and local governments to prevent, protect against, respond to, and recover from terrorist attacks and other disasters. DHS allocated more than $21.3 billion through four of the largest preparedness programs--the Port Security Grant Program, the State Homeland Security Program, the Transit Security Grant Program, and the Urban Areas Security Initiative. In February 2012, GAO identified factors that contribute to the risk of FEMA potentially funding unnecessarily duplicative projects across the four grant programs. In March 2011, GAO reported that FEMA has faced challenges in developing and implementing a national preparedness assessment, which inhibits its abilities to effectively prioritize preparedness grant funding. This testimony updates GAO's prior work and describes DHS's and FEMA's progress over the past year in (1) managing preparedness grants and (2) measuring national preparedness by assessing capabilities. This statement is based on prior products GAO issued from March 2011 to February 2012 and selected updates in March 2013. To conduct the updates, GAO analyzed agency documents and interviewed FEMA officials. Officials in the Federal Emergency Management Agency (FEMA)--a component of the Department of Homeland Security (DHS)--have identified actions they believe will enhance management of the four preparedness programs GAO analyzed; however, FEMA still faces challenges. In February 2012, GAO found that FEMA lacked a process to coordinate application reviews and made award decisions with differing levels of information. To better identify potential unnecessary duplication, GAO recommended that FEMA collect project-level information and enhance internal coordination and administration of the programs. DHS concurred. The fiscal year 2013 President's Budget, proposed the establishment of the National Preparedness Grant Program (NPGP), a consolidation of 16 FEMA grant programs into a single program. However, Members of Congress raised concerns about the NPGP and have not approved the proposal. As a result, FEMA officials reported that the agency was drafting new guidance for the execution of the NPGP based on pending Congressional direction on fiscal year 2013 appropriations. If approved, and depending on its final form and execution, the NPGP could help mitigate the potential for unnecessary duplication and address GAO's recommendation to improve internal coordination. In March 2013, FEMA officials reported that FEMA intends to start collecting and analyzing project-level data from grantees in fiscal year 2014; but has not yet finalized data requirements or fully implemented the data system to collect the information. Collecting appropriate data and implementing project-level enhancements as planned would address GAO's recommendation and better position FEMA to identify potentially unnecessary duplication. FEMA has made progress addressing GAO's March 2011 recommendation that it develop a national preparedness assessment with clear, objective, and quantifiable capability requirements and performance measures; but continues to face challenges developing a national preparedness system that could assist FEMA in prioritizing preparedness grant funding. For example, in March 2012, FEMA issued the first National Preparedness Report, which describes progress made to build, sustain, and deliver capabilities. FEMA also has efforts underway to assess regional, state, and local preparedness capabilities. In April 2012, FEMA issued guidance on developing Threat and Hazard Identification and Risk Assessments (THIRA) to self-assess regional, state, and local capabilities and required states and local areas receiving homeland security funds to complete a THIRA by December 2012. However, FEMA faces challenges that may reduce the usefulness of these efforts. For example, the National Preparedness Report notes that while many programs exist to build and sustain preparedness capabilities, challenges remain in measuring progress over time. According to the report, in many cases, measures do not yet exist to gauge performance, either quantitatively or qualitatively. Further, while FEMA officials stated that the THIRA process is intended to develop a set of national capability performance requirements and measures, such requirements and measures have not yet been developed. Until FEMA develops clear, objective, and quantifiable capability requirements and performance measures, it is unclear what capability gaps currently exist and what level of federal resources will be needed to close such gaps. GAO will continue to monitor FEMA's efforts to develop capability requirements and performance measures. GAO has made recommendations to DHS and FEMA in prior reports. DHS and FEMA concurred with these recommendations and have actions underway to address them.
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LSC was established in 1974 as a private, nonprofit, federally funded corporation to provide legal assistance to low-income people in civil matters. LSC provides the assistance indirectly, through grants to about 260 competitively selected local programs. Grantees may receive additional funding from non-LSC sources. In fiscal years 1998 and 1999, LSC received appropriations of $283 million and $300 million, respectively. eligibility, clients' income, in general, is not to exceed 125 percent of the federal poverty guidelines. LSC regulations require that grantees (1) adopt a form and procedure to obtain eligibility information and (2) preserve that information for audit by LSC. With respect to citizenship/alien eligibility, only citizens and certain categories of aliens are eligible for services. For clients who are provided services in person, a citizen attestation form or documentation of eligible alien status is required. For clients who are provided services via the telephone, documentation of the inquiry regarding citizenship/alien eligibility is required. LSC uses a Case Service Reporting system to gather quantifiable information from grantees on the services they provide that meet LSC's definition of a case. The CSR Handbook is LSC's primary official guidance to grantees on how to record and report cases. LSC relies on such case information in its annual request for federal funding. Audit reports issued by LSC's OIG between October 1998 and July 1999 reported that five grantees misreported the number of cases they had closed during calendar year 1997 and the number of cases that remained open at the end of that year. The OIG found that all five grantees overstated the number of closed cases, while four overstated and one understated open cases. In June 1999, in response to Congress' request for information on whether the 1997 case data of other LSC programs had problems similar to those reported by LSC's OIG, we issued a report on our audit of five of LSC's largest grantees: Baltimore, Chicago, Los Angeles, New York City, and Puerto Rico. We conducted a file review of a random sample of cases at each of these grantees to determine the extent to which they made overreporting errors in reporting cases closed during 1997 and cases open on December 31, 1997. We found similar types of reporting errors to those the OIG found and estimated that, overall, about 75,000 (+/- 6,100) of the approximately 221,000 cases that the five grantees reported to LSC for 1997 were questionable. Three grantees identified about 30,000 of their cases as misreported prior to our case file review. The primary causes for these self-identified overreporting errors were (1) improperly reporting to LSC cases that were wholly funded by other sources, such as states, and (2) problems related to case management reporting systems, such as grantee staffs' difficulty in transitioning to new automated systems. Our case file review deemed approximately 45,000 additional cases questionable for one of the following reasons: The grantee reported duplicate cases for the same legal service to the same client. Some case files did not contain any documentation supporting the grantee's determination that the client was either a U.S. citizen or eligible alien. For cases reported as closed in 1997, some case files showed no activity during the 12 months before the case was closed. For cases reported as open as of December 31, 1997, some cases showed no grantee activity during calendar year 1997. Some case files did not contain any documentation that the grantee had determined that the client was financially eligible for LSC services. LSC regulations did not require specific documentation of these determinations in all cases. However, they required that grantees (1) adopt a form and procedure to obtain eligibility information and (2) preserve that information for audit by LSC. LSC officials and executive directors of the five grantees told us that they had taken or were planning to take steps to correct these case reporting problems. LSC issued a new, 1999 CSR Handbook and distributed other written communications intended to clarify reporting requirements to its grantees. The 1999 handbook, which replaced the 1993 edition, instituted changes to some of LSC's reporting requirements and provided more detailed information on other requirements. In responding to a GAO telephone survey, most grantees indicated that the new guidance helped clarify LSC's reporting requirements, and virtually all of them indicated that they had or planned to make program changes as a result of the requirements. Many grantees, however, identified areas of case reporting that remained unclear to them. The 1999 CSR Handbook included changes to (1) procedures for timely closing of cases; (2) procedures for management review of case service reports; (3) procedures for ensuring single recording of cases; (4) requirements to report LSC-eligible cases, regardless of funding source; and (5) requirements for reporting cases involving private attorneys separately. On November 24, 1998, LSC informed its grantees that two of the changes in the 1999 CSR Handbook were to be applied to the 1998 case data. The two changes pertained to timely closing of cases and management review of case service reports. The remaining new provisions of the 1999 CSR Handbook were not applicable to 1998 cases. For example, for 1998, there was no requirement for grantees to ensure that cases were not double counted. For 1999, LSC is requiring the use of automated case management systems and procedures to ensure that cases involving the same client and specific legal problem are not reported to LSC more than once. For 1998, grantees could report only those cases that were at least partially supported by LSC funds. For 1999, LSC is requiring grantees to report all LSC-eligible cases, regardless of funding source. LSC intends to estimate the percentage of activity spent on LSC service by applying a formula that incorporates the amount of funds grantees receive from other funding sources compared with the amount they receive from LSC. In addition to changing certain reporting requirements, the 1999 handbook also provides more detailed guidance to grantees than the 1993 handbook. For example, the 1999 handbook provides more specific definitions of what constitutes a "case" and a "client" for CSR purposes. The 1999 handbook also addresses documentation requirements that were not discussed in the 1993 handbook. Based on our survey of executive directors of 79 grantees, we estimate that over 90 percent of grantee executive directors viewed the changes in the 1999 CSR Handbook as being clear overall, and virtually all of them indicated that they planned to or had made at least one change to their program operations as a result of the revised case reporting requirements. These changes included revising policies and procedures, providing staff training, modifying forms and/or procedures used during client intake, implementing computer hardware and software changes, and increasing reviews of cases. citizenship/alien eligibility documentation, single recording of cases, and who can provide legal services. LSC sought to determine the accuracy of grantees' case data by requiring that grantees complete self-inspections of their open and closed caseload data for 1998. Grantees were required to determine whether the error rate in their data exceeded 5 percent. According to LSC, about three-fourths of the grantees certified that the error in their data was 5 percent or less. LSC used the results of the self-inspections to estimate the total number of case closings in 1998. Our review of LSC's self-inspection process raised concerns about the accuracy and interpretation of the results, and what the correct number of certifying programs should be. On May 14, 1999, LSC issued a memo to all grantees instructing them to complete a self-inspection procedure by July 1, 1999. The purpose of the self-inspection was to ensure that (1) grantees were properly applying instructions in the 1999 edition of the CSR Handbook that were applicable to the 1998 data, and (2) LSC had accurate case statistical information to report to Congress for calendar year 1998. LSC provided detailed guidance to grantees on the procedures for the self- inspection. Each grantee was to select and separately test random samples of open and closed cases to determine whether the number of cases it reported to LSC earlier in the year was correct. Grantees were to verify that the case file contained a notation of the type of assistance provided, the date on which the assistance was provided, and the name of the case handler providing the assistance. Grantees were also to determine whether assistance had ceased prior to January 1, 1998; was within certain service categories as defined by the 1999 handbook; was provided by an attorney or paralegal; and was not prohibited or restricted. Finally, grantees were to verify that each case had eligibility information on household income, size, assets, citizenship attestation for in-person cases, and indication of citizenship/alien status for telephone-only cases. identified one or more problems in the random sample and corrected their entire 1998 database so that the problems no longer appeared. If, by correcting the problems, the error rate in the data was reduced to 5 percent or less, the grantees could resubmit their 1998 data along with a signed certification attesting to the substantial accuracy of the resubmitted data. In this way, grantees who were unable to certify at one point in time could certify at a later point in time. According to LSC officials, about three-fourths of the grantees certified the accuracy of their 1998 case data. As of August 26, 1999, LSC documents indicated that 199 of 261 grantees (76 percent) reported substantially correct CSR data to LSC. The remaining 62 grantees (24 percent) did not certify to LSC that their CSR data were substantially correct. According to LSC, 30 of the 50 largest grantees did not certify their 1998 data. LSC officials told us they were surprised that such a large number of grantees certified their 1998 CSR data. They attributed the results to the following factors: (1) the self-inspection did not attempt to identify duplicate cases; (2) grantees received the new 1999 handbook in November 1998 and had already implemented some of the new requirements; and (3) grantees were less likely to report as cases telephone referrals in which no legal advice had been given and/or clients' eligibility had not been determined because they were aware that the OIG identified this as a problem. On the basis of the self-inspection results, LSC estimated that grantees closed 1.1 million cases in 1998. Our review raised some concerns about LSC's interpretation of the self- inspection results and about the accuracy of the data provided to LSC by grantees. As a result, we could not assess the accuracy of LSC's estimate of the number of certified programs and case closures for 1998. LSC did not issue standardized procedures for grantees to use in reporting the results of their self-inspections. Grantees that could not certify their data wrote letters to LSC that contained varying degrees of detail about data errors that they found. Since LSC did not have a standard protocol for collecting the results of the self-inspections, LSC officials in some cases had to rely on their own interpretations of grantees' descriptions of the problems they had discovered. We are uncertain how many programs should have been counted as certified because we are uncertain if LSC applied a consistent definition of "certification." Most programs that were on LSC's certification list determined that they had error rates of 5 percent or less for both open and closed cases. However, LSC placed some programs on the certified list if the program's overall error rate for closed cases was 5 percent or less, even if the overall error rate actually was higher than 5 percent. In two instances, executive directors told us that they did not certify their CSR data because their overall error rate exceeded 5 percent. However, these programs appeared on LSC's list of certified programs. When we asked an LSC official about this, he told us that they advised grantees that if their closed case error rate did not exceed 5 percent, they should "partially certify" their data. In response to our inquiry, the official reviewed the certification letters submitted by nearly 200 grantees, and identified 5 certified programs whose error rates for open cases exceeded 5 percent. Given that some grantees submitted only an overall estimate of data error, we do not know how many programs qualified to be certified overall, just for closed cases, or just for open cases. We are also concerned that LSC's instructions to grantees on how to conduct the self-inspections may have led some of the smaller grantees to select too few test cases to make a reliable assessment of the proportion of error in their case data. Because these were smaller grantees, this limitation would have had little effect on LSC's estimate of the total closed caseload. However, it could have affected LSC's count of the number of certified programs. LSC does not know how well grantees conducted the self-inspection process, nor how accurate the results are. We spoke with several executive directors who did not correctly follow LSC's reporting requirements. Incorrect interpretations of LSC guidance may have resulted in some programs certifying their 1998 data when they should not have, and other programs not certifying their 1998 data when they should have. An LSC official told us that, although they have conducted CSR training sessions for grantee executive directors, thousands of case handlers in grantee offices have not received such training. The official acknowledged that written guidance and telephone contacts with grantees may not be sufficient to ensure correct and consistent understanding of reporting requirements, and that LSC plans to consider alternative ways of providing training to staff. LSC officials told us that the self-inspection was valuable and that LSC plans to have grantees complete self-inspections again early next year as part of the 1999 CSR reporting process. LSC's 1999 CSR Handbook and other written communications have improved the clarity of reporting requirements for its grantees. However, many grantees remained unclear about and/or misunderstood certain aspects of the reporting requirements. LSC's practice of disseminating guidance primarily by written or telephone communications may not be sufficient to ensure that grantees correctly and consistently interpret the requirements. LSC sought to determine the accuracy of grantees' 1998 case statistics by requiring grantees to conduct self-inspections. However, we do not know the extent to which the results of the self-inspection process are accurate. The validity of the results are difficult to determine because LSC did not standardize the way that grantees were to report their results, some of the grantees used samples that were too small to assess the proportion of error in their data, some grantees did not correctly follow LSC's reporting guidance, and LSC had done no verification of the grantees' self-inspection procedures. We do not believe that LSC's actions, to date, have been sufficient to fully resolve the case reporting problems that occurred in 1997. develop a standard protocol for future self-inspections to ensure that grantees systematically and consistently report their results for open and closed cases; direct grantees to select samples for future self-inspections that are sufficient to draw reliable conclusions about magnitude of case data errors; and finally, ensure that procedures are in place to validate the results of LSC's 1998 self-inspection, as well as of any future self-inspections. In a written response to a draft of our report, the President of LSC generally agreed with our findings and noted that he plans to implement our recommendations to the fullest extent possible. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Committee may have. Contacts and Acknowledgement For further information regarding this testimony please contact Laurie E. Ekstrand or Evi Rezmovic on (202) 512-8777. Individuals making key contributions to this testimony included Mark Tremba and Jan Montgomery. 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 discussed the two reviews that it has completed pertaining to case service reporting (CSR) by the Legal Services Corporation (LSC), focusing on: (1) what efforts LSC and its grantees have made to correct case reporting problems; and (2) whether these efforts are likely to resolve the case reporting problems that occurred in 1997. GAO noted that: (1) LSC issued a new, 1999 CSR Handbook and distributed other written communications intended to clarify reporting requirements to its grantees; (2) the 1999 Handbook, which replaced the 1993 edition, instituted changes to some of LSC's reporting requirements and provided more detailed information on other requirements; (3) in responding to a GAO telephone survey, most grantees indicated that the new guidance helped clarify LSC's reporting requirements, and virtually all of them indicated that they had or planned to make program changes as a result of the requirements; (4) many grantees, however, identified areas of case reporting that remained unclear to them; (5) the 1999 CSR Handbook included changes to: (a) procedures for timely closing of cases; (b) procedures for management review of case service reports; (c) procedures for ensuring single recording of cases; (d) requirements to report LSC-eligible cases, regardless of funding source; and (e) requirements for reporting cases involving private attorneys separately; (6) based on GAO's survey of executive directors of 79 grantees, GAO estimates that over 90 percent of grantee executive directors viewed the changes in the 1999 CSR Handbook as being clear overall, and virtually all of them indicated that they planned to or had made at least one change to their program operations as a result of the revised case reporting requirements; (7) although most of the grantee executive directors reported that the new LSC guidance helped clarify requirements, many of them also indicated that they were still unclear about certain requirements and that additional clarification was needed; (8) LSC sought to determine the accuracy of grantees' case data by requiring that grantees complete self-inspections of their open and closed caseload data for 1998; (9) on May 14, 1999, LSC issued a memo to all grantees instructing them to complete a self-inspection procedure by July 1, 1999; (10) according to LSC officials, about three-fourths of the grantees certified the accuracy of their 1998 case data; (11) as of August 26, 1999, LSC documents indicated that 199 of 261 grantees reported substantially correct CSR data to LSC; (12) the remaining 62 grantees did not certify to LSC that their CSR data were substantially correct; and (13) GAO's review raised some concerns about LSC's interpretation of the self-inspection results and about the accuracy of the data provided to LSC by grantees.
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Zika virus is a member of the flavivirus family related to dengue virus, yellow fever virus, and West Nile virus, and its primary mode of transmission is via mosquito, most notably by the Aedes aegypti mosquito. Aedes albopictus mosquitoes are a potential vector for the Zika virus. The disease was first identified in the Zika Forest in Africa in the 1940s, from which it subsequently moved eastwards over the following decades, though the Pacific Islands until it reached Brazil, where the population had no indigenous immunity against the virus. According to CDC officials with whom we spoke, the United States also has no indigenous immunity to the Zika virus. A major factor contributing to the declaration of Zika virus disease as a Public Health Emergency of International Concern by the World Health Organization (WHO) is a possible link between Zika virus and microcephaly as well as Guillain-Barre syndrome. Microcephaly--an abnormally small head due to failure of brain growth--is a concern because children with microcephaly can experience impaired cognitive development, delayed motor function and speech, seizures, and reduced life expectancy. To better understand the spread of this disease worldwide, epidemiological studies are required. Epidemiology is concerned with the patterns of disease occurrence in human populations and of the factors that influence these patterns. The goals of epidemiologic study, and more specifically outbreak investigations, are to determine the extent and distribution of the disease in the population, the causes and factors associated with the disease and its modes of transmission, the natural history of disease, and the basis for developing preventive strategies or interventions (see figure 1). The United States has played a significant role in improving global disease surveillance and response capacity. In the mid-1990s, recognizing the threat posed by previously unknown infectious diseases, the United States and other countries initiated a broader effort to ensure that countries can detect disease outbreaks that may constitute a Public Health Emergency of International Concern. The United States has participated in the WHO's efforts to develop and implement the International Health Regulations, currently an agreement among 196 countries, to develop and maintain global capabilities to detect and respond to disease and public health threats. The CDC has helped to define and establish the International Health Regulations and has been designated by the WHO as a key partner in helping to implement the critical capacities for detecting and responding to emerging infectious disease outbreaks. The recent Ebola outbreak in West Africa has highlighted the importance of further improving the U.S. government's global disease surveillance efforts. To help ensure that such threats are addressed early and at their source, the "National Health Security Strategy and Implementation Plan 2015-2018" released by the U.S. Department of Health and Human Services prioritizes efforts to strengthen national capacities and capabilities globally to detect disease in a timely manner, prevent the global spread of public health threats and diseases, and respond to public health emergencies. For example, CDC' s Global Disease Detection and Field Epidemiology Training programs aim to strengthen laboratory systems for the rapid detection and control of emerging infectious diseases and train epidemiologists to effectively detect, investigate, and respond to health threats. While several countries have reported outbreaks of Zika virus disease, unanswered questions remain regarding the epidemiology and the transmission of the disease. Many factors, including a large number of asymptomatic patients, mild symptoms, a lack of a consistent international case definition of Zika virus disease, as well as of microcephaly, and a lack of validated diagnostic tests complicate our understanding of the virus and may hinder our response to the current outbreak. Questions also remain regarding the strength of the association between Zika virus infection and microcephaly or Guillain-Barre syndrome. Since the 1960s, the Zika virus has been known to occur within a narrow equatorial belt from Africa to Asia. In 2007, the virus was detected in Yap Island, the first report that the virus spread outside of Africa and Indonesia to Pacific Islands. In 2014, the virus spread east across the Pacific Ocean to French Polynesia, then to Easter Island. According to the WHO, the virus has continued to spread to the Americas, with the outbreak in Brazil that began in May 2015 and is ongoing. Zika has spread to Mexico, Central America, the Caribbean, and South America, where the outbreak has reached epidemic levels (see figure 2). Recent outbreaks have also been reported in Puerto Rico, as well as the Cape Verde Islands. According to CDC documentation, Zika virus disease is now a nationally notifiable disease. As of February 24, 2016, 107 cases of continental U.S. travel-associated Zika virus disease have been reported, according to CDC. Although CDC documentation states that Zika virus has not yet seen local mosquito-borne spread in the continental United States, some states have mosquito species potentially capable of transmitting the virus. Incidences of mosquito-borne transmission have been reported in the Commonwealth of Puerto Rico, the U.S. Virgin Islands, and American Samoa. The first locally-acquired case of Zika virus disease in Puerto Rico was reported in December of 2015. Through late January of 2016, about 30 additional laboratory-confirmed cases were identified in Puerto Rico, including one pregnant woman. In January of 2016, the CDC issued travel guidance for travel to affected countries, including the use of enhanced precautions for all travelers, as well as the recommendation that pregnant women postpone travel to affected areas. According to CDC documentation, there are a few known routes of transmission of the Zika virus to and among people. These include mosquitoes, mother to child, sexual contact and blood transfusions. The Zika virus is transmitted to people primarily through the bite of infected Aedes species mosquitoes (primarily Aedes aegypti and possibly Aedes albopictus). These are the same mosquitoes that spread dengue and chikungunya viruses. These mosquitoes typically lay eggs in and near standing water in containers like buckets, bowls, animal dishes, flower pots, and vases. They prefer to bite people, and live both indoors and outdoors. Mosquitoes that spread dengue, chikungunya, and Zika are aggressive daytime biters, but also bite at night. Mosquitoes can become infected when they feed on a person already infected with the virus. According to the CDC, the Zika virus is rarely transmitted from an infected mother to child, and there have been no reports of infants contracting the Zika virus through breastfeeding. It is possible but rare that an infected mother would pass the virus to a newborn at delivery. However, an infected mother can pass the Zika virus to her fetus during pregnancy. According to the CDC, it is possible for the Zika virus to be spread by a man to his sexual partners. A few recent cases of Zika virus transmission were reported through sexual contact. In December 2013, during a Zika virus outbreak in French Polynesia, Zika was isolated from the semen of a patient. In one known case of likely sexual transmission, the virus was spread before symptoms developed. The virus appears to be present in semen longer than in blood. Sexual transmission of the disease-- acquired outside of the United States--has been reported in the United States. As of February 23, 2016, the CDC and state public health departments are investigating 14 additional reports of possible sexual transmission of the virus, including several involving pregnant women. Zika virus can also be transmitted through blood transfusion, according to U.S. Food and Drug Administration (FDA) documents. While there have been no reports to date of Zika virus entering the U.S. blood supply, the risk of blood transmission is considered high based on the most current scientific research of how Zika virus and similar viruses (i.e. flaviviruses) are spread, as well as recent reports of transfusion-associated infection outside of the United States, according to the FDA. CDC reports that there have been reports of possible blood transfusion transmission cases in Brazil. During the French Polynesian outbreak in 2013, 2.8 percent of blood donors tested positive for Zika. The maximum time the virus remains in the bloodstream is unknown, but scientists estimate that it is less than 28 days. On February 16, 2016, as a safety measure against the emerging Zika virus outbreak, the FDA issued new guidance recommending that blood donors be deferred for four weeks if they have been to areas with active Zika virus transmission, potentially have been exposed to the virus, or have had a confirmed Zika virus infection. While scientific studies have identified Zika viral components in saliva and urine, they did not report disease transmission from those bodily fluids. It is not currently known if infection with the Zika virus causes, facilitates, or is otherwise associated with the development of certain neurologic and auto-immune conditions. Although strongly suspected, a report suggests the causal relation between in-utero exposure to Zika and microcephaly is yet to be established. Scientific literature has identified several possible linkages, including the presence of Zika virus in fetal brain tissue, as well as evidence of the virus crossing the placental barrier, suggesting a causal effect is plausible, but not yet proven. For example, a fetal autopsy identified an abnormally small brain, as well physical markers of developmental delays, along with the Zika virus in the brain. The mother in the case reported an illness with a fever and rash at the end of the first trimester of pregnancy while she was living in Brazil. A retrospective analysis was reported to the WHO in 2015-2016 of a previous outbreak of Zika virus disease in 2013-2014 in French Polynesia, also established elevated numbers of neurological disorders for that outbreak. The potential association of Guillain-Barre syndrome and Zika virus disease was suspected prior to the recent Brazilian Zika disease outbreak. According to the European Center for Disease Control, the 2013 to 2014 French Polynesian outbreak of Zika virus disease was reportedly the largest documented outbreak at that time. According to the European Center for Disease Control, over 8,000 suspected cases of Zika Virus infection had been reported by February 2014. Notably, there were nearly 40 cases of Guillain-Barre syndrome reported, with all cases following disease episodes compatible with Zika virus infection. Historically, there had been 10 or fewer cases of Guillain-Barre syndrome in Polynesia annually. The European Center for Disease Control stated that further investigations could be conducted to establish the relationship between neurological and auto-immune complications and Zika virus infection. Researchers have reported that an estimated 80 percent of the individuals infected with the Zika virus are asymptomatic, that is, they have the virus but do not manifest clinical symptoms. Since diagnosis of suspected Zika virus disease is often based on clinical symptoms, and in light of the fact that clinical symptoms are usually non-existent or mild, experts told us that many individuals who are infected with the Zika virus may not seek medical care, and thus are not counted as a case, resulting in significant underestimation of the true incidence of infection. An accurate count of the number of Zika virus disease cases requires a consistent case definition, or set of uniform criteria to define the disease for public health surveillance and to determine who is included in the count and who is excluded. However, establishing a definition is problematic for Zika virus disease. If Zika cases are diagnosed based on serology data, then the incidence count may include people who have been infected with the virus, but do not show clinical symptoms. On the other hand, if cases are defined by clinical symptoms only, with no serology testing, then the incidence could be higher or lower than that count obtained from serology testing only, because people who present with clinical symptoms may or may not actually test positive for Zika virus. According to the WHO Zika Response Strategy, there is currently a need to establish a uniform case definition for Zika virus disease, as well as historical rates, or baselines, for associated conditions. The Council of State and Territorial Epidemiologists currently has a case definition for Zika virus disease--under arboviral diseases--with two tiers: a "probable case" definition based on clinical signs and symptoms as well as the presence of certain anti-Zika antibodies, and a "confirmed case" definition for laboratory-confirmed cases based on laboratory analysis. However, because other countries may be using different testing protocols, it is unclear whether their results would be consistent with the CDC case definitions, complicating epidemiological analysis. Engaging international cooperation to establish uniform case definitions and baselines for diagnosing Zika virus disease and microcephaly can facilitate discovery of modes of transmission and causal links between Zika virus disease and microcephaly or Guillain-Barre syndrome. When the WHO declared a Public Health Emergency of International Concern on February 1, 2016, it acknowledged that there was no international standard surveillance case definition for microcephaly. Problems with changing case definitions, lack of sufficient information on underlying causes and brain pathology, and lack of baseline data make it difficult to accurately determine the level of increase of microcephaly in Brazil, and how much is due to the Zika virus. Some researchers offered several possible explanations for the observed increase in microcephaly cases, other than actual increase of cases as a result of Zika virus infection. First, because of the recent attention, newborn babies with visible cranial deformities are likely to be fast- tracked for in-depth examination. This temporal increase in suspected cases of microcephaly could also be distorted given both raised awareness with more children than usual being measured and reported, and the changing definition of microcephaly over time. Although there is evidence of an increased number of cases of microcephaly in Brazil, these authors demonstrated that the number of suspected cases relied on a screening test that had very low specificity and therefore overestimated the actual number of cases. According to the CDC, there are currently two Zika diagnostic tests available in the United States: reverse transcription polymerase chain reaction (RT-PCR) and Immunoglobulin M (IgM) followed by the Plaque Reduction Neutralization Test (PRNT) test. The current RT-PCR test can detect infection only during the period of illness when the virus is present. According to an NIH official, the PRNT diagnostic test is the most specific for antibody detection, but is cumbersome and not suitable for screening a large number of individuals. When detecting antibodies, diagnosing cases of Zika virus disease and differentiating it from other diseases caused by other flaviviruses, such as dengue or yellow fever, is difficult if someone has been infected by another flavivirus. Some tests for Zika virus antibodies suffer from cross- reactivity with antibodies to similar viruses, such as from dengue virus disease, meaning that tests using these antibodies for detection are not specific for the Zika virus. For example, a person previously infected with another flavivirus such as dengue could be falsely identified as also having been exposed to the Zika virus (and vice-versa). In addition, new outbreaks like Zika may not have known patterns or trends, making effective surveillance challenging. For example, after the onset of illness, Zika virus remains in the blood for about 5-7 days, according to the CDC. After this period, called viremia, diagnosis of Zika virus disease at this time relies on detection of antibodies against the Zika virus. Since antibodies in the blood may persist longer than the virus, a positive result for antibodies against the Zika virus indicates only that the patient was previously exposed to the Zika virus. Thus, the window for detecting the actual virus is small. It is not clear whether an antibody test could determine how long ago the patient was exposed. According to the CDC, while there are no commercially-available diagnostic tests for Zika, an antibody-based test for the Zika virus (Zika MAC-ELISA) was recently authorized for Emergency Use by the FDA. One of the main limitations of this test, among others, is its inability to differentiate between infection with Zika and other closely related flaviviruses such as dengue. This test in its current form may confuse the practitioners because of its lack of specificity. Since closely related flaviviruses such as dengue may also be present in Zika outbreak countries, the utilization of this assay could wrongly identify non-Zika- virus associated infections, thus putting extra burden on the laboratory and health care systems, and distort the epidemiological analyses. Adding to the limitations of these diagnostic systems are limited numbers of facilities able to perform definitive confirmatory testing, particularly in the developing world. The WHO is undertaking an analysis of diagnostics under development, developing target product profiles, facilitating the preparation and characterization of reference reagents, and setting up an Emergency Use Assessment and Listing mechanism for priority Zika diagnostics. Because Zika virus disease cannot yet be prevented by drugs or vaccines, vector (mosquito) control remains a critical factor in mitigating risks associated with this disease. The Aedes aegypti and Aedes albopictus mosquitoes are present around the world, as well as in the United States. Figure 3 shows a predicted distribution and intensity of the Aedes aegypti and Aedes albopictus mosquitoes, respectively, and indicates that the southeastern United States, particularly the Gulf Coast states, could be at risk of exposure in the near future. Figure 4 shows the approximate distribution of Aedes aegypti and Aedes albopictus mosquitoes in the United States in more detail. There are both large scale and personal methods for mosquito control. We provide a brief preliminary overview of some population-scale control methods identified in the literature, agency documents, and interviews with industry officials and academicians, which include three potentially- overlapping categories: (1) standing water treatment, (2) insecticides, and (3) emerging technologies. For some of these emerging techniques, their effectiveness remains to be demonstrated, but they have the potential to be additional tools in mosquito control. Personal methods, such as use of repellents, nets or long-sleeved clothing and staying indoors in air- conditioned locations are out the scope of this report. Standing water treatment for mosquito control can be achieved by the physical reduction of bodies of water or by treating the water with chemicals that kill mosquito larvae or interfere with their development. According to CDC documentation, these treatments include use of certain bacteria or insecticides that mimic mosquito hormones, which prevents mosquitoes from maturing or kills them as larvae. Another method involves coating water with a thin film of oil to suffocate immature larvae. According to CDC documentation, insecticide dispersal relies on various techniques such as space spraying by trucks or aircraft, or residual spraying, which entails coating surfaces with insecticide. Spraying is one method currently used in the United States. CDC documentation and scientific literature have established that in the long-term, the effectiveness of spraying may be diluted due to insecticide resistance, concerns over environmental exposure, and questionable efficacy of externally-delivered wide-area fogging or spraying. Additionally, the WHO notes that reactive space spraying during emergencies has a low impact unless integrated with other control strategies. Researchers are developing new chemicals that are more targeted towards mosquitoes, and are attempting to alleviate human toxicity issues. The use of insecticides as control methods effectively reduced mosquito- borne diseases, including malaria and yellow fever, in most of the world in the 1940s-1960s. The WHO determined that maintaining vector control after a disease subsides is complicated by dwindling resources. Indeed, by the 1980s-1990s, many dangerous vector-borne diseases re-emerged or spread to new regions. Additionally, the spread of some diseases, such as dengue virus disease, can be attributed to a combination of mosquito, viral, and human factors. To address the resulting complexities of such disease transmissions, the WHO uses "Integrated Vector Management," which leverages multiple control methods based on surveillance and evaluation of involved insects and disease epidemiology. Emerging technologies include (1) use of biological control methods, (2) genetically-modified mosquitoes, and (3) auto-dissemination traps. Based on scientific literature, these technologies show some promise in studies to overcome issues associated with use of insecticides, such as insecticide resistance. Many of these methods have been tested in smaller-scale controlled field trials internationally. We have not done an independent, comprehensive evaluation of these technologies, due to time limitations. Biological control methods include introducing natural predators of mosquitoes or their eggs and using bacteria to prevent disease transmission to humans. For example, certain small crustaceans and certain fish eat mosquito larvae. The suitability of this approach for the Zika virus is uncertain because the primary mosquito species identified for Zika transmission are the Aedes aegypti and Aedes albopictus, which can breed in very small volumes of water, such as those found in tin cans or in plates under potted plants. Scientific literature has identified another approach--using bacteria to reduce disease transmission from mosquitoes to humans. This bacteria, called Wolbachia, can be transferred from mosquitoes to their eggs, thereby propagating this effect to future generations. This tactic has been demonstrated in laboratory environments and is undergoing field trials internationally, particularly in areas affected by the dengue virus. Control of the disease-transmitting mosquito population using genetically modified mosquitoes can be potentially achieved in different ways. Some genetically-modified mosquitoes are engineered with a "lethal" gene that constantly makes a protein that kills the mosquito larvae. According to one company creating these mosquitoes, the use of genetically modified mosquitoes allows for population control by introducing male genetically-modified mosquitoes that transfer this lethal gene to the female mosquito' s eggs. As a result, mosquito larvae with the inherited lethal gene die. The company claims it has achieved a 90 percent reduction in mosquito populations using its method of releasing the modified male mosquitoes 1-3 times weekly over a period of months. The modified mosquitoes do not persist in the environment, as released mosquitoes generally die out on their own. Given the estimated 200- meter range of a male mosquito during its lifetime, scalability may be challenging. Another genetically-modified mosquito method incorporates viral resistance into mosquitoes, with the goal of replacing existing populations of mosquitoes with one less capable of disease transmission, rather than reducing the number of mosquitoes. Scientific literature indicates there may be public opposition to release of genetically-modified mosquitoes for either procedure due to uncertainties about their effect on people and the environment, or other unknown consequences. Mosquito control by auto-dissemination traps functions similarly to insecticides, but relies on containers coated with similar chemicals. After a mosquito lands on these containers, they are contaminated with the chemicals and subsequently transfer them to the location where they lay eggs, which may result in larval death. In the case of the Aedes aegypti mosquito, WHO documentation indicates these locations tend to be small containers, so auto-dissemination is particularly suited to these mosquitoes. Auto-dissemination traps have shown 42-98 percent decreases in Aedes aegypti mosquito population in field trials. NIH and CDC have identified areas of high priority for research related to the Zika virus. In addition, the Administration's $1.9 billion emergency funding request to combat the spread of the Zika virus is intended to provide resources to both NIH and CDC to this end. If approved, the NIH would receive $130 million to support vaccine development and other work related to Zika and other mosquito-borne diseases such as chikungunya. The CDC would receive $828 million, including $225 million for grants and technical assistance, in part to expand mosquito or vector control. The FDA would receive $10 million, in part to support the approval of new diagnostic tests and evaluation of treatment efficacy. NIH has identified areas of high priority including: Basic research to understand viral replication, pathogenesis, and transmission, as well as the biology of the mosquito vectors; potential interactions with co-infections such as dengue and yellow fever viruses; animal models of Zika virus infection; and novel vector control methods; and Pursuing Zika virus research to develop sensitive, specific, and rapid clinical diagnostic tests; drug treatments for Zika virus as well as broad spectrum therapeutics that treat multiple flaviviral infection; and effective vaccines and vaccination strategies. On February 5th, 2016, several NIH institutes issued a notice to researchers indicating NIH' s interest in supporting research to understand transmission of the Zika virus, optimal screening and management in pregnancy, and the mechanisms by which the Zika virus affects the developing nervous system, including potential links to microcephaly. This notice was followed by a Funding Opportunity Announcement issued on February 19th, 2016, to create an expedited mechanism for funding exploratory and developmental research projects on these topics. The CDC has identified priority areas of research focus on Zika including: Determining the link between Zika virus infections and the birth defect microcephaly and measuring changes in incidence rates of the birth defect over time; Improving diagnostics for the Zika virus, including advanced methods to refine tests and support advanced developments for vector control; and Enhancing international capacity for virus surveillance, expanding laboratory testing, and health care provider testing in countries at highest risk of Zika virus outbreaks. These research activities are intended to supplement other activities for response, readiness and surveillance. The priority research areas identified by NIH and CDC are ambitious and agencies may face some challenges in implementing this agenda, including: Given that there are few known cases in the United States, NIH and CDC may have to rely on the cooperation of other countries with sufficient number of cases in order to carry on the proposed research. However, data from other countries may be different due to different definitions of Zika virus disease and microcephaly. Demonstrating the link between the Zika virus and microcephaly may depend not only on the presence of the virus, but also on environmental and nutritional factors. In addition, shifting case definitions and a lack of baseline data makes it difficult to determine the increase, if any, in microcephaly and how much can be attributed to the Zika virus. The presence of a high percentage of asymptomatic cases makes it difficult to conduct epidemiological studies, both in identifying exposed and unexposed individuals for case control studies. Prior infection or co-infection with another virus such as dengue may complicate any analyses. NIH officials told us that prior work on similar viruses has allowed them to make rapid progress on both a DNA-based vaccine (based on prior work on West Nile Virus), and a live attenuated virus vaccine modeled after the dengue virus vaccine that is currently in phase 3 clinical trials in Brazil. NIH officials told us that prior "platform" work on similar viruses has expedited response to the Zika outbreak, and in the development of diagnostic tests and vaccines. With regard to the dengue vaccine, NIH provided us with the following timeline: It has taken more than 16 years, and trials are not yet complete. NIH officials told us that given their past experience with the development of vaccine for dengue fever, a vaccine for Zika could be ready for use in an emergency situation in three to four years, in the best case scenario. However, when we asked NIH about this estimate, NIH stated that the National Institute of Allergy and Infectious Diseases plans to begin a Phase I clinical trial within this calendar year. If a candidate vaccine shows promise in Phase I testing, additional clinical testing could begin by 2017 in countries where the disease is found, if the outbreak is still ongoing. The progress of these additional tests, and whether they can contribute to successful licensure, depends on a number of factors, including scientific and technical progress, as well as the size of any ongoing Zika outbreaks during clinical testing. For this reason, it is difficult to provide an exact estimate for the time it will take to develop a Zika vaccine from preclinical studies through clinical testing and licensure. Zika virus disease poses new challenges to vaccine development and testing. This disease has specific and important implications for pregnant women. There are substantial knowledge gaps in current understanding of Zika, irrespective of the affected population. Since Zika virus disease is associated with, and may cause, adverse fetal outcomes, pregnant women are at particular risk and may benefit from measures such as vaccines. There are several current scientific and structural barriers to developing and testing vaccines for pregnant women. Overcoming these barriers may extend timeframes for vaccine testing and approval. The information we have from NIH and our prior work suggests that development of a Zika virus vaccine may take longer than anticipated by NIH. Biosurveillance: Ongoing Challenges and Future Considerations for DHS Biosurveillance Efforts. GAO-16-413T. Washington, D.C.: February 11, 2016. Air Travel and Communicable Diseases: Comprehensive Federal Plan Needed for U.S. Aviation System's Preparedness. GAO-16-127. Washington, D.C.: December 16, 2015. Emerging Animal Diseases: Actions Needed to Better Position USDA to Address Future Risks. GAO-16-132. Washington, D.C.: December 15, 2015. Climate Change: HHS Could Take Further Steps to Enhance Understanding of Public Health Risks. GAO-16-122. Washington, D.C.: October 5, 2015. Biosurveillance: Challenges and Options for the National Biosurveillance Integration Center. GAO-15-793. Washington, D.C.: September 24, 2015. Biosurveillance: Additional Planning, Oversight, and Coordination Needed to Enhance National Capability. GAO-15-664T. Washington, D.C.: July 8, 2015. Federal Veterinarians: Efforts Needed to Improve Workforce Planning. GAO-15-495. Washington, D.C.: May 26, 2015. Biological Defense: DOD Has Strengthened Coordination on Medical Countermeasures but Can Improve Its Process for Threat Prioritization. GAO-14-442. Washington, D.C.: May 15, 2014. National Preparedness: HHS Has Funded Flexible Manufacturing Activities for Medical Countermeasures, but It Is Too Soon to Assess Their Effect. GAO-14-329. Washington, D.C.: March 31, 2014. National Preparedness: HHS Is Monitoring the Progress of Its Medical Countermeasure Efforts but Has Not Provided Previously Recommended Spending Estimates. GAO-14-90. Washington, D.C.: December 27, 2013. Homeland Security: An Overall Strategy Is Needed to Strengthen Disease Surveillance in Livestock and Poultry. GAO-13-424. Washington, D.C.: May 21, 2013. National Preparedness: Efforts to Address the Medical Needs of Children in a Chemical, Biological, Radiological, or Nuclear Incident. GAO-13-438. Washington, D.C.: April 30, 2013. Influenza: Progress Made in Responding to Seasonal and Pandemic Outbreaks. GAO-13-374T. Washington, D.C.: February 13, 2013. Homeland Security: Agriculture Inspection Program Has Made Some Improvements, but Management Challenges Persist. GAO-12-885. Washington, D.C.: September 27, 2012. Biosurveillance: Nonfederal Capabilities Should Be Considered in Creating a National Biosurveillance Strategy. GAO-12-55. Washington, D.C.: October 31, 2011. National Preparedness: Improvements Needed for Acquiring Medical Countermeasures to Threats from Terrorism and Other Sources. GAO-12-121. Washington, D.C: October 26, 2011. Homeland Security: Challenges for the Food and Agriculture Sector in Responding to Potential Terrorist Attacks and Natural Disasters. GAO-11-946T. Washington, D.C.: September 13, 2011. Homeland Security: Actions Needed to Improve Response to Potential Terrorist Attacks and Natural Disasters Affecting Food and Agriculture. GAO-11-652. Washington, D.C.: August 19, 2011. Influenza Vaccine: Federal Investments in Alternative Technologies and Challenges to Development and Licensure. GAO-11-435. Washington, D.C.: June 27, 2011. Influenza Pandemic: Lessons from the H1N1 Pandemic Should Be Incorporated into Future Planning. GAO-11-632. Washington, D.C: June 27, 2011. Live Animal Imports: Agencies Need Better Collaboration to Reduce the Risk of Animal-Related Diseases. GAO-11-9. Washington, D.C.: November 8, 2010. Biosurveillance: Efforts to Develop a National Biosurveillance Capability Need a National Strategy and a Designated Leader. GAO-10-645. Washington, D.C.: June 30, 2010. Veterinarian Workforce: The Federal Government Lacks a Comprehensive Understanding of Its Capacity to Protect Animal and Public Health. GAO-09-424T. Washington, D.C.: February 26, 2009. Influenza Pandemic: Sustaining Focus on the Nation's Planning and Preparedness Efforts. GAO-09-334. Washington, D.C: February 26, 2009. Veterinarian Workforce: Actions Are Needed to Ensure Sufficient Capacity for Protecting Public and Animal Health. GAO-09-178. Washington, D.C.: February 4, 2009. Influenza Pandemic: HHS Needs to Continue Its Actions and Finalize Guidance for Pharmaceutical Interventions. GAO-08-671. Washington, D.C.: September 30, 2008. Emergency Preparedness: States Are Planning for Medical Surge, but Could Benefit from Shared Guidance for Allocating Scarce Medical Resources. GAO-08-668. Washington, D.C.: June 13, 2008. Influenza Pandemic: Efforts Underway to Address Constraints on Using Antivirals and Vaccines to Forestall a Pandemic. GAO-08-92. Washington, D.C.: December 21, 2007. Influenza Vaccine: Issues Related to Production, Distribution, and Public Health Messages. GAO-08-27. Washington, D.C: October 31, 2007. Global Health: U.S. Agencies Support Programs to Build Overseas Capacity for Infectious Disease Surveillance. GAO-08-138T. Washington, D.C.: October 4, 2007. Agricultural Quarantine Inspection Program: Management Problems May Increase Vulnerability of U.S. Agriculture to Foreign Pests and Diseases. GAO-08-96T. Washington, D.C.: October 3, 2007. Global Health: U.S. Agencies Support Programs to Build Overseas Capacity for Infectious Disease Surveillance. GAO-07-1186. Washington, D.C.: September 27, 2007. Influenza Pandemic: DOD Combatant Commands' Preparedness Efforts Could Benefit from More Clearly Defined Roles, Resources, and Risk Mitigation. GAO-07-696. Washington, D.C.: June 20, 2007. Influenza Pandemic: Efforts to Forestall Onset Are Under Way; Identifying Countries at Greatest Risk Entails Challenges. GAO-07-604. Washington, D.C.: June 20, 2007. Avian Influenza: USDA Has Taken Important Steps to Prepare for Outbreaks, but Better Planning Could Improve Response. GAO-07-652. Washington, D.C.: June 11, 2007. Influenza Pandemic: DOD Has Taken Important Actions to Prepare, but Accountability, Funding, and Communications Need to be Clearer and Focused Departmentwide. GAO-06-1042. Washington, D.C.: September 21, 2006. Homeland Security: Management and Coordination Problems Increase the Vulnerability of U.S. Agriculture to Foreign Pests and Disease. GAO-06-644. Washington, D.C.: May 19, 2006. Influenza Vaccine: Shortages in 2004-05 Season Underscore Need for Better Preparation. GAO-05-984. Washington, D.C.: September 30, 2005. 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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Emerging infectious diseases constitute a clear and persistent threat to the health and well-being of people and animals around the world. The Zika virus, which at present appears to be primarily transmitted to humans by infected mosquitos, can cause symptoms including fever, rash, and joint pain. A large ongoing outbreak is occurring in Brazil that started in May 2015. As of February 24, 2016, over 100 cases of U.S. travel-associated Zika virus disease cases have been reported. Due to concerns about its potential impact, you asked GAO to present preliminary observations on the Zika virus. This statement addresses (1) the epidemiology and transmission of the Zika virus disease, including reporting on the incidence of disease and what is known about its link to microcephaly; (2) detection and testing methods; (3) methods for mosquito control; and (4) the proposed federal research agenda as it relates to the Zika virus and Zika virus disease. To report on these questions, GAO reviewed relevant peer-reviewed scientific literature, epidemiological alerts, agency documents, and prior GAO work from 2003-2016 on related topics; consulted experts in the fields of virology, infectious diseases, and vector control, including industry representatives; and interviewed officials of the CDC and NIH. While several countries have reported outbreaks of Zika virus disease--which appear to be primarily transmitted to humans by mosquitos--unanswered questions remain regarding the epidemiology and transmission of the disease. Many factors--including a large number of asymptomatic patients and patients with mild symptoms, and a lack of a consistent international case definition of Zika virus disease--complicate understanding of the virus and may hinder responses to the current outbreak. For example, an estimated 80 percent of individuals infected with the Zika virus may not manifest clinical symptoms. As a result, incidence of the infection may be underestimated. Questions also remain regarding the strength of the association between Zika virus infection and two other conditions: microcephaly and Guillain-Barre syndrome. A lack of validated diagnostic tests, consistent international case definitions, and trend information may also contribute to difficulty in estimating the prevalence of the virus. The United States uses two diagnostic tests for Zika, and according to the U.S. Centers for Disease Control and Prevention (CDC), while there are no commercially-available diagnostic tests for Zika, an antibody-based test for Zika virus was recently authorized for Emergency Use by the U.S. Food and Drug Administration. Diagnosing Zika virus infection is also complicated because it is difficult to differentiate it from other similar diseases, such as dengue or yellow fever. For example, a person previously infected with dengue could be falsely identified as also having been exposed to the Zika virus (and vice-versa). Moreover, the World Health Organization has acknowledged the need for a consistent case definition--that is, a set of uniform criteria to define the disease for public health surveillance and to determine who is included in the count and who is excluded. Additionally, a lack of pattern and trend data has made surveillance challenging. Because Zika virus disease cannot yet be prevented by drugs or vaccines, vector (mosquito) control remains a critical factor in preventing and mitigating the occurrence of this disease. There are three methods for mosquito control: (1) standing water treatment, (2) insecticides, and (3) emerging technologies. Mosquito control has been achieved in some locations by methods such as reducing or chemically-treating water sources where mosquitoes breed or mature, or by insecticide dispersal. Emerging technologies, including biological control methods--such as infecting mosquitoes with bacteria-- genetically-modified mosquitoes, and auto-dissemination traps, show some promise but are still in development and testing phases. The National Institutes of Health (NIH) and the CDC have identified several high priority areas of research. Research priorities include basic research to understand viral replication, pathogenesis, and transmission, as well as the biology of the mosquito vectors; potential interactions with co-infections such as dengue and yellow fever viruses; linkages between Zika and the birth defect microcephaly; improving diagnostic tests; vaccine development; and novel vector control methods. These efforts are ambitious, and agencies may face challenges in implementing this agenda. GAO is not making recommendations at this time.
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Some of the TARP performance audit recommendations we made were program-specific, while others addressed crosscutting issues such as staffing and communications. Our program-specific recommendations focused on the following TARP initiatives: Bank investment programs: CPP was designed to provide capital to financially viable financial institutions through the purchase of preferred shares and subordinated debentures. Community Development Capital Initiative provided capital to Community Development Financial Institutions by purchasing preferred stock. Capital Assessment Program (CAP) was created to provide capital to institutions not able to raise it privately to meet Supervisory Capital Assessment Program--or "stress test"-- requirements. This program was never used. Credit market programs: Term Asset-backed Securities Loan Facility (TALF) provided liquidity in securitization markets for various asset classes to improve access to credit for consumers and businesses. SBA 7(a) Securities Purchase Program provided liquidity to secondary markets for government-guaranteed small business loans in the Small Business Administration's (SBA) 7(a) loan program. American International Group (AIG) Investment Program (formerly Systemically Significant Failing Institutions Program) provided support to AIG to avoid disruptions to financial markets from AIG's possible failure. Automotive Industry Financing Program aimed to prevent a significant disruption of the American automotive industry through government investments in the major automakers. Home Affordable Modification Program (HAMP) divides the cost of reducing monthly payments on first-lien mortgages between Treasury and mortgage holders/investors and provides financial incentives to servicers, borrowers, and mortgage holders/investors for loans modified under the program. Principal Reduction Alternative (PRA) pays incentives to mortgage holders/investors for principal reduction in conjunction with a HAMP loan modification for homeowners with a current loan-to-value ratio exceeding 115 percent. The Second-Lien Modification Program (2MP) provides incentives for second-lien holders to modify or extinguish a second-lien mortgage when a HAMP modification has been initiated on the first-lien mortgage for the same property. Home Affordable Foreclosure Alternatives (HAFA) provides incentives for short sales and deeds-in-lieu of foreclosure as alternatives to foreclosure for borrowers unable or unwilling to complete the HAMP first-lien modification process. Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (Hardest Hit Fund or HHF) supports innovative measures developed by state housing finance agencies and approved by Treasury to help borrowers in states hit hardest by the aftermath of the housing crisis. Federal Housing Administration's (FHA) Short Refinance Program provides underwater borrowers--those with properties that are worth less than the principal remaining on their mortgage--whose loans are current and are not insured by FHA with the opportunity to refinance into an FHA-insured mortgage. As of August 22, 2016, our performance audits of the TARP programs resulted in 74 recommendations to Treasury. Treasury implemented 62, or approximately 84 percent. Three of the implemented recommendations were closed based on actions taken by Treasury since we last reported on the status of our TARP recommendations in September 2015--all three recommendations were MHA-related. Five recommendations remain open. Treasury partially implemented three of the recommendations (that is, took some steps toward implementation) and had not taken any steps to implement the remaining two recommendations. Each of the five recommendations for which Treasury took some or no implementation steps were directed at MHA housing programs. Seven recommendations have been closed as not implemented because we determined that they were outdated and no longer applicable due to the evolving nature of the programs. Of these recommendations, one was closed since September 2015 and was directed at CPP. Three of these seven recommendations were related to CPP and two to MHA programs. As of August 22, 2016, Treasury implemented six of nine recommendations for CPP. For example, we recommended that Treasury apply lessons learned from CPP implementation to similar programs, such as the Small Business Lending Fund (SBLF)--specifically, by including a process for reviewing regulators' viability determinations of eligible applicants. Treasury changed the SBLF process to include additional evaluation by a central application review committee for all eligible applicants who had not been approved by their federal regulator. Treasury also took steps to provide information from its evaluation to the regulator when their views differed. These steps should help ensure that applicants will receive consistent treatment across different regulators. Since August 2015, one of our CPP-related recommendations was closed without being implemented by Treasury. In March 2012, we recommended that the Secretary of the Treasury consider analyzing and reporting on remaining and former CPP participants separately. In particular, we noted that remaining CPP institutions tended to be less profitable and held riskier assets than other institutions of similar asset size. We analyzed financial data on 352 remaining CPP institutions and 256 former CPP institutions that exited CPP and found that the remaining CPP institutions had significantly lower returns on average assets and higher percentages of noncurrent loans than former CPP and non-CPP institutions. They also held less regulatory capital and reserves for covering losses. Although our analysis found differences in the financial health of remaining and former CPP institutions, we noted that Treasury's quarterly financial analysis of CPP institutions did not distinguish between them. Treasury said it is not likely to consider analyzing and reporting on remaining and former CPP participants separately. Treasury believes that providing information about the financial position of institutions in CPP was unnecessary because it is publicly available to interested parties through regulatory filings or other sources. We closed this recommendation as not implemented because circumstances have changed significantly since we made the recommendation. Specifically, 363 institutions were in CPP around the time we made the recommendation, and the analysis we recommended was intended to provide Treasury useful information about the relative likelihood of remaining institutions repaying their investments and exiting CPP. However, Treasury has been winding down CPP. When we last conducted an analysis of the financial condition of the 16 institutions that remained in CPP as of February 2016, most of them continued to exhibit signs of financial weakness. Treasury officials recognized that the remaining CPP firms generally have weaker capital levels and worse asset quality than firms that exited the program. They further noted that this situation was a function of the life cycle of the program, because stronger institutions had greater access to new capital and were able to exit, while the weaker institutions have been unable to raise the capital needed to exit the program. Treasury believes that the remaining institutions likely will not be able to repay their investments in full. Consequently, we determined that the recommendation was no longer applicable. As of August 22, 2016, Treasury implemented 22 of our 29 MHA-related recommendations. Three of the 22 recommendations were implemented after our September 2015 report on the status of TARP recommendations: In February 2014, we recommended that Treasury ensure that its MHA compliance agent assess servicer compliance with Limited English Proficiency (LEP) relationship management guidance, once it was established. Treasury issued clarifying LEP guidance to MHA program servicers in April 2014. In June 2016, Treasury provided us with copies of the final report on the results of the compliance reviews of the larger MHA program servicers' implementation of LEP guidance. Treasury also provided specific examination policies and procedures used by MHA Compliance agent in its reviews of program servicers' implementation of LEP requirements. In October 2014, we recommended that Treasury conduct periodic evaluations to help explain differences among MHA servicers in the reasons for denying applications for trial modifications. Since the issuance of that report, Treasury conducted two denial reason rate reviews in 2015--one looking at 11 MHA servicers with a high concentration of various denial reasons and the other looking at 7 MHA servicers--to understand the prevailing reasons for their use of specific denial reason codes (ineligible mortgage, request incomplete, and offer not accepted/withdrawn). According to Treasury officials, the results of these and other evaluations helped inform Treasury's decision to implement Streamline HAMP to help address the most common denial reason (i.e., failure to submit required documentation). Treasury also began conducting quarterly compliance reviews at the largest MHA servicers to verify the accuracy of denial reasons reported. In March 2016, we recommended that Treasury review potential unexpended balances by estimating future expenditures of the MHA program, which would impact its lifetime cost estimate for the program. Treasury stated that it historically assumed that all funds obligated for MHA would be spent in furtherance of its mandate under EESA to preserve homeownership and protect home prices. In February 2016, following the enactment of legislation that terminates MHA on December 31, 2016, Treasury lowered the lifetime cost estimate for MHA, from $29.8 billion to $25.1 billion, which Treasury said would continue to be reflected in its public reports on TARP. Treasury has taken some actions to address three of the open recommendations directed at the MHA programs: In June 2010, we recommended that Treasury expeditiously report activity under PRA, including the extent to which servicers determined that principal reduction was beneficial to investors but did not offer it, to ensure transparency in the implementation of this program feature across servicers. Starting with the monthly MHA performance report for the period through May 2011, Treasury began reporting summary data on the PRA program. Specifically, Treasury provides information on PRA trial modification activity as well as median principal amounts reduced for active permanent modifications. In addition, Treasury's public MHA loan-level data files include information on the results of analyses of borrowers' net present value under PRA and indicate whether principal reduction was part of the modification. While this information would allow interested users with the capability to analyze the extent to which principal reduction was beneficial but not offered overall, it puts the burden on others to analyze and report the results publicly. Also, the publicly available data do not identify individual servicers and thus cannot be used to assess the implementation of this program feature across servicers. Our recommendation was intended to ensure transparency in the implementation of this program feature across servicers, which would require that information be reported on an individual servicer basis to allow comparison between servicers and highlight differences in the policies and practices of individual servicers. We maintain that Treasury partially implemented this recommendation and should take action to fully implement it. In October 2014, we recommended that Treasury conduct periodic evaluations using analytical methods, such as econometric modeling, to help explain differences among MHA servicers in redefault rates. Such analyses could help inform compliance reviews, identify areas of weaknesses and best practices, and determine the need for additional program policy changes. Treasury subsequently conducted an analysis to compare redefault rates among servicers and to determine whether servicers' portfolio of HAMP-modified loans performed at, above, or below expectations for the metrics analyzed. Although they performed these analyses, Treasury officials maintained that such analyses are inherently limited and therefore they did not intend to repeat them. However, by not periodically conducting analyses of differences in servicer redefault rates and capitalizing on the information these methods provide, Treasury risks making policy decisions based on potentially incomplete information and may miss opportunities to identify best practices to assist the greatest number of eligible borrowers. Thus, we continue to maintain that Treasury should take action to fully implement this recommendation. This will continue to be important after December 2016, when the HAMP program is closed to new entrants, since borrowers are eligible for up to 6 years of pay-for-performance incentives if they are able to maintain good standing on their modified loan payments. In March 2016, we recommended that Treasury deobligate funds that its review showed likely would not be expended. Treasury's most recent estimates identified $4.7 billion in potential excess funds, of which Treasury has deobligated $2 billion as of August 22, 2016. For the additional $2.7 billion in potential excess funds Treasury identified, Treasury stated that once servicers report all final transactions to the MHA system of record in late 2017, it plans to calculate the maximum potential expenditures under MHA and deobligate any estimated excess funds at that time, as appropriate. Given the uncertainties in estimating future participation and the associated expenditures--in particular, the effect of Streamline HAMP which was not fully implemented at the time of Treasury's last program estimate--it will be important for Treasury to update its cost estimates as additional information becomes available and take timely action to deobligate likely excess funds. Finally, Treasury has not taken action to address two open recommendations directed at MHA: In February 2014, we recommended that Treasury require its MHA compliance agent to take steps to assess the extent to which servicers established internal control programs that effectively monitored compliance with fair lending laws applicable to MHA programs. As we noted in the report, both the MHA Servicer Participation Agreement and MHA Handbook require that servicers have an internal control program to monitor compliance with relevant consumer protection and fair lending laws. In April 2014, Treasury officials stated that they planned to continue efforts to promote fair lending policies. However, they noted that they believed that the federal agencies with supervisory authority remain in the best position to monitor servicer compliance with fair lending laws and that they did not plan to implement this recommendation. Representatives of the federal regulators said that their fair lending reviews have a broader overall focus that may not specifically focus on MHA activities. Moreover, our analysis identified some statistically significant differences among four large MHA program servicers in the number of denials and cancellations of trial modifications and in the potential for redefault of permanent modifications for certain protected groups. Evaluating the extent to which servicers have developed and maintained internal controls to monitor compliance with fair lending laws could give Treasury additional assurances that servicers have implemented MHA programs in compliance with fair lending laws. In July 2015, we recommended that Treasury develop and implement policies and procedures to better ensure that changes to TARP- funded housing programs are based on evaluations that comprehensively and consistently met the key elements of benefit- cost analysis. Treasury agreed that it is important to assess the benefits and costs of proposed program improvements, and that it would continue to consider the costs of program enhancements and balance those considerations with the overall objective of helping struggling homeowners. Treasury also noted that, given the scheduled application deadline for MHA on December 30, 2016, it did not anticipate making significant policy changes to the MHA programs. Although the deadline for new MHA program applicants is December 30, 2016, elements of the MHA program will remain in effect after the application deadline. For example, in the case of a HAMP loan modification, borrowers are eligible for program benefits for up to 6 years. As such, we continue to maintain that Treasury should take action to fully implement the partially implemented and open recommendations. We will continue to assess the status of these recommendations considering program activity and actions taken by Treasury. We provided a draft of this report to Treasury for comment. Treasury had no formal or technical comments on the draft report. We are sending copies of this report to the appropriate congressional committees. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 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 key contributions to this report are listed in appendix II. The following table summarizes the status of our TARP performance audit recommendations as of August 22, 2016. We classify each recommendation as implemented, partially implemented (the agency took steps to implement the recommendation but more action would be required to fully implement it), open (the agency had not taken steps to implement the recommendation), and closed, not implemented (the agency decided not to take action to implement the recommendation and we no longer consider the recommendation relevant). The recommendations are listed by report. In addition to the contact named above, Harry Medina (Assistant Director), Jason Wildhagen (Analyst-in-Charge), Anne Akin, Bethany Benitez, John Karikari, Barbara Roesmann, Mathew J. Scire, Jena Sinkfield, and Karen Tremba made key contributions to this report.
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The Emergency Economic Stabilization Act of 2008 (EESA) authorized the creation of TARP to address the most severe crisis that the financial system had faced in decades. Treasury has been the primary agency responsible for TARP programs. EESA provided GAO with broad oversight authorities for actions taken under TARP and included a provision that GAO report at least every 60 days on TARP activities and performance. This 60-day report describes the status of GAO's prior TARP performance audit recommendations to Treasury as of August 2016. In particular, this report discusses Treasury's implementation of GAO's recommendations focusing on two programs: CPP and MHA. GAO's methodologies included assessing relevant documentation from Treasury, interviewing Treasury officials, and reviewing prior TARP reports issued by GAO. As of August 2016, GAO's performance audits of the Troubled Asset Relief Program (TARP) activities have resulted in 74 recommendations to the Department of the Treasury (Treasury). Treasury has implemented 62 of the 74 recommendations, some of which were aimed at improving the transparency and internal controls of TARP. Five recommendations remain open, all pertaining to the Making Home Affordable (MHA) program, a collection of housing programs designed to help homeowners avoid foreclosure. Of the five: Treasury has partially implemented three open MHA recommendations--that is, it has taken some steps toward implementation but needs to take more actions. For example, in March 2016, GAO recommended that Treasury deobligate funds that its review showed would likely not be expended. Treasury's most recent estimates identified $4.7 billion in potential excess funds, of which Treasury has deobligated $2 billion as of August 2016. Two additional MHA recommendations remain open--that is, Treasury has not taken steps to implement them. GAO recommended that Treasury take steps to assess the extent to which servicers have established internal control programs that monitor compliance with fair lending laws applicable to MHA programs. GAO also recommended that Treasury establish a standard process to better ensure that changes to TARP-funded MHA programs are based on comprehensive cost-benefit analyses. Treasury told GAO they would consider this recommendation but has noted that it plans no major program policy changes given the December 30, 2016, application deadline for the MHA program. Seven recommendations have been closed but were not implemented. Five were related to the Capital Purchase Program (CPP) and MHA and two to other TARP activities. Generally, these recommendations were closed because GAO determined that the recommendations were no longer applicable. GAO continues to maintain that Treasury should take action to fully implement the three partially implemented and two open MHA recommendations. GAO will continue to assess the status of these recommendations considering new program activity and any further actions taken by Treasury.
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The Medicaid program is one of the largest social programs in the federal budget, and one of the largest components of state budgets. Although it is one federal program, Medicaid consists of 56 distinct state-level programs created within broad federal guidelines and administered by state Medicaid agencies. Each state develops its own Medicaid administrative structure for carrying out the program. It also establishes eligibility standards; determines the type, amount, duration, and scope of covered services; and sets payment rates. Each state is required to describe the nature and scope of its program in a comprehensive plan submitted to CMS, with federal funding depending on CMS's approval of the plan. In general, the federal government matches state Medicaid spending for medical assistance according to a formula based on each state's per capita income. The federal contribution ranges from 50 to 77 cents of every state dollar spent on medical assistance in fiscal year 2004. For most state Medicaid administrative costs, the federal match rate is 50 percent. For skilled professional medical personnel engaged in program integrity activities, such as those who review medical records, 75 percent federal matching is available. States and CMS share responsibility for protecting the integrity of the Medicaid program. States are responsible for ensuring proper payment and recovering misspent funds. CMS has a role in facilitating states' program integrity efforts and seeing that states have the necessary processes in place to prevent and detect improper payments. With varying levels of staff and resources, states conduct Medicaid program integrity activities that include screening providers and monitoring provider billing patterns. CMS requires that states collect and verify basic information on potential providers, including whether they meet state licensure requirements and are not prohibited from participating in federal health care programs. CMS also requires that each state Medicaid agency have certain information processing capabilities, including a Medicaid Management Information System (MMIS) and a Surveillance and Utilization Review Subsystem (SURS). The SURS staff use claims data to develop statistical profiles on services, providers, and beneficiaries to identify potential improper payments. They refer suspected overpayments or overutilization cases to other units in the Medicaid agency for corrective action and potential fraud cases to their state's Medicaid Fraud Control Unit for investigation and prosecution. Medicaid Fraud Control Units can, in turn, refer some cases to the HHS OIG, the Federal Bureau of Investigation (FBI), and the Department of Justice for further investigation and prosecution. State Medicaid programs have experienced a wide range of abusive and fraudulent practices by providers. States have prosecuted providers that bill for services, drugs, and supplies that are not authorized or are not provided. States' investigators have also uncovered deliberate provider upcoding--billing for more expensive procedures than were actually provided--to increase their Medicaid reimbursement. In some cases, they have prosecuted providers for marketing irregularities, such as offering cash, free services, or gifts to induce referrals. While the covert nature of these schemes makes it difficult to quantify the dollars lost to Medicaid fraud or abuse, recent cases provide examples of substantial financial losses. As shown in table 1, these range from a nearly $1.6 million state case that involved billing for transportation services never provided and deliberate upcoding to a $50 million nationwide settlement with a major pharmaceutical and equipment supplier over illegal marketing practices. States take various approaches to conducting program integrity activities that can result in substantial cost savings. Tightened enrollment controls allow states to more closely scrutinize those providers considered to be at high risk for improper billing. Through provider screening, stricter enrollment procedures, and reenrollment programs, states may prevent high-risk providers from enrolling or remaining in their Medicaid programs. Some states require providers to use advanced technologies to confirm beneficiary eligibility before services are rendered. States also use information systems that afford them the ability to query multiple databases efficiently in order to identify improper claims and types of providers and services most likely to foster problems. In addition, state legislatures have assisted their Medicaid agencies by directing that certain preventive or detection controls be used, or by broadening the sanctions they can use against providers that bill improperly. In general, states target their program integrity procedures to those providers that pose the greatest financial risk to their Medicaid programs. They may focus on types of providers whose billing practices have exhibited unusual trends or that are not subject to state licensure. States may also focus on individual providers that have been excluded from the program in the past or for other reasons. For such providers, most states impose more rigorous enrollment checks than the minimum required by CMS. Expanded measures applied to high-risk providers include on-site inspections of the applicant's facility prior to enrollment, criminal background checks, requirements to obtain surety bonds that protect the state against certain financial losses, and time-limited enrollment. Thirty- four of the states that completed our inventory reported using at least one of these enrollment controls. Twenty-nine states reported conducting on-site inspections for providers considered at high-risk for inappropriate billing before allowing them to enroll or reenroll in their Medicaid programs. Such visits help validate a provider's existence and generate information on its service capacity. Illinois and Florida officials reported that performing on-site inspections of some providers' facilities is a valuable part of their statewide Medicaid provider enrollment control efforts. For each targeted provider group, Illinois Medicaid staff inspect the facilities, inventory, and vehicles (in the case of nonemergency transportation providers). Officials told us that their on-site inspections prevented 49 potential providers that did not meet requirements from enrolling. By not approving these providers to bill Medicaid, Illinois officials estimated that the state avoided a total of $1 million in potentially improper payments for 2001 and 2002. Florida uses a contractor to conduct on-site inspections of potential providers. Since April 2003, Florida Medicaid officials have required its contractor to randomly select and inspect 10 percent of all new applicants, including pharmacies, physicians, billing agents, nurses, and other types of providers. Thirteen states reported that they conduct criminal background checks for certain high-risk providers rather than relying solely on applicants' self- disclosures. These background checks entail verifying with law enforcement agencies the information given in provider enrollment applications regarding criminal records. As of December 2003, states conducting criminal background checks included New Jersey (for employees of pharmacies, clinical laboratories, transportation services, adult medical day care, and physician group practices), Wisconsin (for employees of licensed agencies, such as home health care agencies), and Illinois (for employees of nonemergency transportation providers). Four states that conduct criminal background checks also have the authority to require surety bonds for the targeted providers. Surety bonds, also known as performance bonds, protect the state against financial loss in case the terms of a contract are not fulfilled. Florida officials established a $50,000 bonding requirement for durable medical equipment (DME) suppliers, independent laboratories, certain transportation companies, and non-physician-owned physician groups. In Washington, home health agencies must be Medicare-certified to participate in the state's Medicaid program. Medicare requires a surety bond of $50,000 or 15 percent of annual Medicare payments to the home health agency based on the agency's most recent cost report to CMS, whichever is greater. Twenty-five states require all of their Medicaid providers to periodically reapply for enrollment. This process allows state officials to verify provider information such as medical specialty credentials and ownership and licensure status. Eleven states reported having probationary and time- limited enrollment policies specifically for high-risk providers, with reenrollment requirements ranging from 6 months to 3 years. Examples of their probationary and reenrollment policies follow: California officials estimated avoiding over $200 million in Medicaid expenditures in state fiscal year 2003 by increasing scrutiny of new provider applications and placing providers in provisional status for the first 12 to 18 months of their enrollment. Those who continue to meet the standards for enrollment and have not been terminated are converted automatically to enrolled provider status. In Illinois, nonemergency transportation providers are on probation for the first 180 days of their enrollment. Medicaid officials explained that this probationary period gives the state time to monitor the provider's billing patterns and conduct additional on-site inspections, as needed. They said that any negative findings uncovered during the probationary period would result in a provider's immediate termination without cause, meaning the provider could not grieve the termination decision. Nevada officials reported that certain types of providers located in the state--including dentists, DME suppliers, and home health agencies--are permitted to enroll for only a 1-year period and must reapply each year to continue billing Medicaid. Out-of-state providers are limited to a 3-month enrollment period and must reapply to continue to bill the Nevada program. Wisconsin officials reported that the state requires nonemergency transportation providers to reenroll annually, while all other types of providers must submit new enrollment applications every 3 years. Many states deter fraud, abuse, and error by using advanced technologies and keeping their provider rolls up to date. States seek to enhance program integrity activities by investing in information technologies that enable them to preauthorize services and improve their data processing capabilities. They also contract with companies that specialize in claims and utilization review--analyses of claims to identify aberrant billing patterns--to augment their in-house capabilities. In addition, nearly all states take steps to eliminate paying claims billed under unauthorized provider numbers. Most states use advanced technology to prevent improper payments by requiring providers to validate beneficiary eligibility before services are rendered. For example, 32 states use online systems that require pharmacies to obtain state approval confirming a beneficiary's eligibility before filling a prescription. Using a different technology, New York implemented a system that stores information on the magnetic strip of a beneficiary's Medicaid card, which also includes the beneficiary's photo. By swiping the card, providers are able to verify eligibility before providing a service. In another application, New York uses technology to track prescribing patterns and curb overutilization. New York officials told us that physicians ordering drugs and medical supplies must use the state's interactive telephone system to obtain payment authorization numbers. This system leads physicians through a menu-driven series of questions about patient diagnosis and treatment alternatives before an authorization number is given. Officials estimated that during the 6-month period from April to September 2003, the state saved $15.4 million by using its interactive phone system for prior approvals. In addition to verifying beneficiary eligibility and controlling utilization, many states also use technology to better target their claims review efforts. Of the 47 states that completed our inventory, 34 reported targeting their reviews to claims from high-risk providers. These reviews entail verifying the appropriateness of the services billed by, and payments made to, a provider within a certain period. Twenty-one of the 34 states reported using advanced information technology to more effectively pinpoint aberrant billing patterns. These states developed data warehouses to store several years of information on claims, providers, and beneficiaries in integrated databases, and they use data-mining software to look for unusual patterns that might indicate provider abuse. Additional software detects claims with incongruous billing code combinations. For example, a state can link related service claims, such as emergency transportation invoices and hospital emergency department claims for the same client. States that use these technologies to enhance their targeted reviews include the following: New York officials reported that targeted reviews of claims submitted by part-time clinics, mobile radiology service providers, midwives, and physician assistants saved an estimated $24.9 million in state fiscal years 2002 through 2003. Ohio officials reported that targeted reviews by Ohio's in-house utilization review staff saved an estimated $14 million in state fiscal years 2000 through 2002. Texas officials reported recouping over $18.9 million in state fiscal year 2003. Officials also noted that the state's targeted reviews and queries enabled them to identify weaknesses in state payment safeguards. For example, the state identified hospital "unbundling"--billing separately for services that were already included in a combined reimbursement-- through its analysis of claims data. Some states rely on contractors to supply claims review expertise that either is lacking in-house or that supplements existing staff resources. Of the states completing our national inventory, 24 states use contractors to review Medicaid claims either before or after payments are made. Colorado used contractors to increase the volume of claims reviewed. Kansas reported that its contractor's 2003 review of hospital inpatient claims resulted in recovering over $4.7 million. North Carolina officials estimated that since 1999, the state's contractors' reviews of inpatient claims resulted in an estimated 4-to-1 return on investment. Out-of-date information increases the risk that Medicaid will pay individuals who are not eligible to bill the program. For instance, in California, individuals were found to have falsely billed the Medicaid program using the provider billing numbers of retired practitioners. Forty- three states reported that, at a minimum, they cancel or suspend inactive provider billing numbers. For example: New Jersey deactivates billing numbers that have been inactive for 12 months. To reactivate their numbers, providers must submit their requests using their office letterhead. If a number is reactivated and there is no billing activity within 6 months, New Jersey will again deactivate the number. North Carolina notifies providers with billing numbers that have been inactive for 12 months before taking any action. The state terminates the number if the provider does not respond within 30 days and updates the state's provider database each month, listing which billing numbers have been terminated. Many states have made Medicaid program integrity a priority, either through directives to employ certain preventive or detection controls or by expanding enforcement authority to use against providers that bill improperly. In some states, legislative initiatives have encouraged Medicaid program integrity units to adopt information technology; in others, legislation has expanded Medicaid agencies' authority to investigate providers and beneficiaries and impose sanctions. Of the states that completed our inventory, 24 reported having legislation mandating sanctions against fraudulent providers or beneficiaries. Examples of legislative activities from 2 states are as follows: New Jersey: Under a 1996 law, all licensed prescribers and certain licensed health care facilities are required to use tamper-proof, nonreproducible prescription order blanks. State Medicaid officials estimated annual savings of at least $6 million since the law's implementation in 1997. The law also made prescription forgery a third-degree felony. Texas: In September 2003, Texas law consolidated responsibility for Medicaid program integrity in the Office of Inspector General in the Health and Human Services Commission and funded 200 additional positions to investigate Medicaid fraud. The legislation also expanded the state's powers to conduct claims reviews, impose prior authorization and surety bond requirements, and issue subpoenas. The law also required that the state explore the feasibility of using biometric technology--such as fingerprint imaging--as an eligibility verification tool. Texas budget officials estimated that over a 2-year period, net savings would exceed $1 billion. CMS has provided states with information, tools, and training to improve their Medicaid program integrity efforts. The agency has funded a pilot that measures payment accuracy rates and another pilot that analyzes provider billing patterns across the Medicare and Medicaid programs. In addition, CMS has facilitated states' sharing of information on program integrity issues and related federal policies. Also, CMS has conducted occasional reviews of state program integrity operations. However, these reviews are infrequent and limited in scope. CMS is conducting a 3-year Payment Accuracy Measurement (PAM) pilot to develop estimates of the level of accuracy in Medicaid claims payments, taking into account administrative error and estimated loss due to abuse or fraud. At its conclusion, in fiscal year 2006, PAM will become a permanent, mandatory program--to be known as the Payment Error Rate Measurement (PERM) initiative--satisfying requirements of the Improper Payments Information Act of 2002. Under PERM, states will be expected to ultimately reduce their payment error rates by better targeting program integrity activities in their Medicaid programs and the State Children's Health Insurance Program (SCHIP) and tracking their performance over time. PERM is intended to develop an aggregate measure of states' claims payment errors as well as error rates for seven health care service areas-- inpatient hospital services, long-term care services, independent physicians and clinics, prescription drugs, home and community-based services, primary care case management, and other services and supplies. CMS proposes developing annual national error rate estimates from rates developed by one-third of the states rather than requiring each state to compute an error rate each year. CMS further proposes that in the 2-year period after a state determines its error rate, the state develop and implement a plan to address the causes of improper payments uncovered in its review. CMS is in the third and final year of PAM. Each year, CMS tested various measurement methodologies and expanded participation to additional states. CMS used information from the 9 states participating in PAM's first year, fiscal year 2002, to help refine the measurement methodologies for subsequent years. CMS also constructed a single model to be used by all 12 states participating in the second year of PAM, which began in fiscal year 2003. Those states that reported on Medicaid fee-for-service payment accuracy had rates ranging from 81.4 percent to 99.7 percent. Sources of inaccurate payments included incomplete documentation of a service, inappropriate coding, clerical errors, as well as provision of medically unnecessary services. In PAM's final year, fiscal year 2004, the 27 participating states will include in their claims reviews payments made under SCHIP and verification of recipient eligibility, among other things. Beginning in fiscal year 2006, the PAM pilot will transition into the PERM initiative to produce both state-specific and national estimates of Medicaid program error rates. Although state responses to CMS's pilot were generally positive, program integrity officials raised concerns about the cyclical nature of the permanent program. Officials in several states--including Illinois, Louisiana, and North Carolina--indicated concern that the 3-year cycle presents significant staffing challenges. They contend that it is impractical for a state to employ sufficient staff, with the necessary expertise, to perform these functions only once every 3 years. Officials in other states, such as New York and Washington, expressed concern that the measurement effort might result in diverting staff from ongoing, and potentially more productive, program integrity activities. In its April 2004 final report on the second year of the pilot, CMS identified high state staff turnover and limited availability of medical records as obstacles that kept some states from completing their pilots on time. In another effort to support states' program integrity activities, CMS facilitates the sharing of health benefit and claims information between the Medicaid and Medicare programs. For example, it arranged for state Medicaid agency officials to gain access to confidential provider information contained in Medicare's restricted fraud alerts (a warning against emerging schemes), provider suspension notices, and databases. One of the Medicare-Medicaid information-sharing activities is a data match pilot that received funding from several sources. The purpose of this state-operated pilot is to identify improper billing and utilization patterns by matching Medicare and Medicaid claims information on providers and beneficiaries. Such matching is important, as fraudulent schemes can cross program boundaries. CMS initiated the Medicare-Medicaid data match pilot in California in September 2001. CMS estimated that in its first year, the pilot achieved a 21-to-1 return on investment, with about $58 million in cost avoidance, savings, and overpayment recoupments to the Medicaid and Medicare programs. In addition, over 80 cases were opened against suspected fraudulent providers. For example, the pilot identified the following: One provider billed more than 24 hours a day. Although the Medicare claims alone were not implausible, once the Medicare and Medicaid dates of service were matched, the provider showed up as billing for more than a reasonable number of hours in a day. Several providers serving beneficiaries eligible for both programs purposely submitted flawed Medicare bills, received full payment from Medicaid based on the denied Medicare claims, then resubmitted corrected Medicare bills and were paid again. In assessing the results of the California pilot, CMS officials noted challenges that delayed implementation for about a year. These included time-consuming activities such as negotiating data-sharing agreements with the contractors that process Medicare claims and reconciling data formatting differences in Medicare and Medicaid claims. CMS officials believe that these challenges were largely due to the novel nature of the effort and that implementation should proceed more smoothly in other states. In fiscal year 2003, CMS expanded the data match pilot to six additional states: Florida, Illinois, New Jersey, North Carolina, Pennsylvania, and Texas. CMS also sponsors a Medicaid fraud and abuse technical assistance group (TAG), which provides a forum for states to discuss issues, solutions, resources, and experiences. TAG meets monthly by teleconference and convenes annually in one location. Each of four geographic areas-- Midwest, Northeast, South, and West--has two TAG delegates from state Medicaid program integrity units who participate in the teleconferences. Any state may participate in the teleconferences and 18 do so regularly. Delegates discuss concerns raised by the states in their geographic regions and convey information on agenda items to their states. For example, state officials told us that they have discussed issues such as new data systems and other fraud and abuse detection tools. TAG members also use this forum to alert one another to emerging schemes. In one instance, TAG members discussed a drug diversion operation involving serostim--a drug used to treat AIDS patients for degenerative weight loss--from a Pennsylvania mail-order pharmacy. Serostim--which costs about $5,000 for a month's supply--was being sold to body builders to enhance muscle tissue. According to New York officials, over a 2-year period, the state's Medicaid expenditures for serostim increased from $4 million to $50 million. Following this discovery, several states, including New York, instituted prior authorization policies for the drug. In addition, states use TAG to communicate and propose policy changes to CMS. For example, through TAG, the states proposed that CMS modify the federal 60-day repayment rule. This rule implements a statutory requirement that state Medicaid agencies refund the federal portion of any identified overpayments within 60 days of discovery, except in cases where providers or other entities have filed for bankruptcy or gone out of business. Some states participating in TAG contend that complying with the 60-day repayment rule discourages states from pursuing complex cases for which recoveries may prove difficult and instead gives them an incentive to focus on easy overpayment cases. CMS has supported and endorsed legislative proposals to amend the statute in the case of overpayments resulting from fraud or abusive practices, proposing that the federal share be returned 60 days after recovery versus 60 days after discovery. However, CMS's efforts to change the policy have not been successful. CMS officials point to compliance reviews of the states' program integrity activities as the agency's principal means for exercising oversight. CMS conducts on-site reviews to assess whether state Medicaid program integrity efforts comply with federal requirements, such as those governing provider enrollment, claims review, utilization control, and coordination with each state's Medicaid Fraud Control Unit. Such on-site reviews typically last 5 days and are announced 30 days in advance. If reviewers find states significantly out of compliance, they may revisit the states to verify that they have taken corrective action. However, teams conducting these reviews do not evaluate the effectiveness of state activities on reducing improper payments. Staffing and funding constraints have limited this oversight effort. From January 2000 through December 2003, CMS completed reviews of 29 states. At its current pace of conducting eight state compliance reviews each year, CMS would not begin a second round of nationwide reviews before fiscal year 2007. CMS officials explained that the agency can conduct only eight reviews per year, given the resources allocated for Medicaid program integrity. For fiscal year 2004, CMS allocated eight staff nationally--about four full-time equivalent (FTE) staff in headquarters and four FTEs distributed across the agency's 10 regional offices--and an operating budget of $26,000 for overseeing the states' Medicaid program integrity activities, including the cost of conducting compliance reviews. This level of funding represents a $14,000, or 35 percent, decline from the previous year. At the peak of its funding in fiscal year 2002, CMS's operating budget for these activities was about $80,000. According to agency officials, the size of the federal Medicaid program integrity group relative to its responsibilities has resulted in its use of Medicare's program integrity resources to help implement pilot projects and conduct technical assistance activities. From the states' perspective, compliance reviews have provided useful information for identifying needed areas of improvement and potential best practices. For example, Michigan officials told us that after CMS's review, they took steps to strengthen their provider enrollment activities. In another state, CMS discovered numerous areas of noncompliance. The state agency's provider enrollment processes did not require applicants to disclose prior criminal convictions or business ownership and control. The state agency also did not investigate potential instances of fraud and abuse identified by its SURS unit or beneficiary complaints, or make the required referrals to the state Medicaid Fraud Control Unit. As a result of these findings, CMS required the state to develop a corrective action plan. About a year later, the review team revisited the state and learned that it had begun to implement corrective actions. CMS has pointed to its compliance reviews of the states' program integrity activities as providing the agency with information on the states' strengths and vulnerabilities to improper payments. However, as we reported in February 2002, these structured site reviews focus on state compliance and do not evaluate the effectiveness of the states' fraud and abuse prevention and detection activities for reducing improper payments. The varied and substantial cases of Medicaid fraud or abuse that have been uncovered around the country reaffirm the need for Medicaid agencies to safeguard program dollars. Such losses have prompted program integrity units and legislatures in many states to take active roles in prevention and detection efforts. In their attempts to limit improper payments, states have pursued a broad range of methods, such as tightened provider enrollment and advanced claims review techniques. As some states report identifying substantial cost savings, further enhancements in program integrity activities are likely to generate positive returns on such investments. At the same time, there may be a disparity between the level of CMS resources devoted to Medicaid program integrity and the program's vulnerability to financial losses. On its current schedule for conducting state program integrity compliance reviews, CMS will not obtain a programwide picture of states' prevention and detection activities more than once every 6 years. Moreover, because these reviews are limited in scope, CMS does not evaluate states' effectiveness in addressing improper payments. In addition, findings from the payment accuracy pilot indicate a need for CMS to further enhance state efforts to prevent and detect payment errors. In written comments on a draft of this report, CMS officials took issue with our observation that the level of resources devoted to federal oversight of states' program integrity activities may be inconsistent with the financial risks to the program. They pointed out that the agency's program integrity work should be viewed as part of its broader financial management of state Medicaid programs. Officials noted that 65 financial management staff in CMS regional offices review Medicaid expenditures, conduct financial management reviews, provide technical assistance to states on financial policy issues, and analyze state cost allocation and administrative claiming plans. Officials also stated that the agency expects to hire 100 new Medicaid financial management staff this fiscal year and has contracted with HHS OIG to perform additional auditing. (See app. II.) We commend CMS for the actions it has begun to take to address its Medicaid financial management challenges. As we have reported in recent years, CMS had fallen short in providing the level of oversight required to ensure states' Medicaid financial responsibility. When fully implemented, CMS's efforts to increase the number of staff dedicated to reviewing the states' financial management reports should help it strengthen the fiscal integrity of Medicaid's state and federal partnership. However, financial management and program integrity, while related functions, are not interchangeable. Financial management focuses on the propriety of states' claims for federal reimbursement, such as the matching, administrative, and disproportionate share funds that CMS provides the states. In contrast, program integrity--the focus of this report--addresses federal and state efforts to ensure the propriety of payments made to providers. Unlike the commitment to expand resources for Medicaid financial management activities, CMS has not indicated a similar commitment to enhancing its support and oversight of states' program integrity efforts. CMS officials also provided technical comments, which we incorporated into the report where appropriate. 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 date. At that time, we will send copies of this report to the Secretary of HHS, Administrator of CMS, appropriate congressional committees, and other interested parties. In addition, this report will be available at no charge on GAO's Web site at http://www.gao.gov. We will also make copies available to others upon request. If you or your staff have any questions about this report, please call me at (312) 220-7600. Another contact and key contributors to this report are listed in appendix III. Appendix I: States' Approaches to Medicaid Program Integrity A surety bond may protect the state against certain financial losses. A data warehouse stores information on claims, providers, and beneficiaries in an integrated database. Data mining is the analysis of large databases to identify unusual utilization patterns. Data matching and modeling are techniques that allow comparisons of providers within specialties to determine normative patterns in claims data so that aberrant patterns can be identified. Smart technology is software that analyzes patterns in claims data and feeds the information back into the system to identify new patterns. A drug formulary is a list of prescription medications approved for coverage. National Association of Surveillance and Utilization Review Officials. In addition to the contact named above, Enchelle Bolden, Helen Chung, Hannah Fein, Shirin Hormozi, and Geri Redican made key contributions to this report.
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During fiscal year 2002, Medicaid--a program jointly funded by the federal government and the states--provided health care coverage for about 51 million low-income Americans. That year, Medicaid benefit payments reached approximately $244 billion, of which the federal share was about $139 billion. The program is administered by state Medicaid agencies with oversight provided by the Centers for Medicare & Medicaid Services (CMS) in the Department of Health and Human Services. Medicaid's size and diversity make it vulnerable to improper payments that can result from fraud, abuse, or clerical errors. States conduct program integrity activities to prevent, or detect and recover, improper payments. This report provides information on (1) the types of provider fraud and abuse problems that state Medicaid programs have identified, (2) approaches states take to ensure that Medicaid funds are paid appropriately, and (3) CMS's efforts to support and oversee state program integrity activities. To address these issues, we compiled an inventory of states' Medicaid program integrity activities, conducted site visits in eight states, and interviewed CMS's Medicaid program integrity staff. Various forms of fraud and abuse have resulted in substantial financial losses to states and the federal government. Fraudulent and abusive billing practices committed by providers include billing for services, drugs, equipment, or supplies not provided or not needed. Providers have also been found to bill for more expensive procedures than actually provided. In recent cases, 15 clinical laboratories in one state billed Medicaid $20 million for services that had not been ordered, an optical store falsely claimed $3 million for eyeglass replacements, and a medical supply company agreed to repay states nearly $50 million because of fraudulent marketing practices. States report that their Medicaid program integrity activities generated cost savings by applying certain measures to providers considered to be at high risk for inappropriate billing and by generally strengthening their program controls for all providers. Thirty-four of the 47 states that completed our inventory reported using one or more enrollment controls with their high-risk providers, such as on-site inspections of the applicant's facility, criminal background checks, or probationary or time-limited enrollment. States also reported using information technology to integrate databases containing provider, beneficiary, and claims information and conduct more efficient utilization reviews. For example, 34 states reported conducting targeted claims reviews to identify unusual patterns that might indicate provider abuse. In addition, states cited legislation that directed the use of certain preventive or detection controls or authorized enhanced enforcement powers as lending support to their Medicaid program integrity efforts. At the federal level, CMS is engaged in several initiatives designed to support states' program integrity efforts; however, its oversight of these state efforts is limited. CMS initiatives include two pilots, one to measure the accuracy of each state's Medicaid claims payments and another to identify aberrant provider billing by linking Medicaid and Medicare claims information. CMS also provides technical assistance to states by sponsoring monthly teleconferences where states can discuss emerging issues and propose policy changes. To monitor Medicaid program integrity activities, CMS teams conduct on-site reviews of states' compliance with federal requirements, such as referring certain cases to the state agency responsible for investigating Medicaid fraud. In fiscal year 2004, CMS allocated $26,000 and eight staff positions nationally for overseeing the states' Medicaid program integrity activities, including the cost of compliance reviews. With this level of resources, CMS aims to review 8 states each year until all 50 states and the District of Columbia have been covered. From January 2000 through December 2003, CMS has conducted reviews of 29 states and, at its current pace, would not begin a second round of reviews before fiscal year 2007. This level of effort suggests that CMS's oversight of the states' Medicaid program integrity efforts may be disproportionately small relative to the risk of serious financial loss.
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Yellowstone National Park is at the center of about 20 million acres of publicly and privately owned land, overlapping three states--Idaho, Montana, and Wyoming. This area is commonly called the greater Yellowstone area or ecosystem and is home to numerous species of wildlife, including the largest concentration of free-roaming bison in the United States. Bison are considered an essential component of this ecosystem because they contribute to the biological, ecological, cultural, and aesthetic purposes of the park. However, because the bison are naturally migratory animals, they seasonally attempt to migrate out of the park in search of suitable winter range. The rate of exposure to brucellosis in Yellowstone bison is currently estimated at about 50 percent. Transmission of brucellosis from bison to cattle has been documented under experimental conditions, but not in the wild. Scientists and researchers disagree about the factors that influence the risk of wild bison transmitting brucellosis to domestic cattle and are unable to quantify the risk. Consequently, the IBMP partner agencies are working to identify risk factors that affect the likelihood of transmission, such as the persistence of the brucellosis-causing bacteria in the environment and the proximity of bison to cattle, and are attempting to limit these risk factors using various management actions. The National Park Service first proposed a program to control bison at the boundary of Yellowstone National Park in response to livestock industry concerns over the potential transmission of brucellosis to cattle in 1968. Over the next two decades, concerns continued over bison leaving the park boundaries, particularly after Montana's livestock industry was certified brucellosis-free in 1985. In July 1990, the National Park Service, Forest Service, and Montana's Department of Fish, Wildlife and Parks formed an interagency team to examine various alternatives for the long- term management of the Yellowstone bison herd. Later, the interagency team was expanded to include USDA's Animal and Plant Health Inspection Service and the Montana Department of Livestock. In 1998, USDA and Interior jointly released a draft environmental impact statement (EIS) analyzing several proposed alternatives for long-term bison management and issued a final EIS in August 2000. In December 2000, the interagency team agreed upon federal and state records of decision detailing the long- term management approach for the Yellowstone bison herd, commonly referred to as the IBMP. "maintain a wild, free-ranging population of bison and address the risk of brucellosis transmission to protect the economic interest and viability of the livestock industry in Montana." Although managing the risk of brucellosis transmission from bison to cattle is at the heart of the IBMP, the plan does not seek to eliminate brucellosis in bison. The plan instead aims to create and maintain a spatial and temporal separation between bison and cattle sufficient to minimize the risk of brucellosis transmission. In addition, the plan allows for the partner agencies to make adaptive management changes as better information becomes available through scientific research and operational experience. Under step one of the plan, bison are generally restricted to areas within or just beyond the park's northern and western boundaries. Bison attempting to leave the park are herded back to the park. When attempts to herd the bison back to the park are repeatedly unsuccessful, the bison are captured or lethally removed. Generally, captured bison are tested for brucellosis exposure. Those that test positive are sent to slaughter, and eligible bison--calves and yearlings that test negative for brucellosis exposure--are vaccinated. Regardless of vaccination-eligibility, partner agency officials may take a variety of actions with captured bison that test negative including, temporarily holding them in the capture facility for release back into the park or removing them for research. In order to progress to step two, cattle can no longer graze in the winter on certain private lands north of Yellowstone National Park and west of the Yellowstone River. Step two, which the partner agencies expected to reach by the winter of 2002/2003, would use the same management methods on bison attempting to leave the park as in step one, with one exception--a limited number of bison, up to a maximum of 100, that test negative for brucellosis exposure would be allowed to roam in specific areas outside the park. Finally, step three would allow a limited number of untested bison, up to a maximum of 100, to roam in specific areas outside the park when certain conditions are met. These conditions include determining an adequate temporal separation period, gaining sufficient experience in managing bison in the bison management areas, and initiating an effective vaccination program using a remote delivery system for eligible bison inside the park. The partner agencies anticipated reaching this step on the northern boundary in the winter of 2005/2006 and the western boundary in the winter of 2003/2004. In 1997, as part of a larger land conservation effort in the greater Yellowstone area, the Forest Service partnered with the Rocky Mountain Elk Foundation--a nonprofit organization dedicated to ensuring the future of elk, other wildlife and their habitat--to develop a Royal Teton Ranch (RTR) land conservation project. The ranch is owned by and serves as the international headquarters for the Church Universal and Triumphant, Inc. (the Church)--a multi-faceted spiritual organization. It is adjacent to the northern boundary of Yellowstone National Park and is almost completely surrounded by Gallatin National Forest lands. The overall purpose of the conservation project was to preserve critical wildlife migration and winter range habitat for a variety of species, protect geothermal resources, and improve recreational access. The project included several acquisitions from the Church, including the purchase of land and a wildlife conservation easement, a land-for-land exchange, and other special provisions such as a long-term right of first refusal for the Rocky Mountain Elk Foundation to purchase remaining RTR lands. The project was funded using fiscal years 1998 and 1999 Land and Water Conservation Fund appropriations totaling $13 million. Implementation of the IBMP remains in step one because cattle continue to graze on RTR lands north of Yellowstone National Park and west of the Yellowstone River. All Forest Service cattle grazing allotments on its lands near the park are held vacant, and neither these lands nor those acquired from the Church are occupied by cattle. The one remaining step to achieve the condition of cattle no longer grazing in this area is for the partner agencies to acquire livestock grazing rights on the remaining private RTR lands. Until cattle no longer graze on these lands, no bison will be allowed to roam beyond the park's northern border, and the agencies will not be able to proceed further under the IBMP. Although unsuccessful, Interior attempted to acquire livestock grazing rights on the remaining RTR lands in August 1999. The Church and Interior had signed an agreement giving Interior the option to purchase the livestock grazing rights, contingent upon a federally approved appraisal of the value of the grazing rights and fair compensation to the Church for forfeiture of this right. The appraisal was completed and submitted for federal review in November 1999. In a March 2000 letter to the Church, Interior stated that the federal process for reviewing the appraisal was incomplete and terminated the option to purchase the rights. As a result, the Church continues to exercise its right to graze cattle on the RTR lands adjacent to the north boundary of the park, and the agencies continue operating under step one of the IBMP. More recently, the Montana Department of Fish, Wildlife and Parks has re- engaged Church officials in discussions regarding a lease arrangement for Church-owned livestock grazing rights on the private RTR lands. Given the confidential and evolving nature of these negotiations, specific details about funding sources or the provisions being discussed, including the length of the lease and other potential conditions related to bison management, are not yet available. Although the agencies continue to operate under step one of the plan, they reported several accomplishments in their September 2005 Status Revew i of Adaptve Management Elements for 2000-2005. These accomplishments included updating interagency field operating procedures, vacating national forest cattle allotments within the bison management areas, and conducting initial scientific studies regarding the persistence of the brucellosis-causing bacteria in the environment. The lands and conservation easement acquired by the federal government through the RTR land conservation project sought to provide critical habitat for a variety of wildlife species including bighorn sheep, antelope, elk, mule deer, bison, grizzly bear, and Yellowstone cutthroat trout; however, the value of this acquisition for the Yellowstone bison herd is minimal because bison access to these lands remains limited. The Forest Service viewed the land conservation project as a logical extension of past wildlife habitat acquisitions in the northern Yellowstone region. While the Forest Service recognized bison as one of the migrating species that might use the habitat and noted that these acquisitions could improve the flexibility of future bison management, the project was not principally directed at addressing bison management issues. Through the RTR land conservation project, the federal government acquired from the Church a total of 5,263 acres of land and a 1,508-acre conservation easement using $13 million in Land and Water Conservation Fund appropriations. As funding became available and as detailed agreements could be reached with the Church, the following two phases were completed. In Phase I, the Forest Service used $6.5 million of its fiscal year 1999 Land and Water Conservation Fund appropriation to purchase Church-owned lands totaling 3,107 acres in June and December 1998 and February 1999. Of these lands, 2,316 acres were RTR lands, 640 acres were lands that provided strategic public access to other Gallatin National Forest lands, and 151 acres were an in-holding in the Absaroka Beartooth Wilderness area. In Phase II, BLM provided $6.3 million of its fiscal year 1998 Land and Water Conservation Fund appropriations for the purchase of an additional 2,156 acres of RTR lands and a 1,508-acre conservation easement on the Devil's Slide area of the RTR property in August 1999. In a December 1998 letter to the Secretary of the Interior from the Chairs and Ranking Minority Members of the House and Senate Committees on Appropriations, certain conditions were placed on the use of these funds. The letter stated that "the funds for phase two should only be allocated by the agencies when the records of decision for the 'Environmental Impact Statement for the Interagency Bison Management Plan for the State of Montana and Yellowstone National Park' are signed and implemented." The letter also stated that the Forest Service and Interior were to continue to consult with and gain the written approval of the governor of Montana regarding the terms of the conservation easement. Under the easement, numerous development activities, including the construction of commercial facilities and road, are prohibited. However, the Church specifically retained the right to graze domestic cattle in accordance with a grazing management plan that was to be reviewed and approved by the Church and the Forest Service. The Church's grazing management plan was completed in December 2002, and the Forest Service determined in February 2003 that it was consistent with the terms of the conservation easement. The Church currently grazes cattle throughout the year on portions of its remaining 6,000 acres; however, as stipulated in the conservation easement and incorporated in the grazing management plan, no livestock can use any of the 1,508 acres covered by the easement between October 15 and June 1 of each calendar year, the time of year that bison would typically be migrating through the area. While purchased for wildlife habitat, geothermal resources, and recreational access purposes, the federally acquired lands and conservation easement have been of limited benefit to the Yellowstone bison. As previously noted, under the IBMP, until cattle no longer graze on private RTR lands north of the park and west of the Yellowstone River, no bison are allowed to migrate onto these private lands and the partner agencies are responsible for assuring that the bison remain within the park boundary. Mr. Chairman, this concludes my prepared statement. Because we are in the very early stages of our work, we have no conclusions to offer at this time regarding these bison management issues. We will continue our review and plan to issue a report near the end of this year. I would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. For further information on this testimony, please contact 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. David P. Bixler, Assistant Director; Sandra Kerr; Diane Lund; and Jamie Meuwissen made key contributions to this statement. Wid feManagement: Negota ons on a LongTerm Plan or Managing Yellowstone Bson Still Ongoing. GAO/RCED-00-7. Washington, D.C.: i November 1999. Wid feManagement: Issues Concernng the Management of Bson and Elk Herds n Ye owstone Natonal Park. GAO/T-RCED-97-200. llii Washington, D.C.: July 1997. 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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Yellowstone National Park, in northwest Wyoming, is home to a herd of about 3,600 free-roaming bison. Some of these bison routinely attempt to migrate from the park in the winter. Livestock owners and public officials in states bordering the park have concerns about the bison leaving the park because many are infected with brucellosis--a contagious bacterial disease that some fear could be transmitted to cattle, thus potentially threatening the economic health of the states' livestock industry. Other interested groups believe that the bison should be allowed to roam freely both within and outside the park. In an effort to address these concerns, five federal and Montana state agencies agreed to an Interagency Bison Management Plan (IBMP) in December 2000 that includes three main steps to "maintain a wild, free-ranging population of bison and address the risk of brucellosis transmission to protect the economic interest and viability of the livestock industry in Montana." This testimony discusses GAO's preliminary observations on the progress that has been made in implementing the IBMP and the extent to which bison have access to lands and an easement acquired for $13 million in federal funds. It is based on GAO's visit to the greater Yellowstone area, interviews with federal and state officials and other interested stakeholders, and review of related documents. More than 6 years after approving the IBMP, the five federal and state partnering agencies--the federal Department of the Interior's National Park Service and Department of Agriculture's Animal and Plant Health Inspection Service and Forest Service, and the state of Montana's Departments of Livestock and of Fish, Wildlife and Parks--remain in step one of the three-step plan primarily because cattle continue to graze on certain private lands. A key condition for the partner agencies to progress further under the plan requires that cattle no longer graze in the winter on certain private lands north of Yellowstone National Park and west of the Yellowstone River to minimize the risk of brucellosis transmission from bison to cattle; the agencies anticipated meeting this condition by the winter of 2002/2003. Until this condition is met, bison will not be allowed to roam beyond the park's northern border in this area. While a prior attempt to acquire grazing rights on these private lands was unsuccessful, Montana's Department of Fish, Wildlife and Parks is currently negotiating with the private land owner to acquire grazing rights on these lands. Yellowstone bison have limited access to the lands and conservation easement that federal agencies acquired north of the park. In 1998 and 1999, as part of a larger conservation effort to provide habitat for a variety of wildlife species, protect geothermal resources, and improve recreational access, federal agencies spent nearly $13 million to acquire 5,263 acres and a conservation easement on 1,508 acres of private lands north of the park's border--lands towards which bison frequently attempt to migrate in the winter. The conservation easement prohibits development, such as the construction of commercial facilities and roads, on the private land; cattle grazing rights were retained by the land owner. The Yellowstone bison's access to these lands will remain limited until cattle no longer graze on the easement and certain other private lands in the area.
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Medicaid programs generally represent an open-ended entitlement under which the federal government is obligated to pay its share of expenditures for covered services provided to eligible individuals under each state's federally approved Medicaid plan. Under federal Medicaid law, to qualify for Medicaid coverage, individuals generally must fall within certain eligibility categories--such as children, pregnant women, adults in families with dependent children, and those who are aged or disabled-- and meet financial eligibility criteria. In addition, since 1986, federal law has required that, as a condition of Medicaid eligibility, individuals declare under penalty of perjury that they are citizens or nationals of the United States or in satisfactory immigration status. Eligibility is determined at the time of application, and for individuals enrolled in the program, at a regular basis referred to as redetermination. States differ in how they determine eligibility for Medicaid, and many took steps before 2006 to streamline their enrollment processes. While some states conduct all eligibility screening and determinations within the state's Medicaid agency, other states contract with different state agencies, counties, or other local governmental entities to conduct or assist with eligibility determinations. In some cases, states also utilize community-based organizations to assist with outreach and education in their Medicaid programs. Over the past decade, states have also made efforts to simplify the application process to make Medicaid programs more accessible to eligible families. As part of these efforts, many states implemented mail-in applications and ended requirements for face-to-face interviews. States also began coordinating Medicaid eligibility determinations with other public programs, such as school lunch programs and Temporary Assistance for Needy Families. Enacted in February 2006, the DRA includes a number of new requirements for state Medicaid programs. Most relevant to this report, as of July 1, 2006, the DRA required states to document citizenship of applicants and beneficiaries as a condition of receiving federal matching funds for their Medicaid expenditures. Under this provision, Medicaid applicants and beneficiaries who are undergoing redeterminations of eligibility must provide "satisfactory documentary evidence" of citizenship. Documenting citizenship is a onetime event completed by individuals either at application or, for those already enrolled, at their first redetermination of eligibility. (Fig. 1 illustrates the sequence of key events regarding the requirement from enactment of the DRA through February 2007.) The DRA explicitly exempts certain individuals from having to document citizenship, specifically those entitled to or enrolled in Medicare, certain individuals receiving Supplemental Security Income, and any additional populations as designated by the Secretary of HHS. In December 2006, Congress expanded the list of populations that are exempt, adding individuals receiving Social Security disability insurance benefits and children in foster care or children who are receiving adoption or foster care assistance. In implementing the DRA provision, CMS first provided guidance to states in a June 2006 letter to state Medicaid directors and subsequently published an interim final rule on July 12, 2006, almost 2 weeks after the DRA provision went into effect. In the interim final rule, CMS expanded upon the list of acceptable documents identified in the DRA and published regulations that grouped the documents by level of reliability, creating a hierarchy in the list and restricting the use of less reliable documents. As required under the DRA, certain documents, such as U.S. passports, are considered sufficient evidence of citizenship. The DRA requires that if an individual does not have one of these primary documents, the individual must produce specific types of documentation establishing citizenship, such as a U.S. birth certificate, as well as documentation establishing personal identity. The regulations published by CMS similarly identify primary, or tier 1, documents to establish citizenship. Under the regulations, if individuals do not have primary evidence, they are expected to produce secondary, or tier 2, evidence of citizenship, such as a military record showing a U.S. place of birth, as well as evidence of identity, such as a state-issued driver's license. If neither primary nor secondary evidence of citizenship is available, individuals may provide third tier evidence of citizenship to accompany evidence of identity. If primary evidence of citizenship is unavailable, secondary and third tier evidence do not exist or cannot be obtained in a reasonable time period, and the individual was born in the United States, then the individual may provide fourth tier evidence of citizenship, along with evidence of identity. (See table 1 and app. I.) In addition to prescribing a list of acceptable documents for verifying citizenship, the regulations issued by CMS specify, with one exception, that documents must be originals or copies certified by the issuing agency. The exception is that for a U.S. birth certificate, which is a tier 2 document, states may use a cross match with a state vital statistics agency to document a birth record. The regulations allow states to accept original documentation from individuals in person or through the mail. Under the regulations issued by CMS, states must provide applicants and Medicaid beneficiaries a "reasonable opportunity" to document their citizenship before denying or terminating Medicaid eligibility. States have flexibility in defining the length of the reasonable opportunity period. The regulations further explain that current Medicaid beneficiaries must remain eligible for benefits during this period but that states may terminate eligibility afterward if they determine that the beneficiary has not made a good faith effort to present documentation. In contrast, applicants are not eligible for Medicaid coverage until they submit the required documentation. The regulations also require states to assist individuals who are physically or mentally incapable of obtaining documentation and do not have a representative to assist them. However, the regulations do not specify criteria for determining who is capable or the level of assistance states should provide. CMS intends to monitor state implementation of the requirement, including the extent to which states use the most reliable evidence available to establish citizenship based on its hierarchy. States that do not comply with the regulations may face either denied or deferred payment of federal matching funds. In the interim final rule, CMS assessed potential administrative and fiscal effects of the requirement. For example, CMS estimated that individuals would need, on average, 10 minutes to acquire and provide the state with acceptable documentary evidence and that states would need 5 minutes per individual to verify citizenship and maintain current records. In addition, CMS determined that implementing the rule would have no consequential effect on costs for state, local, or tribal governments or the private sector. Under the rule, states may seek federal Medicaid matching funds for administrative expenditures associated with implementing the requirement at a 50 percent federal matching rate. States reported that the requirement resulted in barriers to access, such as delayed or lost Medicaid coverage for some eligible individuals. Of the 44 states, 22 reported a decline in Medicaid enrollment due to the requirement. Most that reported a decline in enrollment attributed it to delays in or losses of coverage for individuals who appeared to be eligible citizens, and all states reporting a decline reported that children were affected by the requirement. States that reported a decline in enrollment varied in their views of the effects on access to Medicaid coverage after the first year of implementation. State enrollment policies and whether an individual is an applicant or a beneficiary at redetermination are two factors that may have influenced the effect of the requirement on individuals' access. Half the states that reported implementing the requirement noted that the requirement resulted in declines in Medicaid enrollment. Of the 44 states, 22 states reported a decline in enrollment due to implementing the requirement, 12 reported no change in enrollment as a result of the requirement, and 10 reported that they did not know the effect of the requirement on enrollment (see fig. 1). Of the 22 states that reported a decline in enrollment due to the requirement, all responded that children were affected by the requirement, and 21 reported that adults were affected, with 2 specifying pregnant women. A few also responded that the aged and blind and disabled were also affected. Though states often cited a combination of reasons for the decline in Medicaid enrollment, when asked the primary reason, the majority of states (12 of 22) reported that enrollment declined because applicants who appeared to be eligible citizens experienced delays in receiving coverage. In addition, 5 of the 22 states identified the primary reason for the enrollment decline as current beneficiaries losing coverage, with 4 of the 5 states reporting that those individuals appeared eligible. Two states reported that declines were largely driven by denials in coverage for individuals who did not prove their citizenship. It was unclear from survey results, however, whether these individuals were determined ineligible because they were not citizens or simply because they did not provide the required documents within the time frames allowed by the state. (See fig. 3.) Two of the remaining 3 states reported that the primary reason for the decline was that individuals were discouraged from applying because of the requirement or were not responding to states' requests for documentation of citizenship. The extent of the decline in Medicaid enrollment due to the requirement in some individual states or nationally was unknown because not all states track the effect of the requirement on enrollment. However, 1 state that had begun tracking the effect reported (1) denying an average of 15.6 percent of its monthly applications because of insufficient citizenship documentation in the first 7 months following implementation and (2) terminating eligibility for an average of 3.2 percent of beneficiaries at redetermination per month over the same period and for the same reason. Overall, these denials and terminations represented over 18,000 individuals, who the state generally believed were eligible citizens. While not tracking the effect of the requirement on enrollment explicitly, 10 other states that attributed enrollment declines at least in part to applicants who were delayed or denied coverage also reported increases in monthly denials ranging from 1 to 14 percent after implementing the requirement. States reporting a decline in Medicaid enrollment differed in their views of the effects of the requirement on enrollment after the first year of implementation. Of the 22 states that reported a decline in enrollment, 17 states responded that they expected the downward enrollment trend to continue. Five of these states indicated that the declines would level off within approximately 1 year of implementation, citing, for example, a drop-off in terminations once their current beneficiaries have successfully documented their citizenship. Ten of the 17 states reported that they were unsure how long enrollment declines would continue or generally expected the trend to continue indefinitely. A few of these states noted concern about the ongoing effect on new applicants who will be unfamiliar with the requirement and may be denied enrollment or discouraged from applying. The remaining 5 of 22 states reported that they did not expect the decline to continue. Variation in the effects of the requirement on individuals' access may have resulted from different state enrollment policies. For example, states that reported a previous reliance on mail-in applications and redeterminations were more likely to report a decline in Medicaid enrollment. About two- thirds of the 22 states that reported a decline in enrollment indicated that individuals most commonly applied by mail before the requirement was implemented. In contrast, the majority of the 12 states that reported no change in enrollment reported that individuals most frequently applied in person before the requirement was implemented. In addition, prior to implementation, 6 states had documentation policies in place that were similar to the requirement. Three of these 6 states reported no change in enrollment, with 1 explaining that it was because the state already required (1) proof of birth to verify age and family relationship and (2) proof of identity for adults. Two of the 6 states reported a decline in enrollment caused by the requirement. Another enrollment policy that may have influenced the requirement's effect on access to Medicaid coverage was the amount of time states allowed individuals to comply with the requirement--otherwise known as reasonable opportunity periods. In total, 33 states reported the number of days they allowed applicants and beneficiaries to meet the requirement before denying applications or terminating eligibility, with limits generally ranging from 10 days to 1 year. Nine of the 33 states reported allowing applicants 30 days or less, and 4 of these states also reported a decline in enrollment due to the requirement. A few states reported allowing applicants and beneficiaries an indefinite amount of time to obtain and submit the necessary documentation, provided they were deemed as making a good faith effort. Some states' written policies indicated that the reasonable opportunity period could be extended, provided the individual notified the state that he or she was making a good faith effort to obtain the documentation but needed more time. The effect of the requirement on access may have also depended on whether the individual was a new applicant or a beneficiary at redetermination. Applicants who declare themselves citizens are not eligible for Medicaid coverage until they submit the required documentation, while beneficiaries at redetermination maintain their eligibility while collecting documents as long as they are within the reasonable opportunity period allowed by the state or deemed as making a good faith effort to comply with the requirement. For example, a pregnant woman at redetermination is eligible to have her 20-week ultrasound covered by Medicaid, even though she has not yet submitted her documentation to the state. In contrast, a pregnant woman who is a new Medicaid applicant would not be determined eligible for coverage until she submits her documentation (see fig. 4). In addition, applicants who were born out of state may have faced additional delays while attempting to obtain documentation from their birth state. For example, one state noted that it could take 6 months or more to obtain a birth certificate from another state. In addition, applicants in some states were given less time than beneficiaries to meet the requirement. Of the 33 states that provided information on their reasonable opportunity periods, 13 states reported that the time allowed for providing documentation was longer for beneficiaries at redetermination than for applicants, with this difference ranging from 24 to 320 days. Five of the 13 states reported allowing 45 days for applicants and 300 days or more for beneficiaries. States may offer more flexibility to Medicaid beneficiaries as CMS officials told us that for these individuals the state cannot terminate benefits without documenting that the beneficiary has not made a good faith effort to provide the necessary documentation. Although states reported investing resources to implement the requirement, potential fiscal benefits for the federal government and states are uncertain. To implement the requirement and assist individuals with compliance, all of the 44 states took a number of administrative measures, such as providing additional training for eligibility workers and hiring additional staff, and some also reported committing financial resources. Despite these measures, however, states reported that as a result of the requirement, individuals needed more assistance in person and it was taking the state longer on average to complete applications and redeterminations. According to states, two particular aspects of the requirement increased the burden of implementing it: (1) that documents must be originals and (2) the list of acceptable documents was complex and did not allow for exceptions. While CMS estimated federal and state savings from the requirement, the estimates may be overstated. All 44 states reported taking a number of administrative measures to implement the requirement and assist individuals with compliance. Measures most frequently taken by states included training eligibility workers, revising application and redetermination forms, conducting vital statistics data matches, and modifying information technology systems. For example, 1 state reported that in addition to training 18,000 staff on the requirement, it also provided training and information to community agencies, consumer advocates, and providers on how to assist individuals with compliance. Another state established data matches with Indian Health Services to obtain hospital records that met the requirement and built a Web site on which eligibility workers could search the state's vital records to document citizenship. To supplement the efforts of eligibility workers, 3 states reported having formed special units of staff focused entirely on assisting individuals to meet the requirement, particularly in difficult cases where eligibility workers had been unsuccessful in their attempts to help individuals comply. One of those states reported that it was in the process of expanding the size of its team from 22 workers to 40 workers. Table 2 lists the administrative measures frequently reported by states. Beyond these administrative measures, 40 percent of the 44 states reported having appropriated funds for implementation or planned to do so in future years. Specifically, 12 states reported that funds were appropriated in their state fiscal year 2007 to implement the requirement, which for the 10 states that specified the amount totaled over $28 million, with appropriations ranging from $350,000 to $10 million in individual states. Further, 15 states budgeted funds for implementation costs in state fiscal year 2008. While many states did not specifically appropriate funds toward implementing the requirement in state fiscal year 2007, this may have been due, in part, to the timing of the requirement within the budget year. States may not be budgeting funds for future years for various reasons, including that the burden of the requirement may decrease after the first year of implementation or that the state may face other budget constraints. For example, one state Medicaid office that reported a significant backlog in applications and redeterminations as a result of the requirement requested funds for implementation in state fiscal year 2008 and planned to renew those requests in state fiscal years 2009 and 2010, but was not sure whether the state legislature would appropriate the funds. Despite investments of resources, most states reported that the requirement resulted in the state spending more time completing applications and redeterminations and individuals needing more assistance in person during the process. Of the 44 states, 28 states reported increases in the level of assistance provided to clients in person, and 35 states reported an increase in the amount of time it took the state to complete applications and redeterminations. (See fig. 5.) States reporting no change in the level of in-person assistance or time spent completing applications and redeterminations since implementation were frequently states where individuals primarily applied for and renewed Medicaid enrollment in person prior to the requirement. Of the 35 states that reported increases in enrollment processing time, most reported that the requirement added 5 or more minutes per case to the processing time for applications and redeterminations. While only 1 of the 35 states expected an increase of less than 5 minutes per case, 9 states estimated an additional 5 to 15 minutes per case, and 16 states expected the requirement to add over 15 minutes of processing time per application or redetermination, well above the 5 minutes estimated by CMS in the interim final rule. One of these 16 states reported processing an average of over 150,000 applications per month in the 8 months following implementation. In that state, assuming an increase in processing time of a minimum of 16 minutes per application since implementing the requirement, this would have added at least 40,000 hours of staff time per month. Other states emphasized that the effect of the requirement on workload goes beyond the amount of time necessary to complete applications and redeterminations. For example, one state reported a 60 percent increase in phone calls (from 24,000 to 39,000 per month), a tenfold increase in voice messages (from 1,200 to 11,000 per month), and an 11 percent increase in the amount of time spent on each call. Though the requirement represented a change in enrollment procedures for most states, states reported that certain aspects of the requirement specified under federal regulations by CMS increased their implementation burden. More than 80 percent of states (36 of 44) reported facing administrative challenges in implementing the requirement, and many attributed the challenges to two specific aspects of the requirement outlined in the regulations, namely (1) that documents must be originals and (2) that the list of acceptable documentation was complex and did not allow for exceptions. In fact, nearly all states (42 of the 44) reported that having to provide original documentation posed a barrier to eligible citizens' meeting the requirement. Further, many states also reported that mandating originals affected state workload primarily because individuals did not feel comfortable mailing the documents to the state and instead began presenting them in person. With regard to the list of acceptable documents, states reported that the list was complex, often confusing both individuals and eligibility workers, and left states with no discretion to allow exceptions. For example, 1 state that documented citizenship for Medicaid prior to enactment of the DRA noted that when acceptable documentation was not available, the state made an assessment based on a preponderance of evidence, which included certain tribal documents excluded from CMS's list. Thirty-four states reported that an individual's inability to provide documents other than those defined under federal regulations by CMS created a barrier to individuals' compliance with the requirement. Table 3 presents some of the challenges reported by states to implement the requirement. When developing its interim final rule, CMS officials said that CMS considered the specifications of the DRA and other existing federal policies on documenting citizenship, including policies of SSA. CMS officials told us that after meeting the specifications of the DRA, the agency modeled its regulations after the policy established by SSA for documenting citizenship when individuals apply for a Social Security number. Specifically, SSA's policy mandates that documents be originals and includes a hierarchy of documents with restrictions on the use of less reliable documents. Also, the list of acceptable documents identified by CMS mirrors SSA's list with only a few exceptions. In contrast, however, SSA's policy allows more flexibility in special cases. For example, when a U.S.-born applicant for a Social Security number does not have any of the documents from the list, SSA's policy allows staff to work with their supervisors to determine what would be acceptable in those cases. CMS officials told us that CMS's list of acceptable documents represents a significant expansion of what was included in the DRA provision and is exhaustive and that they were not aware of any case where an individual was unable to provide any document from the list. To assist states and individuals in complying with documenting citizenship, CMS included some important tools in the regulations. For example, the regulations allow states to use data matches with state vital statistics agencies to verify citizenship and with other government agencies to verify identity, which could alleviate the need for individuals to submit original documents. While many states reported conducting data matches on behalf of individuals, several also expressed concerns that such matches required additional resources and could not be done for individuals born out of state. One state reported conducting 60,000 on-line inquiries per month into the state's vital records system after implementing the requirement. In one area of the state, however, nearly all children were born across state lines and therefore the state could not electronically verify their citizenship. The state reported that verifying citizenship for children in that portion of the state was especially difficult. While CMS officials confirmed that there is no nationwide database for verifying citizenship, they also told us that there are currently initiatives under way in more than one state to share vital statistics with other states through data matches. Though CMS expected some savings to result from the requirement in fiscal year 2008, the estimate did not account for the cost to states and the federal government to implement the requirement. CMS's Office of the Actuary estimated that the requirement would result in $50 million in savings for the federal government and $40 million in savings for states in fiscal year 2008, with all savings resulting from terminations of eligibility for individuals who were not citizens. Specifically, CMS assumed that 50,000 noncitizen beneficiaries (which represent less than 1 percent of Medicaid enrollment nationwide) would prove ineligible for Medicaid benefits and be terminated from the program. Though CMS authorized states to claim federal Medicaid matching funds for administrative expenditures related to implementing the requirement, and 15 states reported budgeting funds for 2008 in addition to the numerous other measures being taken by states, CMS's estimate of savings did not account for any increase in administrative expenditures by states or the federal government. CMS expected, however, that states would experience higher administrative costs during the first year of implementation with these costs decreasing in later years. In addition to not accounting for the cost of the requirement, survey results indicated that CMS may have overestimated the potential savings from the requirement because the intended effect of the requirement, that is, to prevent ineligible noncitizens from receiving Medicaid benefits, may be less prevalent than expected. When asked about potential savings from the requirement, only 5 of the 44 states reported expecting the requirement to result in a decrease in their expenditures for Medicaid benefits in state fiscal year 2008, due in large part to individuals who appeared to be eligible citizens who experienced delays in or lost coverage. Only 1 of the 5 states expecting savings reported that enrollment declines resulted in part from denials or terminations of Medicaid coverage for individuals who were determined ineligible because of their citizenship status. The remaining 39 states expected no savings (20 states) or reported that it was too early to know (19 states). Several of the 20 states that expected no savings in 2008 reported that though some individuals have experienced delays in coverage, those individuals were eligible citizens and would eventually provide the required documentation and receive coverage. In addition, 2 of these 20 states noted that they were not inappropriately financing Medicaid benefits for noncitizens in the past and so expected no savings. Of the 19 states that were unsure how the requirement would affect expenditures, 2 were still tracking the effects of the requirement. Another of these 19 states--a state that reported a decline in enrollment as a result of implementing the requirement--noted that it was difficult to determine whether it would result in lower costs or whether costs would increase, as the state expected individuals would wait to enroll until they were ill or injured, rather than receive preventive care that is less costly to provide. We provided a draft of this report to CMS for comment and received a written response, which is included in this report as appendix II. CMS also provided technical corrections, which we incorporated as appropriate. CMS commented that it generally did not disagree with the approach of our study, but raised several concerns regarding the sufficiency of the underlying data for, and certain aspects of, our findings. In particular, CMS characterized the report's conclusions as overstating the effect of the requirement on enrollment, and stated it had concerns about the fact that the states did not submit data to substantiate their responses to the survey questions on which we based our findings. CMS also commented on our findings related to the challenges posed by the requirement for states and individuals and the cost to states of implementing the requirement. Specific concerns raised and comments made by CMS, and our evaluation, follow. Regarding the sufficiency of underlying data for certain findings, CMS commented that our survey asked states about the effects of the requirement on enrollment, although states did not provide data to validate their responses. In addition, CMS expressed concerns that the draft report appeared to draw broad conclusions about the effect of the requirement from data provided by one state. The purpose of our work was to report on the initial effects of the requirement. Absent national CMS data on the effects and because state Medicaid offices were largely responsible for implementing the requirement, we determined they were the best source for this information. Though not all states could quantify the effect of the requirement on enrollment, 22 states reported that the requirement resulted in decreases in enrollment, 12 reported that the requirement had no effect on enrollment, and 10 reported not knowing the effect of the requirement on enrollment. We disagree with CMS's assertion that the draft report drew broad conclusions about the effect of the requirement on enrollment from one state's data. The report clearly indicates that these data are from a single state and further notes that the extent of the decline in Medicaid enrollment due to the requirement in some individual states and nationally is unknown. CMS raised concerns about one survey question that asked states that reported enrollment declines due to the requirement the reasons for those declines and also about the level of information provided regarding the degree to which the requirement deterred nonqualified aliens from applying for Medicaid. With regard to the first concern, in responding to our survey, states could check an option that said enrollment declines were caused by the delays in or losses of coverage for individuals who appeared eligible. CMS objected to the use of "appeared eligible," noting that the term is vague and subjective and that it tends to lead the respondent to certain conclusions. However, as we explain in the report, asking states to assess the citizenship status of individuals is consistent with most states' experience in making such determinations under the self- attestation policies that were in effect prior to the DRA provision. With regard to the second concern, we agree with CMS that our report provides limited information about the extent to which the requirement is deterring nonqualified aliens from applying for Medicaid. However, the report does discuss whether CMS had evidence that such individuals were falsely declaring citizenship when applying for Medicaid. Specifically, our report notes that CMS in its comments to the 2005 OIG report on state self- attestation policies acknowledged that the OIG did not find problems regarding false allegations of citizenship, and CMS was not aware of any such problems. CMS commented that the draft report overstated the effect of the requirement on enrollment because the majority of states reporting enrollment declines attributed the declines primarily to delays in receiving coverage rather than denials of coverage. Our report notes the implications for individuals of such delays in coverage. The report points out, for example, that a pregnant woman who is a citizen may be forced to forgo needed prenatal care while her coverage is delayed by efforts to meet the requirement. CMS also noted that its goal in implementing the requirement was to minimize the incidence of delays in or denials of eligibility due to the requirement. In response to our findings that two aspects of the requirement specified under regulations issued by CMS--namely that documents be originals and that the list of acceptable documents is complex and does not allow for exceptions--presented challenges to states and individuals, CMS commented that the agency has attempted to provide as much flexibility as possible and that other federal agencies require original documentation. Nonetheless, our survey results clearly indicated that these two aspects of the requirement are viewed by most states as posing barriers to access. In particular, 42 of 44 states reported that having to provide original documentation posed a barrier to eligible citizens' meeting the requirement, and 34 states reported that an individual's inability to provide documents other than those defined under federal regulations by CMS created a barrier to compliance. Further, while the report explains that CMS modeled its regulations after SSA's policy for documenting citizenship when individuals apply for a Social Security number, the report also notes that, unlike CMS, SSA provides for flexibility in special cases. CMS also commented on our finding that CMS's estimates of potential savings from the requirement in fiscal year 2008 did not account for administrative costs. Specifically, CMS agreed that its estimate did not account for administrative costs incurred by states to implement the requirement, but stated that any such costs would decrease after the first year of implementation. Our report describes that some states reported not having budgeted funds for the requirement in future years and explains that one reason for this may be that the burden of the requirement may decrease after the first year of implementation. However, the ongoing costs of assisting applicants in complying with the requirement may continue to be significant for some states, especially those states that had to substantially modify their enrollment procedures. For example, as noted in the report, due to the requirement, one state faced an additional 40,000 hours of staff time needed per month to process applications. CMS commented that it was not surprised that states reported facing challenges, given that the report's findings were based on states' experiences after less than 1 year of implementing the requirement. While agreeing that the requirement posed challenges for individuals and states, CMS asserted that these initial challenges have diminished and will continue to do so. Based on our survey responses, states largely do not share CMS's optimism in this regard. In addition to describing the initial effects of the requirement, which in states' perspectives have included enrollment declines and increased administrative burdens, our report includes additional indicators that the effects states experienced in the first year will continue at least to some extent in the future. For example, 17 of the 22 states that reported a decline in enrollment due to the requirement reported that they expected the downward trend in enrollment to continue, with some expecting the decline to continue indefinitely. In addition, 15 states reported already having budgeted funds for the requirement in state fiscal year 2008. CMS also emphasized actions it has taken to implement the requirement, such as issuing a letter to state Medicaid directors, publishing an interim final rule, and working on a final rule to be issued shortly. Our report describes the steps taken by CMS to implement the requirement. With regard to CMS's work on a final rule, we modified our report to indicate CMS's plans to issue such a rule shortly. As arranged with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Secretary of HHS, the Administrator of the Centers for Medicare & Medicaid Services, and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Federal regulations published by the Centers for Medicare & Medicaid Services (CMS) identify primary, or tier 1, documents that are considered sufficient to establish citizenship. Under the regulations, if individuals do not have primary evidence, they are expected to produce secondary, or tier 2, evidence of citizenship as well as evidence of identity. If neither primary nor secondary evidence of citizenship is available, individuals may provide third tier evidence of citizenship with accompanying evidence of identity. If primary evidence of citizenship is unavailable, secondary and third tier evidence do not exist or cannot be obtained in a reasonable time period, and the individual was born in the United States, then the individual may provide fourth tier evidence of citizenship, along with evidence of identity. See table 4 for a list of acceptable documents to prove citizenship and table 5 for acceptable identity documents. Kathryn Allen, Director, led the engagement through its initial phases. In addition, Susan Anthony, Assistant Director; Susan Barnidge; Laura Brogan; Elizabeth T. Morrison; and Hemi Tewarson made key contributions to this report.
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The Deficit Reduction Act of 2005 (DRA) included a provision that requires states to obtain documentary evidence of U.S. citizenship or nationality when determining eligibility of Medicaid applicants and current beneficiaries; self-attestation of citizenship and nationality is no longer acceptable. The Centers for Medicare & Medicaid Services (CMS) issued regulations states must follow in obtaining this documentation. Interested parties have raised concerns that efforts to comply with the requirement will cause eligible citizens to lose access to Medicaid coverage and will be costly for states to implement. GAO was asked to examine how the requirement has affected individuals' access to Medicaid benefits and assess the administrative and fiscal effects of implementing the requirement. To do this work, GAO surveyed state Medicaid offices in the 50 states and the District of Columbia about their perspectives on access issues and the administrative and fiscal effects of the requirement. GAO obtained complete responses from 44 states representing 71 percent of national Medicaid enrollment in fiscal year 2004. GAO also reviewed federal laws, regulations, and CMS guidance. States reported that the citizenship documentation requirement resulted in barriers to access to Medicaid for some eligible citizens. Twenty-two of the 44 states reported declines in Medicaid enrollment due to the requirement, and a majority of these states attributed the declines to delays in or losses of Medicaid coverage for individuals who appeared to be eligible citizens. Of the remaining states, 12 reported that the requirement had no effect and 10 reported they did not know the requirement's effect on enrollment. Not all of the 22 states reporting declines could quantify enrollment declines due specifically to the requirement, but a state that had begun tracking the effect identified 18,000 individuals in the 7 months after implementation whose applications were denied or coverage was terminated for inability to provide the necessary documentation, though the state believed most of them to be eligible citizens. Further, states reporting a decline in enrollment varied in their impressions about the requirement's effect on enrollment after the first year of implementation. States' enrollment policies and whether an individual was an applicant or a beneficiary may have influenced the requirement's effect on access to Medicaid. For example, states that relied primarily on mail-in applications before the requirement were more likely to report declines in enrollment than states where individuals usually applied in person. In addition, the requirement may have more adversely affected applicants than beneficiaries because applicants were given less time to comply in some states and were not eligible for Medicaid benefits until they documented their citizenship. Although states reported investing resources to implement the requirement, potential fiscal benefits for the federal government and states are uncertain. All 44 states reported taking administrative measures to implement the requirement and assist individuals with compliance. In addition, 10 states reported that a total of $28 million was appropriated in state fiscal year 2007, and 15 states budgeted funds for implementation costs in state fiscal year 2008. Despite these measures, states reported that the requirement has increased the level of assistance needed by individuals and amount of time spent by states during the enrollment process. States specified two aspects of the requirement as increasing the burden for them and for individuals: that documents had to be originals and the list of acceptable documents was complex and did not allow for exceptions. Further, although CMS estimated the requirement would result in savings for the federal government and states of $90 million for fiscal year 2008, states' responses indicated that this estimate may be overstated for two reasons. Specifically, CMS did not account for the increased administrative expenditures reported by states, and the agency's estimated savings from ineligible, noncitizens no longer receiving benefits may be less than anticipated. In commenting on a draft of the report, CMS raised concerns about the conclusions drawn from the survey responses as to the requirement's effect on access, mainly that states did not submit data to support their responses.
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As you are aware, technology plays an important role in helping the federal government ensure the security of its many physical and information assets. Today, federal employees are issued a wide variety of identification (ID) cards that are used to access federal buildings and facilities, sometimes solely on the basis of visual inspection by security personnel. These cards often cannot be used for other important identification purposes--such as gaining access to an agency's computer systems--and many can be easily forged or stolen and altered to permit access by unauthorized individuals. In general, the ease with which traditional ID cards--including credit cards--can be forged has contributed to an increase in identity theft and related security and financial problems for both individuals and organizations. The unique advantage of smart cards--as opposed to cards with simpler technology, such as magnetic stripes or bar codes--is that smart cards can exchange data with other systems and process information rather than simply serving as static data repositories. Smart cards can readily be tailored to meet the varying needs of federal agencies or to accommodate previously installed systems. For example, other media, such as magnetic stripes, bar codes, and optical memory (laser-readable) stripes can be added to smart cards to support interactions with existing systems and services or to provide additional storage capacity. An agency that has been using magnetic stripe cards for access to certain facilities could migrate to smart cards that would work with both its existing magnetic stripe readers as well as new smart card readers. Of course, the functions provided by the card's magnetic stripe, which cannot process transactions, would be much more limited than those supported by the card's integrated circuit chip. Optical memory stripes (which are similar to the technology used in commercial compact discs) can be used to equip a card with a large memory capacity for storing more extensive data--such as color photos, multiple fingerprint images, or other digitized images--and for making that card and its stored data very difficult to counterfeit. A typical example of a smart card is shown in figure 1. Smart cards can be used to significantly enhance the security of an organization's computer systems by tightening controls over user access. A user wishing to log on to a computer system or network with controlled access must "prove" his or her identity to the system--a process called authentication. Many systems authenticate users by requiring them to enter secret passwords, which provide only modest security because the passwords can be easily compromised. Substantially better user authentication can be achieved by supplementing passwords with smart cards. Even stronger authentication can be achieved when smart cards are used in conjunction with biometrics. Smart cards are one type of media that can be configured to store biometric information--such as fingerprints or iris scans--in electronic records that can be retrieved and compared with an individual's live biometric scan to verify that person's identity in a way that is difficult to circumvent. A system requiring users to present a smart card, enter a password, and verify a biometric scan provides what security experts call "three-factor" authentication, with the three factors being (1) something you possess (the smart card), (2) something you know (the password), and (3) something you are (the biometric). Systems with three-factor authentication are considered to provide a relatively high level of security. Additionally, smart cards can be used in conjunction with public key infrastructure (PKI) technology to better secure electronic messages and transactions. A PKI is a system of hardware, software, policies, and people that, when fully and properly implemented, can provide a suite of information security assurances that are important in protecting sensitive communications and transactions. A properly implemented and maintained PKI can offer several important security services, including assurance that (1) the parties to an electronic transaction are really who they claim to be, (2) the information has not been altered or shared with any unauthorized entity, and (3) the parties will not be able to deny taking part in the transaction. Security experts generally agree that PKI technology is most effective when deployed in conjunction with smart cards. Smart cards are grouped into two major classes: contact cards and "contactless" cards. Contact cards have gold-plated contacts that connect directly with the read/write heads of a smart card reader when the card is inserted into the device. Contactless cards contain an embedded antenna and work when the card is waved within the magnetic field of a card reader or terminal. Contactless cards are better suited for environments where quick interaction between the card and reader is required, such as high-volume physical access. For example, the Washington Metropolitan Area Transit Authority has deployed an automated fare collection system using contactless smart cards as a way of speeding patrons' access to the Washington, D.C. subway system. Smart cards can be configured to include both contact and contactless capabilities; however, two separate interfaces are needed because standards for the technologies are very different. Since the 1990s, the federal government has considered the use of smart card technology as one option for electronically improving security over buildings and computer systems. In 1996, OMB tasked GSA with taking the lead in facilitating a coordinated interagency management approach for the adoption of multi-application smart cards across government. In this regard, GSA has taken important steps to promote federal smart card use. For example, since 1998, it has worked with several other federal agencies to promote broad adoption of smart cards for authentication throughout the federal government. Specifically, GSA worked with the Department of the Navy to establish a technology demonstration center to showcase smart card technology and applications and it established a smart card project managers' group and Government Smart Card Interagency Advisory Board. For many federal agencies, GSA's chief contribution toward promoting smart card adoption was its effort in 2000 to develop a standard contracting vehicle for use by federal agencies in procuring commercial smart card products from vendors. Under the terms of the Smart Access Common ID Card contract, GSA, NIST, and the contract's awardees worked together to develop smart card interoperability guidelines--including an architectural model, interface definitions, and standard data elements--that were intended to guarantee that all the products made available through the contract would be capable of working together. Further, OMB has begun taking action to develop a framework of policy guidance for governmentwide smart card adoption. Specifically, on July 3, 2003, OMB's Administrator for E-Government and Information Technology issued a memorandum detailing specific actions the administration was taking to streamline authentication and identity management in the federal government. This included establishing the Federal Identity and Credentialing Committee to collect agency input on policy and requirements and coordinate the development of a comprehensive policy for credentialing federal employees. Since 1998, multiple smart card projects have been launched in the federal government addressing an array of capabilities and providing many tangible and intangible benefits, including enhancing security over buildings and other facilities, safeguarding computer systems and data, and conducting financial and nonfinancial transactions more accurately and efficiently. As of June 2004, 15 federal agencies reported 34 ongoing smart card projects. Initially, many of the smart card initiatives that were undertaken were small-scale demonstration projects that involved as few as 100 cardholders and intended to show the value of using smart cards for identification or to store cash value or other personal information. However, federal efforts toward the adoption of smart cards have continued to evolve as agencies have gained an increased understanding of the technology and its potential uses and benefits. Our most recent study of federal agencies' investments in smart card technology, which we reported on last month, noted that agencies are increasingly moving away from many of their earlier efforts-- which frequently involved small-scale, limited-duration pilot projects--toward much larger, integrated, agencywide initiatives aimed at providing smart cards as identity credentials that agency employees can use to gain both physical access to facilities, such as buildings, and logical access to computer systems and networks. In some cases, additional functions, such as asset management and stored value, are also being included. To date, the largest smart card program to be implemented in the federal government is the Common Access Card program of the Department of Defense (DOD), which is intended to be used for identification by about 3.5 million military and civilian personnel. Results from this project have indicated that smart cards can offer many useful benefits, such as significantly reducing the processing time required for deploying military personnel, tracking immunization records of dependent children, and verifying the identity of individuals accessing buildings and computer systems. Another large agencywide initiative is the Department of Homeland Security's (DHS) Identification and Credentialing project, an effort in which the agency plans to issue 250,000 cards to employees and contractors using PKI technology for logical access and proximity chips for physical access. Authentication is to rely on biometrics with a personal identification number as a backup. Further, GSA's Nationwide Identification is a recently initiated agencywide smart card project in which the agency plans to issue a single standard credential card for identification, building access, property management, and other applications to 61,000 federal employees, contractors, and tenant agencies. While smart card technology offers benefits, launching smart card projects--whether large or small--has proved challenging to federal agencies and efforts to sustain successful adoption of the technology across government. Our prior work noted a number of management and technical challenges that agency managers have faced. These challenges include: * Sustaining executive-level commitment. Maintaining executive- level commitment is essential to implementing smart card technology effectively. Without this support and clear direction, large-scale smart card initiatives may encounter organizational resistance and cost concerns that lead to delays and cancellations. DOD officials stated that having a formal mandate from the Deputy Secretary of Defense to implement a uniform, common access identification card across the department was essential to getting a project as large as the Common Access Card initiative launched and funded. * Recognizing resource requirements. Smart card implementation costs can be high, particularly if significant infrastructure modifications are required, or other technologies, such as biometrics and PKI, are being implemented in tandem with the cards. Key implementation activities that can be costly include managing contractors and card suppliers, developing systems and interfaces with existing personnel or credentialing systems, installing equipment and systems to distribute the cards, and training personnel to issue and use smart cards. As a result, agency officials have found that obtaining adequate resources is critical to implementing a major government smart card system. * Integrating physical and logical security practices across organizations. The ability of smart card systems to address both physical and logical (information systems) security means that unprecedented levels of cooperation may be required among internal organizations that often had not previously collaborated, particularly physical security organizations and information technology organizations. In addition to the gap between physical and logical security organizations, the sheer number of separate and incompatible existing systems also adds to the challenge of establishing an integrated agencywide smart card system. * Achieving interoperability among smart card systems. Interoperability is a key consideration in smart card deployment. The value of a smart card is greatly enhanced if it can be used with multiple systems at different agencies, and GSA has reported that virtually all agencies agree that interoperability at some level is critical to widespread adoption of smart cards across the government. However, achieving interoperability has been difficult because smart card products and systems developed in the past have generally been incompatible in all but very rudimentary ways. With varying products available from many vendors, there has been no obvious choice for an interoperability standard. GSA considered the achievement of interoperability across card systems to be one of its main priorities in developing its Smart Access Common ID Card contract that I discussed earlier. * Maintaining security of smart card systems and privacy of personal information. Although concerns about security are a key driver for the adoption of smart card technology in the federal government, the security of smart card systems themselves is not foolproof and must be addressed when agencies plan the implementation of a smart card system. Although smart card systems are generally much more difficult to attack than traditional ID cards and password-protected systems, they are not invulnerable. In order to obtain the improved security services that smart cards offer, care must be taken to ensure that the cards and their supporting systems do not pose unacceptable security risks. In addition, protecting the privacy of personal information is a growing concern and must be addressed with regard to the personal information contained on the smart cards. Once in place, smart card-based systems designed simply to control access to facilities and systems could also be used to track the day-to-day activities of individuals, thus potentially compromising the individual's privacy. Further, smart card-based systems could be used to aggregate sensitive information about individuals for purposes other than those prompting the initial collection of the information, which could compromise privacy. The Privacy Act of 1974 requires the federal government to restrict the disclosure of personally identifiable records maintained by federal agencies while permitting individuals access to their own records and the right to seek amendment of agency records that are inaccurate, irrelevant, untimely, or incomplete. Further, the E-Government Act of 2002 requires agencies to conduct privacy impact assessments before developing or procuring information technology that collects, maintains, or disseminates personally identifiable information. Accordingly, agency officials need to assess and plan for appropriate privacy measures when implementing smart card-based systems and ensure that privacy impact assessments are conducted when required. In considering these challenges, it is important to note that, while they served to slow the adoption of smart card technology in past years, they may be less difficult in the future because of increased management concerns about securing federal facilities and information systems and because technical advances have improved the capabilities and reduced the cost of smart card systems. Nonetheless, sustained diligence in responding to such challenges is essential in light of the growing emphasis on the use of smart card technology. Recognizing the critical role that GSA, OMB, and NIST play in furthering the successful adoption of smart card technology, we made recommendations in January 2003 to these agencies that were aimed at advancing the adoption of smart card technology governmentwide. Specifically, we recommended that * the Director, OMB, issue governmentwide policy guidance regarding adoption of smart cards for secure access to physical and logical assets; * the Director, NIST, continue to improve and update the government smart card interoperability specification by addressing governmentwide standards for additional technologies--such as contactless cards, biometrics, and optical stripe media--as well as integration with PKI; and * the Administrator, GSA, improve the effectiveness of GSA's promotion of smart card technologies within the federal government by (1) developing an internal implementation strategy with specific goals and milestones to ensure that GSA's internal organizations support and implement smart card systems consistently; (2) updating its governmentwide implementation strategy and administrative guidance on implementing smart card systems to address current security priorities; (3) establishing guidelines for federal building security that address the role of smart card technology; and (4) developing a process for conducting ongoing evaluations of the implementation of smart card-based systems by federal agencies to ensure that lessons learned and best practices are shared across government. As of last month, all three agencies had taken actions to address the recommendations made to them. Specifically, in response to our recommendations, OMB issued its July 3, 2003, memorandum to major departments and agencies directing them to coordinate and consolidate investments related to authentication and identity management, including the implementation of smart card technology. NIST responded by improving and updating the government smart card interoperability specification to address additional technologies, including contactless cards and biometrics. GSA responded to our recommendations by updating its "Smart Card Policy and Administrative Guidance" to better address security priorities, including minimum-security standards for federal facilities, computer systems, and data across the government. However, three of our four recommendations to GSA remained outstanding. GSA officials stated that they were working to address the recommendations to develop an internal GSA smart card implementation strategy, develop a process for conducting evaluations of smart card implementations, and share lessons learned and best practices across government. The responsibility for one recommendation--establishing guidelines for federal building security that address the role of smart card technology--was transferred to DHS. Recent federal direction contained in Homeland Security Presidential Directive 12 could further facilitate smart card adoption across the federal government. This directive, signed in late August, seeks to establish a common identification standard for federal employees and contractors to protect against a litany of threats, including terrorism and identity theft. The directive instructs the Departments of Commerce, State, Defense, Justice, and Homeland Security to work with OMB and the Office of Science and Technology Policy to institute the new standards and policies. With federal agencies' increasing pursuit of smart cards, directives from central management such as this one could be an important vehicle for ensuring that more comprehensive guidance is available to support and sustain the broader implementation of agencywide smart card initiatives. Mr. Chairman, beyond the governmentwide assessment presented, you requested that we specifically address actions of the Department of Veterans Affairs in adopting smart card technology. Our report last month discussing agencies' investments in smart card technology identified VA as being among 9 federal agencies that currently have large-scale, agencywide smart card projects underway. VA's effort--the Authentication and Authorization Infrastructure Project (AAIP)--was begun in December 2002 as an attempt to provide agencywide capability to authenticate users with certainty and grant them access to information systems necessary to perform business functions. The initiative, currently in a limited deployment phase, involves three core components: (1) a One-VA ID smart card; (2) an enterprise PKI solution; and (3) an identity and access management infrastructure that addresses internal and external access requirements for VA users. VA currently estimates that, between fiscal years 2004 and 2009, this initiative will cost about $162 million. The project is currently focusing on development of the One-VA ID card, which is to employ a combination of smart card and PKI technologies to store a user's credentials digitally. According to project documentation, the One-VA ID card is intended to replace the several hundred methods for issuing identification cards that are currently in place across the department, and improve physical and information security by strengthening the ability to authenticate users and grant access to information systems that employees and contractors rely on to perform VA's business functions. As an official source of government identification credentialing, the card is expected to be compliant with Homeland Security Presidential Directive 12. VA is using a phased approach to develop and implement the One- VA ID card. This approach involves prototype testing followed by limited production testing at the department's facilities in the United States, and by 2006, the issuance of 500,000 cards with PKI credentials to its personnel. VA reported that it has already begun an initial limited deployment of the cards to about 15,000 to 25,000 users. The AAIP project manager anticipated that the results from this limited deployment would provide lessons learned for ensuring successful implementation, support, and training once full deployment of the One-VA ID card begins in early 2005. Further, the department has indicated that it plans to use information gathered from the limited deployment to create agency-wide policies and procedures for the full deployment of smart cards across all VA business units. As of late September, VA reported that fiscal year 2004 spending on the One-VA ID card totaled approximately $27 million for activities such as the acquisition of smart cards, card readers, and hardware support. We have not yet had an opportunity to fully assess the outcomes of the department's One-VA ID card initiative or its actions to develop the enterprise PKI solution and identity and access management infrastructure that are also key components of this initiative. However, VA officials believe that the department is sufficiently positioned to successfully implement the smart card technology on an agencywide level. The AAIP project manager noted the chief information officer's involvement, as chair of the department's Enterprise Information Board, in monitoring progress of the project. Further, as a participant in a number of governmentwide initiatives supporting the adoption of smart card technology, VA should be effectively positioned to carry out such an undertaking. Among its collaborations, VA is one of five agencies using GSA's Smart Card Access Common ID contracting vehicle and plans to purchase smart cards for AAIP through the GSA contract. It is also a member of the Federal Identity Credentialing Committee, which provides guidance to federal agencies on the use of smart card technology that supports interoperable identity and authentication to enable an individual's identity to be verified within an agency and across the federal enterprise for both physical and logical networks. Collectively, the department's experiences and collaborations should lend strength to its own and overall federal efforts toward making smart cards a key means of securing critical information and assets. In summary, the federal government is continuing to make progress in promoting and implementing smart card technology, which offers clear benefits for enhancing security over access to buildings and other facilities, as well as computer systems and networks. The adoption of such technology is continuing to evolve, with a number of large-scale, agencywide projects having been undertaken by federal agencies over the past several years. As agencies have sought greater use of smart cards, they have had to contend with a number of significant management and technical challenges, including sustaining executive-level commitment, recognizing resource requirements, integrating physical and logical security practices, achieving interoperability, and maintaining system security and privacy of personal information. These challenges become less difficult to address, however, as managers place greater emphasis on enhancing the security of federal facilities and information systems and technical advances improve the capabilities and reduce the costs of smart card systems. The challenges are also tempered as increased federal guidance brings direction to agencies' handlings of their smart card initiatives. VA is among a number of agencies currently undertaking large-scale, agencywide projects to implement smart cards. While its project is still under development, VA has gained experience as a participant on governmentwide initiatives to further smart card adoption that should facilitate the increasing movement toward the use of smart cards as an essential means of securing critical information and assets. 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. If you should have any questions about this testimony, please contact me at (202) 512-6240 or via e-mail at [email protected]. Other major contributors to this testimony included Michael A. Alexander, John de Ferrari, Nancy Glover, Steven Law, Valerie C. Melvin, J. Michael Resser, and Eric L. Trout. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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The federal government is interested in the use of smart cards--credit card-like devices that use integrated circuit chips to store and process data--for improving the security of its many physical and information assets. Besides providing better authentication of the identities of people accessing buildings and computer systems, smart cards offer a number of other potential benefits and uses, such as creating electronic passenger lists for deploying military personnel and tracking immunization and other medical records. Over the past 2 years, GAO has studied and reported on the uses of smart cards across the federal government. Congress requested that GAO testify on federal agencies' efforts in adopting smart card technology--based on the results of this prior work--and on the specific actions that the Department of Veterans Affairs is taking to implement smart card technology. As the unique properties and capabilities of smart cards have become more apparent, federal agencies, including the Office of Management and Budget, the National Institute of Standards and Technology, and the General Services Administration, have acted to advance the governmentwide adoption of smart card technology. In turn, numerous smart card projects that offer a variety of uses and benefits have been launched. As of June 2004, 15 federal agencies reported 34 ongoing smart card projects. Further, agencies' actions toward the adoption of smart cards continue to evolve as understanding of the technology grows. Agencies are moving away from the small-scale, limited-duration demonstration projects of past years (involving as few as 100 cardholders and aiming mostly to show the value of using smart cards for identification) to larger, more integrated, agencywide initiatives involving many thousands (or even millions) of users and that are focused on physical access to facilities and logical (information systems) access to computer systems and networks. In pursuing smart card projects, federal agencies have had to contend with numerous management and technical challenges. However, these challenges may be less imposing in the future because of increased management concerns about securing federal facilities and because technical advances have improved the capabilities and cost effectiveness of smart card systems. The Department of Veterans Affairs (VA) is one of 9 federal agencies currently pursuing large-scale, agencywide smart card initiatives. VA's project, currently in limited deployment, involves using, among other technologies, the One-VA Identification smart card to provide an agencywide capability to authenticate users with certainty and grant them access to information systems essential to accomplishing the agency's business functions. VA estimates that this project will cost about $162 million between 2004 and 2009, and enable it to issue 500,000 smart cards to its employees and contractors.
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General hospitals face competition from a variety of sources, including the approximately 100 specialty hospitals in operation or under development in some markets in 2005. Despite the relatively small number of specialty hospitals, the issue of how general hospitals have responded to the competition from specialty hospitals has been a subject of debate. Federal agencies have broadly addressed how general hospitals' competitive actions have been influenced by the presence of specialty hospitals; however, to date, the evidence has been largely anecdotal. Specialty hospitals represent a small share of the national health care market and the competition that general hospitals face from other general hospitals, ASCs, imaging centers, and other types of facilities. In 2005, we identified 66 existing specialty hospitals and an additional 46 that were under development. In contrast, there were an estimated 4,800 general hospitals, 4,100 Medicare certified ASCs, and 2,400 imaging centers. (See fig. 1.) Another methodology for assessing the relative magnitude of specialty hospitals is through Medicare inpatient spending. In prior work pertaining to specialty hospitals of various types and ownership structures, we found that specialty hospitals accounted for a low share of Medicare spending for inpatient services relative even to their low share of the hospital market. Specifically, in April 2003 we reported that specialty hospitals in existence accounted for about 2 percent of existing hospitals, but 1 percent of total Medicare inpatient spending. The overall competitive effect of specialty hospitals on general hospitals continues to be the subject of debate. Advocates of specialty hospitals contend that the focused mission and dedicated resources of specialty hospitals enable them to offer reduced treatment costs, improved care quality, and enhanced amenities for patients compared with what general hospitals are able to provide. Moreover, some advocates maintain that competition from specialty hospitals can prompt general hospitals to implement efficiency, quality, and amenity improvements, thus favorably affecting the overall health care delivery system. However, critics are concerned that general hospitals may be adversely affected by specialty hospitals. In 2003, using a broader definition of specialty hospitals that included facilities with and without physician owners or investors, we reported that specialty hospitals tended to treat less-severely-ill patients, served proportionately fewer Medicaid patients, and were less likely to have emergency rooms. We also reported that physicians were owners or investors in the majority of specialty hospitals we identified. These findings were consistent with critics' concerns that specialty hospitals tend to concentrate on the most profitable procedures and serve patients with the fewest complications. According to such critics, specialty hospitals draw financial resources away from general hospitals and leave those hospitals with the responsibility of caring for the sickest patients and fulfilling their broad missions to provide charity care, emergency services, and standby capacity to respond to communitywide disasters. Critics are also concerned that physician ownership of specialty hospitals creates financial incentives that could inappropriately affect physicians' clinical behavior and their decisions to refer patients to specific facilities. To date, there have been only anecdotal reports of how general hospitals have competitively responded to specialty hospitals. Two reports--one jointly issued by the Federal Trade Commission (FTC) and the Department of Justice (DOJ), and another issued by MedPAC--discussed general hospitals' responses to specialty hospitals. The FTC/DOJ report was based primarily on written submissions and testimony provided by health care experts at the agencies' 2002 workshops and 2003 hearings. The information contained in MedPAC's report was gathered through site visits and interviews with representatives of specialty and general hospitals in selected markets where specialty hospitals existed and interviews with others in the health care community. Collectively, the reports identified several actions general hospitals took in response to the entry, or the anticipation of entry, of specialty hospitals into the marketplace, including: improving operating room scheduling, extending service hours, building a single-specialty wing to discourage the establishment of competing facilities, partnering with physicians on their medical staff to open a specialty hospital, signing exclusive contracts with private payers to preclude specialty hospitals or the physicians who invest in them from contracting with those payers, and revoking the admitting privileges of physicians involved with a competing specialty hospital. Nearly all general hospitals responding to our survey reported making operational and clinical service changes to remain competitive in markets they viewed as increasingly competitive; however, there was little evidence to suggest that the absence or presence of specialty hospitals had much of an effect on the number or types of changes general hospitals reported implementing between 2000 and 2005. General hospitals responding to our survey reported facing increasing competition both from other general hospitals and from limited-service facilities--a category that includes specialty hospitals, ambulatory surgical centers, and imaging centers. The general hospitals that responded to our survey reported implementing a variety of operational and clinical service changes. However, we found little evidence associating specific changes made by general hospitals with the presence or absence of a nearby specialty hospital. That is, with few exceptions, general hospitals did not report implementing a substantially different number of changes or different types of changes just because there was a specialty hospital in their market. Nearly all general hospitals that responded to our survey described their market environments as ranging from somewhat competitive to extremely competitive. Only one hospital described its market as not competitive. Urban general hospitals were much more likely than rural general hospitals to describe their market as either very or extremely competitive. (See table 1.) A larger percentage of general hospitals that responded to our survey-- both urban and rural--reported increased competition from limited- service facilities relative to those that reported increased competition from other general hospitals. More than 90 percent of urban general hospitals indicated that competition from limited-service facilities had either increased or greatly increased in their markets, while 75 percent of urban general hospitals indicated that competition from other general hospitals had either increased or greatly increased. (See table 2.) Similarly, 74 percent of rural general hospitals indicated that competition from limited-service facilities had either increased or greatly increased, while 53 percent of rural general hospitals indicated that competition from other general hospitals had either increased or greatly increased. (See table 3.) Among the 72 potential operational changes survey respondents could have indicated that they made and the 34 potential clinical services respondents could have indicated that they added, expanded, reduced, or eliminated on our survey, general hospitals reported implementing an average of 30 changes (22 operational changes and 8 clinical service changes) from 2000 through 2005. Overall, general hospitals that responded to our survey had reported implementing between 3 and 66 separate changes. Overall, 100 percent of general hospitals we surveyed reported implementing at least 1 operational change. There were 18 specific operational changes that at least half of the general hospitals that responded to our survey reported implementing. (See table 4.) Four of the 6 most commonly reported operational changes involved increasing wages and benefits for nurses and offering more flexible working schedules in an effort to improve nursing staff retention or recruitment. In addition, 4 of the 18 most commonly reported operational changes related to physicians. These changes involved increasing the physicians' role in hospital governance, increasing physician income guarantees, hiring new physicians, and beginning a hospitalist program. Nearly all general hospitals that responded to our survey reported implementing clinical service changes. Overall, 97 percent of the hospitals added or expanded at least one type of clinical service. The majority of hospitals added or expanded imaging/radiology services (73 percent) and cardiology services (57 percent). Other types of clinical services were added or expanded by a minority of hospitals, such as outpatient surgical services (37 percent) and orthopedic services (31 percent). Nearly one- third of hospitals (33 percent) reduced or eliminated at least one type of clinical service. The most commonly reported clinical services to be reduced or eliminated were inpatient/outpatient psychiatric services (7 percent). Overall, the operational and clinical service changes reported by general hospitals that responded to our survey appeared largely unaffected by the presence or absence of specialty hospitals in their markets. On average, rural general hospitals with a specialty hospital in their regional market made a few more operational service changes than rural general hospitals in markets without specialty hospitals, but made a similar number of clinical service changes. More specifically, rural general hospitals in markets with specialty hospitals made an average of 21 operational changes, 7 clinical service additions or expansions, and 1 clinical service reduction or elimination. Rural general hospitals in markets without specialty hospitals made an average of 18 operational changes, 6 clinical service additions or expansions, and no clinical service reductions or eliminations. (See table 5.) Urban general hospitals in regional and local markets with specialty hospitals made similar numbers of operational and clinical service changes as general hospitals in markets without specialty hospitals. For most of the 72 potential operational changes and 34 potential clinical service changes listed on our survey, the percentage of general hospitals that had reported implementing each change did not systematically vary with the presence or absence of a specialty hospital in the market. For example, 12 percent of urban general hospitals in regional markets with specialty hospitals and 13 percent of urban general hospitals in regional markets without specialty hospitals opened a new hospital wing specializing in one type of medicine between 2000 and 2005. However, for a few of the potential changes listed on our survey, there was a relationship between the percentage of general hospitals that had reported implementing the change and the presence of a specialty hospital in the market. For example, there were 6 operational changes and 3 clinical service changes (including clinical services that were added, expanded, reduced, or eliminated) for which the percentage of rural general hospitals implementing the change significantly differed depending on whether or not a specialty hospital existed in the regional market. (See table 6.) The greatest number of differences (11 operational change differences and 5 clinical service change differences) was observed between the group of urban general hospitals in local markets with specialty hospitals and the group of urban general hospitals where there were no specialty hospitals in either the local or regional markets. Rural general hospitals in markets with specialty hospitals were more likely to have reported implementing six operational changes and two clinical service changes relative to rural general hospitals in markets without specialty hospitals. (See table 7.) For only one clinical service-- adding or expanding sleep laboratory services--rural general hospitals in markets with specialty hospitals were less likely to have reported implementing a clinical service change. If there was a specialty hospital in its regional market, an urban general hospital was more likely to have reported making three of the seven operational changes that significantly differed between general hospitals in markets with and without specialty hospitals. Urban hospitals in regional markets with specialty hospitals were less likely to have made four operational changes and one clinical service change. (See table 8.) Urban hospitals in local markets with specialty hospitals were more likely to have made six operational changes and three clinical service changes and less likely to have made five operational changes and two clinical service changes relative to general hospitals in regional markets without specialty hospitals. (See table 9.) Overall, the general hospitals that responded to our survey reported making a variety of operational and clinical service changes to better compete in their markets. Some advocates of specialty hospitals have stated that the presence of one or more of these facilities in a market may prompt general hospitals to improve the quality of the care they deliver or increase the efficiency with which they deliver their services. However, our survey results found relatively few differences, in terms of operational and clinical service changes reported, between general hospitals in markets with and without specialty hospitals. That is, on average, general hospitals in markets with specialty hospitals did not make a substantially different number of changes or different types of changes relative to general hospitals in markets without specialty hospitals. These results held for both rural and urban general hospitals. Our survey results did show that general hospitals reported facing a competitive market for their services. However, general hospitals face competition from many types of facilities, not just specialty hospitals. Competing facilities, including other general hospitals in the market, ASCs, and imaging centers, far outnumber the relatively few specialty hospitals in existence or under development. The predominance of other types of competitors may help explain the lack of a uniquely competitive response of the general hospitals in our study to the existence of specialty hospitals. We obtained comments from CMS and representatives of AHA--a group representing hospitals, health care systems, networks, and other providers of care--and FAH--a group representing investor-owned and investor- managed hospitals and health systems. Their comments are summarized below. In written comments on a draft of this report, CMS stated that our study, by providing quantitative data on the market effect of specialty hospitals, was extremely helpful and that CMS would use the information as the agency developed its DRA-mandated report on physician investment in specialty hospitals. (CMS's comments are reprinted in app. IV.) CMS also provided technical comments, which we incorporated where appropriate. AHA and FAH stated that their concerns regarding specialty hospitals were specific to those facilities that have physician owners or investors. Both organizations suggested text changes to emphasize that our report is focused on the effect of these types of specialty hospitals on general hospitals, which we incorporated where appropriate. In addition, representatives of AHA stated that general hospitals may make operational and clinical service changes for a variety of reasons, regardless of the degree of competition in their market. While we recognize that general hospitals may make changes for a variety of reasons, that fact does not detract from our finding that general hospitals largely did not make a different number of changes, or different types of changes, in response to competition from specialty hospitals. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of this report until 30 days after its date. At that time, we will send copies of this report to appropriate congressional committees and other interested parties. We will also make copies available to others upon request. This report will be available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions, please contact me at (202) 512-7101 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 app. V. This appendix provides information on the key aspects of our analysis of the competitive response of general hospitals to specialty hospitals. First, it describes the sample selection process. Second, it discusses the survey used to collect data from a sample of general hospitals and the process of fielding the survey. Third, it explains the differences between local and regional markets. Fourth, it describes the methodology used to analyze survey data. Finally, it addresses issues related to data reliability and limitations. We selected two groups of general hospitals for this analysis--the sample and a comparison sample. The sample consisted of general hospitals in hospital referral regions (HRR)--which we refer to in this report as regional health care markets--with a specialty hospital that opened since the start of 1998. The comparison sample consisted of general hospitals in regional health care markets without any specialty hospitals. In constructing the comparison sample, we also excluded regional health care markets with specialty hospitals that did not have physician owners or investors. Regional markets capable of meeting the criteria for the sample were identified by compiling a current list of specialty hospitals that opened from 1998 through 2005. We excluded markets in states where certificate of need (CON) laws existed, because specialty hospitals are located primarily in non-CON states. We identified 32 unique regional markets containing 53 specialty hospitals that met these criteria. (See table 10.) We selected markets for the comparison sample on the basis of their similarity to the markets used for the sample, except for the presence of a specialty hospital. We excluded markets from the comparison sample if they contained a specialty hospital, regardless of ownership or date of opening. We used data from DAP pertaining to market characteristics to ensure that markets included in the comparison sample were similar to markets in the sample. We excluded markets from the comparison sample if any one of their values for seven market characteristics--overall population, Medicare population, average number of inpatient beds, population to beds ratio, physician specialists to total physicians ratio, average number of surgical discharges, and the Herfindahl-Hirschman Index--fell outside the range of values for markets in the sample. The application of these criteria resulted in a sample that consisted of 78 unique regional markets. The Centers for Medicare & Medicaid Services' (CMS) 2005 Provider of Services (POS) file was used to identify general hospitals located in the markets selected for the sample and the comparison sample, and these hospitals were subject to several exclusions. General hospitals that were major teaching hospitals or had fewer than five cardiac, orthopedic, or surgical discharges in 2004, were excluded from both samples because the presence of a specialty hospital may not affect these hospitals in the same manner it would affect other types of general hospitals. In addition, we considered urban general hospitals to be in a regional market with a specialty hospital only if it was also less than 90 miles away from a specialty hospital. We considered rural general hospitals to be in a regional market with a specialty hospital only if it was also less than 120 miles away from a specialty hospital. Information on these hospital characteristics were obtained from CMS's 2005 POS file, 2002/2003 Cost Report file, and 2004 Health Care Information System (HCIS) file, and Census 2000 US Gazetteer files. The sample included 326 general hospitals and the comparison sample included 294 general hospitals. (See table 11.) The survey questionnaire had two sections. (See app. II.) First, it obtained respondents' perceptions of competition in their health care markets. Second, it asked respondents to provide information on the operational and clinical service changes that the respondents' hospitals had made from 2000 through 2005 to remain competitive in their markets. The questionnaire included 72 potential operational changes and 34 potential clinical service changes. The specific operational and clinical service change questions included in the survey were identified through a review of articles in academic journals, industry reports, periodicals, a joint study by the Federal Trade Commission and the Department of Justice, and studies by CMS and the Medicare Payment Advisory Commission (MedPAC). We tested our survey questionnaire with external experts, including one MedPAC analyst and seven hospital administrators from four general hospitals and one hospital system. In August and September of 2005, survey questionnaires were distributed to 603 of the 620 hospitals in our sample--315 general hospitals in the sample and 288 general hospitals in the comparison sample. Sixty-seven percent of general hospitals that received our survey questionnaire responded--401 general hospitals. Seventy percent of the sample and 63 percent of the comparison sample responded to our survey questionnaire. We created a subsample to analyze the competive response of general hospitals to specialty hospitals that were in close proximity. The subsample consisted of general hospitals in hospital service areas (HSA)-- which we refer to in this report as local health care markets--with a specialty hospital that opened from 1998 through 2005. Groups of local health care markets form a regional health care market. (See fig. 2.) On average, general hospitals in local health care markets with a specialty hospital were in closer proximity to a specialty hospital than were general hospitals in regional health care markets with a specialty hospital. Among the 315 general hospitals in the sample, 152 resided in the same local health care market as a specialty hospital. Sixty-four percent of general hospitals in the local health care market subsample responded to our survey. From the survey responses, we determined the percentage of general hospitals that reported making each of the potential operational and clinical changes and then compared those percentages for three paired sets of general hospitals. First, we compared rural general hospitals in regional markets with specialty hospitals to rural general hospitals in regional markets without specialty hospitals. (See fig. 3.) Second, we compared urban general hospitals in regional markets with specialty hospitals to urban general hospitals in regional markets without specialty hospitals. Third, we compared urban general hospitals that had a specialty hospital in their local markets to urban general hospitals that did not have a specialty hospital in either their local or regional markets. The third comparison was conducted to explore the possibility that specialty hospitals are more likely to elicit a competitive response from general hospitals that are closest to them. As a part of each comparison we conducted a statistical test, the Pearson chi-square, in order to test the statistical significance of the percentages for each of the three paired sets of general hospitals. This test enabled us to determine if differences between the paired sets of general hospitals were statistically significant. Among the general hospitals that responded to our survey, the comparison of rural general hospitals in regional health care markets included 71 rural general hospitals in regional markets with specialty hospitals and 79 rural general hospitals in regional markets without specialty hospitals. The comparison of urban general hospitals in regional health care markets included 148 urban general hospitals in regional markets with specialty hospitals and 103 urban general hospitals in regional markets without specialty hospitals. The comparison of urban general hospitals in local health care markets with urban general hospitals in regional markets included 90 urban general hospitals in markets with specialty hospitals and 103 urban general hospitals in regional markets without specialty hospitals. Because only 8 rural general hospitals in local markets responded to the survey, we did not conduct a comparison of rural general hospitals in local markets to rural general hospitals in regional markets. We used the survey data we collected for this work, three CMS datasets, and four datasets from DAP to produce the results of this report. In each case, we determined that the data were sufficiently reliable to address the reporting objective. Overall, 67 percent of general hospitals we contacted responded to our 2005 survey, and few respondents failed to complete the questionnaire in full. We identified incomplete and inconsistent survey responses within individual surveys and placed follow-up calls to respondents to complete or verify their responses. We conducted an analysis to identify outliers who made extremely high numbers of service changes. We manually verified 10 percent of all survey responses contained in our aggregated electronic data files, in order to ensure that survey response data were accurately transferred to electronic files for analytical purposes. We determined the three CMS datasets--2002/2003 Cost Report File, first quarter 2005 POS file, and the 2004 HCIS File--and four DAP datasets-- 2003 Zip Code Crosswalk File, 1999 Chapter 2 Table File, 2001 selected surgical discharge rates by HRR, and 1999 physician workforce data-- were sufficiently reliable for our purposes. The CMS datasets were used to gather descriptive information for hospitals in our sample, to determine general hospital teaching status, and to tie discharge data to individual hospitals. The DAP datasets were used to link the general hospitals in our sample to their corresponding market characteristics. These CMS and DAP files are widely used for similar research purposes. We identified two potential limitations of our analysis. First, because independent information to verify survey responses was not available, all analyses in this report are based on data that are self-reported and potentially limited by the respondent's ability to report the operational or clinical service changes implemented from 2000 through 2005 for competitive reasons. Second, in response to the threat of future competition, it is possible that general hospitals made changes to their facilities prior to 2000 or that changes made by some general hospitals in anticipation of the new specialty hospitals successfully deterred the entry of that hospital, which our survey did not capture. Our survey listed 72 potential operational changes and 34 potential clinical service changes that a respondent hospital could have indicated that they had implemented from 2000 through 2005. Within the survey, the potential operational changes were organized into nine separate subject-oriented categories. For each of the clinical service changes, respondents were asked to indicate whether they had added, expanded, eliminated, or decreased the service. For analytical purposes, we grouped together "added" and "expanded" clinical service change responses. Also, we grouped together "eliminated" and "decreased" clinical service change responses. When stratified by urban and rural location there were few differences between general hospitals in markets with and without specialty hospitals, in terms of the average number of changes they reported implementing in each category of operational and clinical service change from 2000 through 2005. (See table 12.) Other contributors to this report include James Cosgrove, Assistant Director; Jennie Apter; Zachary Gaumer; Gregory Giusto; Kevin Milne; and Dae Park. Specialty Hospitals: Information on Potential New Facilities. GAO-05- 647R. Washington, D.C.: May 19, 2005. Specialty Hospitals: Geographic Location, Services Provided, and Financial Performance. GAO-04-167. Washington, D.C.: October 22, 2003. Specialty Hospitals: Information on National Market Share, Physician Ownership, and Patients Served. GAO-03-683R. Washington, D.C.: April 18, 2003.
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There has been much debate about specialty hospitals--short-term acute care hospitals with physician owners or investors that primarily treat patients who have specific medical conditions or need surgical procedures--and the competitive effects they may have on general hospitals. Advocates of specialty hospitals contend that competition from these physician-owned facilities can prompt general hospitals to implement efficiency, quality, and amenity improvements, thus favorably affecting the overall health care delivery system. Critics of specialty hospitals are concerned that general hospitals may respond to such competition by making changes that do not necessarily increase efficiency or benefit patients or communities, for example, by adding services already available in the community. The appropriateness of physicians' financial interests in specialty hospitals has also been questioned. GAO was asked to provide information on the competitive response of general hospitals to specialty hospitals. GAO surveyed approximately 600 general hospitals in markets with and without specialty hospitals to provide information on the extent to which these two groups of general hospitals reported implementing operational and clinical service changes to remain competitive. GAO received responses from 401 general hospitals. Nearly all general hospitals responding to GAO's survey reported making operational and clinical service changes to remain competitive in what they viewed as increasingly competitive healthcare markets; however, there was little evidence to suggest that general hospitals made substantially more or fewer changes or different types of changes if some of their competition came from a specialty hospital. While the majority of survey respondents indicated that competition from other general hospitals had increased, a larger proportion of respondents--91 percent of urban general hospitals and 74 percent of rural general hospitals--reported increases in competition from limited service facilities, a category that includes approximately 100 specialty hospitals across the nation and thousands of ambulatory surgical centers and imaging centers. To enhance their ability to compete, general hospitals reported making an average of 22 operational changes, such as introducing a formal process for evaluating efforts to improve quality and reduce costs, and 8 clinical service changes, such as adding or expanding cardiology services, from 2000 through 2005. Although specialty hospital advocates have hypothesized that the entrance of a specialty hospital into a market encourages the area's existing general hospitals to adopt changes that make them more efficient and better able to compete, the survey responses largely did not support this view. There were no substantial differences in the average number of operational and clinical service changes made by general hospitals in markets with and without specialty hospitals and, for the vast majority of the potential changes included on GAO's survey, there was no statistical difference between the two groups of hospitals in terms of the specific changes they reported implementing. GAO received comments on a draft of this report from the Centers for Medicare & Medicaid Services (CMS). In its comments, CMS stated that GAO's study, by providing quantitative data on the market effect of specialty hospitals, was extremely helpful.
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The Congress and others have been addressing the question of how to strengthen the acquisition workforce since 1974 when the OFPP was created to establish governmentwide procurement policies for executive agencies. One of the primary responsibilities of this office and its Federal Acquisition Institute (FAI) is to strengthen acquisition workforce training. The concern about the quality of the acquisition workforce deepened in the 1990s, as it became clear that the government was experiencing significant contracting failures partly because it lacked skilled personnel to manage and oversee contracts. There was also concern that program managers and other personnel integral to the success of the acquisition process were only marginally involved with the contracts. Two of the most significant steps taken in this regard were the passage of the Defense Acquisition Workforce Improvement Act in 1990 and the Clinger-Cohen Act in 1996. The Defense Acquisition Workforce Improvement Act, among other things, provided specific guidance on DOD's acquisition workforce definition. The Clinger-Cohen Act required civilian agencies to establish acquisition workforce definitions. Those definitions were to include contract and procurement specialist positions and other positions "in which significant acquisition-related functions are performed." The Clinger-Cohen Act also required civilian agencies to collect standardized information on their acquisition workforce and establish education, training, and experience requirements that are "comparable to those established for the same or equivalent positions" in DOD and the military services. Table 1 provides more details on this act and other legislation and federal agency initiatives. OFPP Policy Letter 97-01 directs executive agencies to establish core training for entry and advancement in the acquisition workforce. Agencies normally establish specific core training required to meet the standards for certification in each career field in their acquisition workforce (e.g., contracting officers, CORs, and COTRs). For contracting officers, agencies usually establish several warrant levels, with specified contracting authority for each level. Agencies issue permanent warrants only to contracting officers who have completed the core training required for each warrant level and who have the necessary work experience and formal education. Because contracting officers' warrant levels generally correspond to their grade levels, employees' career development and advancement is dependent on attending and passing required core training courses. The OFPP policy letter also established continuing education requirements for contract specialists and contracting officers. DOD includes a wide variety of disciplines--ranging from contracting, to technical, to financial, to program staff--in its acquisition workforce definition, but civilian agencies have employed narrower definitions that are largely limited to staff involved in awarding and administering contracts. Having a broader definition is important because it is one method to facilitate agencies' efforts to ensure that training reaches all staff integral to the success of a contract. While most civilian agencies acknowledge that the acquisition process requires the efforts of multiple functions and disciplines beyond those in traditional contracting offices, few have broadened their definitions of the acquisition workforce to include them. Officials at two agencies we reviewed said that they had not broadened their definitions because officials responsible for managing the acquisition workforce did not have management responsibility for or control of the training of individuals in offices other than their own. DOD is required by the Defense Acquisition Workforce Improvement Act to include, at a minimum, all acquisition-related positions in 11 specified functional areas in its definition of its acquisition workforce. It is also required to include acquisition-related positions in "management headquarters activities and in management headquarters support activities." Therefore, DOD's acquisition workforce includes contracting, program, technical, budget, financial, logistics, scientific, and engineering personnel. DOD uses a methodology, known as the Refined Packard methodology,to identify its acquisition workforce personnel. Using the Refined Packard methodology, DOD now includes personnel in its acquisition workforce from three categories: (1) specific occupations that are presumed to be performing acquisition-related work no matter what organization the employee is in, (2) a combination of an employee's occupational series and the organization in which the employee works, and (3) specific additions and deletions to the first two categories. DOD is currently coding the positions and employees identified by the Refined Packard methodology into its official personnel systems. DOD components and the military services' estimate that the number of personnel included in the acquisition workforce will expand when the coding is completed in October 2002. All the civilian agencies we reviewed include personnel in the contract specialist and purchasing agent job series as specified by the Clinger- Cohen Act. All agencies also include contracting officers and three include CORs and COTRs as required in OFPP's policy enumerating acquisition- related positions. Every civilian agency includes additional positions in which contracting functions are performed, such as property disposal or procurement clerks. However, only VA and DOE include positions in which acquisition-related functions are performed (i.e., program managers). Table 2 shows how the agencies defined their acquisition workforces. Agencies are aware of the need to expand their definitions to include all positions in which "significant acquisition-related functions are performed," as required by the Clinger-Cohen Act. To assist agencies in this effort, OFPP Policy Letter 97-01 identified acquisition workforce positions, in addition to contracting and purchasing specialists, to include contracting officers, CORs, and COTRs. Furthermore, OFPP Policy Letter 97-01 stated that the Administrator would "consult with the agencies in the identification of other acquisition related positions." All agencies include positions other than those enumerated in the Clinger-Cohen Act and OFPP policy, and GSA plans to do so. Specifically: VA includes program managers and procurement clerks in its definition. DOE includes program managers and property managers in its definition. HHS and NASA include procurement clerks in their definitions. GSA is identifying and including other acquisition-related positions in its acquisition workforce and expects to include program managers and other positions in the future, but GSA has not established a firm time frame. NASA asserted that managing a much wider range of acquisition personnel, including "other equivalent positions," such as CORs and COTRs, would be much more difficult than current practice because agency managers responsible for acquisition workforce training did not have authority over personnel in offices other than theirs to require they take specific training courses. However, HHS, which has CORs and COTRs (which it refers to as project officers) not under control of the acquisition office, established regulations requiring the head of each contracting activity ensure their CORs and COTRs receive specified training. In addition, DOE, which has similar oversight concerns, has established an "umbrella" directive governing acquisition career development. Two offices, the Acquisition Career Development Program office and the Project Management Career Development Program office, monitor the training of employees in their respective career fields. Every agency we reviewed has established specific training requirements for each position identified in their acquisition workforce. The Defense Acquisition Workforce Improvement Act and the Clinger-Cohen Act established similar career management requirements, including education, experience, and training requirements employees must meet to qualify for each acquisition workforce position. These requirements are further defined, for DOD, by DOD regulations and other guidance, and for the civilian agencies by OFPP and the agencies' own regulations. Two agencies also established training requirements for acquisition-related positions not formally included in their acquisition workforce definitions. The DAU develops curricula, approved by the Under Secretary of Defense (Acquisition, Technology & Logistics), that include descriptions of the education, experience, and core training required to meet the standards for certification in each acquisition career field. In addition, DAU offers assignment-specific training. Annually, advisors from each DOD career field determine whether certification standards and assignment-specific training requirements should be updated and whether training curricula are current. Any changes must be approved by the Director of Acquisition Education, Training, and Career Development before they are published in the DAU catalog. The DAU curriculum includes courses identified by the Under Secretary of Defense (Acquisition, Technology & Logistics) as integral to the education and training of personnel in identified positions. These courses are intended to provide unique acquisition knowledge for specific assignments, jobs, or positions; maintain proficiency; and remain current with legislation, regulation, and policy. They also cover topics such as program management, systems acquisition, construction, and advanced contract pricing. OFPP's FAI develops training and career development programs for civilian agency acquisition workforce personnel. Specifically, FAI developed the contracting and procurement curriculum for the acquisition workforce, worked closely with DAU in its course development, and coordinated with colleges and universities to identify and develop education programs for the acquisition workforce. In addition, FAI is developing several Web-based courses for various acquisition personnel. All DOD agencies follow the DAU curriculum. Some civilian agencies, including NASA and DOE, also follow the DAU curriculum for the contracting and purchasing functions. Other agencies, including GSA and VA, have developed training programs and courses that follow the curriculum established by FAI. While HHS has awarded contracts to teach courses for its own acquisition workforce, the curriculum and course contents are modeled on those developed by FAI. The civilian agencies we reviewed all had policies describing the education and training requirements for each member of their acquisition workforce. Even when agencies do not include all positions that play a role in their acquisition process in their acquisition workforce, they established education and training requirements for those positions. For instance, NASA and HHS, which do not include COTRs in their acquisition workforce, established training requirements for that position. To ensure training requirements are being met, DOD and the military services use a centralized management information system that is automatically updated with training and personnel data. The civilian agencies use less sophisticated spreadsheet programs to collect and maintain information on the education, training, and continuing education received by their acquisition workforce. At least once a year, each agency collects data from its regional offices and/or contracting components and consolidates the data into its tracking system. Although we obtained data from DOD and the civilian agencies to determine the various elements collected, we did not assess the reliability or adequacy of their systems. Our purpose was to ascertain that DOD and the civilian agencies maintained data on the training received by their acquisition workforce and not to validate the accuracy of that data. While we have reported weaknesses in the data maintained by VA and GSA,those agencies are taking action to improve the reliability and completeness of their tracking systems. Civilian agencies said that they did not have centralized management information systems because they were awaiting development and implementation of OFPP's proposed Web-based Acquisition Career Management Information System (ACMIS), expected to be available in September 2002. The civilian agencies, with the exception of VA, viewed their systems as being interim. As a result of not having a centralized management information system, these agencies must rely on the data submitted periodically by training coordinators in their various locations throughout their agencies. Also, this data is often maintained on unofficial manual records or on various spreadsheets, making it difficult for the responsible acquisition officer to verify its accuracy. Because of ACMIS development delays, VA developed its own management information system to alleviate these problems, and it is currently entering historical employee training data into the database. ACMIS is to be a federal Web-accessible database of records to track acquisition workforce training and education. It is expected that the data in ACMIS will be used in making budgeting, staffing, and training decisions and monitoring the status of staff warrants. The baseline data for ACMIS will come from the Office of Personnel Management's Centralized Data Personnel File and agency workforce databases. Those records will then be supplemented with education, training, warrant, and certification data provided by individuals in the acquisition workforce. In addition, the system is to provide for computer-to-computer interfaces for bulk and automated data transfers (i.e., updates from agency personnel files or updates of multiple employee records with a common set of data, such as the completion of a course). The development of the new system, however, has experienced considerable delays. Although OFPP tasked FAI to develop the system in September 1997, it has not yet been implemented. In 2000, we reported that delays in developing the system were largely attributable to difficulties in obtaining agreement on the requirements for the system. Since our report, FAI, under OFPP direction, has published functional specifications and data requirements for the system. In December 2001, FAI contracted for development of the system, and FAI officials said the contractor was on track to meet the September 2002 implementation. While DOD and the agencies we reviewed had varying degrees of funding available, all reported that they managed to meet their acquisition workforces' current required training needs. However, we did not review or validate acquisition workforce training budget and obligation data. Officials explained that knowing what training courses employees will need, determining the courses that will be provided to meet training needs, and knowing the costs of providing each course, including related travel costs, allowed them to establish the funding required for needed training. DOD employs a centralized approach in determining its funding requirements for acquisition workforce training for its services and components. Using its management information system and estimated costs, DOD and the military services and components go through the iterative process of reconciling course needs, class size, instructor availability, and other costs, such as travel. DAU funds (1) the cost of developing and presenting the courses and (2) the travel expenses for DOD employees attending the courses. The civilian agencies we reviewed employ similar procedures relying on the data available to them in their interim systems comprised of spreadsheets and unofficial manual records. DOD, the military services, and civilian agencies stated they had sufficient funds to meet their current minimum core training requirements. NASA and HHS reported making acquisition workforce training a priority and earmarking sufficient funds for it. Other agencies-GSA and VA--said that because they use revolving funds to pay for their training, they also had sufficient funds earmarked for their acquisition workforce training. However, DOE, which reported having limited funds for training, often relied on DOD and NASA courses provided free of charge, on a space available basis, for much of its acquisition training. Although they could fund current core training, DOD, the military services, and DOE-because they rely on DAU for much of their training-expressed concerns with their ability to meet future required training and career development needs of their employees, since DAU faces budget reductions. A DOD official noted that fiscal year 2001 budget reductions combined with 2 years of "straight-line" budgets have precluded DAU from providing all the courses requested by the DOD components. Also, while all employees received core training for their current positions and grades, they were often unable to receive core training needed to obtain warrants at the next higher level to allow them to work on larger contracts and to be competitive for promotion to a higher grade. Army and Navy officials cited similar concerns regarding DAU's budget reductions. Air Force officials stated that anticipated increases in the acquisition workforce, because of the implementation of the Refined Packard methodology, the replacement of retirees, and its planned increases in cross training between acquisition specialties to meet strategic objectives, would require additional funding for core training in the future. A DOE official said that DAU's budget cuts also potentially affect DOE's ability to meet its future training requirements because of its reliance on DAU-provided courses. The official also noted that DOE's limited training funds have curtailed funding tuitions for college courses, intern programs, continuing education, as well as management and leadership development programs, which could have an impact on the acquisition workforce's career development. Other agencies reviewed did not indicate concerns about future training and career development. DOD and the military services have a more broadly defined acquisition workforce, including functions beyond the traditional contracting function. Civilian agencies' definitions are narrower. Regardless of whether or not an agency determines to include a particular position in its acquisition workforce, each agency needs to take active steps to identify all those positions that have a role in the acquisition process important enough to warrant specific training. This knowledge can be fed into the agencies' strategic planning efforts and increases their ability to provide human capital strategies to meet their current and future programmatic needs. The challenge for civilian agencies ensuring their acquisition workforce is receiving the proper training has been made more difficult by OFPP's slow progress in implementing ACMIS. Continued delays in implementing this system will increase the time in which agencies have to use less sophisticated tools for tracking acquisition workforce training. In an effort to ensure agencies succeed in defining a multifunctional and multidimensional acquisition workforce, we recommend that the Administrator of OFPP work with all the agencies to determine the appropriateness of further refining the definition of the acquisition workforce and to determine which positions, though not formally included in the acquisition workforce, nonetheless require certain training to ensure their role in the acquisition process is performed efficiently and effectively. We also recommend that the Administrator of OFPP continue to monitor the ACMIS contract milestones to ensure that the contractor and FAI complete and implement the proposed governmentwide system on schedule. We received written comments on a draft of this report from the Administrator of OFPP. She generally concurred with our recommendations and made observations about OFPP's efforts regarding the acquisition workforce (see appendix I). However, the Administrator took issue with our conclusion that delays in implementing the ACMIS system caused difficulties in ensuring the civilian agencies acquisition workforce is trained. The Administrator noted that, despite the absence of a centralized system, the agencies are responsible for managing the training of their workforce. Our recommendations are intended to help ensure that all staff integral to the success of agencies' acquisition efforts receive appropriate training. Also, as we noted in the report, the civilian agencies said they had not developed centralized management information systems because they were awaiting the implementation of OFPP's proposed governmentwide system that OFPP originally tasked FAI to develop in September 1997. We also received written comments from DOE, NASA, and VA and comments via e-mail from DOD, HHS, and GSA as discussed below. All agencies generally agreed with our findings. DOE concurred with our findings and offered additional technical comments regarding the inclusion of financial assistant specialists in its acquisition workforce and the status of certification and training requirements for personnel in its acquisition workforce. We incorporated these comments where appropriate. DOE's comments appear in appendix II. NASA noted that it included procurement clerks in its acquisition workforce. We changed the report to reflect this. NASA also provided additional specific information regarding the training required of those acquisition personnel not included in its acquisition workforce definition. NASA's comments appear in appendix III. VA concurred with our findings and noted the release of its Procurement Reform Task Force Report, which addresses the need for acquisition workforce enhancements. VA's comments appear in appendix IV. DOD provided several technical comments and suggestions to clarify our draft report. We incorporated these comments and suggestions where appropriate. HHS concurred with our findings and provided technical comments. HHS noted that although certain acquisition personnel are not under the control of its acquisition office, that office has established regulations to ensure they receive required training. We believe our report adequately reflects their concerns. GSA stated it had reviewed our report and had no comments. To accomplish the objectives, we reviewed policies and procedures, examined records, and interviewed acquisition personnel, training, and budget officials at DOD, Army, Navy, Air Force; VA, DOE, HHS, GSA, and NASA. However, we did not attempt to determine the adequacy or timeliness of the training these agencies provided their employees. These agencies are the largest in terms of their annual expenditures and among the largest in terms of the number of people in their acquisition workforce. In fiscal year 2000, their acquisition workforce included almost 25,000 contract specialists and purchasing agents (the primary career fields in the acquisition workforce), who were responsible for nearly $200 billion in federal obligations for goods and services. To obtain information on the oversight and guidance provided to federal agencies, we reviewed legislation, regulations, directives, and policies and interviewed officials at OFPP and FAI. We conducted our review between October 2001 and June 2002 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. At that time, we will send copies to other interested congressional committees, the secretaries of Defense, Army, Air Force, Navy, Energy, Health and Human Services, and Veterans Affairs; and the administrators of General Services Administration and the National Aeronautics and Space Administration, and the Office of Federal Procurement Policy. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4125 or Hilary Sullivan at (214) 777-5652 if you have any questions regarding this report. Major contributors to this report were Thom Barger, Cristina Chaplain, Susan Ragland, Sylvia Schatz, and Tanisha Stewart.
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GAO's continuing reviews of the acquisition workforce, focusing on the Department of Defense (DOD); the Departments of the Army, Navy, and Air Force; the Departments of Veterans Affairs, Energy, and Health and Human Services; the General Services Administration; and the National Aeronautics and Space Administration, indicate that some of the government's largest procurement operations are not run efficiently. GAO found that requirements are not clearly defined, prices and alternatives are not fully considered, or contracts are not adequately overseen. The ongoing technological revolution requires a workforce with new knowledge, skills, and abilities, and the nature of acquisition is changing from routine simple buys toward more complex acquisitions and new business practices. DOD has adopted multidisciplinary and multifunctional definitions of their acquisition workforce, but the civilian agencies have not. DOD and the civilian agencies reviewed have developed specific training requirements for their acquisition workforce and mechanisms to track the training of acquisition personnel. All of the agencies reviewed said they had sufficient funding to provide current required core training for their acquisition workforce, but some expressed concerns about funding training for future requirements and career development, particularly because of budget cuts made recently at the Defense Acquisition University.
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GPRA is intended to shift the focus of government decisionmaking, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. New and valuable information on the plans, goals, and strategies of federal agencies has been provided since federal agencies began implementing GPRA. Under GPRA, annual performance plans are to clearly inform the Congress and the public of (1) the annual performance goals for agencies' major programs and activities, (2) the measures that will be used to gauge performance, (3) the strategies and resources required to achieve the performance goals, and (4) the procedures that will be used to verify and validate performance information. These annual plans, which are issued soon after transmittal of the president's budget, provide a direct linkage between an agency's longer-term goals and mission and day-to-day activities.Subsequent annual performance reports show the degree to which performance goals were met. The issuance of the agencies' performance reports, due by March 31, represents a new and potentially more substantive phase in the implementation of GPRA--the opportunity to assess federal agencies' actual performance for the prior fiscal year and to consider what steps are needed to improve performance and to reduce costs in the future. NRC is responsible for ensuring that those who use radioactive material in the generation of electricity, for experiments in universities, and for such medical uses as treating cancer do so in a manner that protects the public, the environment, and workers. NRC has issued licenses to 103 operating commercial nuclear power plants and 10 facilities that produce fuel for these plants. In addition, NRC or the 32 states that have agreements with NRC regulate almost 21,000 entities. In the medical field alone, licensees annually perform an estimated 10 million to 12 million procedures that involve radioactive material in the diagnosis or treatment of diseases. NRC is confronting a number of challenges to ensure the safe operation of commercial nuclear power plants, safe use of nuclear material, and safe disposal of radioactive waste. NRC has been moving from its traditional regulatory approach, which was largely developed without the benefit of quantitative estimates of risk, to a more risk-informed, performance-based approach. Under this approach, NRC will use risk assessment findings, engineering analysis, and performance history to focus attention on the most important safety- related activities, establish objective criteria to evaluate performance, develop measures to assess licensee's performance, and focus more on results as the primary basis for making regulatory decisions. This section discusses our analysis of NRC's performance in achieving its selected key outcomes and existing strategies, particularly for strategic human capital management and information technology, for achieving these outcomes. In discussing these outcomes, we have also provided information drawn from our prior work on the extent to which NRC provided assurances that the performance information it is reporting is credible. In its fiscal year 2000 performance report, NRC said that it had met its goal and targets for the safety-related performance outcomes related to civilian nuclear reactor safety. Although NRC's strategies to achieve its safety- related performance outcomes seem clear and reasonable, we could not assess its performance for the three nonsafety performance goals because NRC only recently reported measures to achieve them in its fiscal year 2002 performance plan. However, since NRC has had limited experience in applying the strategies and measures for the three nonsafety goals, it may need to revise them after it completes various planned program evaluations. Like other federal agencies, NRC faces strategic human capital management and other challenges that could affect achieving its future goals. In a highly technical, complex industry, NRC is facing the loss of a significant percentage of its senior managers and technical staff. For example, within the Office of Nuclear Reactor Regulation, about 22 percent of the technical staff and 16 percent of senior executive service staff are eligible to retire now; and by 2005, the number eligible for some type of retirement is about 42 percent and 77 percent, respectively. At the same time, NRC will need to rely on these staff to achieve its strategic and performance goals. To help resolve its strategic human capital management challenge, NRC identified such options as allowing it to rehire retired staff without jeopardizing their pension. In addition, for the nuclear reactor safety key outcome, NRC is implementing an intern program to attract and retain individuals with scientific, engineering, and other technical competencies. Another major challenge will be for NRC to demonstrate that it meets one of its four performance goals--increasing public confidence--for three reasons. First, to ensure its independence, NRC cannot promote nuclear power and must walk a fine line when communicating with the public. Second, NRC has not defined the public that it wants to target in achieving this goal. Third, NRC has not established a baseline to measure the "increase" in its performance goal. As we reported last year, the Commission did not approve a staff proposal to conduct a survey to establish a baseline. Instead, in October 2000, NRC began an 18-month pilot effort to use feedback at the conclusion of public meetings. NRC expects to semiannually evaluate the information received to enhance its public outreach efforts. NRC's evaluation of feedback from public meetings will provide information on the extent of public awareness of the meeting and the clarity, completeness, and thoroughness of the information that NRC provided at the meetings. Over time, for a particular plant, NRC may find that the public better understands the issues of concern or interest. It is not clear, however, how this information will show that the public's confidence in NRC as a regulator has increased. In addition, the Office of Nuclear Reactor Regulation began a 1-year effort in October 2000 to assess the effectiveness of NRC's program that verifies allegations concerning regulated activities and the impact of the program on public confidence. NRC has been asking whether an individual's experience with the program has increased his/her confidence in NRC as a regulator. NRC believes that such information will provide it a baseline to judge the contribution that the allegation program makes to meeting its public confidence goal. Like the feedback from public meetings discussed above, the feedback from those who participate in the allegation program will be limited. For example, in fiscal year 2000, NRC received 468 reactor- related allegations and estimates receiving 370 in fiscal year 2001. Therefore, the baseline data that NRC accumulates will be limited to a very small percentage of the public. Although program evaluations would help determine the validity and reasonableness of NRC's key outcomes, goals, and strategies and identify the factors that are likely to affect their achievement, NRC did not complete any evaluations in the key outcome of nuclear reactor safety in fiscal year 2000. NRC would benefit from such evaluations because the actions of its licensees and industry organizations have a significant impact on the extent to which NRC will achieve its strategic and performance goals for this key outcome and because NRC cannot show a one-to-one relationship between the performance of its licensees and the impact that the agency's programs have on safety. According to NRC staff, no one program evaluation will test its strategic direction for this and other key outcomes. Rather, NRC expects to conduct a number of evaluations that over time, should provide insights on whether a need exists to change its strategic direction. For example, by the end of June 2001, NRC expects to complete one program evaluation related to this key outcome--an assessment of its first year of implementing the new safety oversight process for commercial nuclear power plants. The new safety oversight process has been the centerpiece in NRC's efforts to move to a risk-informed, performance- based regulatory approach. NRC believes that the evaluation will help determine whether it will meet its four performance goals, but as discussed earlier, we have doubts that the evaluation will determine whether NRC will meet its increasing public confidence goal because it will not have the baseline data needed for the evaluation. In addition, a NRC advisory panel concluded in May 2001 that the agency did not have the necessary data to evaluate the new safety oversight process against the performance goals. NRC's strategies to ensure that the commercial nuclear power plants continue to operate safely appear clear and reasonable. For example, NRC expects to improve its inspection activities to better assess the safety performance of the nation's 103 operating nuclear power plants. Other strategies include resolving such safety issues as age-related plant degradation, ensuring that plant operator licenses are issued to and renewed only for qualified individuals, and continuing to develop and incrementally use risk-informed, and where appropriate, less prescriptive performance-based regulatory approaches. For its newly developed strategies for the three nonsafety goals, NRC may need to revise them and/or specify how some strategies will help achieve its desired outcomes. For example, one strategy to make its activities more effective, efficient, and realistic is to anticipate challenges posed by the introduction of new technologies and changing regulatory demands. Without further amplification, it is difficult to see how this strategy will result in more effective, efficient, and realistic NRC activities and decisions. NRC reported that it had improved its performance in fiscal year 2000 compared with its performance fiscal year 1999 for the safety-related performance outcomes for this key outcome. However, NRC has concerns about the quality of its performance data for 10 measures related to this key outcome and noted that the actual data reported for some of the safety performance goal measures are subject to change on the basis of further analysis and the receipt of newly reported information. NRC's strategies to achieve its safety-related performance goal outcomes seem clear and reasonable. But we could not assess its performance for the three nonsafety performance goals because NRC only recently reported the measures to achieve them in its fiscal year 2002 performance plan. As with the nuclear reactor safety key outcome, NRC has had limited experience in applying the strategies and measures for the three nonsafety goals. As a result, it may need to revise them after it completes various planned program evaluations. Although NRC has set more realistic performance targets for this key outcome, it continues to set others that are easily achievable and do not challenge or stretch its staff to improve their performance. On the basis of more complete historical data, NRC revised some of its performance targets. The same analysis showed that in some areas, actual nuclear material licensees' performance was much better than NRC's targeted performance. Table 1 shows some of NRC's performance goal measures for the nuclear material safety key outcome and compares its actual performance in fiscal years 1999 and 2000 with the targets for fiscal year 2002. As noted above in the nuclear reactor safety key outcome, NRC faces strategic human capital management and other challenges that could impair accomplishing its goals. During this period of potentially very high attrition, the Office of Nuclear Material Safety and Safeguards will be challenged to implement a risk-informed regulatory approach for a large number of diverse licensees. As part of its strategy to address this challenge, NRC is implementing an intern program to attract and retain individuals with scientific, engineering, and other technical competencies. As it did with the nuclear reactor safety key outcome, NRC did not complete any program evaluations in fiscal year 2000 for the key outcome of nuclear material safety. NRC expects to complete one program evaluation in June 2001. The evaluation will address redefining NRC's role in an environment where an increasing number of states are entering into agreements with NRC to regulate material licensees within their borders (agreement states). As of September 2000, 32 states had such agreements with NRC and by 2004, NRC anticipates that 35 states will have such agreements and that the states will oversee more than 80 percent of all material licensees. Such a large shift of responsibility over time from NRC to the agreement states could have significant budgetary and other implications for NRC. The program evaluation will consider such issues as the roles and legal responsibilities of NRC, the agreement states, and others; the need for statutory changes; and the resources needed. This program evaluation should help determine whether NRC will meet one of its four performance goals--maintain safety--but is not likely to provide information to assess the impact on NRC's three nonsafety performance goals. For example, it is unlikely that a useful assessment can be made of the "improve the efficiency and effectiveness of NRC's activities" performance goal when the evaluation will not address such questions as the following: Would NRC continue to need staff in all four of its regional offices as the number of agreement states increases? And what are the appropriate number, type, and skills needed for its headquarters staff? In commenting on a draft of this report, NRC said that program evaluations are to assess the manner and extent to which programs achieve their intended objectives and to assess program implementation policies, practices, and processes. NRC's strategies to ensure that licensees use nuclear material safely appear clear and reasonable. For example, NRC will continue to focus on the relative risk of licensees' activities to determine the appropriate level of oversight, determine that licensees' activities are consistent with regulatory requirements, and respond to operational events that have potential safety or safeguards consequences. For its newly developed strategies for the three nonsafety goals, NRC may need to revise them and/or specify how some strategies will help achieve its desired outcomes. For example, one strategy is to improve the regulatory framework to increase NRC's effectiveness and efficiency. Without further amplification on how NRC expects to improve the regulatory framework, it is difficult to determine how this strategy will result in more effective and efficient NRC activities and decisions. NRC reported that it had met the safety-related performance outcomes for this key outcome in fiscal year 2000. Although NRC's performance and strategies for achieving the safety-related goal for this key outcome appear reasonable, as with the other two key outcomes, we could not assess NRC's performance relative to the three nonsafety goals for which NRC did not have performance measures. In addition, to ensure that NRC can meet the strategies, goals, and measures, it will have to follow through on its plans to attract and retain individuals with the competencies and skills needed to carry out its mission. On the basis of our prior work, we believe that NRC's achieving some of its strategies and performance goals in this key outcome may be affected by such external factors as the standards that the Environmental Protection Agency (EPA) eventually issues on the level of residual radiation that can safely remain at a nuclear power plant site after licensees complete their decommissioning activities as well as the recently issued standards for the Department of Energy's potential high-level waste repository at Yucca Mountain, Nevada. EPA started to develop residual radiation standards in 1984 but has not yet finalized them. Currently, licensees are using standards that NRC issued in 1997. If NRC's licensees are ultimately required to comply with EPA standards, which are more restrictive than NRC's, the licensees may have to perform additional cleanup activities and incur additional costs. Likewise, NRC's success may be affected by EPA's final rule on the environmental radiation protection standards for Yucca Mountain. The rule, published in the Federal Register on June 13, 2001, includes a separate limit for groundwater. NRC, along with such others as the National Academy of Sciences, does not believe that a scientific basis exists for establishing the separate limit. Nevertheless, in commenting on a draft of this report, NRC said that it will implement EPA's standards for Yucca Mountain. Although program evaluations are helpful and important, NRC did not complete any such evaluations related to the nuclear waste safety key outcome in fiscal year 2000. However, NRC expects to evaluate ongoing and planned changes related to its decommissioning program for nuclear power plants and other radioactively contaminated sites in fiscal year 2003. In doing so, NRC expects to assess its various decommissioning initiatives, determine whether it has achieved all four performance goals, identify deviations from its performance goals, and determine whether a need exists for NRC to change its goals, strategies, or measures related to this key outcome. If NRC meets these objectives, the information should help determine the validity and reasonableness of the agency's goals and strategies for this key outcome. NRC's strategies appear reasonable and clearly discuss how the agency plans to meet its fiscal year 2002 safety-related goals. For example, NRC expects to evaluate new research and safety information as well as international programs and licensees' operational experience to improve its regulation of nuclear waste activities. NRC says that it will also keep pace with the nation's high-level waste program to ensure that it can meet the time frame established by legislation when deciding to license a geological repository. For its newly developed strategies for the three nonsafety goals, NRC may need to revise them and/or specify how some strategies will help achieve its desired outcomes. As with the nuclear material safety outcome, one strategy is to improve the regulatory framework to increase NRC's effectiveness and efficiency. Again, however, without further amplification on how NRC expects to improve the regulatory framework, it is difficult to determine how this strategy will result in more effective and efficient NRC activities and decisions. For the selected key outcomes, this section describes major improvements or remaining weaknesses in NRC's (1) fiscal year 2000 performance report in comparison with its fiscal year 1999 report and (2) fiscal year 2002 performance plan in comparison with its fiscal year 2001 plan. It also discusses the degree that NRC's fiscal year 2000 report and fiscal year 2002 plan address concerns and recommendations by the Congress, GAO, the Inspectors General, and others. NRC made a number of improvements to its fiscal year 2000 performance report. For example, NRC used final and finite data for its performance measures rather than preliminary data as it had for some measures last year. In its fiscal year 1999 performance report, NRC used preliminary data for three nuclear reactor safety measures: no more than one event that could lead to a severe accident, no significant radiation exposures resulting for nuclear power plants, and no deaths resulting from radiation or radiation releases from nuclear plant operations. NRC designated the data as preliminary because the Commission had not approved their release to the public. In its fiscal year 2000 report, NRC used final data. According to NRC staff, they would be aware of an event, release, or death by the end of the fiscal year and before the Commission approved releasing the data. Therefore, NRC concluded that it did not need to show this information as "preliminary" in the fiscal year 2000 performance report. In addition, NRC previously used a combined 5-year average as its target for some performance measures. NRC now uses an annual value, which will better allow the Congress and others to assess its performance in a particular fiscal year. In addition, NRC included information to address the requirements of the Reports Consolidation Act of 2000. The act requires agency heads to assess the completeness and reliability of the data used in their fiscal year 2000 performance reports. The Office of Management and Budget (OMB) issued draft guidance describing how agencies should assess the completeness and reliability of data. NRC's performance report discusses these two data related issues. In its fiscal year 2000 performance report, NRC says that its performance data are complete, noting that it has reported actual or preliminary data for every strategic and performance measure, and reliable because its managers and decision makers use the data in the normal course of their duties. NRC discusses data quality in its fiscal year 2000 performance report and refers to its fiscal year 2002 performance plan for details on its efforts to ensure that its performance data are credible. NRC's performance plan for fiscal year 2002 differs in several significant ways from its predecessor. First, NRC followed through on its commitment to establish measures for three of its performance goals. In its fiscal year 2001 performance plan, NRC established measures for the "maintain safety" performance goal only, saying that it would develop measures for the three nonsafety performance goals--increase public confidence; reduce unnecessary regulatory burden; and enhance the effectiveness, efficiency, and realism of its activities and decisions--for the fiscal year 2002 plan. NRC has done so and now shows measures for all four performance goals. NRC also links each performance measure to a specific performance goal. Second, NRC provided greater details on how it ensures the credibility of the data used to assess its performance in achieving its strategic and performance goal measures. As noted in prior reports on NRC's performance plans, the credibility of its performance data is an issue that has concerned us for several years. Now, NRC links each strategic and performance goal measure to the data source and the automated system in which the data are collected and stored. NRC also described its process to ensure that the data were valid and reliable. For example, to verify the data used to determine whether it has achieved the "no more than one event per year identified as a significant precursor of a nuclear accident" performance measure, NRC evaluates nuclear power plants' operating experience and identifies those events that were the most safety significant. NRC describes each step taken in its evaluation process. In those cases where NRC identified data limitations, it described the actions it had taken to address the limitations. For example, NRC highlighted its concerns with the credibility of the data used to assess its achievements in the key outcome of nuclear material safety. In commenting on a draft of this report, NRC noted that this key outcome includes over 15,000 licensees administered by the agreement states and that NRC relies on the agreement states to collect performance data related to them. NRC also said that it has provided training for the states and its own staff on the database used to collect the information and data collection procedures. It is also developing an internal policy to ensure continued improvements in the performance data reported to the Congress. Third, NRC described the actions it has taken to address the management challenges that we and its Office of the Inspector General identified. NRC's fiscal year 2002 performance plan includes an appendix that describes its ongoing and planned actions to address these management challenges. NRC also relates each challenge to its strategic and performance goals and strategies. NRC did not include comparable information in its fiscal year 2001 performance plan. Finally, NRC addressed three governmentwide performance goals as directed by OMB in March 2001: (1) the use of performance-based contracts for at least 20 percent of all service contracts over $25,000; (2) expanding the use of on-line procurement methods by posting acquisitions of over $25,000 to www.FedBizOpps.gov; and (3) completing studies to determine whether it is more cost-effective to have commercial activities performed in-house by its staff or outsourced. In September 2000, we reported that NRC identified 783 full-time equivalent employees performing activities that are exempt from OMB's cost comparison requirements. NRC discusses its efforts to meet the three governmentwide reforms and believes that it has satisfied OMB's requirements for various reasons. For example, its management strategy to "employ innovative and sound business practices" includes efforts to make greater use of performance-based contracts. NRC participated in a task group that developed the Best Practices Guide on Performance- Based Service Contracting, which the Office of Federal Procurement Policy published for use by other federal agencies. In addition, NRC believes that the same management strategy will help it increase the use of competition and ensure more accurate Federal Activities Inventory Reform Act inventories. Despite these enhancements over its fiscal year 2001 performance plan, we identified an area warranting improvement and additional attention. NRC says it will provide proactive information management and information technology services by working with its program and support offices and by providing reliable and easy-to-use systems for internal and external stakeholders. Although NRC's fiscal year 2002 performance plan sets targets to meet its information technology objectives, it does not address how it expects to verify and validate the data. As a result, we have no assurance that the measures can be used reliably to gauge the effectiveness of NRC's information technology performance or as a basis for making program decisions and revisions. According to its staff, NRC only describes how it verifies and validates performance goal data that are reported to the Congress. Since it only has output measures (that are not reported to the Congress) for information technology, NRC does not describe how it verifies and validates the data related to them. For the three major management challenges that GAO identified, NRC's fiscal year 2000 performance report discussed its progress in resolving two challenges, but it did not discuss the agency's progress in resolving the challenge related to managing the agency--strategic human capital management, financial management, and information technology. However, in its fiscal year 2002 performance plan, NRC identified management strategies to address this challenge. GAO identified two governmentwide high-risk areas: strategic human capital management and information security. Regarding strategic human capital management, NRC's performance report for fiscal year 2000 did not explain its progress in resolving this challenge and its performance plan for fiscal year 2002 did not have goals and measures related to it. However, in its fiscal year 2002 performance plan, NRC included a management strategy to sustain a high-performing, diverse workforce. To achieve this strategy, NRC says that it will base human resource decisions on sound workforce planning and analysis. In this regard, in January 2001, the staff provided the Commission with a suggested action plan--a 5-year, $2.4 million effort to maintain the core competencies, knowledge, and skills needed by NRC. NRC has also taken the initiative and identified options to attract new employees with critical skills, developed training programs to meet its changing needs, and identified legislative options to help resolve its aging staff issue. As we recently testified, continued oversight of NRC's multiyear effort is needed to ensure that it is being properly implemented and is effective in achieving its goals. With respect to information security, NRC has no goal, strategy, or measure to resolve this challenge agencywide, and its fiscal year 2000 performance report did not explain its progress in resolving it. NRC staff acknowledged the lack of an agencywide goal, strategy, or measure but noted that the support office responsible for information security has developed a management strategy and output measure for its own use in addressing this issue. Since the output measure is not applicable to the entire agency and NRC did not include one that is in its fiscal year 2002 performance plan, the Congress will have no assurance that NRC is effectively addressing this challenge. In addition, NRC's plan did not address contingency planning to respond to the loss or degradation of essential services because of a problem in an automated system. In general, a contingency plan describes the steps that NRC would take, including the activation of manual processes, to ensure the continuity of its core business processes in the event of a system failure. According to NRC staff, the agency has processes to ensure continuity in the event of a system failure and did not believe that it needed to disclose this information in the fiscal year 2002 performance plan. For two other major management challenges that GAO identified-- resolving numerous issues to implement a risk-informed approach for commercial nuclear power plants and overcoming inherent difficulties to apply a risk-informed approach to nuclear material licensees--NRC established strategies or performance measures that specifically address them. For example, one strategy is to develop and incrementally use risk- information and, where appropriate, less prescriptive performance-based regulatory approaches to maintain safety. As agreed, our evaluation was generally based on the requirements of GPRA, the Reports Consolidation Act of 2000, guidance to agencies from OMB for developing performance plans and reports (OMB Circular A-11, Part 2), previous reports and evaluations by us and others, our knowledge of NRC's operations and programs, GAO's identification of best practices concerning performance planning and reporting, and our observations on NRC's other GPRA-related efforts. We also discussed our review with NRC staff in the Office of the Chief Financial Officer, Office of the Executive Director for Operations, and Office of the Inspector General. The agency outcomes that were used as the basis for our review were identified by the Ranking Minority Member, Senate Governmental Affairs Committee, as important mission areas for NRC and generally reflect the outcomes for almost all of NRC's programs or activities. The major management challenges confronting NRC, including the governmentwide high-risk areas of strategic human capital management and information security, were identified by GAO in our January 2001 performance and accountability series and high-risk update, and were identified by NRC's Office of the Inspector General in December 2000. We did not independently verify the information contained in the performance report and plan, although we did draw from other GAO work in assessing the validity, reliability, and timeliness of NRC's performance data. We conducted our review from April 2001 through June 2001 in accordance with generally accepted government auditing standards. We provided copies of a draft of this report to NRC for its review and comment. NRC provided a number of specific comments, which are presented in appendix II. Although NRC generally agreed with the information presented in the report, it does not agree that its fiscal year 2000 performance report showed mixed progress in achieving the three key outcomes. We revised the report to make it clear that we concluded that NRC's performance was mixed because it did not have measures for three performance goals until it issued its fiscal year 2002 performance plan. NRC also provided technical clarifications, which we 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 after the date of this letter. At that time, we will send copies to appropriate congressional committees; the Chairman, Nuclear Regulatory Commission; the Commissioners, Nuclear Regulatory Commission; and the Director, Office of Management and Budget. Copies will also be made available to others on request. The following table identifies the major management challenges that confront the Nuclear Regulatory Commission (NRC), including the governmentwide high-risk areas of strategic human capital management and information security. The first column lists the management challenges that we and/or NRC's Office of the Inspector General (OIG) have identified. The second column discusses the progress, as discussed in its fiscal year 2000 performance report, that NRC has made in resolving its challenges. The third column discusses the extent to which NRC's fiscal year 2002 performance plan includes performance goals and measures to address the challenges that we and its OIG identified. Overall, we found that NRC's performance report discussed the agency's progress in resolving some of its challenges. However, it did not discuss its progress in resolving the following challenges: coping with strategic human capital management, improving its financial management activities, and ensuring that its information technology acquisitions perform as intended; information security; intra-agency communication (up, down, and across agency organizational lines); and regulatory processes that are integrated and continue to meet NRC's safety mission in a changing external environment. In its fiscal year 2000 performance report, NRC says that the Reports Consolidation Act of 2000 required an assessment by the Inspector General of the agency's management challenges. As a result, NRC staff said they did not discuss each of the management challenges in its performance report but that specific actions and milestones related to the challenges are included in NRC's fiscal year 2002 performance plan. Of its nine major management challenges, NRC has strategic and performance goals and measures directly related to four; management strategies for four others; but no goal, strategy, or output for one-- information security. One GAO management challenge includes three issues--strategic human capital management, financial management, and information technology. For ease of presentation, we discuss each of these issues separately. Table 2 provides information on how NRC addresses the two governmentwide high-risk areas and its major management challenges. The following are GAO's comments on the Nuclear Regulatory Commission's letter dated June 19, 2001. 1. We agree that NRC's fiscal year 2000 performance report shows that it achieved its goals and targets for the safety-related performance goal for the three key outcomes. We revised the report to make it clear that we concluded that NRC's performance was mixed because it did not have measures for three performance goals until it issued its fiscal year 2002 performance plan. Therefore, we could not fully assess NRC's progress in meeting the three key outcomes. 2. We did not make the change suggested by NRC since we wanted to distinguish between safety- and nonsafety performance goals. 3. We revised the report to show the Office of Nuclear Reactor Regulation staff that are eligible to retire now. 4. We did not include the additional information that NRC suggested because the final standards that the Environmental Protection Agency issued on June 13, 2001, relate to the Department of Energy's proposed high-level waste repository at Yucca Mountain, Nevada--not to the residual radiation that can safely remain at a commercial nuclear power plant site after decommissioning. 5. The information presented on pages 3 and 14 are not inconsistent and do not need to be changed. In our comparison of performance plans for fiscal year 2001 and 2002 (p. 14), we note that NRC's fiscal year 2002 performance plan describes the actions that NRC has taken to address the management challenges that we and its Office of the Inspector General identified. This is not inconsistent with our discussion related to the information that was not included in NRC's fiscal year 2000 performance report (p. 3). The information that we discuss relates to two different NRC documents. 6. We did not make the change that NRC recommended because in fiscal year 2001, about 16 percent of NRC staff are eligible to retire, and by the end of fiscal year 2005, about 33 percent will be eligible. In our opinion, NRC's replacing such a large number of staff qualifies as a crisis. In addition, last year, one NRC Commissioner said, "There is a crisis looming in government" because an entire generation of employees is going to retire or will be eligible to retire in the near future. Finally, in January 2001, we identified strategic human capital management as a high-risk area governmentwide. 7. See comment 3. 8. NRC has correctly portrayed one of the overall conclusions of its advisory panel concerning the new safety oversight process; that is, that the process has made progress toward achieving NRC's four performance goals. The advisory panel also concluded that NRC has the necessary elements to evaluate the new oversight process against the performance goals. But the panel concluded, as we noted in this report, that NRC did not have the necessary data to evaluate the new safety oversight process against the performance goals. As a result, we did not change the report as NRC suggested. 9. NRC says that the strategy--anticipate the introduction of new technologies and changing regulatory demands--focuses on making NRC's activities more realistic. We will add "realistic" to the information presented. However, NRC provided no further amplification about how the strategy will make NRC's activities more realistic. 10. As NRC noted, its fiscal year 2000 performance report discussed data limitations related to the nuclear material safety key outcome. Since NRC's efforts to provide greater details on how it ensures the credibility of the data used to assess its performance are discussed later in the report, we made no change here as NRC suggested. However, we included some of the information that NRC suggested in the section of the report that compares the fiscal years 2001 and 2002 performance plans. 11. We revised the report to include a broader description of how program evaluations can be used. It should be noted that NRC's programs contribute to achieving its performance measures and ultimately its performance and strategic goals. Therefore, we do not believe that NRC's views and our views are inconsistent. 12. We revised the report to show that the Environmental Protection Agency issued the final rule for the Department of Energy's high-level waste repository at Yucca Mountain on June 13, 2001. We also included the information that NRC recommended. 13. We did not revise the report as NRC suggested because we included the information earlier in the report. (See comment 11.) 14. We corrected the typographical error that NRC identified. 15. We did not delete the information as NRC suggested because we believe it clarifies the conditions under which NRC verifies and validates performance data. 16. We corrected the typographical error that NRC identified. 17. We revised the report as NRC recommended. 18. We revised the report as NRC recommended and included some of the additional information it provided. 19. We revised the report to show that NRC staff have offered recommendations for improving internal communications to the Executive Director for Operations who will determine the actions that NRC staff should pursue.
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This report reviews the Nuclear Regulatory Commission's (NRC) fiscal year 2000 performance report and fiscal year 2002 performance plan required by the Government Performance and Results Act of 1993 to assess its progress in achieving selected key outcomes that are important mission areas for the agency. NRC reports mixed progress in achieving the three outcomes GAO reviewed. To measure performance for the three outcomes, NRC established the same four goals: one relates to safety and three relate to such nonsafety issues as public confidence, regulatory burden, and organizational enhancements. Although NRC's strategies for the safety-related performance goal outcomes seem clear and reasonable, GAO could not assess NRC's performance for the three nonsafety performance goals because NRC only recently developed and reported strategies for them in its fiscal year 2002 performance plan. Because NRC has had little experience in applying the strategies and measures for the three nonsafety goals, it may need to revise them after it completes various planned evaluations during the next three years.
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DHS and FEMA have streamlined application and award processes, enhanced the use of risk management principles in its grant programs, and proposed consolidation of its various grant programs to address grant management concerns. In February 2012, we reported that better coordination and improved data collection could help FEMA identify and mitigate potential unnecessary duplication among four overlapping grant programs--the Homeland Security Grant Program, the Urban Areas Security Initiative, the Port Security Grant Program, and the Transit Security Grant Program. FEMA has proposed changes to enhance preparedness grant management, but these changes may create new challenges. Since its creation in April 2007, FEMA's Grant Programs Directorate (GPD) has been responsible for the program management of DHS's preparedness grants. GPD consolidated the grant business operations, systems, training, policy, and oversight of all FEMA grants and the program management of preparedness grants into a single entity. GPD works closely with other DHS entities to manage grants, as needed, through the grant life cycle, shown in figure 1. For example, GPD works with the U.S. Coast Guard for the Port Security Grant Program and the Transportation Security Administration for the Transit Security Grant Program. Since 2006, DHS has taken a number of actions to improve its risk-based grant allocation methodology. Specifically, in March 2008, we reported that DHS had adopted a more sophisticated risk-based grant allocation approach for the Urban Areas Security Initiative to (1) determine both states' and urban areas' potential risk relative to other areas that included empirical analytical methods and policy judgments, and (2) assess and score the effectiveness of the proposed investments submitted by the eligible applicants and determine the final amount of funds awarded. We also reported that DHS's risk model for the Urban Areas Security Initiative could be strengthened by measuring variations in vulnerability. Specifically, we reported that DHS had held vulnerability constant, which limited the model's overall ability to assess risk and more precisely allocate funds. Accordingly, we recommended that DHS and FEMA formulate a method to measure vulnerability in a way that captures variations in vulnerability, and apply this vulnerability measure in future iterations of this risk-based grant allocation model. DHS concurred with our recommendations and FEMA took actions to enhance its approaches for assessing and incorporating vulnerability into risk assessment methodologies for this program. Specifically, FEMA created a risk assessment that places greater weight on threat and calculates the contribution of vulnerability and consequence separately. In June 2009, we reported that DHS used a risk analysis model to allocate Transit Security Grant Program funding and awarded grants to higher-risk transit agencies using all three elements of risk--threat, vulnerability, and consequence. Accordingly, we recommended that DHS formulate a method to measure vulnerability in a way that captures variations in vulnerability, and apply this vulnerability measure in future iterations of this risk-based grant allocation model. DHS concurred with our recommendations and FEMA took actions to enhance its approach for assessing and incorporating vulnerability into risk assessment methodologies for this program. In November 2011, we reported that DHS had made modifications to enhance the Port Security Grant Program's risk assessment model's vulnerability element for fiscal year 2011. Specifically, DHS modified the vulnerability equation to recognize that different ports have different vulnerability levels. We also reported that FEMA had taken actions to streamline the Port Security Grant Program's management efforts. For example, FEMA shortened application time frames by requiring port areas to submit specific project proposals at the time of grant application. According to FEMA officials, this change was intended to expedite the grant distribution process. Further, we reported that to speed the process, DHS took actions to reduce delays in environmental reviews, increased the number of GPD staff working on the Port Security Grants, revised and streamlined grant application forms, and developed time frames for review of project documentation. Despite these continuing efforts to enhance preparedness grant management, we identified multiple factors in our February 2012 report that contributed to the risk of FEMA potentially funding unnecessarily duplicative projects across the four grant programs we reviewed--the Homeland Security Grant Program, the Urban Areas Security Initiative, the Port Security Grant Program, and the Transit Security Grant Program.and geographic locations, combined with differing levels of information that FEMA had available regarding grant projects and recipients. We also reported that FEMA lacked a process to coordinate application reviews across the four grant programs. These factors include overlap among grant recipients, goals, Overlap among grant recipients, goals, and geographic locations exist. The four grant programs we reviewed have similar goals and fund similar activities, such as equipment and training in overlapping jurisdictions, which increases the risk of unnecessary duplication among the programs. For instance, each state and eligible territory receives a legislatively-mandated minimum amount of State Homeland Security Program funding to help ensure that geographic areas develop a basic level of preparedness, while the Urban Areas Security Initiative grants explicitly target urban areas most at risk of terrorist attack. However, many jurisdictions within designated Urban Areas Security Initiative regions also apply for and receive State Homeland Security Program funding. Similarly, port stakeholders in urban areas could receive funding for equipment such as patrol boats through both the Port Security Grant Program and the Urban Areas Security Initiative, and a transit agency could purchase surveillance equipment with Transit Security Grant Program or Urban Areas Security Initiative funding. While we understand that some overlap may be desirable to provide multiple sources of funding, a lack of visibility over grant award details around these programs increases the risk of unintended and unnecessary duplication. FEMA made award decisions for all four grant programs with differing levels of information. In February 2012, we reported that FEMA's ability to track which projects receive funding among the four grant programs varied because the project information FEMA had available to make award decisions--including grant funding amounts, grant recipients, and grant funding purposes--also varied by program due to differences in the grant programs' administrative processes. For example, FEMA delegated some administrative duties to stakeholders for the State Homeland Security Program and the Urban Areas Security Initiative, thereby reducing its administrative burden. However, this delegation also contributed to FEMA having less visibility over some grant applications. FEMA recognized the trade-off between decreased visibility over grant funding in exchange for its reduced administrative burden. Differences in information requirements also affected the level of information that FEMA had available for making grant award decisions. For example, for the State Homeland Security Program and Urban Areas Security Initiative, states and eligible urban areas submit investment justifications for each program with up to 15 distinct investment descriptions that describe general proposals in wide-ranging areas such as "critical infrastructure protection." Each investment justification encompasses multiple specific projects to different jurisdictions or entities, but project-level information, such as a detailed listing of subrecipients or equipment costs, is not required by FEMA. In contrast, Port Security and Transit Security Grant Program applications require specific information on individual projects such as detailed budget summaries. As a result, FEMA has a much clearer understanding of what is being requested and what is being funded by these programs. FEMA has studied the potential utilization of more specific project-level data for making grant award decisions, especially for the State Homeland Security Program and Urban Areas Security Initiative. However, while our analysis of selected grant projects determined that this additional information was sufficient for identifying potentially unnecessary duplication for nearly all of the projects it reviewed, the information did not always provide FEMA with sufficient detail to identify and prevent the risk of unnecessary duplication. While utilizing more specific project-level data would be a step in the right direction, at the time of our February 2012 report, FEMA had not determined the specifics of future data requirements. FEMA lacked a process to coordinate application reviews across the four grant programs. In February 2012, we reported that grant applications were reviewed separately by program and were not compared across each other to determine where possible unnecessary duplication may occur. Specifically, FEMA's Homeland Security Grant Program branch administered the Urban Areas Security Initiative and State Homeland Security Program while the Transportation Infrastructure Security branch administered the Port Security Grant Program and Transit Security Grant Program. We and the DHS Inspector General concluded that coordinating the review of grant projects internally would give FEMA more complete information about applications across the four grant programs, which could help FEMA identify and mitigate the risk of unnecessary duplication across grant applications. In our February 2012 report, we note that one of FEMA's section chiefs said that the primary reasons for the current lack of coordination across programs are the sheer volume of grant applications that need to be reviewed and FEMA's lack of resources to coordinate the grant review process. She added that FEMA reminds grantees not to duplicate grant projects; however, due to volume and the number of activities associated with grant application reviews, FEMA lacks the capabilities to cross-check for unnecessary duplication. We recognize the challenges associated with reviewing a large volume of grant applications, but to help reduce the risk of funding duplicative projects, FEMA could benefit from exploring opportunities to enhance its coordination of project reviews while also taking into account the large volume of grant applications it must process. Thus, we recommended that FEMA take actions to identify and mitigate any unnecessary duplication in these programs, such as collecting more complete project information as well as exploring opportunities to enhance FEMA's internal coordination and administration of the programs. In commenting on the report, DHS agreed and identified planned actions to improve visibility and coordination across programs and projects. We also suggested that Congress consider requiring DHS to report on the results of its efforts to identify and prevent duplication within and across the four grant programs, and consider these results when making future funding decisions for these programs. In the President's Fiscal Year 2013 budget request to Congress, FEMA has proposed consolidating its various preparedness grant programs-- with the exception of the Emergency Management Performance Grants and Assistance to Fire Fighters Grants--into a single, comprehensive preparedness grant program called the National Preparedness Grant Program (NPGP) in fiscal year 2013. FEMA also plans to enhance its preparedness grants management through a variety of proposed initiatives to implement the new consolidated program. According to FEMA, the new NPGP will require grantees to develop and sustain core capabilities outlined in the National Preparedness Goal rather than work to meet mandates within individual, and often disconnected, grant programs. NPGP is intended to focus on creating a robust national response capacity based on cross-jurisdictional and readily deployable state and local assets. According to FEMA's policy announcement, consolidating the preparedness grant programs will support the recommendations of the Redundancy Elimination and Enhanced Performance for Preparedness Grants Act, and will streamline the grant application process. This will, in turn, enable grantees to focus on how federal funds can add value to their jurisdiction's unique preparedness needs while contributing to national response capabilities. To further increase the efficiency of the new grant program, FEMA plans to issue multi-year guidelines, enabling the agency to focus its efforts on measuring progress towards building and sustaining national capabilities. The intent of this consolidation is to eliminate administration redundancies and ensure that all preparedness grants are contributing to the National Preparedness Goal. For fiscal year 2013, FEMA believes that the reorganization of preparedness grants will allow for a more targeted grants approach where states build upon the capabilities established with previous grant money and has requested $1.54 billion for the National Preparedness Grant Program. FEMA's Fiscal Year 2013 Grants Drawdown Budget in Brief also proposes additional measures to enhance preparedness grant management efforts and expedite prior years' grant expenditures. For example, to support reprioritization of unobligated prior year funds and focus on building core capabilities, FEMA plans to: allow grantees to apply prior years' grant balances towards more urgent priorities, promising an expedited project approval by FEMA's Grant Programs Directorate; expand allowable expenses under the Port Security Grant Program and Transit Security Grant Program, for example, by allowing maintenance and sustainment expenses for equipment, training, and critical resources that have previously been purchased with either federal grants or any other source of funding to support existing core capabilities tied to the five mission areas contained within the National Preparedness Goal. The changes FEMA has proposed for its fiscal year 2013 National Preparedness Grants program may create new management challenges. As noted by Chairman Bilirakis in last month's hearing by the House Homeland Security Committee's Subcommittee on Emergency Preparedness, Response, and Communications, allocations under the new grant program would rely heavily on a state's Threat and Hazard Identification and Risk Assessment (THIRA). However, nearly a year after the THIRA concept was first introduced as part of the fiscal year 2011 grant guidance, grantees have yet to receive guidance on how to conduct the THIRA process. As we reported in February 2012, questions also remain as to how local stakeholders would be involved in the THIRA process at the state level. In March 2012, FEMA's GPD announced that FEMA has established a website to solicit input from stakeholders on how best to implement the new program. According to Chairman Bilirakis, it is essential that the local law enforcement, first responders, and emergency managers who are first on the scene of a terrorist attack, natural disaster, or other emergency be involved in the THIRA process. They know the threats to their local areas and the capabilities needed to address them. Finally, according to FEMA's plans, the new National Preparedness Grant Program will require grantees to develop and sustain core capabilities; however, the framework for assessing capabilities and prioritizing national preparedness grant investments is still not complete. As we noted in our February 2012 report, FEMA'S efforts to measure the collective effectiveness of its grants programs are recent and ongoing and thus it is too soon to evaluate the extent to which these initiatives will provide FEMA with the information it needs to determine whether these grant programs are effectively improving the nation's security. DHS and FEMA have had difficulty in implementing longstanding plans to develop and implement a system for assessing national preparedness capabilities. For example, DHS first developed plans in 2004 to measure preparedness by assessing capabilities, but these efforts have been repeatedly delayed and are not yet complete. FEMA's proposed revisions to the new NPGP may help the agency overcome these continuing challenges to developing and implementing a national preparedness assessment. Since 2004, DHS and FEMA have initiated a variety of efforts to develop a system of measuring preparedness. From 2005 until September 2011, much of FEMA's efforts focused on developing and operationalizing a list of target capabilities that would define desired capabilities and could be used in a tiered framework to measure their attainment. In July 2005, we reported that DHS had established a draft Target Capabilities List that provides guidance on the specific capabilities and levels of capability at various levels of government that FEMA would expect federal, state, local, and tribal first responders to develop and maintain.to organize classes of jurisdictions that share similar characteristics-- such as total population, population density, and critical infrastructure-- into tiers to account for reasonable differences in capability levels among groups of jurisdictions and to appropriately apportion responsibility for development and maintenance of capabilities among levels of government and across these jurisdictional tiers. According to DHS's Assessment and Reporting Implementation Plan, DHS intended to implement a capability assessment and reporting system based on target capabilities that would allow first responders to assess their preparedness by identifying gaps, excesses, or deficiencies in their existing capabilities or capabilities they will be expected to access through mutual aid. In addition, this information could be used to (1) measure the readiness of federal civil response assets, (2) measure the use of federal assistance at the state and local levels, and (3) assess how federal assistance programs are supporting national preparedness. DHS planned DHS's efforts to implement these plans were interrupted by the 2005 hurricane season. In August 2005, Hurricane Katrina--the worst natural disaster in our nation's history--made final landfall in coastal Louisiana and Mississippi, and its destructive force extended to the western Alabama coast. Hurricane Katrina and the following Hurricanes Rita and Wilma--also among the most powerful hurricanes in the nation's history--graphically illustrated the limitations at that time of the nation's readiness and ability to respond effectively to a catastrophic disaster; that is, a disaster whose effects almost immediately overwhelm the response capabilities of affected state and local first responders and require outside action and support from the federal government and other entities. In June 2006, DHS concluded that target capabilities and associated performance measures should serve as the common reference system for preparedness planning. In September 2006, we reported that numerous reports and our work suggested that the substantial resources and capabilities marshaled by federal, state, and local governments and nongovernmental organizations were insufficient to meet the immediate challenges posed by the unprecedented degree of damage and the resulting number of hurricane victims caused by Hurricanes Katrina and Rita. We also reported that developing the capabilities needed for catastrophic disasters should be part of an overall national preparedness effort that is designed to integrate and define what needs to be done, where it needs to be done, how it should be done, how well it should be done, and based on what standards. FEMA's National Preparedness Directorate within its Protection and National Preparedness organization was established in April 2007 and is responsible for developing and implementing a system for measuring and assessing national preparedness capabilities. Figure 2 provides an illustration of how federal, state, and local resources provide capabilities for different levels of "incident effect" (i.e., the extent of damage caused by a natural or manmade disaster). In October 2006, Congress passed the Post-Katrina Act that required FEMA, in developing guidelines to define target capabilities, to ensure that such guidelines are specific, flexible, and measurable. In addition, the Post-Katrina Act calls for FEMA to ensure that each component of the national preparedness system, which includes the target capabilities, is developed, revised, and updated with clear and quantifiable performance metrics, measures, and outcomes. We recommended in September 2006, among other things, that DHS apply an all-hazards, risk management approach in deciding whether and how to invest in specific capabilities for a catastrophic disaster. DHS concurred with this recommendation and FEMA said it planned to use the Target Capabilities List to assess capabilities to address all hazards. In September 2007, FEMA issued an updated version of the Target Capabilities List to provide a common perspective in conducting assessments that determine levels of readiness to perform critical tasks and identify and address any gaps or deficiencies. According to FEMA, policymakers need regular reports on the status of capabilities for which they have responsibility to help them make better resource and investment decisions and to establish priorities. In April 2009, we reported that establishing quantifiable metrics for target capabilities was a prerequisite to developing assessment data that can be compared across all levels of government. At the time of our review, FEMA was in the process of refining the target capabilities to make them more measurable and to provide state and local jurisdictions with additional guidance on the levels of capability they need. Specifically, FEMA planned to develop quantifiable metrics--or performance objectives--for each of the 37 target capabilities that are to outline specific capability targets that jurisdictions (such as cities) of varying size should strive to meet, recognizing that there is not a "one size fits all" approach to preparedness. In October 2009, in responding to congressional questions regarding FEMA's plan and timeline for reviewing and revising the 37 target capabilities, FEMA officials said they planned to conduct extensive coordination through stakeholder workshops in all 10 FEMA regions and with all federal agencies with lead and supporting responsibility for emergency support-function activities associated with each of the 37 target capabilities. The workshops were intended to define the risk factors, critical target outcomes, and resource elements for each capability. The response stated that FEMA planned to create a Task Force comprised of federal, state, local, and tribal stakeholders to examine all aspects of preparedness grants, including benchmarking efforts such as the Target Capabilities List. FEMA officials have described their goals for updating the list to include establishing measurable target outcomes, providing an objective means to justify investments and priorities, and promoting mutual aid and resource sharing. In November 2009, FEMA issued a Target Capabilities List Implementation Guide that described the function of the list as a planning tool and not a set of standards or requirements. Finally, in 2011, FEMA announced that the Target Capabilities List would be replaced by a new set of national Core Capabilities. However, it is not clear how the new approach will help FEMA overcome ongoing challenges to assessing national preparedness capabilities discussed below. FEMA has not yet fully addressed ongoing challenges in developing and implementing a system for assessing national preparedness capabilities. For example, we reported in July 2005 that DHS had identified potential challenges in gathering the information needed to assess capabilities, including determining how to aggregate data from federal, state, local, and tribal governments and others and integrating self-assessment and external assessment approaches. In analyzing FEMA's efforts to assess capabilities, we further reported in April 2009 that FEMA faced methodological challenges with regard to (1) differences in data available, (2) variations in reporting structures across states, and (3) variations in the level of detail within data sources requiring subjective interpretation. As noted above, FEMA was in the process of refining the target capabilities at the time of our review to make them more measurable and to provide state and local jurisdictions with additional guidance on the levels of capability they need. We recommended that FEMA enhance its project management plan to include milestone dates, among other things, a recommendation to which DHS concurred. In October 2010, we reported that FEMA had enhanced its project management plan by providing milestone dates and identifying key assessment points throughout the project to determine whether project changes are necessary. Nonetheless, DHS and FEMA have had difficulty overcoming the challenges we reported in July 2005 and April 2009 in establishing a system of metrics to assess national preparedness capabilities. As we reported in October 2010, FEMA officials said that, generally, evaluation efforts they used to collect data on national preparedness capabilities were useful for their respective purposes but that the data collected were limited by data reliability and measurement issues related to the lack of standardization in the collection of data. FEMA officials reported that one of its evaluation efforts, the State Preparedness Report, has enabled FEMA to gather data on the progress, capabilities, and accomplishments of the preparedness program of a state, the District of Columbia, or a territory. However, they also said that these reports included self-reported data that may be subject to interpretation by the reporting organizations in each state and not be readily comparable to other states' data. The officials also stated that they have taken actions to address these limitations by, for example, creating a Web-based survey tool to provide a more standardized way of collecting state preparedness information that will help FEMA officials validate the information by comparing it across states. We reported in October 2010 that FEMA had an ongoing effort to develop measures for target capabilities that would serve as planning guidance, not requirements, to assist in state and local capability assessments. FEMA officials had not yet determined how they planned to revise the Target Capabilities List and said they were awaiting the completed revision of Homeland Security Presidential Directive 8, which was to address national preparedness. That directive, called Presidential Policy Directive 8 on National Preparedness (PPD-8), was issued on March 30, 2011. In March 2011, we reported that FEMA's efforts to develop and implement a comprehensive, measurable, national preparedness assessment of capability and gaps were not yet complete and suggested that Congress consider limiting preparedness grant funding until FEMA completes a national preparedness assessment of capability gaps at each level based on tiered, capability-specific performance objectives to enable prioritization of grant funding. In April 2011, Congress passed the fiscal year 2011 appropriations act for DHS, which reduced funding for FEMA preparedness grants by $875 million from the amount requested in the President's fiscal year 2011 budget. The consolidated appropriations act for fiscal year 2012 appropriated $1.7 billion for FEMA Preparedness grants, $1.28 billion less than requested. The House committee report accompanying the DHS appropriations bill for fiscal year 2012 stated that FEMA could not demonstrate how the use of the grants had enhanced disaster preparedness. According to FEMA's testimony in a hearing on the President's Fiscal Year 2013 budget request before the House Committee on Homeland Security's Subcommittee on Emergency Preparedness, Response, and Communications, FEMA became the federal lead for the implementation of PPD-8 in 2011. The new presidential policy directive calls for the development of both a National Preparedness Goal and a National Preparedness System (both of which were required by the Post-Katrina Act in 2006). FEMA issued the National Preparedness Goal in September 2011, which establishes core capabilities for prevention, protection, response, recovery, and mitigation that are to serve as the basis for preparedness activities within FEMA, throughout the federal government, and at the state and local levels. These new core capabilities are the latest evolution of the Target Capabilities List. According to FEMA officials, they plan to continue to organize the implementation of the National Preparedness System and will be working with partners across the emergency management community to integrate activities into a comprehensive campaign to build and sustain preparedness. According to FEMA, many of the programs and processes that support the components of the National Preparedness System exist and are currently in use, while others will need to be updated or developed. For example, FEMA has not yet developed national preparedness capability requirements based on established metrics for the core capabilities to provide a framework for national preparedness assessments. As I testified last year, until such a framework is in place, FEMA will not have a basis to operationalize and implement its conceptual approach for assessing federal, state, and local preparedness capabilities against capability requirements to identify capability gaps for prioritizing investments in national preparedness. Chairman Bilirakis, Ranking Member Richardson, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. For further information about this statement, please contact William O. Jenkins Jr., Director, Homeland Security and Justice Issues, 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. In addition to the contact named above, the following individuals from GAO's Homeland Security and Justice Team also made major contributions to this testimony: Chris Keisling, Assistant Director; Allyson Goldstein, Dan Klabunde, Tracey King, 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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From fiscal years 2002 through 2011, the federal government appropriated over $37 billion to the Department of Homeland Security's (DHS) preparedness grant programs to enhance the capabilities of state and local governments to prevent, protect against, respond to, and recover from terrorist attacks. DHS allocated $20.3 billion of this funding to grant recipients through four of the largest preparedness grant programs--the State Homeland Security Program, the Urban Areas Security Initiative, the Port Security Grant Program, and the Transit Security Grant Program. The Post-Katrina Emergency Management Reform Act of 2006 requires the Federal Emergency Management Agency (FEMA) to develop a national preparedness system and assess preparedness capabilities--capabilities needed to respond effectively to disasters. FEMA could then use such a system to help it prioritize grant funding. This testimony addresses the extent to which DHS and FEMA have made progress in managing preparedness grants and measuring preparedness by assessing capabilities and addressing related challenges. GAO's comments are based on products issued from April 2002 through February 2012 and selected updates conducted in March 2012. DHS and FEMA have taken actions with the goal of enhancing management of preparedness grants, but better project information and coordination could help FEMA identify and mitigate the risk of unnecessary duplication among grant applications. Specifically, DHS and FEMA have taken actions to streamline the application and award processes and have enhanced their use of risk management for allocating grants. For example, in November 2011, GAO reported that DHS modified its risk assessment model for the Port Security Grant Program by recognizing that different ports have different vulnerability levels. However, in February 2012, GAO reported that FEMA made award decisions for four of its grant programs--the State Homeland Security Grant Program, the Urban Area Security Initiative, the Port Security Grant Program, and the Transit Security Grant Program--with differing levels of information, which contributed to the risk of funding unnecessarily duplicative projects. GAO also reported that FEMA did not have a process to coordinate application reviews across the four grant programs. Rather, grant applications were reviewed separately by program and were not compared across each other to determine where possible unnecessary duplication may occur. Thus, GAO recommended that (1) FEMA collect project information with the level of detail needed to better position the agency to identify any potential unnecessary duplication within and across the four grant programs, weighing any additional costs of collecting this data and (2) explore opportunities to enhance FEMA's internal coordination and administration of the programs to identify and mitigate the potential for any unnecessary duplication. DHS agreed and identified planned actions to improve visibility and coordination across programs and projects. FEMA has proposed consolidating the majority of its various preparedness grant programs into a single, comprehensive preparedness grant program called the National Preparedness Grant Program (NPGP) in fiscal year 2013; however, this may create new challenges. For example, allocations under the NPGP would rely heavily on a state's risk assessment, but grantees have not yet received guidance on how to conduct the risk assessment process. FEMA has established a website to solicit input from stakeholders on how best to implement the program. DHS and FEMA have had difficulty implementing longstanding plans and overcoming challenges in assessing capabilities, such as determining how to validate and aggregate data from federal, state, local, and tribal governments. For example, DHS first developed plans in 2004 to measure preparedness by assessing capabilities, but these efforts have been repeatedly delayed. In March 2011, GAO reported that FEMA's efforts to develop and implement a comprehensive, measurable, national preparedness assessment of capability and gaps were not yet complete and suggested that Congress consider limiting preparedness grant funding until FEMA completes a national preparedness assessment of capability gaps based on tiered, capability-specific performance objectives to enable prioritization of grant funding. In April 2011, Congress passed the fiscal year 2011 appropriations act for DHS that reduced funding for FEMA preparedness grants by $875 million from the amount requested in the President's fiscal year 2011 budget. For fiscal year 2012, Congress appropriated $1.28 billion less than requested in the President's budget. GAO has made recommendations to DHS and FEMA in prior reports to strengthen their management of preparedness grants and enhance their assessment of national preparedness capabilities. DHS and FEMA concurred and have actions underway to address them.
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When first conceived, the LCS program represented an innovative approach for conducting naval operations, matched with a unique acquisition strategy that included two nontraditional shipbuilders and two different ships based on commercial designs--Lockheed Martin's Freedom variant and Austal USA's Independence variant, respectively. The Navy planned to experiment with these ships to determine its preferred design variant. However, in relatively short order, this experimentation strategy was abandoned in favor of a more traditional acquisition of over 50 ships. More recently, the Secretary of Defense has questioned the appropriate capability and quantity of the LCS. The purpose of the program has evolved from concept experimentation, to LCS, and more recently, to an LCS that will be upgraded to a frigate. The strategy for contracting and competing for ship construction has also changed. This evolution is captured in figure 1. While one could argue that a new concept should be expected to evolve over time, the LCS evolution has been complicated by the fact that major commitments have been made to build large numbers of ships before proving their capabilities. Whereas acquisition best practices embrace a "fly before you buy" approach, the Navy has subscribed to a buy before you fly approach for LCS. Consequently, the business imperatives of budgeting, contracting, and ship construction have outweighed the need to demonstrate knowledge, such as technology maturation, design, and testing, resulting in a program that has delivered 8 ships and has 14 more in some stage of the construction process (includes LCS 21, with a planned December 2016 construction start) despite an unclear understanding of the capability the ships will ultimately be able to provide and with notable performance issues discovered among the few ships that have already been delivered. The Navy's vision for the LCS has evolved significantly over time, with questions remaining today about the program's underlying business case. In its simplest form, a business case requires a balance between the concept selected to satisfy warfighter needs and the resources-- technologies, design knowledge, funding, and time--needed to transform the concept into a product, in this case a ship. In a number of reports and assessments since 2005, we have raised concerns about the Navy's business case for LCS, noting risks related to cost, schedule, and technical problems, as well as the overall capability of the ships. Business case aside, the LCS program deviated from initial expectations, while continuing to commit to ship and mission package purchases. The LCS acquisition was challenging from the outset. The Navy hoped to deliver large numbers of ships to the fleet quickly at a low cost. In an effort to achieve its goals, the Navy deviated from sound business practices by concurrently designing and constructing the two lead ship variants while still determining the ship's requirements. The Navy believed it could manage this approach because it considered LCS to be an adaptation of existing commercial ship designs. However, transforming a commercial ship into a capable, survivable warship was an inherently complex undertaking. Elements of the business case further eroded-- including initial cost and schedule expectations. Table 1 compares the Navy's initial expectations of the LCS business case with the present version of the program. Our recent work has shown that the LCS business case continues to weaken. LCS ships under construction have exceeded contract cost targets, with the government responsible for paying for a portion of the cost growth. This growth has prompted the Navy to request $246 million in additional funding for fiscal years 2015-2017 largely to address cost overruns on 12 LCS seaframes. Similarly, deliveries of almost all LCS under contract (LCS 5-26) have been delayed by several months, and, in some cases, closer to a year or longer. Navy officials recently reported that, despite having had 5 years of LCS construction to help stabilize ship delivery expectations, the program would not deliver four LCS in fiscal year 2016 as planned. Whereas the program expected to deliver all 55 ships in the class by fiscal year 2018, today that expectation has been reduced to 17 ships. LCS mission packages, in particular, lag behind expectations. The Navy has fallen short of demonstrating that the LCS with its mission packages can meet the minimum level of capability defined at the beginning of the program. As figure 2 shows, 24 LCS seaframes will be delivered by the time all three mission packages achieve a minimum capability. Since 2007, delivery of the total initial mission package operational capability has been delayed by about 9 years (from 2011 to 2020) and the Navy has lowered the level of performance needed to achieve the initial capability for two packages--surface warfare and mine countermeasures. In addition to mission package failures, the Navy has not met several seaframe objectives, including speed and range. For example, Navy testers estimate that the range of one LCS variant is about half of the minimum level identified at the beginning of the program. As the Navy continues to concurrently deliver seaframes and develop mission packages, it has become clear that the seaframes and mission package technologies were not mature and remain largely unproven. In response, the Navy recently designated the first four LCS as test ships to support an aggressive testing schedule between fiscal years 2017 and 2022. Additional deficiencies discovered during these tests could further delay capability and require expensive changes to the seaframes and mission packages that have already been delivered. As the cost and schedule side of the business case for LCS has grown, performance and capabilities have declined. Changes in the LCS concept of operations are largely the consequence of less than expected lethality and survivability, which remain mostly unproven 7 years after delivery of the lead ships. LCS was designed with reduced requirements as compared to other surface combatants, and over time the Navy has lowered several survivability and lethality requirements further and removed some design features--making the ships less survivable in their expected threat environments and less lethal than initially planned. This has forced the Navy to redefine how it plans to operate the ships. Our previous work highlighted the changes in the LCS's expected capability, as shown in table 2. Further capability changes may be necessary as the Navy continues to test the seaframes and mission packages, as well as gain greater operational experience. For example, the Navy has not yet demonstrated that LCS will achieve its survivability requirements and does not plan to complete survivability assessments until 2018--after more than 24 ships are either in the fleet or under construction. The Navy has identified unknowns related to the Independence variant's aluminum hull, and conducted underwater explosion testing in 2016 but the Navy has yet to compile and report the results. Both variants also sustained some damage in trials in rough sea conditions, but the Navy has not completed its analytical report of these events. Results from air defense and cybersecurity testing also indicate capability concerns. The Navy elected to pursue a frigate concept based on a minor modified LCS. The frigate, as planned, will provide multi-mission capability that is an improvement over LCS and offers modest improvements to some other capabilities, such as the air search radar. Still, many questions remain to be settled about the frigate's design, cost, schedule, and capabilities--all while the Navy continues to purchase additional LCS. Despite the uncertainties, the Navy's acquisition strategy involves effectively demonstrating a commitment to buy all of the planned frigates--12 in total--before establishing realistic cost, schedule, and technical parameters--because the Navy will ask Congress to authorize the contracting approach for the 12 frigates (what the Navy calls a block buy contract) in 2017. Further, the frigate will inherit many of the shortcomings or uncertainties of the LCS, and does not address all the priorities that the Navy had identified for its future frigate. The costs for the frigate are still uncertain. Navy officials have stated that the frigate is expected to cost no more than 20 percent--approximately $100 million--more per ship than the average LCS seaframes. However, the Navy will not establish its cost estimate until May 2017-- presumably after the Navy requests authorization from Congress in its fiscal year 2018 budget request for the block buy contracting approach for 12 frigates--raising the likelihood that the budget request will not reflect the most current costs for the program moving forward. In addition to the continued cost uncertainty, the schedule and approach for the frigate acquisition have undergone substantial changes in the last year, as shown in table 3. According to frigate program officials, under the current acquisition approach the Navy will award contracts in fiscal year 2017 to each of the current LCS contractors to construct one LCS with a block buy option for 12 additional LCS--not frigates. Then, the Navy plans to obtain proposals from both LCS contractors in late 2017 that would upgrade the block buy option of LCS to frigates using frigate-specific design changes and modifications. The Navy will evaluate the frigate upgrade packages and then exercise the option--now for frigates--on the contract that provides the best value based on tradeoffs between price and technical factors. This downselect will occur in summer 2018. Figure 3 illustrates how the Navy plans to modify the fiscal year 2017 LCS contract to convert the ships in the block buy options to frigates. The Navy's current plan, which moves the frigate award forward from fiscal year 2019 to fiscal year 2018, is an acceleration that continues a pattern of committing to buy ships in advance of adequate knowledge. Specifically, the Navy has planned for its downselect award of the frigate to occur before detail design of the ship begins. As we previously reported, awarding a contract before detail design is completed--though common in Navy ship acquisitions--has resulted in increased ship prices. Further, in the absence of a year of frigate detail design, the Navy plans to rely on a contractor-driven design process that is less prescriptive. This approach is similar to that espoused by the original LCS program, whereby the shipyards were given performance specifications and requirements, selecting the design and systems that they determined were best suited to fit their designs in a producible manner. Program officials told us that this new approach should yield efficiencies; however, history from LCS raises concern that this approach for the frigate similarly could lead to the ships having non-standard equipment, with less commonality with the other design and the rest of the Navy. As LCS costs grew and capabilities diluted, the Secretary of Defense directed the Navy to explore alternatives to the LCS to address key deficiencies. In response, the Navy created the Small Surface Combatant Task Force and directed it to consider new and existing frigate design options, including different types of modified LCS designs. The task force concluded that the Navy's desired capability requirements could not be met without major modifications to an LCS design or utilizing other non- LCS designs. When presented with this conclusion, senior Navy leadership directed the task force to explore what capabilities might be more feasible on a minor modified LCS. This led the task force to develop options with diminished capabilities, such as reduced speed or range, resulting in some capabilities becoming equal to or below expected capabilities of the current LCS. Ultimately, the department chose a frigate concept based on a minor modified LCS in lieu of more capable small surface combatant options because of LCS's relatively lower cost and quicker ability to field, as well as the ability to upgrade remaining LCS. Table 4 presents an analysis from our past work, which found that the Navy's proposed frigate will offer some improvements over LCS. For example, the Navy plans to equip the frigates with the mission systems from both the surface and anti-submarine mission packages simultaneously instead of just one at a time like LCS. However, the Navy's planned frigate upgrades will not result in significant improvements in survivability areas related to vulnerability--the ability to withstand initial damage effects from threat weapons--or recoverability-- the ability of the crew to take emergency action to contain and control damage. Further, the Navy sacrificed capabilities that were prioritized by fleet operators. For example, fleet operators consistently prioritized a range of 4,000 nautical miles, but the selected frigate concept is as much as 30 percent short of achieving such a range. The Director, Operational Test and Evaluation has noted that the Navy's proposed frigate design is not substantially different from LCS and does not add much more redundancy or greater separation of critical equipment or additional compartmentation, making the frigate likely to be less survivable than the Navy's previous frigate class. Further, the Navy plans to make some similar capability improvements to existing and future LCS, narrowing the difference between LCS and the frigate. We found that the proposed frigate does not add any new offensive anti-submarine or surface warfare capabilities that are not already part of one of the LCS mission packages, so while the frigate will be able to carry what equates to two mission packages at once, the capabilities in each mission area will be the same as LCS. While specific details are classified, there are only a few areas where there are differences in frigate warfighting capability compared to the LCS. Since it will be based on the LCS designs, the frigate will likely carry forward some of the limitations of the LCS designs. For example, LCS was designed to carry a minimally-sized crew of approximately 50. The Navy has found in various studies that the crew is undersized and made some modest increases in crew size. A frigate design based on LCS may not be able to support a significant increase in crew size due to limited space for berthing and other facilities. Additionally, barring Navy-directed changes to key mechanical systems, the frigate will carry some of the more failure-prone LCS equipment, such as some propulsion equipment, and will likely carry some of the non-fleet-standard, LCS-unique equipment that has challenged the Navy's support and logistics chain. Uncertainties or needs that remain with the surface and anti-submarine warfare mission packages, such as demonstrating operational performance of the surface-to-surface missile and the anti-submarine warfare package, also pose risk for the frigate. The Navy's plans for fiscal years 2017 and 2018 involve significant decisions for the LCS and the frigate programs, including potential future commitments of approximately $14 billion for seaframes and mission packages. First, the Navy plans to buy the last two LCS in fiscal year 2017, even though DOD and the Navy recognize that the LCS does not meet needs. Second, the Navy is planning to seek congressional authorization for a block buy of all planned frigates and funding for the lead frigate as soon as next year--2017--despite significant unknowns about the cost, schedule, and capability of the vessel. The Navy's acquisition approach for the frigate raises concerns about overcommitting to the future acquisition of ships for which significant cost, schedule, and technical uncertainty remains. Similar to what we previously have advised about LCS block buy contracting, a frigate block buy approach could reduce funding flexibility. For example, the LCS contracts provide that a failure to fully fund the purchase of a ship in a given year would make the contract subject to renegotiation. Following this reasoning, such a failure to fund a ship in a given year could result in the government paying more for remaining ships under the contract, which provides a notable disincentive to take any action that might delay procurement, even when a program is underperforming. The Navy requested funding for two LCS in its fiscal year 2017 budget request. We previously suggested that Congress consider not funding any requested LCS in fiscal year 2017 because of unresolved concerns with lethality and survivability of the LCS design, the Navy's ability to make needed improvements, and the lagging construction schedule of the shipyards. As figure 4 depicts, even if no ships were funded in fiscal year 2017, delays that have occurred for previously funded ships have resulted in a construction workload that extends into fiscal year 2020. In all, 8 ships have been delivered (LCS 1-8) and 14 are in various phases of construction (LCS 9-22), with 3 more (LCS 23, 24, and 26) set to begin construction later in fiscal year 2017. Although the Navy has argued that pausing LCS production would result in loss of production work and start-up delays to the frigate program, the schedule suggests that the shipyards in Marinette, Wisconsin, and Mobile, Alabama, will have sufficient workload remaining from prior LCS contract awards that offsets the need to award additional LCS in fiscal year 2017. The Navy's concern also does not account for any other work that the shipyards may have from other Navy or commercial contracts and the possibility of continued delays in the delivery of LCS. On the heels of the decision to fund fiscal year 2017 LCS will be the decision on whether to authorize the frigate contracting approach and fund the lead frigate. As I noted above, the current acquisition plans for the frigate have been accelerated during the past year. If these plans hold, Congress will be asked in a few months to consider authorizing a block buy of 12 frigates and funding the lead frigate when the fiscal year 2018 budget is proposed--before detail design has begun and the scope and cost of the design changes needed to turn an LCS into a frigate are well understood. The frigate acquisition strategy also reflects a proclivity by the Navy to use contracting approaches such as block buys and multiyear procurement for acquisition programs, which may have the cumulative effect of inuring the programs against changes--such as in quantities bought. If you or your staff has any questions about this statement, please contact Paul L. Francis 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 statement. GAO staff who made key contributions to this testimony are Michele Mackin (Director), Diana Moldafsky (Assistant Director), Pete Anderson, Jacob Leon Beier, Laurier Fish, Kristine Hassinger, C. James Madar, Sean Merrill, LeAnna Parkey, and Robin Wilson. Littoral Combat Ship: Need to Address Fundamental Weaknesses in LCS and Frigate Acquisition Strategies. GAO-16-356. Washington, D.C.: June 9, 2016. Littoral Combat Ship: Knowledge of Survivability and Lethality Capabilities Needed Prior to Making Major Funding Decisions. GAO-16-201. Washington, D.C.: December 18, 2015. Littoral Combat Ship: Additional Testing and Improved Weight Management Needed Prior to Further Investments. GAO-14-827. Washington, D.C.: September 25, 2014. Littoral Combat Ship: Navy Complied with Regulations in Accepting Two Lead Ships, but Quality Problems Persisted after Delivery. GAO-14-749. Washington, D.C.: July 30, 2014. Littoral Combat Ship: Deployment of USS Freedom Revealed Risks in Implementing Operational Concepts and Uncertain Costs. GAO-14-447. Washington, D.C.: July 8, 2014. Navy Shipbuilding: Opportunities Exist to Improve Practices Affecting Quality. GAO-14-122. Washington, D.C.: November 19, 2013. Navy Shipbuilding: Significant Investments in the Littoral Combat Ship Continue Amid Substantial Unknowns about Capabilities, Use, and Cost. GAO-13-738T. Washington, D.C.: July 25, 2013. Navy Shipbuilding: Significant Investments in the Littoral Combat Ship Continue Amid Substantial Unknowns about Capabilities, Use, and Cost. GAO-13-530. Washington, D.C.: July 22, 2013. Defense Acquisitions: Realizing Savings under Different Littoral Combat Ship Acquisition Strategies Depends on Successful Management of Risks. GAO-11-277T. Washington, D.C.: December 14, 2010. National Defense: Navy's Proposed Dual Award Acquisition Strategy for the Littoral Combat Ship Program. GAO-11-249R. Washington, D.C.: December 8, 2010. Defense Acquisitions: Navy's Ability to Overcome Challenges Facing the Littoral Combat Ship Will Determine Eventual Capabilities. GAO-10-523. Washington, D.C.: August 31, 2010. Littoral Combat Ship: Actions Needed to Improve Operating Cost Estimates and Mitigate Risks in Implementing New Concepts. GAO-10-257. Washington, D.C.: February 2, 2010. Best Practices: High Levels of Knowledge at Key Points Differentiate Commercial Shipbuilding from Navy Shipbuilding. GAO-09-322. Washington, D.C.: May 13, 2009. Defense Acquisitions: Overcoming Challenges Key to Capitalizing on Mine Countermeasures Capabilities. GAO-08-13. Washington, D.C.: October 12, 2007. Defense Acquisitions: Plans Need to Allow Enough Time to Demonstrate Capability of First Littoral Combat Ships. GAO-05-255. Washington, D.C.: March 1, 2005. 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 Navy envisioned a revolutionary approach for the LCS program: dual ship designs with interchangeable mission packages intended to provide mission flexibility at a lower cost. This approach has fallen short, with significant cost increases and reduced expectations about mission flexibility and performance. The Navy has changed acquisition approaches several times. The latest change involves minor upgrades to an LCS design--referred to now as a frigate. Yet, questions persist about both the LCS and the frigate. GAO has reported on the acquisition struggles facing LCS and now the frigate, particularly in GAO-13-530 and GAO-16-356 . This statement discusses: (1) the evolution of the LCS acquisition strategy and business case; (2) key risks in the Navy's plans for the frigate based on the LCS program; and (3) remaining oversight opportunities for the LCS and small surface combatant programs. This statement is largely based on GAO's prior reports and larger work on shipbuilding and acquisition best practices. It incorporates limited updated audit work where appropriate. The Navy's vision for Littoral Combat Ship (LCS) program has evolved significantly over the last 15 years, reflecting degradations of the underlying business case. Initial plans to experiment with two different prototype ships adapted from commercial designs were abandoned early in favor of an acquisition approach that committed to numerous ships before proving their capabilities. Ships were not delivered quickly to the fleet at low cost. Rather cost, schedule, and capability expectations degraded over time. In contrast, a sound business case would have balanced needed resources--time, money, and technical knowledge--to transform a concept into the desired product. Concerned about the LCS's survivability and lethality, in 2014 the Secretary of Defense directed the Navy to evaluate alternatives. After rejecting more capable ships based partly on cost, schedule, and industrial base considerations, the Navy chose the existing LCS designs with minor modifications and re-designated the ship as a frigate. Much of the LCS's capabilities are yet to be demonstrated and the frigate's design, cost, and capabilities are not well-defined. The Navy proposes to commit quickly to the frigate in what it calls a block buy of 12 ships. Congress has key decisions for fiscal years 2017 and 2018 that have significant funding and oversight implications. First, the Navy has already requested funding to buy two more baseline LCS ships in fiscal year 2017. Second, early next year, the Navy plans to request authorization for a block buy of all 12 frigates and funding in the fiscal year 2018 budget request for the lead frigate. Making these commitments now could make it more difficult to make decisions in the future to reduce or delay the program should that be warranted. A more basic oversight question today is whether a ship that costs twice as much yet delivers less capability than planned warrants an additional investment of nearly $14 billion. GAO has advised Congress to consider not funding the two LCS requested in 2017 given its now obsolete design and existing construction backlogs. Authorizing the block buy strategy for the frigate appears premature. The decisions Congress makes could have implications for what aspiring programs view as acceptable strategies. GAO is not making any new recommendations in this statement but has made numerous recommendations to the Department of Defense (DOD) in the past on LCS and frigate acquisition, including strengthening the program's business case before proceeding with acquisition decisions. While DOD has, at times, agreed with GAO's recommendations, it has taken limited action to implement them.
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The vast majority of Recovery Act funding for transportation programs goes to the Federal Highway Administration (FHWA), the Federal Railroad Administration, and the Federal Transit Administration for the construction, rehabilitation, or repair of highway, road, bridge, transit, and rail projects. The remaining funds are allocated among other DOT administrations. Over half of these funds are for highway infrastructure investments. (See table 1). Of the $27.5 billion provided for highway and related infrastructure investments, $26.7 billion is provided to the states for restoration, repair, construction, and other activities allowed under FHWA's Surface Transportation Program and for other eligible surface transportation projects, which apportions money to states for construction and preventive maintenance of eligible highways and for other surface transportation projects. The Act requires that 30 percent of these funds be suballocated to metropolitan and other areas. The Recovery Act generally requires that funds be invested in projects that can be started and completed expeditiously and identifies several specific deadlines for investing funds provided through several transportation programs. For example, 50 percent of state-administered Federal-aid Highway formula funds (excluding suballocated funds) must be obligated within 120 days of apportionment (apportioned on March 2) and all must be obligated within 1 year of apportionment. Although highway funds are being apportioned to states and localities through existing mechanisms, Recovery Act funding for highway infrastructure investment differs from the usual practice in the Federal-aid Highway Program in a few important ways. Most significantly, for projects funded under the Recovery Act, the federal share is up to 100 percent while the federal share under the Federal-aid Highway Program is usually 80 percent. Priority is also to be given to projects that are projected to be completed within 3 years and are within economically distressed areas. Furthermore, the governor must certify that the state will maintain its current level of transportation spending with regard to state funding (called maintenance of effort), and the governor or other appropriate chief executive must certify that the state or local government to which funds have been made available has completed all necessary legal reviews and determined that the projects are an appropriate use of taxpayer funds. Any amount of the funding that was apportioned on March 2 and is not obligated within deadlines established by the Act (excluding suballocated funds) will be withdrawn by DOT and redistributed to other states that have obligated their funds in a timely manner. Both the President and Congress have emphasized the need for accountability, efficiency, and transparency in the allocation and expenditure of Recovery Act funds. Accordingly, the Office of Management and Budget (OMB) has called on federal agencies to (1) award and distribute funds in a timely and fair manner, (2) ensure the funding recipients and uses are transparent, and the resulting benefits are clearly and accurately reported, (3) ensure funds are used for authorized purposes, (4) avoid unnecessary project delays and cost overruns, and (5) achieve specific program outcomes and improve the economy. For transportation programs, DOT is required to report on the number of direct and indirect jobs created or sustained by the Act's funds for each program and to the extent possible estimate of the number of indirect jobs created or sustained by project or activity in the associated supplying industries, including the number of job-years created and the total increase in employment since the date of enactment of this Act. In order to coordinate DOT's efforts and help ensure accountability and transparency, DOT established a team of senior officials across the department--the Transportation Investment Generating Economic Recovery (TIGER) team. According to DOT, this leadership team will coordinate consistent implementation of the Act, exchange information, provide guidance, and track transportation dollars spent. DOT established individual stewardship groups as part of the TIGER team to gather expertise from across the department to address common issues and identify coordinated and appropriate actions. According to DOT, these groups include financial stewardship, data collection, procurement and grant management, job measurement, information technology and communication, and accountability. The accountability stewardship group meets biweekly with the department's Office of the Inspector General and us to improve transparency and provide an efficient forum for sharing information between management and the auditing entities. As of April 16, DOT reported that nationally $6.4 billion in Recovery Act highway infrastructure investment funding apportioned to the states had been obligated--meaning that DOT and the states had executed agreements on projects worth this amount. For the locations that we reviewed, approximately $3.3 billion in highway funding has been obligated with the percent of apportioned funds obligated to the states and the District of Columbia, ranging from 0 to 65 percent. (See table 2.) For two of the states, DOT had obligated over 50 percent of the states' apportioned funds, for four states it had obligated 30 to 50 percent of the funds, for eight states it had obligated fewer than 30 percent of the funds, and for three states it had not obligated any funds. Most states we visited, while they had not yet expended significant funds, were planning to solicit bids in April or May. They also stated that they planned to meet statutory deadlines for obligating the highway funds. A few states had already executed contracts. As of April 1, the Mississippi Department of Transportation, for example, had signed contracts for 10 projects totaling approximately $77 million. These projects include the expansion of State Route 19 in eastern Mississippi into a four-lane highway. This project fulfills part of the state's 1987 Four-Lane Highway Program which seeks to link every Mississippian to a four-lane highway within 30 miles or 30 minutes. Most often however, we found that highway funds in the states and the District of Columbia have not yet been spent because highway projects were at earlier stages of planning, approval, and competitive contracting. For example, the Florida Department of Transportation plans to use the Recovery Act funds to accelerate road construction programs in its preexisting 5-year plan. This resulted in some projects being reprioritized and selected for earlier completion. On April 15, the Florida Legislative Budget Commission approved the Recovery Act- funded projects that the Florida Department of Transportation had submitted. As required by the Act, states have used existing planning processes and plans to quickly identify and obligate funds for projects. For example, as of April 16, FHWA had obligated $261 million of Recovery Act transportation funding for 20 projects from California's State Highway Operation and Protection Program. These projects involve rehabilitating roadways, pavement, and rest areas as well as upgrading median barriers and guardrails. Some states reported that the use of existing plans has enabled them to quickly distribute transportation funds. As of April 16, FHWA had obligated about $277million to New York state for 108 transportation projects. Officials reported that the state was able to move quickly on these projects largely because New York State Department of Transportation, as required by federal surface transportation legislation, has a planning mechanism that routinely identifies needed transportation projects and performs preconstruction activities, such as completing environmental permitting requirements. Selected states reported that they targeted transportation projects that can be started and completed expeditiously, in accordance with Recovery Act requirements. Several selected states have generally focused on initiating preventive maintenance projects, because these projects require less environmental review or design work and can be started quickly. For example, the New Jersey Department of Transportation selected 40 projects and concentrated mainly on replacement projects that require little environmental clearance or extensive design work, such as highway and bridge painting and deck replacement. Officials from the New York State Department of Transportation reported that they will target most Recovery Act transportation funds to infrastructure rehabilitation, including preventive maintenance and reconstruction, such as bridge repairs and replacement, drainage improvement, repaving, and roadway construction. State officials emphasized that these projects extend the life of infrastructure and can be contracted for and completed relatively easily within the 3-year time frame required by the Act. The state will also target some Recovery Act highway dollars to more typical "shovel ready" highway construction projects for which there were previously insufficient funds. Some states also reported targeting funds toward projects with an emphasis on job creation and consideration of economically distressed areas. For example, the North Carolina Department of Transportation plans to award 70 highway and bridge stimulus projects between March and June, which are estimated to cost $466 million (of an expected $735 million). According to North Carolina Department of Transportation officials, these projects were identified based on Recovery Act criteria that priority be given to projects that are expected to be completed within 3 years and are located in economically distressed areas, among other factors. According to Colorado Department of Transportation officials, they are emphasizing construction projects rather than projects in planning or design phases, in order to maximize job creation. These projects include resurfacing and highway bridge replacements in the Denver metropolitan area, as well as improvements to mountain highways. The Illinois Department of Transportation reported that it is planning to spend a large share of its estimated $655 million in Recovery Act funds for highway and bridge projects in economically distressed areas. In March 2009, FHWA directed its field offices to ensure that states give adequate consideration to economically distressed areas in selecting projects. Specifically, field offices were directed to discuss this issue with the states and to document FHWA oversight. We plan to review states' consideration of economically distressed areas and FHWA's oversight in our subsequent reports on the Recovery Act. Several of the locations that we are reviewing have submitted certifications that they have maintained their level of state funding of projects (maintenance-of-effort certifications) with explanations or conditions attached. Seven states and the District of Columbia submitted "explanatory" certifications--certifications that used language that articulated assumptions or stated the certification was based on the best information available at the time. Six states submitted "conditional" certifications because their certifications were subject to conditions or assumptions, future legislative action, future revenues, or other conditions. The remaining three states--Arizona, Michigan, and New York--submitted certifications free of explanatory or conditional language. On April 22, DOT informed governors that the Recovery Act does not authorize the use of conditional or qualified certifications. The Secretary of Transportation provided the states the opportunity to amend their maintenance-of-effort certifications by May 22, 2009, as needed. In future bimonthly reports, we expect to report on FHWA's oversight of states' efforts to comply with the maintenance of effort requirements and why states indicated that they believe that conditions in their states may change such that they may not be able to maintain their levels of effort. States' and localities' tracking and accounting systems are critical to the proper execution and accurate and timely recording of transactions associated with the Recovery Act. Officials from all 16 states and the District of Columbia told us they have established or are establishing methods and processes to separately identify (i.e., tag), monitor, track, and report on the use of the Recovery Act funds they receive. The states and localities generally plan on using their current accounting systems for recording Recovery Act funds, but many are adding identifiers to account codes to track Recovery Act funds separately. Many said this involved adding digits to the end of existing accounting codes for federal programs. In California, for instance, officials told us that while their plans for tracking, control, and oversight are still evolving, they intend to rely on existing accountability mechanisms and accounting systems, enhanced with newly created codes, to separately track and monitor Recovery Act funds that are received by and pass through the state. The Pennsylvania Department of Transportation issued an administrative circular in March 2009 that established specific Recovery Act program codes to track highway and bridge construction spending, including four new account codes for Recovery Act fund reimbursements to local governments. Several officials told us that the state's accounting system should be able to track Recovery Act funds separately. State officials reported a range of concerns on the federal requirements to identify and track Recovery Act funds going to subrecipients, localities and other non-state entities. These concerns include their inability to track these funds with existing systems, uncertainty regarding state officials' accountability for the use of funds which do not pass through state government entities, and their desire for additional federal guidance to establish specific expectations on sub-recipient reporting requirements. Additionally, FHWA has identified eight major risks in implementing the Recovery Act, including states' oversight of local public agencies and these agencies' lack of experience in handling federal-aid projects. Officials from many of the 16 selected states and the District of Columbia told us that they had concerns about the ability of subrecipients, localities, and other nonstate entities to separately tag, monitor, track, and report on the Recovery Act funds they receive. Given that governors have certified the use of funds in their states, officials in many states also expressed concern about being held accountable for funds flowing directly from federal agencies to localities or other recipients. For example, officials in Colorado expressed concern that they will be held accountable for all Recovery Act funds flowing to the state, including those flowing directly to nonstate entities, such as transportation districts, for which they do not have oversight or information about. Officials in several states indicated that either their states would not be tracking Recovery Act funds going to the local levels or that they were unsure how much data would be available on the use of these funds. For example, Pennsylvania officials said that the state will rely on subrecipients to meet reporting requirements at the local level. Recipients and subrecipients can be local governments or other entities such as transit agencies. For example, about $367 million in Recovery Act money for transit capital assistance and fixed guideway (such as commuter rails and trolleys) modernization was apportioned directly to areas such as Philadelphia, Pittsburgh, and Allentown. State officials also told us that the state would not track or report Recovery Act funds that go straight from the federal government to localities and other entities. We will discuss these issues with local governments and transit entities as we conduct further work. OMB and FHWA continue to develop guidance and communication strategies for Recovery Act implementation as it relates to non-state recipients. To mitigate risks, such as local public agencies' lack of experience in handling federal-aid projects, FHWA outlined eight mitigation strategies, including (1) providing Recovery Act guidance and monitoring strategies for risk areas, such as sub-recipient guidance and checklists to assist local monitoring and oversight, and (2) sharing risks through agreement and contract modifications to help ensure oversight and reporting of funds. To foster efficient and timely communications, in our first bimonthly report on the Recovery Act, we recommended that OMB develop an approach that provides dependable notification to (1) prime recipients in states and localities when funds are made available for their use, (2) states, where the state is not the primary recipient of funds, but has a statewide interest in this information, and (3) all non-federal recipients, on planned releases of federal agency guidance and, if known, whether additional guidance or modifications are expected. Some states also expressed concerns about the Recovery Act reporting requirements. State officials and others are uncertain about the ability of reporting systems to roll up data from multiple sources and synchronize state level reporting with Recovery.gov. Some officials are concerned that too many federal requirements will slow distribution and use of funds and others have expressed reservations about the capacity of smaller jurisdictions and nonprofit organizations to report data. Even those who are confident about their own systems are uncertain about the cost and speed of making any required modifications needed for Recovery.gov reporting or any further data collection requirements. Some state transportation agencies also noted concerns about the burden and redundancy of Recovery Act reporting, including reporting for the state, DOT and its modal offices, and Congress. In response to states' concerns about Recovery Act reporting requirements, in our first bimonthly report we recommended that OMB, in consultation with the Recovery Accountability and Transparency Board and states, evaluate current information and data collection requirements to determine whether sufficient, reliable, and timely information is being collected before adding further data collection requirements. We also recommended that OMB consider the cost and burden of additional reporting on states and localities against expected benefits. States vary in how they plan to assess the impact of Recovery Act funds. Some states will use existing federal program guidance or performance measures to evaluate impact, particularly for ongoing programs, such as FHWA's Surface Transportation Program. Other states are waiting for additional guidance on how and what to measure to assess impact. Some states indicated that they have not determined how they will assess impact. A number of states have expressed concerns about definitions of jobs created and jobs retained under the Act, as well as methodologies that can be used for the estimation of each. Officials from several of the states we met with expressed a need for clearer definitions of "jobs retained" and "jobs created." Officials from a few states expressed the need for clarification on how to track indirect jobs, while others expressed concern about how to measure the impact of funding that is not designed to create jobs. Some of the questions that states and localities have raised about the Recovery Act implementation may have been answered in part via the guidance provided by OMB for the data elements, as well as by guidance issued by federal departments. For example, OMB provided draft definitions for employment, as well as for jobs retained and jobs created via Recovery Act funding. However, OMB did not specify methodologies such as some states have sought for estimating jobs retained and jobs created. Data elements were presented in the form of templates with section-by-section data requirements and instructions. OMB provided a comment period during which it is likely to receive many questions and requests for clarification from states, localities, and other entities that can directly receive Recovery Act funding. OMB plans to update this guidance again in the next 30 to 60 days. Given questions raised by many state and local officials about how best to determine both direct and indirect jobs created and retained under the Recovery Act, we recommended in our first bimonthly report that OMB continue its efforts to identify appropriate methodologies that can be used to assess jobs created and retained from projects funded by the Recovery Act, determine the Recovery Act spending when job creation is indirect, and identify those types of programs, projects, or activities that in the past have demonstrated substantial job creation or are considered likely to do so in the future. Some states are also pursuing a number of different approaches for measuring the effects of Recovery Act funding for transportation projects. For example, the Iowa Department of Transportation tracks the number of worker hours by highway project based on contractor reports and will use these reports to estimate jobs created. New Jersey Transit is using an academic study that examined job creation from transportation investment to estimate the number of jobs that are created by contractors on its Recovery Act-funded construction projects. In addition, Mississippi hired a contractor to conduct an economic impact analysis of transportation projects. As previously mentioned, we will be reporting further on states' and localities' use of Recovery Act funds, including maintenance of effort and projects in economically distressed areas. In addition, we plan to undertake or are already conducting these other assessments of Recovery Act activities that fall within the Committee's interests: Supplementary discretionary grants: The Act provides $1.5 billion to be awarded competitively to state and local governments and transit agencies for surface transportation projects that will have a significant impact on the nation, a metropolitan area, or a region. This is a new program and the Act requires that DOT publish its grant selection criteria by mid-May. We expect to assess how DOT developed its criteria and plan to report several weeks after the criteria are published. High-speed rail: The Act provides about $8 billion for projects that support intercity high-speed rail service. This is also a new program. Our work will likely focus on assessing how DOT is developing a program that will increase the chances of viable high-speed rail projects, consistent with recommendations we recently made on the development of high-speed rail. We expect to start this work later this year. Federal buildings: The Act provides about $5.6 billion for the General Services Administration (GSA) to spend on projects related to its federal buildings, primarily to convert existing buildings to high-performance green buildings. As a part of our ongoing work to report on agencies' implementation of the Energy Independence and Security Act of 2007, which among other things calls for agencies to increase the energy efficiency and the availability of renewable energy in federal buildings, we plan to assess the impact of Recovery Act funding on GSA's ability to meet the 2007 energy act's high-performance federal building requirements. In addition, in coordination with GSA's Office of Inspector General, this summer, we plan to review GSA's conversion of existing federal buildings to high-performance green buildings. We will work with this Committee as we begin work in these areas and in other areas in which the Committee might be interested. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Committee might have. For further information regarding this statement, please contact Katherine Siggerud at (202) 512-2834 or [email protected]. Contact points for our Congressional Relations and Public Affairs offices may be found on the last page of this statement. Individuals who made key contributions to this statement are Daniel Cain, Steven Cohen, Heather Krause, Heather Macleod, and James Ratzenberger. 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) provided $48.1 billion in additional spending at the Department of Transportation (DOT) for investments in transportation infrastructure, including highways, passenger rail, and transit. This statement provides a general overview of (1) selected states' use of Recovery Act funds for highway programs, (2) the approaches taken by these states to ensure accountability for these funds, and (3) the selected states' plans to evaluate the impact of the Recovery Act funds that they receive for highway programs. This statement is based on work in which GAO examined the use of Recovery Act funds by a core group of 16 states and the District of Columbia, representing about 65 percent of the U.S. population and two-thirds of the intergovernmental federal assistance available through the Act. GAO issued its first bimonthly report on April 23, 2009. According to DOT, as of mid-April, the 17 locations that GAO reviewed had obligated $3.3 billion of the over $15 billion (21 percent) in highway investment funds that DOT had apportioned to them. These funds will be used in about 900 projects. States are using existing statewide plans to quickly identify and obligate funding for Recovery Act transportation projects. Several states have generally focused on rehabilitation and repair projects, because these projects require lessenvironmental review or design work. For example, the New Jersey Department of Transportation selected 40 projects and concentrated mainly on projects that require little environmental clearance or extensive design work, such as highway and bridge painting and deck replacement. Some states also reported targeting funds toward projects with an emphasis on job creation and consideration of economically distressed areas. For example, Colorado Department of Transportation officials are emphasizing construction projects, such as highway bridge replacements, rather than projects in planning or design phases, in order to maximize job creation. The Illinois Department of Transportation reported that it is planning to spend a large share of its estimated $655 million in Recovery Act funds for highway and bridge projects in economically distressed areas. States are modifying systems to track Recovery Act funds but are concerned about tracking funds distributed directly to nonstate entities. Officials from all 16 of the states which GAO is reviewing and the District of Columbia stated that they have established or are establishing ways to identify, monitor, track, and report on the use of the Recovery Act funds. However, officials from many of these states and the District of Columbia have concerns about the ability of subrecipients, localities, and other non-state entities to separately monitor, track, and report on the Recovery Act funds these nonstate entities receive. Officials in several states also expressed concern about being held accountable for funds flowing directly to localities or other recipients and indicated that either their states would not be tracking Recovery Act funds going to the local levels or that they were unsure how much data would be available on the use of these funds. Our April 23rd report recommended that the OMB evaluate current reporting requirements before adding further data collection requirements. States vary in their responses to determining how to assess the impact of Recovery Act funds. For programs such as the Federal-aid Highway Surface Transportation Program, some states will use existing federal program guidance or performance measures to evaluate impact. However, a number of states have expressed concerns about definitions of "jobs retained" and "jobs created" under the act, as well as methodologies that can be used for the estimation of each. Given these concerns, GAO recommended in its first bimonthly report that the OMB continue to identify methodologies that can be used to determine jobs retained and created from projects funded by the Recovery Act.
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Distance education is a growing force in postsecondary education, and its rise has implications for the federal student aid programs. Studies by Education indicate that enrollments in distance education quadrupled between 1995 and 2001. By the 2000-2001 school year, nearly 90 percent of public 4-year institutions were offering distance education courses, according to Education's figures. Entire degree programs are now available through distance education, so that a student can complete a degree without ever setting foot on campus. Students who rely extensively on distance education, like their counterparts in traditional campus-based settings, often receive federal aid under Title IV of the Higher Education Act, as amended, to cover the costs of their education, though their reliance on federal aid is somewhat less than students who are not involved in any distance education. We previously reported that 31 percent of students who took their entire program through distance education received federal aid, compared with 39 percent of students who did not take any distance education courses. There is growing recognition among postsecondary officials that changes brought about by the growing use of distance education need to be reflected in the process for monitoring the quality of schools' educational programs. Although newer forms of distance education--such as videoconferencing or Internet courses--may incorporate more elements of traditional classroom education than older approaches like correspondence courses, they can still differ from a traditional educational experience in many ways. Table 1 shows some of the potential differences. The Higher Education Act focuses on accreditation--a task undertaken by outside agencies--as the main tool for ensuring quality in postsecondary programs. Under the act, accreditation for purposes of meeting federal requirements can only be done by agencies that are specifically "recognized" by Education. In all, Education recognizes 62 accrediting agencies. Some, such as Middle States Association of Colleges and Schools - Commission on Higher Education and the Western Association of Schools and Colleges - Accrediting Commission for Community and Junior Colleges, accredit entire institutions that fall under their geographic or other purview. Others, such as the American Bar Association--Council of the Section of Legal Education and Admissions to the Bar, accredit specific programs or departments. Collectively, accrediting agencies cover public and private 2-year and 4-year colleges and universities as well as for-profit vocational schools and nondegree training programs. Thirty-nine agencies are recognized for the purpose of accrediting schools or programs for participation in the federal student aid programs. Education is required to recognize or re-recognize these agencies every 5 years. In order to be recognized by Education as a reliable authority with regard to educational quality, accrediting agencies must, in addition to meeting certain basic criteria, establish standards that address 10 broad areas of institutional quality, including student support services, facilities and equipment, and success with respect to student achievement. While the statute provides that these standards must be consistently applied to an institution's courses and programs of study, including distance education courses and programs, it also gives accrediting agencies flexibility in deciding what to require under each of the 10 areas, including flexibility in whether and how to include distance education within the accreditation review. The current accreditation process is being carried out against a public backdrop of concern about holding schools accountable for student learning outcomes. For example, concerns have been expressed about such issues as the following: Program completion--the percentage of full-time students who graduate with a 4-year postsecondary degree within 6 years of initial enrollment was about 52 percent in 2000. Unprepared workforce--business leaders and educators have pointed to a skills gap between many students' problem solving, communications, and analytical thinking ability and what the workplace requires. To address concerns such as these, there is increased interest in using outcomes more extensively as a means of ensuring quality in distance education and campus-based education. The Council for Higher Education Accreditation--a national association representing accreditors--has issued guidelines on distance education and campus-based programs, that, among other things, call for greater attention to student learning outcomes. Additionally, in May 2003, we reported that 18 states are promoting accountability by publishing the performance measures of their colleges and universities, including retention and graduation rates, because some officials believe that this motivates colleges to improve their performance in that area. At the national level, Education stated in its 2004 annual plan that it will propose to hold institutions more accountable for results, such as ensuring a higher percentage of students complete their programs on-time. The congressionally appointed Web-based Education Commission has also called for greater attention on student outcomes. The Commission said that a primary concern related to program accreditation is that "quality assurance has too often measured educational inputs (e.g., number of books in the library, etc.) rather than student outcomes." Finally, the Business Higher Education Forum--an organization representing business executives and leaders in postsecondary education--has said that improvements are needed in adapting objectives to specific outcomes and certifiable job-skills that address a shortage of workers equipped with analytical thinking and communication skills. Although current federal restrictions on the extent to which schools can offer programs by distance education and still qualify to participate in federal student aid programs affect a small number of schools, the growing popularity of distance education could cause the number to increase in the future. We found that 14 schools were either now adversely affected by the restrictions or would be affected in the future; collectively, these schools serve nearly 225,000 students. Eight of the 14 schools are exempt from the restrictions because they have received waivers as participants in Education's Demonstration Program, under which schools can remain eligible to participate in the student aid programs even if the percentage of distance education courses or the percentage of students involved in distance education rises above the maximums set forth in the law. Three of the remaining 5 schools in the Demonstration Program are negotiating with Education to obtain a waiver. The 14 schools that the current federal restrictions--called the 50-percent rules--affect, or nearly affect, are shown in table 2. They vary in a number of respects. For example, 2 are large (the University of Phoenix has nearly 170,000 students and the University of Maryland University College has nearly 30,000), while 5 have fewer than 1,000 students. Six of the 14 are private for-profit schools, 5 are private nonprofit schools, and 3 are public. Thirteen of the schools are in Education's Demonstration Program, and without the waivers provided under this program, 8 of the 13 would be ineligible to participate in federal student aid programs because 50 percent or more of their students are involved in distance education. One school that is not part of the Demonstration Program faces a potential problem in the near future because of its growing distance education programs. Two examples from among the 14 schools will help illustrate the effect that the restrictions on the size of distance education programs have on schools and their students. The University Maryland University College, a public institution, located in Adelphi, Maryland, had nearly 30,000 students and more than 70 percent of its students took at least one Internet course in the 2000-2001 school year. The college is participating in Education's Demonstration Program and has received waivers to the restrictions on federal student aid for schools with substantial distance education programs. According to university officials, without the waivers, the college and about 10,000 students (campus-based and distance education students) would no longer receive about $65 million in federal student aid. Jones International University, a private for-profit school founded in 1993 and located in Englewood, Colorado, served about 450 students in the 2000-2001 school year. The university offers all of its programs online and offers no campus-based courses. The university has received accreditation from the North Central Association of Colleges and Schools, a regional accrediting agency that reviews institutions in 19 states. In August 2003, school administrators told us that they would be interested in federal student program eligibility in the future. In December 2003, the school became a participant in Education's Demonstration Program and, therefore, its students will be eligible for federal student aid when Education approves the school's administrative and financial systems for managing the federal student aid programs. In the second of two congressionally mandated reports on federal laws and regulations that could impact access to distance education, Education concluded, "he Department has uncovered no evidence that waiving the 50-percent rules, or any of the other rules for which waivers were provided, has resulted in any problems or had negative consequences." In its report, Education also stated that there is a need to amend the laws and regulations governing federal student financial aid to expand distance education opportunities, and officials at Education recognize that several policy options are available for doing so. A significant consideration in evaluating such options is the cost to the federal student aid programs. Regarding these costs, Education has not provided data on the cost of granting waivers to the 50-percent rules in the first two reports on the Demonstration Program. Based in part on our discussions with Education officials and proposals made by members of Congress, there appear to be three main options for consideration in deciding whether to eliminate or modify the current federal restrictions on distance education: (1) continuing the use of case- by-case waivers, as in the current Demonstration Program, coupled with regular monitoring and technical assistance; (2) offering exceptions to those schools with effective controls already in place to prevent fraud and abuse, as evidenced by such characteristics as low default rates; or (3) eliminating the rules and imposing no additional management controls. Evaluating these options involves three main considerations: the extent to which the changes improve access to postsecondary schools, the impact the changes would have on Education's ability to prevent institutions from fraudulent or abusive practices, and the cost to the federal student aid programs and to monitor schools with substantial distance education programs. Our analysis of the three options, as shown in table 3, suggests that while all three would improve students' access to varying degrees, the first two would likely carry a lower risk of fraud and abuse than the third, which would eliminate the rules and controls altogether. We also found support for some form of accountability at most of the 14 schools that current restrictions affect or nearly affect. For example, officials at 11 of these schools said they were generally supportive of some form of accountability to preserve the integrity of the federal student aid programs rather than total elimination of the restrictions. The first option would involve reauthorizing the Demonstration Program as a means of continuing to provide schools with waivers or other relief from current restrictions. Even though exempting schools from current restrictions on the size of distance education programs costs the federal student aid programs, Education has yet to describe the extent of the costs in its reports on the program. According to Education staff, developing the data on the amount of federal student aid could be done and there are no major barriers to doing so. The data would prove valuable in determining the potential costs of various policy options since the program is expanding in scope--five new schools joined in December 2003--and additional reports will need to be prepared for the Congress. Our review of the Demonstration Program and our discussions with Education officials surfaced two additional considerations that would be worthwhile addressing if the Congress decided to reauthorize the program. They relate to streamlining Demonstration Program requirements and improving resource utilization. Reducing paperwork requirements. When the Congress authorized the Demonstration Program, it required that Education evaluate various aspects of distance education, including the numbers and types of students participating in the program and the effective use of different technologies for delivering distance education. These requirements now may be redundant since Education collects such information as part of its National Postsecondary Student Aid Study and other special studies on distance education. Eliminating such requirements could ease the paperwork burden on participating institutions and Education staff. Limiting participation to schools that are adversely affected by federal restrictions. Some schools participating in the Demonstration Program do not need waivers to the 50-percent rules, because their programs are not extensive enough to exceed current restrictions. Limiting participation in the program to only schools that need relief from restrictions on the size of distance education programs could ease the administrative burden on Education. However, in the future, more schools may be interested in receiving waivers if their distance education programs expand. The seven accrediting agencies we reviewed varied in the extent to which their institutional reviews included distance education. While all seven agencies had adopted standards or policies calling for campus-based and distance education programs to be evaluated using the same standards, the agencies varied in (1) the extent to which agencies required schools to demonstrate that distance education and campus-based programs were comparable and (2) the size a distance education program had to be before it was formally included in the overall institutional review. While the Higher Education Act requires Education to ensure that accrediting agencies have standards and policies in place regarding the quality of education, including distance education, it gives the agencies latitude with regard to the details of setting their standards or policies. Differences in standards or policies do not necessarily lead to differences in educational quality, but if one accrediting agency's policies and procedures are more or less rigorous than another's, the potential for quality differences may increase. An Education official said the historical role of the federal government in exerting control over postsecondary education has been limited. Similarly, Education has limited authority to push for greater consistency in areas related to the evaluation of distance education. The agencies we reviewed all had standards or policies in place for evaluating distance education programs. The Higher Education Act does not specify how accrediting agencies should review distance education programs, but instead directs them to cover key subject areas, such as student achievement, curricula, and faculty. The law does not specify how accrediting agencies are to develop their standards or what an appropriate standard should be. All seven agencies had a policy stating that the standards they would apply in assessing a school's distance education programs would be the same as the standards used for assessing campus- based programs. The six regional accrediting agencies within this group had also adopted a set of supplemental guidelines to help schools assess their own distance education programs. While all the agencies had standards or policies in place for evaluating distance education and campus-based learning, we found variation among the agencies in the degree to which they required institutions to compare their distance learning courses with their campus-based courses. Five of the seven agencies, including the one national accrediting agency reviewed, required schools to demonstrate comparability between distance education programs and campus-based programs. For example, one agency required each school to evaluate "the educational effectiveness of its distance education programs (including assessments of student learning outcomes, student retention, and student satisfaction) to ensure comparability to campus-based programs." Another accrediting agency required that the successful completion of distance education courses and programs be similar to those of campus-based courses and programs. The remaining two accrediting agencies did not require schools to demonstrate comparability in any tangible way. A second area in which variations existed is in the threshold for deciding when to conduct a review of a distance education program. While accrediting agencies complete their major review of a school on a multiyear cycle, federal regulations provide they also must approve "substantive changes" to the accredited institutions' educational mission or program. The regulations prescribe seven types of change, such as a change in the established mission or objectives of the institution, that an agency must include in its definition of a substantive change for a school. For example, starting a new field of study or beginning a distance education program might both be considered a substantive change for a school. However, the seven agencies vary in their definition of "substantive" so the amount of change needed for such a review to occur varies from agency to agency. Three of the seven agencies review distance education programs when at least half of all courses in a program are offered through distance learning. A fourth agency reviews at an earlier stage--when 25 percent or more of a degree or certificate program are offered through distance learning. The remaining three agencies have still other polices for when they initiate reviews of distance education programs. The variations among accrediting agencies that we found probably result from the statutory latitude provided to accrediting agencies in carrying out their roles. For example, in the use of their varying policies and practices, the agencies are operating within the flexible framework provided under the Higher Education Act. Such variations likewise do not necessarily lead to differences in how effectively agencies are able to evaluate educational quality. However, the lack of consistently applied procedures for matters such as comparing distance education and campus-based programs or deciding when to incorporate reviews of new distance education programs could potentially increase the chances that some schools are being held to higher standards than others. Additionally, the flexible framework of the Higher Education Act extends to the requirements that accrediting agencies set for schools in evaluating student learning outcomes. In discussions on this matter, Education officials indicated that the law's flexibility largely precludes them from being more prescriptive about the standards, policies, or procedures that accrediting agencies should use. The seven accrediting agencies we reviewed varied in the extent to which their standards and policies address student-learning outcomes for either campus-based or distance education courses or programs. Over the past decade, our work on outcomes-based assessments in a variety of different areas shows that when organizations successfully focus on outcomes, they do so through a systematic approach that includes three main components. The three are (1) setting measurable and quantifiable goals for program outcomes, (2) developing strategies for achieving these goals, and (3) disclosing the results of their efforts to the public. The accrediting agencies we reviewed generally recognized the importance of outcomes, but only one of the seven had an approach that required schools to cover all three of these components. The three-part approach we found being used to successfully implement an outcomes-based management strategy was based on our assessments across a wide spectrum of agencies and activities, including, for example, the Federal Emergency Management Agency working with local governments and the building industry to strengthen building codes to limit deaths and property losses from disaster and the Coast Guard working with the towing industry to reduce marine casualties. Briefly, here are examples of how these three components would apply in an educational setting. Developing measurable and quantifiable goals. It is important that outcome goals be measurable and quantifiable, because without such specificity there is little opportunity to determine progress objectively. A goal of improving student learning outcomes would require measures that reflect the achievement of student learning. For example, a goal of improving student learning outcomes would need to be translated into more specific and measurable terms that pertain directly to a school's mission, such as an average state licensing examination score or a certain job placement rate. Other measures could include test scores measuring writing ability, the ability to defend a point orally, or analyze critically, and work habits, such as time management and organization skills. Developing strategies for achieving the goals. This component involves determining how human, financial, and other resources will be applied to achieve the goals. In education, this component could include such strategies as training for faculty, investments in information technology, or tutoring programs to help improve skills to desired levels. This component helps align an organization's efforts towards improving its efficiency and effectiveness. Our work has shown that providing a rationale for how the resources will contribute to accomplishing the expected level of performance is an important part of this component. Reporting performance data to the public. Making student learning outcome results public is a primary means of demonstrating performance and holding institutions accountable for results. Doing so could involve such steps as requiring schools to put distance learning goals and student outcomes (such as job placement rates or pass rates on state licensing examinations) in a form that can be distributed publicly, such as on the school's Web site. This would provide a basis for students to make more informed decisions on whether to enroll in distance education programs and courses. It would also provide feedback to schools on where to focus their efforts to improve performance. Education's 2002-2007 strategic plan calls for public disclosure of data by stating, "n effective strategy for ensuring that institutions are held accountable for results is to make information on student achievement and attainment available to the public, thus enabling prospective students to make informed choices about where to attend college and how to spend their tuition dollars." Similarly, in September 2003, the Council for Higher Education Accreditation stated that "institutions and programs should routinely provide students and prospective students with information about student learning outcomes and institutional and program performance in terms of these outcomes" and that accrediting organizations should "establish standards, policies and review processes that visibly and clearly expect institutions and programs to discharge responsibilities." The accrediting agencies we reviewed generally recognized the importance of student learning outcomes and had practices in place that embody some aspects of the outcomes-based approach. However, only one of the agencies required schools to have all three components in place. Developing measurable and quantifiable goals. Five of seven agencies had standards or policies requiring that institutions develop measurable goals. For example, one accrediting agency required institutions to formulate goals for its distance learning programs and campus-based programs that cover student achievement, including course completion rates, state licensing examination scores, and job placement rates. Another accrediting agency required that schools set expectations for student learning in various ways. For example, the agency required institutions to begin with measures already in place, such as course and program completion rate, retention rate, graduation rate, and job placement rate. We recognize that each institution will need to develop its own measures in a way that is aligned with its mission, the students it serves, and its strategic plans. For example, a 2-year community college that serves a high percentage of low-income students may have a different mission, such as preparing students for 4-year schools, than a major 4-year institution. Developing strategies for achieving the goals. All of the agencies we visited had standards or policies requiring institutions to develop strategies for achieving goals and allocating resources. For example, one agency had a standard that requires institutions to effectively organize the human, financial, and physical resources necessary to accomplish its purposes. Another agency had a standard that an institution's student development services must have adequate human, physical, financial, and equipment resources to support the goals of the institution. In addition, the standard requires that staff development to be related to the goals of the student development program and should be designed to enhance staff competencies and awareness of current theory and practice. Our prior work on accountability systems, however, points out that when measurable goals are not set, developing strategies may be less effective because there is no way to measure the results of applying the strategies and no way of determining what strategies to develop. Our visits to the accrediting agencies produced specific examples of schools they reviewed that had tangible results in developing strategies for meeting distance education goals. One was Old Dominion University, which had collected data on the writing skills of distance education students. When scores by distance learners declined during an academic year, school administrators identified several strategies to improve students' writing abilities. They had site directors provide information on tutoring to students and directed students to writing and testing centers at community colleges. In addition, they conducted writing workshops at sites where a demonstrated need existed. After putting these strategies in place, writing test scores improved. Reporting performance data to the public. Only one of the agencies had standards or policies requiring institutions to disclose student learning outcomes to the public. However, various organizations, including the Council for Higher Education Accreditation, are considering ways to make the results of such performance assessments transparent and available to the public. Among other things, the Council is working with institutions and programs to create individual performance profiles or to expand existing profiles. The Student Right to Know and Campus Security Act of 1990 offers some context for reporting performance data to the public. This act requires schools involved in the federal student loan programs to disclose, among other things, completion or graduation rates and, if applicable, transfer-out rates for certificate- or degree-seeking, full-time, first-time undergraduates. In this regard, Education is considering ways to make available on its Web site the graduation rates of these schools. However, according to two postsecondary experts, the extent that schools make such information available to prospective students may be uneven. The federal government has a substantial interest in the quality of postsecondary education, including distance education programs. As distance education programs continue to grow in popularity, statutory restrictions on the size of distance education programs--put in place to guard against fraud and abuse in correspondence schools--might soon result in increasing numbers of distance education students losing eligibility for federal student aid. At the same time, some form of control is needed to prevent the potential for fraud and abuse. Over the past few years, the Department of Education has had the authority to grant waivers to schools in the Demonstration Program so that schools can bypass existing statutory requirements. The waivers offer schools the flexibility to increase the size of their distance education programs while remaining under the watchful eye of Education. Education is required to evaluate the efficacy of these waivers as a way of determining the ultimate need for changing the statutory restrictions against distance education. To do so, the Department would need to develop data on the cost to the federal student aid programs of granting waivers to schools. Developing such data and evaluating the efficacy of waivers would be a helpful step in providing information to the Congress about ways for balancing the need to protect the federal student aid programs against fraud and abuse while potentially providing students with increased access to postsecondary education. In addition to administering the federal student aid programs, Education is responsible for ensuring the quality of distance education through the postsecondary accreditation process. Among other things, measures of the quality of postsecondary education include student-learning outcomes, such as the extent to which students complete programs and/or the extent to which students' performance improves over time. As distance education programs proliferate, challenges with evaluating these programs mount because accreditation procedures were developed around campus-based, classroom learning. There is growing awareness in the postsecondary education community that additional steps may be needed to evaluate and ensure the quality of distance education and campus-based programs, though there is far less unanimity about how to go about it. Several accrediting agencies have taken significant steps towards applying an outcome-based, results-oriented approach to their accreditation process, including for distance education. These steps represent a potential set of "best practices" that could provide greater accountability for the quality of distance education. Due to the autonomous nature of accrediting agency operations, Education cannot require that all accrediting agencies adopt these practices. It could, however, play a pivotal role in encouraging and fostering the use of an outcomes-based model. In the long run, if the practices of accrediting agencies remain so varied that program quality is affected, Education may need additional authority to bring about a more consistent approach. Finally, if Education wishes to hold schools more accountable for the quality of distance education and campus-based programs--such as ensuring that a minimum percentage of students complete their programs--aligning the efforts of accrediting agencies to ensure that these factors are measured could increase the likelihood for success in this area. Indeed, a more systematic approach by accrediting agencies could help Education in its effort to focus greater attention on evaluating schools and educational policy through such outcomes. To better inform federal policymakers, we recommend that the Secretary of Education include data in future Demonstration Program reports on the potential cost to the federal student aid programs of waiving the 50-percent rules. To enhance oversight of distance education quality, we recommend that the Secretary of Education, (1) develop, with the help of accrediting agencies and schools, guidelines or a mutual understanding for more consistent and thorough assessment of distance education programs, including developing evaluative components for holding schools accountable for such outcomes and (2) if necessary, request authority from the Congress to require that accrediting agencies use these guidelines in their accreditation efforts. In commenting on a draft of this report, Education generally agreed with our findings and the merits of our recommendations. For instance, Education said that it will consider the potential cost of the federal student aid programs of eliminating the 50-percent rules; however, due to the timing of the process of reauthorizing the Higher Education Act, Education believes it is unlikely these estimates will become part of a future report to Congress on the Demonstration Program. While we can appreciate the difficulties surrounding the timing of the reauthorization, we believe that policymakers would be better informed if this information was provided to them as part of the Demonstration Program. Given the uncertainty about whether Congress will indeed amend the 50-percent rules as part of reauthorization and that the timing of such changes is uncertain, providing information on the costs of the waivers would appear to have value--especially since such information would, in part, carry out the spirit of Demonstration Program requirements. With respect to our recommendation for accreditation, Education said that it would study it carefully. Education agrees that it could engage in a series of discussions with accrediting agencies and schools leading to guidance on assessment and public disclosure of information. Education, however, said that the results would be largely informational because the agencies would not be required to adopt the guidance, and Education is not convinced of the necessity or appropriateness of requiring the guidance via the Higher Education Act. Again, we can appreciate Education's position on this issue, but continue to believe that greater accountability for student learning outcomes is necessary for enhanced oversight of distance education programs. Given Education's stated desire to hold institutions more accountable for results, such as ensuring a higher percentage of students complete their programs on time, working with accrediting agencies to develop guidelines or a mutual understanding of what this involves would be one management tool for doing so. We are sending copies of this report to the Secretary of Education, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. Please call me at (202) 512-8403 if you or your staffs have any questions about this report. Other contacts and acknowledgments are listed in appendix III. To address the two questions about the extent to which current federal restrictions on distance education affect schools' ability to offer federal student aid to their students and what the Department of Education's Distance Education Demonstration Program has revealed with respect to the continued appropriateness of these restrictions, we obtained information from Education staff and other experts on which postsecondary institutions might be affected by these provisions or were close to being affected. We limited our work primarily to schools that were involved in the Demonstration Program or had electronically transmitted distance education programs and that were accredited or pre-accredited by accrediting agencies recognized by Education for eligibility in the federal student aid programs. We initially interviewed officials at 21 institutions with a standard set of questions regarding the effect, if any, current federal restrictions have on the schools' ability to offer federal student aid, and we obtained information on the distance education programs at the schools. Based on our interviews, we determined that only 14 of the 21 schools had been affected or could be affected by the restrictions. We also obtained data on default rates at the 14 schools, if applicable, from Education's student loan cohort default rate database. With respect to the Demonstration Program, we interviewed officials at Education who were responsible for assessing distance education issues. Additionally, we reviewed monitoring and progress reports on participating institutions involved in the Demonstration Program. We reviewed various reports on federal restrictions related to distance education as well as pertinent statutes and regulations. To address the two questions related to the work of accrediting agencies: To what extent do accreditation agencies include distance education in their reviews of schools or programs and as they evaluate distance education programs and campus-based programs, to what extent do accreditation agencies assess educational outcomes, we focused on the standards and policies of seven accrediting agencies that collectively are responsible for more than two-thirds of all distance education programs. We interviewed agency administrators and evaluated the extent of their outcomes-based assessment standards and policies using criteria that we had developed in a variety of past work addressing performance and accountability issues. We compared accrediting agency standards and policies with prior work we conducted on key components for accountability. We provided our preliminary findings to the seven accrediting agencies and asked them to verify our initial findings. In addition, we interviewed staff at Education involved in accreditation issues. We reviewed Education's monitoring reports on accreditation agencies. Additionally, we interviewed officials at the Council for Higher Education Accreditation and reviewed various reports that they have produced. We conducted our work in accordance with generally accepted government auditing standards from October 2002 to February 2004. In addition to those named above, Jerry Aiken, Jessica Botsford, Elizabeth Curda, Luann Moy, Corinna Nicolaou, Jill Peterson, Stan Stenersen, and Susan Zimmerman made important contributions to this report.
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Distance education--that is, offering courses by Internet, video, or other forms outside the classroom--has changed considerably in recent years and is a growing force in postsecondary education. More than a decade ago, concerns about fraud and abuse by some correspondence schools led to federal restrictions on, among other things, the percentage of courses a school could provide by distance education and still qualify for federal student aid. Given the recent changes in distance education, GAO was asked to review the extent to which the restrictions affect schools' ability to offer federal student aid and the Department of Education's assessment of the continued appropriateness of the restrictions. Additionally, GAO was asked to look at the extent to which accrediting agencies evaluate distance education programs, including their approach for assessing student outcomes. While federal restrictions on the size of distance education programs affect only a small number of schools' ability to offer federal student aid, the growing popularity of distance education could cause the number to increase in the future. GAO found that 14 schools were either now adversely affected by the restrictions or would be affected in the future; collectively, these schools serve nearly 225,000 students. Eight of these schools, however, will remain eligible to offer federal student aid because they have been granted waivers from the restrictions by Education. Education granted the waivers as part of a program aimed at assessing the continued appropriateness of the restrictions given the changing face of distance education. In considering the appropriateness of the restrictions, there are several policy options for amending the restrictions; however, amending the restrictions to improve access would likely increase the cost of the federal student aid programs. One way to further understand the effect of amending the restrictions would be to study data on the cost of granting the waivers to schools, but Education has yet to develop this information. The seven accrediting agencies GAO reviewed varied in the extent to which they included distance education programs in their reviews of postsecondary institutions. All seven agencies had developed policies for reviewing these programs; however, there were differences in how and when they reviewed the programs. Agencies also differed in the extent to which they included an assessment of student outcomes in their reviews. GAO's work in examining how organizations successfully focus on outcomes shows that they do so by (1) setting measurable goals for program outcomes, (2) developing strategies for meeting these goals, and (3) disclosing the results of their efforts to the public. Measured against this approach, only one of the seven accrediting agencies we reviewed had policies that require schools to satisfy all three components. As the key federal link to the accreditation community, Education could play a pivotal role in encouraging an outcomes-based model.
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Mortgage insurance, a commonly used credit enhancement, protects lenders against losses in the event of default, and FHA is a government mortgage insurer in a market that also includes private insurers. During fiscal years 2001 to 2003, FHA insured a total of about 3.7 million mortgages with a total value of about $425 billion. FHA plays a particularly large role in certain market segments, including low-income and first-time homebuyers. In 2000, almost 90 percent of FHA-insured home purchase mortgages had an LTV higher than 95 percent. FHA insures most of its mortgages for single-family housing under its Mutual Mortgage Insurance (MMI) Fund. To cover lender's losses, FHA collects premiums from borrowers. These premiums, along with proceeds from the sale of foreclosed properties, pay for claims that FHA pays lenders as a result of foreclosures. In recent years, other members of the conventional mortgage market (such as private mortgage insurers, government-sponsored enterprises such as Fannie Mae and Freddie Mac, and large private lenders) have been increasingly active in supporting low and even no down payment mortgage products. For example, Fannie Mae and Freddie Mac's no down payment mortgage products were introduced in 2000; and many private mortgage insurers will now insure a mortgage up to 100 percent LTV. However, the characteristics and standards for low and no down payment products vary among mortgage institutions. Currently, homebuyers with FHA-insured loans need to make a 3 percent contribution toward the purchase of the property and may finance some of the closing costs associated with the loan. As a result, an FHA-insured loan could equal nearly 100 percent of the property's value or sales price. In recent years, a growing proportion of borrowers have received down payment assistance, which further helps them meet the hurdle of accumulating sufficient funds to purchase a home. Based on our preliminary analysis of FHA-insured loans that had LTVs above 95 percent, use of down payment assistance has grown to over half of such loans insured during the first seven months of 2005. When considering the risk of mortgages, a substantial amount of research GAO reviewed indicates that the LTV ratio and the borrower's credit score are among the most important factors when estimating the risk level associated with individual mortgages. We also analyzed the performance, expressed by the percent of borrowers defaulting within four years of mortgage origination, of low and no down payment mortgages supported by FHA and others. Our analysis supports the findings we found in the research literature. Generally, mortgages with higher LTV ratios (smaller down payments) and lower credit scores are riskier than mortgages with lower LTV ratios and higher credit scores. As can be seen in Figure 1, when focusing only on LTV for FHA loans, default rates increase as the LTV ranges increase. In theory, LTV ratios are important because of the direct relationship that exists between the amount of equity borrowers have in their homes and the risk of default. The higher the LTV ratio, the less cash borrowers will have invested in their homes and the more likely it is that they may default on mortgage obligations, especially during times of economic hardship (e.g., unemployment, divorce, home price depreciation). Risk assessment is a very important component of issuing and insuring mortgages, particularly when introducing a mortgage product that has the risk associated with a higher LTV. To help assess the risks associated with mortgages, the mortgage industry has moved toward greater use of mortgage scoring and automated underwriting systems. Mortgage scoring is a technology-based tool that relies on the statistical analysis of millions of previously originated mortgage loans to determine how key attributes such as the borrower's credit history, the property characteristics, and the terms of the mortgage note affect future loan performance. During the 1990s, private mortgage insurers, the GSEs, and larger financial institutions developed automated underwriting systems. Automated underwriting systems refer to the process of collecting and processing the data used in the underwriting process. These systems rely, in part, on individuals' credit scores or credit history, and they have played an integral role in the provision of low and no down payment mortgage products. These systems allow lenders to quickly assess the riskiness of mortgages by simultaneously considering multiple factors including the credit score and credit history of borrowers. FHA has developed and recently implemented a mortgage scoring tool, called the FHA TOTAL Scorecard, to be used in conjunction with existing automated underwriting systems. More than 60 percent of all mortgages-- conventional and government-insured--were underwritten by an automated underwriting system, as of 2002, and this percentage continues to rise. According to representatives of mortgage institutions we interviewed, they use a number of similar practices in designing and implementing new products. These practices can be especially important when designing and implementing new products with higher or less well understood risk, such as low and no down payment products. Some of these practices could be helpful to FHA in its design and implementation of a zero down payment product, as well as other new products. More specifically, mortgage institutions often establish additional requirements for new products such as additional credit enhancements or underwriting requirements. Although FHA has less flexibility in imposing additional credit enhancements it does have the authority to seek co-insurance, which it is not currently using. FHA makes adjustments to underwriting criteria and to its premiums, but told us that it is unlikely to use a credit score threshold for a new zero down payment product. Further, mortgage institutions also use different means to limit how widely they make available a new product, particularly during its early years. FHA does sometimes use practices for limiting a new product but usually does not pilot products on its own initiative. FHA officials with whom we spoke question the circumstances in which they can limit the availability of a program and told us they do not have the resources to manage programs with limited availability. Finally, according to officials of mortgage institutions, including FHA, they also often put in place more substantial monitoring and oversight mechanisms for their new products including lender oversight. In an earlier report, we made recommendations designed to improve HUD's oversight of FHA lenders. Some mortgage institutions require additional credit enhancements-- mechanisms for transferring risk from one party to another such as mortgage insurance--on low and no down payment products. Mortgage institutions such as Fannie Mae and Freddie Mac mitigate the risk of low and no down payment products by requiring additional credit enhancements such as higher mortgage insurance coverage. Fannie Mae and Freddie Mac believe that the higher-LTV loans represent a greater risk to them and they seek to partially mitigate this risk by requiring higher mortgage insurance coverage on these loans. For example, Fannie Mae and Freddie Mac require insurance coverage of 35 percent of the claim amount (on individual loans that foreclose) for loans that have an LTV of greater than 95 percent and require lower insurance coverage for loans with LTVs below 95 percent. Although FHA is required to provide up to 100 percent coverage of the loans it insures, FHA may engage in co-insurance of its single-family loans. Under co-insurance, FHA could require lenders to share in the risks of insuring mortgages by assuming some percentage of the losses on the loans that they originated (lenders would generally use private mortgage insurance for risk sharing). FHA has used co-insurance before, primarily in its multifamily programs, but does not currently use co-insurance at all. FHA officials told us they tried to put together a co-insurance agreement with Fannie Mae and Freddie Mac and, while they were able to come to agreement on the sharing of premiums, they could not reach agreement on the sharing of losses and it was never implemented. Mortgage institutions also can mitigate risk through stricter underwriting. For example, mortgage institutions such as Fannie Mae and Freddie Mac sometimes introduce stricter underwriting standards as part of the development of new low and no down payment products (or products about which they do not fully understand the risks). Institutions can do this in a number of ways, including requiring a higher credit score threshold for certain products, or requiring greater borrower reserves or more documentation of income or assets from the borrower. Once the mortgage institution has learned enough about the risks that were previously not understood, it can change the underwriting requirements for these new products. FHA could also benefit from mitigating risk such as through stricter underwriting. Although FHA has to meet some statutory standards, it retains some flexibility in how it implements a newly authorized product or changes an existing product. The HUD Secretary has latitude within statutory limitations in changing underwriting requirements for new and existing products and has done this many times. The requirements in H.R. 3043 that prospective zero down payment loans go through FHA's TOTAL Scorecard and that borrowers receive prepurchase counseling are consistent with stricter underwriting. However, in addressing the final recommendations in our February report, FHA wrote that is unlikely to mandate a credit score threshold for a new zero down payment product because the new product is intended to serve borrowers who are underserved by the conventional market including those who lack credit scores. Also, FHA wrote that it is unlikely to mandate borrower reserve requirements since the purpose of a zero down payment product is to serve borrowers with little wealth or personal savings. Mortgage institutions can increase fees or charge higher premiums to help offset the potential costs of a program that is believed to have greater risk. For example, Fannie Mae officials stated that they would charge higher guarantee fees on low and no down payment loans if they were not able to require higher insurance coverage. FHA could set higher premiums in anticipation of higher claims from no down payment loans. Within statutory limits, the HUD Secretary has the authority to set up-front and annual premiums that are charged to borrowers who have FHA-insured loans. In fact, in the administration's 2006 budget proposal for a zero down payment product, it included higher up front and annual premiums for these loans. Some mortgage institutions may limit in some way a new product before fully implementing the new product. For example, Fannie Mae and Freddie Mac sometimes use pilots, or limited offerings of new products, to build experience with a new product type or to learn about particular variables that can help them better understand the factors that contribute to risk for these products. Freddie Mac and Fannie Mae also sometimes set volume limits for the percentage of their business that could be low and no down payment lending. Fannie Mae and Freddie Mac officials provided numerous examples of products that they now offer as standard products but which began as part of underwriting experiments. These include the Fannie Mae Flexible 97®️ product, as well as the Freddie Mac 100 product. FHA has utilized pilots or demonstrations as well when making changes to its single-family mortgage insurance. Generally, HUD has done this in response to legislation that requires a pilot and not on its own initiative. For example, FHA's Home Equity Conversion Mortgage (HECM) insurance program started as a pilot. Congress initiated HECM in 1987; the program is designed to provide elderly homeowners a financial vehicle to tap the equity in their homes without selling or moving from their homes (sometimes called a "reverse mortgage"). Through statute, HECM started as a demonstration program that authorized FHA to insure 2,500 reverse mortgages. Through subsequent legislation, FHA was authorized to insure an increasing number of these mortgages until Congress made the program permanent in 1998. Under the National Housing Act, the HECM program was required to undergo a series of evaluations and it has been evaluated four times since its inception. FHA officials told us that administering this demonstration for 2,500 loans was difficult because of the challenges of selecting a limited number of lenders and borrowers. FHA ultimately had to use a lottery to limit loans to lenders. H.R. 3043 also would mandate that FHA pilot the zero down payment program: it limits the annual number of zero down mortgages to 10 percent of the aggregate number of loans insured during the previous fiscal year, and sets an aggregate limit of 50,000 loans. The appropriate size for a pilot program depends on several factors. For example, the precise number of loans needed to detect a difference in performance between standard loans and loans of a new product type depends in part on how great the differences are in loan performance. If delinquencies early in the life of a mortgage were about 10 percent for FHA's standard high LTV loans, and FHA wished to determine whether loans in the pilot had delinquency rates no more than 20 percent greater that the standard loans (delinquency no more than 12 percent), a sample size of about 1,000 loans would be sufficient to detect this difference with 95 percent confidence. If delinquency rates or FHA's desired degree of precision were different, a different sample size would be appropriate. FHA officials told us they have conducted pilot programs when Congress has authorized them, but they questioned the circumstances under which pilot programs are needed. FHA officials also said that they lacked sufficient resources to appropriately manage a pilot. Additionally, some mortgage institutions may also limit the initial implementation of a new product by limiting the origination and servicing of the product to their better lenders and servicers. Mortgage institutions may also limit servicing on the loans to servicers with particular product expertise, regardless of who originates the loans. Fannie Mae and Freddie Mac both reported that these were important steps in introducing a new product and noted that lenders tend to take a more conservative approach when first implementing a new product. FHA officials agreed that they could, under certain circumstances, envision piloting or limiting the ways in which a new or changed product would be available but pointed to the practical limitations in doing so. FHA approves the sellers and services that are authorized to support FHA's single-family product, but FHA officials told us they face challenges in offering any of their programs only in certain regions of the country or in limiting programs to certain approved lenders or servicers. FHA generally offers products on a national basis and, when they do not, specific regions of the county or lenders might question why they are not able to receive the same benefit (even on a demonstration or pilot basis). However, these officials did provide examples in which their products had been initially limited to particular regions of the country or to particular lenders, including the rollout of the HECMs and their TOTAL Scorecard. Mortgage institutions, including FHA, may take several steps related to increased monitoring of new products and subsequently make changes based on what they learned. Fannie Mae and Freddie Mac officials described processes in which they monitor actual versus expected loan performance for new products, sometimes including enhanced monitoring of early loan performance. Some mortgage institutions, such as Fannie Mae, told us that they may conduct rigorous quality control sampling of new acquisitions, early payment defaults, and nonperforming loans. Depending on the scale of a new initiative, and its perceived risk, these quality control reviews could include a review of up to 100 percent of the loans that are part of the new product. FHA officials told us they also monitor more closely loans underwritten under revised guidelines. Specifically, FHA officials told us that FHA routinely conducts a review of underwriting for approximately 6 to 7 percent of loans it insures. According to FHA officials, as part of the review, it may place greater emphasis on reviewing those aspects of the insurance product that are the subject of a recent change. Fannie Mae and Freddie Mac also reported that they conduct more regular reviews at mortgage servicer sites for new products. In some cases, Fannie Mae and Freddie Mac have staff who conduct on-site audits at the sellers and servicers to provide an extra layer of oversight. According to FHA officials, they have staff that conduct reviews of lenders that they have identified as representing higher risk to FHA programs. However, we recently reported that HUD's oversight of lenders could be improved and identified a number of recommendations for improving this oversight. Loans with low or no down payments carry greater risk. Without any compensating measures such as offsetting credit enhancements and increased risk monitoring and oversight of lenders, introducing a new FHA no down payment product would expose FHA to greater credit risk. The administration's proposal for a zero down product included increased premiums to help compensate for an increase in the cost of the FHA program which would permit FHA to potentially offset additional costs stemming from a new product that entails greater risk or not well understood risk. The proposed bill also requires that borrowers receive prepurchase counseling. Although FHA appears to follow many key practices used by mortgage institutions in designing and implementing new products, several practices not currently or consistently followed by FHA stand out as appropriate means to manage the risks associated with introducing new products or significantly changing existing products. Moreover, these practices can be viewed as part of a formal framework used by some mortgage institutions for managing the risks associated with new or changed products. The framework includes techniques such as limiting the availability of a new product until it is better understood and establishing stricter underwriting standards--all of which would help FHA to manage risk associated with any new product it may introduce. For example, FHA could set volume limits or limit the initial number of participating lenders in the product. Further, changes in FHA's premiums, an important element of the administration's 2006 budget proposal for a zero down payment product would permit FHA to potentially offset additional costs stemming from a new product that entails greater risk or not well understood risk. However, FHA officials believe that the agency does not have sufficient resources to implement products with limited volumes, such as through a pilot program. Yet, when FHA makes new products widely available or makes significant changes to existing products with less-understood risks, these products or actions also can introduce significant risks. Products that would introduce significant risks can impose significant costs. We believe that FHA could mitigate these risks and potential costs by using techniques such as piloting. Moreover, FHA told us that it believes that pilot programs are not needed because the risks of every new year of loans are assessed annually as part of credit subsidy budgetary transactions and in its annual actuarial study, and it could terminate the program early in its life if it identified problems. However, because it may take a few years to determine the risks of a new loan product, early termination could still expose the government to significant financial risk without some type of limits on the number of loans insured. If FHA is unsure about its authority to conduct pilots or concerned about expectations of equitable distribution of its products, Congress can make clear that FHA has this authority by requiring a product to be implemented as part of a pilot, or by explicitly giving the HUD Secretary the authority to establish and implement pilots for new products. If Congress authorizes FHA to insure a no down payment product or any other new single-family insurance products, Congress may want to provide guidance and clear authority to FHA on this new product. Congress may want to consider a number of means to mitigate the additional risks that these loans may pose. Such means may include limiting the initial availability of such a new product, requiring higher premiums, requiring stricter underwriting standards, or requiring enhanced monitoring. Such risk mitigation techniques would serve to help protect the Mutual Mortgage Insurance Fund while allowing FHA the time to learn more about the performance of loans using this new product. Limits on the initial availability of the new product would be consistent with the approach Congress took in implementing the HECM program. The limits could also come in the form of an FHA requirement to limit the new product to better performing lenders and servicers as part of a demonstration program or to limit the time period during which the product is first offered. Mr. Chairman, this completes my prepared statement. I would be pleased to respond to any questions you or other members of the Committee may have at this time. For more information regarding this testimony, please contact William B. Shear at (202) 512-8678 or [email protected] or Mathew Scire at (202) 512- 6794 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on this last page of this testimony. Individuals making key contributions to this testimony also included Anne Cangi, Bert Japikse, Austin Kelly, Andy Pauline, Susan Etzel, and Barbara Roesmann. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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To assist Congress in considering legislation to authorize the Secretary of the Department of Housing and Urban Development (HUD) to carry out a pilot program to insure zero down payment mortgages, this testimony provides information about practices mortgage institutions use in designing and implementing low and no down payment products. It also contains information about how these practices could be instructive for FHA in managing risks associated with a zero down payment product--a product for which the risks are not well understood. This testimony is primarily based on GAO's February 2005 report, Mortgage Financing: Actions Needed to Help FHA Manage Risks from New Mortgage Loan Products, (GAO-05-194). In recent years, many mortgage institutions have become increasingly active in supporting low and even no down payment mortgage products. In considering the risks of these new products, a substantial amount of research GAO reviewed indicates that loan-to-value (LTV) ratio and credit score are among the most important factors when estimating the risk level associated with individual mortgages. GAO's analysis of the performance of low and no down payment mortgages supported by FHA and others corroborates key findings in the literature. Generally, mortgages with higher LTV ratios (smaller down payments) and lower credit scores are riskier than mortgages with lower LTV ratios and higher credit scores. Some practices of other mortgage institutions offer a framework that could help FHA manage the risks associated with introducing new products or making significant changes to existing products. Mortgage institutions sometimes require additional credit enhancements, such as higher insurance coverage, and stricter underwriting, such as credit score thresholds, when introducing a new low or no down payment product. FHA is authorized to require an additional credit enhancement, but does not currently use this authority. FHA has used stricter underwriting criteria, but told us it is unlikely they would use a credit score threshold for a new zero down payment product. Mortgage institutions may also impose limits on the volume of the new products they will permit and on who can sell and service these products. FHA officials question the circumstances in which they can limit volumes for their products and believe they do not have sufficient resources to manage a product with limited volumes, but the potential costs of making widely available a product with risk that is not well understood could exceed the cost of initially implementing such a product on a limited basis.
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The department is facing near-and long-term internal fiscal pressures as it attempts to balance competing demands to support ongoing operations, rebuild readiness following extended military operations, and manage increasing personnel and health care costs as well as significant cost growth in its weapon systems programs. For more than a decade, DOD has dominated GAO's list of federal programs and operations at high risk of being vulnerable to fraud, waste, abuse. In fact, all of the DOD programs on GAO's High-Risk List relate to business operations, including systems and processes related to management of contracts, finances, supply chain, and support infrastructure, as well as weapon systems acquisition. Long-standing and pervasive weaknesses in DOD's financial management and related business processes and systems have (1) resulted in a lack of reliable information needed to make sound decisions and report on the financial status and cost of DOD activities to Congress and DOD decision makers; (2) adversely impacted its operational efficiency and mission performance in areas of major weapons system support and logistics; and (3) left the department vulnerable to fraud, waste, and abuse. Because of the complexity and long-term nature of DOD's transformation efforts, GAO has reported the need for a chief management officer (CMO) position and a comprehensive, enterprisewide business transformation plan. In May 2007, DOD designated the Deputy Secretary of Defense as the CMO. In addition, the National Defense Authorization Acts for Fiscal Years 2008 and 2009 contained provisions that codified the CMO and Deputy CMO (DCMO) positions, required DOD to develop a strategic management plan, and required the Secretaries of the military departments to designate their Undersecretaries as CMOs and to develop business transformation plans. DOD financial managers are responsible for the functions of budgeting, financing, accounting for transactions and events, and reporting of financial and budgetary information. To maintain accountability over the use of public funds, DOD must carry out financial management functions such as recording, tracking, and reporting its budgeted spending, actual spending, and the value of its assets and liabilities. DOD relies on a complex network of organizations and personnel to execute these functions. Also, its financial managers must work closely with other departmental personnel to ensure that transactions and events with financial consequences, such as awarding and administering contracts, managing military and civilian personnel, and authorizing employee travel, are properly monitored, controlled, and reported, in part, to ensure that DOD does not violate spending limitations established in legislation or other legal provisions regarding the use of funds. Before fiscal year 1991, the military services and defense agencies independently managed their finance and accounting operations. According to DOD, these decentralized operations were highly inefficient and failed to produce reliable information. On November 26, 1990, DOD created the Defense Finance and Accounting Service (DFAS) as its accounting agency to consolidate, standardize, and integrate finance and accounting requirements, functions, procedures, operations, and systems. The military services and defense agencies pay for finance and accounting services provided by DFAS using their operations and maintenance appropriations. The military services continue to perform certain finance and accounting activities at each military installation. These activities vary by military service depending on what the services wanted to maintain in-house and the number of personnel they were willing to transfer to DFAS. As DOD's accounting agency, DFAS records these transactions in the accounting records, prepares thousands of reports used by managers throughout DOD and by the Congress, and prepares DOD-wide and service-specific financial statements. The military services play a vital role in that they authorize the expenditure of funds and are the source of most of the financial information that allows DFAS to make payroll and contractor payments. The military services also have responsibility for most of DOD assets and the related information needed by DFAS to prepare annual financial statements required under the Chief Financial Officers Act. DOD accounting personnel are responsible for accounting for funds received through congressional appropriations, the sale of goods and services by working capital fund businesses, revenue generated through nonappropriated fund activities, and the sales of military systems and equipment to foreign governments or international organizations. DOD's finance activities generally involve paying the salaries of its employees, paying retirees and annuitants, reimbursing its employees for travel- related expenses, paying contractors and vendors for goods and services, and collecting debts owed to DOD. DOD defines its accounting activities to include accumulating and recording operating and capital expenses as well as appropriations, revenues, and other receipts. According to DOD's fiscal year 2012 budget request, in fiscal year 2010 DFAS processed approximately 198 million payment-related transactions and disbursed over $578 billion; accounted for 1,129 active DOD appropriation accounts; and processed more that 11 million commercial invoices. DOD financial management was designated as a high-risk area by GAO in 1995. Pervasive deficiencies in financial management processes, systems, and controls, and the resulting lack of data reliability, continue to impair management's ability to assess the resources needed for DOD operations; track and control costs; ensure basic accountability; anticipate future costs; measure performance; maintain funds control; and reduce the risk of loss from fraud, waste, and abuse. Other business operations, including the high-risk areas of contract management, supply chain management, support infrastructure management, and weapon systems acquisition are directly impacted by the problems in financial management. We have reported that continuing weaknesses in these business operations result in billions of dollars of wasted resources, reduced efficiency, ineffective performance, and inadequate accountability. Examples of the pervasive weaknesses in the department's business operations are highlighted below. DOD invests billions of dollars to acquire weapon systems, but it lacks the financial management processes and capabilities it needs to track and report on the cost of weapon systems in a reliable manner. We reported on this issue over 20 years ago, but the problems continue to persist. In July 2010, we reported that although DOD and the military departments have efforts underway to begin addressing these financial management weaknesses, problems continue to exist and remediation and improvement efforts would require the support of other business areas beyond the financial community before they could be fully addressed. DOD also requests billions of dollars each year to maintain its weapon systems, but it has limited ability to identify, aggregate, and use financial management information for managing and controlling operating and support costs. Operating and support costs can account for a significant portion of a weapon system's total life-cycle costs, including costs for repair parts, maintenance, and contract services. In July 2010, we reported that the department lacked key information needed to manage and reduce operating and support costs for most of the weapon systems we reviewed--including cost estimates and historical data on actual operating and support costs. For acquiring and maintaining weapon systems, the lack of complete and reliable financial information hampers DOD officials in analyzing the rate of cost growth, identifying cost drivers, and developing plans for managing and controlling these costs. Without timely, reliable, and useful financial information on cost, DOD management lacks information needed to accurately report on acquisition costs, allocate resources to programs, or evaluate program performance. In June 2010, we reported that the Army Budget Office lacked an adequate funds control process to provide it with ongoing assurance that obligations and expenditures do not exceed funds available in the Military Personnel-Army (MPA) appropriation. We found that an obligation of $200 million in excess of available funds in the Army's military personnel account violated the Antideficiency Act. The overobligation likely stemmed, in part, from lack of communication between Army Budget and program managers so that Army Budget's accounting records reflected estimates instead of actual amounts until it was too late to control the incurrence of excessive obligations in violation of the act. Thus, at any given time in the fiscal year, Army Budget did not know the actual obligation and expenditure levels of the account. Army Budget explained that it relies on estimated obligations--despite the availability of actual data from program managers--because of inadequate financial management systems. The lack of adequate process and system controls to maintain effective funds control impacted the Army's ability to prevent, identify, correct, and report potential violations of the Antideficiency Act. In our February 2011 report on the Defense Centers of Excellence (DCOE), we found that DOD's TRICARE Management Activity (TMA) had misclassified $102.7 million of the nearly $112 million in DCOE advisory and assistance contract obligations. The proper classification and recording of costs are basic financial management functions that are also key in analyzing areas for potential future savings. Without adequate financial management processes, systems, and controls, DOD components are at risk of reporting inaccurate, inconsistent, and unreliable data for financial reporting and management decision making and potentially exceeding authorized spending limits. The lack of effective internal controls hinders management's ability to have reasonable assurance that their allocated resources are used effectively, properly, and in compliance with budget and appropriations law. Over the years, DOD has initiated several broad-based reform efforts to address its long-standing financial management weaknesses. However, as we have reported, those efforts did not achieve their intended purpose of improving the department's financial management operations. In 2005, the DOD Comptroller established the DOD FIAR Directorate to develop, manage, and implement a strategic approach for addressing the department's financial management weaknesses for achieving auditability, and for integrating these efforts with other improvement activities, such as the department's business system modernization efforts. In May 2009, we identified several concerns with the adequacy of the FIAR Plan as a strategic and management tool to resolve DOD's financial management difficulties and thereby position the department to be able to produce auditable financial statements. Overall, since the issuance of the first FIAR Plan in December 2005, improvement efforts have not resulted in the fundamental transformation of operations necessary to resolve the department's long-standing financial management deficiencies. However, DOD has made significant improvements to the FIAR Plan that, if implemented effectively, could result in significant improvement in DOD's financial management and progress toward auditability, but progress in taking corrective actions and resolving deficiencies remains slow. While none of the military services has obtained an unqualified (clean) audit opinion, some DOD organizations, such as the Army Corps of Engineers, DFAS, the Defense Contract Audit Agency, and the DOD Inspector General, have achieved this goal. Moreover, some DOD components that have not yet received clean audit opinions are beginning to reap the benefits of strengthened controls and processes gained through ongoing efforts to improve their financial management operations and reporting capabilities. Lessons learned from the Marine Corps' Statement of Budgetary Resources audit can provide a roadmap to help other components better stage their audit readiness efforts by strengthening their financial management processes to increase data reliability as they develop action plans to become audit ready. In August 2009, the DOD Comptroller sought to further focus efforts of the department and components, in order to achieve certain short- and long- term results, by giving priority to improving processes and controls that support the financial information most often used to manage the department. Accordingly, DOD revised its FIAR strategy and methodology to focus on the DOD Comptroller's two priorities--budgetary information and asset accountability. The first priority is to strengthen processes, controls, and systems that produce DOD's budgetary information and the department's Statements of Budgetary Resources. The second priority is to improve the accuracy and reliability of management information pertaining to the department's mission-critical assets, including military equipment, real property, and general equipment, and validating improvement through existence and completeness testing. The DOD Comptroller directed the DOD components participating in the FIAR Plan--the departments of the Army, Navy, Air Force and the Defense Logistics Agency--to use a standard process and aggressively modify their activities to support and emphasize achievement of the priorities. GAO supports DOD's current approach of focusing and prioritizing efforts in order to achieve incremental progress in addressing weaknesses and making progress toward audit readiness. Budgetary and asset information is widely used by DOD managers at all levels, so its reliability is vital to daily operations and management. DOD needs to provide accountability over the existence and completeness of its assets. Problems with asset accountability can further complicate critical functions, such as planning for the current troop withdrawals. In May 2010, DOD introduced a new phased approach that divides progress toward achieving financial statement auditability into five waves (or phases) of concerted improvement activities (see appendix I). According to DOD, the components' implementation of the methodology described in the 2010 FIAR Plan is essential to the success of the department's efforts to ultimately achieve full financial statement auditability. To assist the components in their efforts, the FIAR guidance, issued along with the revised plan, details the implementation of the methodology with an emphasis on internal controls and supporting documentation that recognizes both the challenge of resolving the many internal control weaknesses and the fundamental importance of establishing effective and efficient financial management. The FIAR Guidance provides the process for the components to follow, through their individual Financial Improvement Plans, in assessing processes, controls, and systems; identifying and correcting weaknesses; assessing, validating, and sustaining corrective actions; and achieving full auditability. The guidance directs the components to identify responsible organizations and personnel and resource requirements for improvement work. In developing their plans, components use a standard template that comprises data fields aligned to the methodology. The consistent application of a standard methodology for assessing the components' current financial management capabilities can help establish valid baselines against which to measure, sustain, and report progress. Improving the department's financial management operations and thereby providing DOD management and the Congress more accurate and reliable information on the results of its business operations will not be an easy task. It is critical that the current initiatives being led by the DOD Deputy Chief Management Officer and the DOD Comptroller be continued and provided with sufficient resources and ongoing monitoring in the future. Absent continued momentum and necessary future investments, the current initiatives may falter, similar to previous efforts. Below are some of the key challenges that the department must address in order for the financial management operations of the department to improve to the point where DOD may be able to produce auditable financial statements. Committed and sustained leadership. The FIAR Plan is in its sixth year and continues to evolve based on lessons learned, corrective actions, and policy changes that refine and build on the plan. The DOD Comptroller has expressed commitment to the FIAR goals, and established a focused approach that is intended to help DOD achieve successes in the near term. But the financial transformation needed at DOD, and its removal from GAO's high-risk list, is a long-term endeavor. Improving financial management will need to be a cross-functional endeavor. It requires the involvement of DOD operations performing other business functions that interact with financial management--including those in the high-risk areas of contract management, supply chain management, support infrastructure management, and weapon systems acquisition. As acknowledged by DOD officials, sustained and active involvement of the department's Chief Management Officer, the Deputy Chief Management Officer, the military departments' Chief Management Officers, the DOD Comptroller, and other senior leaders is critical. Within every administration, there are changes at the senior leadership; therefore, it is paramount that the current initiative be institutionalized throughout the department--at all working levels--in order for success to be achieved. Effective plan to correct internal control weaknesses. In May 2009, we reported that the FIAR Plan did not establish a baseline of the department's state of internal control and financial management weaknesses as its starting point. Such a baseline could be used to assess and plan for the necessary improvements and remediation to be used to measure incremental progress toward achieving estimated milestones for each DOD component and the department. DOD currently has efforts underway to address known internal control weaknesses through three interrelated programs: (1) Internal Controls over Financial Reporting (ICOFR) program, (2) ERP implementation, and (3) FIAR Plan. However, the effectiveness of these three interrelated efforts at establishing a baseline remains to be seen. Furthermore, DOD has yet to identify the specific control actions that need to be taken in Waves 4 and 5 of the FIAR Plan, which deal with asset accountability and other financial reporting matters. Because of the department's complexity and magnitude, developing and implementing a comprehensive plan that identifies DOD's internal control weaknesses will not be an easy task. But it is a task that is critical to resolving the long-standing weaknesses and will require consistent management oversight and monitoring for it to be successful. Competent financial management workforce. Effective financial management in DOD will require a knowledgeable and skilled workforce that includes individuals who are trained and certified in accounting, well versed in government accounting practices and standards, and experienced in information technology. Hiring and retaining such a skilled workforce is a challenge DOD must meet to succeed in its transformation to efficient, effective, and accountable business operations. The National Defense Authorization Act for Fiscal Year 2006 directed DOD to develop a strategic plan to shape and improve the department's civilian workforce. The plan was to, among other things, include assessments of (1) existing critical skills and competencies in DOD's civilian workforce, (2) future critical skills and competencies needed over the next decade, and (3) any gaps in the existing or future critical skills and competencies identified. In addition, DOD was to submit a plan of action for developing and reshaping the civilian employee workforce to address any identified gaps, as well as specific recruiting and retention goals and strategies on how to train, compensate, and motivate civilian employees. In developing the plan, the department identified financial management as one of its enterprisewide mission-critical occupations. In July 2011, we reported that DOD's 2009 overall civilian workforce plan had addressed some legislative requirements, including assessing the critical skills of its existing civilian workforce. Although some aspects of the legislative requirements were addressed, DOD still has significant work to do. For example, while the plan included gap analyses related to the number of personnel needed for some of the mission-critical occupations, the department had only discussed competency gap analyses for 3 mission-critical occupations--language, logistics management, and information technology management. A competency gap for financial management was not included in the department's analysis. Until DOD analyzes personnel needs and gaps in the financial management area, it will not be in a position to develop an effective financial management recruitment, retention, and investment strategy to successfully address its financial management challenges. Accountability and effective oversight. The department established a governance structure for the FIAR Plan, which includes review bodies for governance and oversight. The governance structure is intended to provide the vision and oversight necessary to align financial improvement and audit readiness efforts across the department. To monitor progress and hold individuals accountable for progress, DOD managers and oversight bodies need reliable, valid, meaningful metrics to measure performance and the results of corrective actions. In May 2009, we reported that the FIAR Plan did not have clear results-oriented metrics. To its credit, DOD has taken action to begin defining results-oriented FIAR metrics it intends to use to provide visibility of component-level progress in assessment; and testing and remediation activities, including progress in identifying and addressing supporting documentation issues. We have not yet had an opportunity to assess implementation of these metrics--including the components' control over the accuracy of supporting data--or their usefulness in monitoring and redirecting actions. Ensuring effective monitoring and oversight of progress--especially by the leadership in the components--will be key to bringing about effective implementation, through the components' Financial Improvement Plans, of the department's financial management and related business process reform. If the department's future FIAR Plan updates provide a comprehensive strategy for completing Waves 4 and 5, the plan can serve as an effective tool to help guide and direct the department's financial management reform efforts. Effective oversight holds individuals accountable for carrying out their responsibilities. DOD has introduced incentives such as including FIAR goals in Senior Executive Service Performance Plans, increased reprogramming thresholds granted to components that receive a positive audit opinion on their Statement of Budgetary Resources, audit costs funded by the Office of the Secretary of Defense after a successful audit, and publicizing and rewarding components for successful audits. The challenge now is to evaluate and validate these and other incentives to determine their effectiveness and whether the right mix of incentives has been established. Well-defined enterprise architecture. For decades, DOD has been challenged in modernizing its timeworn business systems. Since 1995, we have designated DOD's business systems modernization program as high risk. Between 2001 and 2005, we reported that the modernization program had spent hundreds of millions of dollars on an enterprise architecture and investment management structures that had limited value. Accordingly, we made explicit architecture and investment management-related recommendations. Congress included provisions in the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 that were consistent with our recommendations. In response, DOD continues to take steps to comply with the act's provisions and to satisfy relevant system modernization management guidance. Collectively, these steps address best practices in implementing the statutory provisions concerning the business enterprise architecture and review of systems costing in excess of $1 million. However, long-standing challenges that we previously identified remain to be addressed. Specifically, while DOD continues to release updates to its corporate enterprise architecture, the architecture has yet to be federated through development of aligned subordinate architectures for each of the military departments. In this regard, each of the military departments has made progress in managing its respective architecture program, but there are still limitations in the scope and completeness, as well as the maturity of the military departments' architecture programs. For example, while each department has established or is in the process of establishing an executive committee with responsibility and accountability for the enterprise architecture, none has fully developed an enterprise architecture methodology or a well-defined business enterprise architecture and transition plan to guide and constrain business transformation initiatives. In addition, while DOD continues to establish investment management processes, the DOD enterprise and the military departments' approaches to business systems investment management still lack the defined policies and procedures to be considered effective investment selection, control, and evaluation mechanisms. Until DOD fully implements these longstanding institutional modernization management controls, its business systems modernization will likely remain a high-risk program. Successful implementation of the ERPs. The department has invested billions of dollars and will invest billions more to implement the ERPs. DOD officials have said that successful implementation of ERPs is key to transforming the department's business operations, including financial management, and in improving the department's capability to provide DOD management and Congress with accurate and reliable information on the results of DOD's operations. DOD has stated that the ERPs will replace over 500 legacy systems. The successful implementation of the ERPs is not only critical for addressing long-standing weaknesses in financial management, but equally important for helping to resolve weaknesses in other high-risk areas such as business transformation, business system modernization, and supply chain management. Over the years we have reported that the department has not effectively employed acquisition management controls to help ensure the ERPs deliver the promised capabilities on time and within budget. Delays in the successful implementation of ERPs have extended the use of existing duplicative, stovepiped systems, and continued funding of the existing legacy systems longer than anticipated. Additionally, the continued implementation problems can erode savings that were estimated to accrue to DOD as a result of modernizing its business systems and thereby reduce funds that could be used for other DOD priorities. To help improve the department's management oversight of its ERPs, we have recommended that DOD define success for ERP implementation in the context of business operations and in a way that is measurable. Accepted practices in system development include testing the system in terms of the organization's mission and operations--whether the system performs as envisioned at expected levels of cost and risk when implemented within the organization's business operations. Developing and using specific performance measures to evaluate a system effort should help management understand whether the expected benefits are being realized. Without performance measures to evaluate how well these systems are accomplishing their desired goals, DOD decision makers, including program managers, do not have all the information they need to evaluate their investments to determine whether the individual programs are helping DOD achieve business transformation and thereby improve upon its primary mission of supporting the warfighter. Another key element in DOD efforts to modernize its business systems is investment management policies and procedures. We reported in June 2011 that DOD's oversight process does not provide sufficient visibility into the military department's investment management activities, including its reviews of systems that are in operations and maintenance made and smaller investments. As discussed in our information technology investment management framework and previous reports on DOD's investment management of its business systems, adequately documenting both policies and associated procedures that govern how an organization manages its information technology projects and investment portfolios is important because doing so provides the basis for rigor, discipline, and repeatability in how investments are selected and controlled across the entire organization. Until DOD fully defines missing policies and procedures, it is unlikely that the department's over 2,200 business systems will be managed in a consistent, repeatable, and effective manner that, among other things, maximizes mission performance while minimizing or eliminating system overlap and duplication. To this point, there is evidence showing that DOD is not managing its systems in this manner. For example, DOD reported that of its 79 major business and other IT investments, about a third are encountering cost, schedule, and performance shortfalls requiring immediate and sustained management attention. In addition, we have previously reported that DOD's business system environment has been characterized by (1) little standardization, (2) multiple systems performing the same tasks, (3) the same data stored in multiple systems, and (4) manual data entry into multiple systems. Because DOD spends billions of dollars annually on its business systems and related IT infrastructure, the potential for identifying and avoiding the costs associated with duplicative functionality across its business system investments is significant. In closing, I am encouraged by the recent efforts and commitment DOD's leaders have shown toward improving the department's financial management. Progress we have seen includes recently issued guidance to aid DOD components in their efforts to address their financial management weaknesses and achieve audit readiness; standardized component financial improvement plans to facilitate oversight and monitoring; and the sharing of lessons learned. In addition, the DCMO and the DOD Comptroller have shown commitment and leadership in moving DOD's financial management improvement efforts forward. The revised FIAR strategy is still in the early stages of implementation, and DOD has a long way and many long-standing challenges to overcome, particularly with regard to sustained commitment, leadership, and oversight, before the department and its military components are fully auditable, and DOD financial management is no longer considered high risk. However, the department is heading in the right direction and making progress. Some of the most difficult challenges ahead lie in the effective implementation of the department's strategy by the Army, Navy, Air Force, and DLA, including successful implementation of ERP systems and integration of financial management improvement efforts with other DOD initiatives. GAO will continue to monitor the progress of and provide feedback on the status of DOD's financial management improvement efforts. We currently have work in progress to assess implementation of the department's FIAR strategy and efforts toward auditability. As a final point, I want to emphasize the value of sustained congressional interest in the department's financial management improvement efforts, as demonstrated by this Panel's leadership. Mr. Chairman and Members of the Panel, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the Panel may have at this time. For further information regarding this testimony, please contact Asif A. Khan, (202) 512-9095 or [email protected]. Key contributors to this testimony include J. Christopher Martin, Senior-Level Technologist; F. Abe Dymond, Assistant Director; Gayle Fischer, Assistant Director; Greg Pugnetti, Assistant Director; Darby Smith, Assistant Director; Steve Donahue; Keith McDaniel; Maxine Hattery; Hal Santarelli; and Sandy Silzer. The first three waves focus on achieving the DOD Comptroller's interim budgetary and asset accountability priorities, while the remaining two waves are intended to complete actions needed to achieve full financial statement auditability. However, the department has not yet fully defined its strategy for completing waves 4 and 5. Each wave focuses on assessing and strengthening internal controls and business systems related to the stage of auditability addressed in the wave. Wave 1--Appropriations Received Audit focuses on the appropriations receipt and distribution process, including funding appropriated by Congress for the current fiscal year and related apportionment/reapportionment activity by the OMB, as well as allotment and sub-allotment activity within the department. Wave 2--Statement of Budgetary Resources Audit focuses on supporting the budget-related data (e.g., status of funds received, obligated, and expended) used for management decision making and reporting, including the Statement of Budgetary Resources. In addition to fund balance with Treasury reporting and reconciliation, other significant end-to-end business processes in this wave include procure-to-pay, hire- to-retire, order-to-cash, and budget-to-report. Wave 3--Mission Critical Assets Existence and Completeness Audit focuses on ensuring that all assets (including military equipment, general equipment, real property, inventory, and operating materials and supplies) that are recorded in the department's accountable property systems of record exist; all of the reporting entities' assets are recorded in those systems of record; reporting entities have the right (ownership) to report these assets; and the assets are consistently categorized, summarized, and reported. Wave 4--Full Audit Except for Legacy Asset Valuation includes the valuation assertion over new asset acquisitions and validation of management's assertion regarding new asset acquisitions, and it depends on remediation of the existence and completeness assertions in Wave 3. Also, proper contract structure for cost accumulation and cost accounting data must be in place prior to completion of the valuation assertion for new acquisitions. It involves the budgetary transactions covered by the Statement of Budgetary Resources effort in Wave 2, including accounts receivable, revenue, accounts payable, expenses, environmental liabilities, and other liabilities. Wave 5--Full Financial Statement Audit focuses efforts on assessing and strengthening, as necessary, internal controls, processes, and business systems involved in supporting the valuations reported for legacy assets once efforts to ensure control over the valuation of new assets acquired and the existence and completeness of all mission assets are deemed effective on a go-forward basis. Given the lack of documentation to support the values of the department's legacy assets, federal accounting standards allow for the use of alternative methods to provide reasonable estimates for the cost of these assets. In the context of this phased approach, DOD's dual focus on budgetary and asset information offers the potential to obtain preliminary assessments regarding the effectiveness of current processes and controls and identify potential issues that may adversely impact subsequent waves. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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As one of the largest and most complex organizations in the world, the Department of Defense (DOD) faces many challenges in resolving serious problems in its financial management and related business operations and systems. DOD is required by various statutes to (1) improve its financial management processes, controls, and systems to ensure that complete, reliable, consistent, and timely information is prepared and responsive to the financial information needs of agency management and oversight bodies, and (2) produce audited financial statements. Over the years, DOD has initiated numerous efforts to improve the department's financial management operations and achieve an unqualified (clean) opinion on the reliability of its reported financial information. These efforts have fallen short of sustained improvement in financial management or financial statement auditability. The Panel requested that GAO provide its perspective on the status of DOD's financial management weaknesses and its efforts to resolve them; the challenges DOD continues to face in improving its financial management and operations; and the status of its efforts to implement automated business systems as a critical element of DOD's Financial Improvement and Audit Readiness strategy. DOD financial management has been on GAO's high-risk list since 1995 and, despite several reform initiatives, remains on the list today. Pervasive deficiencies in financial management processes, systems, and controls, and the resulting lack of data reliability, continue to impair management's ability to assess the resources needed for DOD operations; track and control costs; ensure basic accountability; anticipate future costs; measure performance; maintain funds control; and reduce the risk of loss from fraud, waste, and abuse. DOD spends billions of dollars each year to maintain key business operations intended to support the warfighter, including systems and processes related to the management of contracts, finances, supply chain, support infrastructure, and weapon systems acquisition. These operations are directly impacted by the problems in financial management. In addition, the long-standing financial management weaknesses have precluded DOD from being able to undergo the scrutiny of a financial statement audit. DOD's past strategies for improving financial management were ineffective, but recent initiatives are encouraging. In 2005, DOD issued its Financial Improvement and Audit Readiness (FIAR) Plan for improving financial management and reporting. In 2009, the DOD Comptroller directed that FIAR efforts focus on financial information in two priority areas: budget and mission-critical assets. The FIAR Plan also has a new phased approach that comprises five waves of concerted improvement activities. The first three waves focus on the two priority areas, and the last two on working toward full auditability. The plan is being implemented largely through the Army, Navy, and Air Force military departments and the Defense Logistics Agency, lending increased importance to the committed leadership in these components. Improving the department's financial management operations and thereby providing DOD management and Congress more accurate and reliable information on the results of its business operations will not be an easy task. It is critical that current initiatives related to improving the efficiency and effectiveness of financial management that have the support of the DOD's Deputy Chief Management Officer and Comptroller continue with sustained leadership and monitoring. Absent continued momentum and necessary future investments, current initiatives may falter. Below are some of the key challenges that DOD must address for its financial management to improve to the point where DOD is able to produce auditable financial statements: (1) committed and sustained leadership, (2) effective plan to correct internal control weaknesses, (3) competent financial management workforce, (4) accountability and effective oversight, (5) well-defined enterprise architecture, and (6) successful implementation of the enterprise resource planning systems.
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IAEA's technical cooperation program provides nuclear technical assistance through projects that have three main components--equipment, expert services, and training activities (project- and non-project-related), including fellowships, scientific visits, and training courses--that support the upgrading or establishment, for peaceful purposes, of nuclear techniques and facilities in IAEA member states. IAEA's technical cooperation program funds projects in 10 major program areas, including the development of member states' commercial nuclear power and nuclear safety programs. Nuclear technical assistance projects are approved by IAEA's Board of Governors for a 2-year programming cycle, and member states are required to submit written project proposals to IAEA 1 year before the start of the programming cycle. These proposals are then appraised for funding by IAEA staff and by the agency's member states in terms of technical and practical feasibility, national development priorities, and long-term advantages to the recipient countries. Within IAEA, the Department of Technical Cooperation and three other technical departments--the departments of Research and Isotopes, Nuclear Safety, and Nuclear Energy--are the main channels for technology transfer activities within the technical cooperation program. While the funding for IAEA's technical cooperation program comes primarily from member states' voluntary contributions, the funding for activities in the other three technical departments is through IAEA's regular budget. The United States contributes about 25 percent of IAEA's regular budget. In 1996, the United States' contribution to IAEA's regular budget of $219 million was $63 million. IAEA spent about $12 million on nuclear technical assistance projects for Cuba from 1963--when Cuba started to receive nuclear technical assistance from IAEA--through 1996, for equipment, expert services, fellowships, scientific visits, and subcontracts (agreements between IAEA and a third party to provide services to its member states). IAEA has approved an additional $1.7 million in nuclear technical assistance projects for Cuba for 1997 through 1999. Over half of this additional assistance will be provided for the application of isotopes and radiation in medicine, industry, and hydrology. In addition to the approximately $12 million for nuclear technical assistance projects for Cuba, IAEA spent $2.39 million on regional and interregional training courses for Cuban nationals. These courses were not related to IAEA's nuclear technical assistance projects. (This information was available from IAEA only for 1980 through 1996.) Cuban nationals attended IAEA training courses in radiation protection and nuclear safety, probabilistic safety assessment, safety analysis and assessment techniques for the operational safety of nuclear power plants, and quality assurance for nuclear power plants. In addition, IAEA spent about $433,000 on research contracts for Cuba. (This information was available from IAEA only for 1989 through 1996.) Under IAEA's research contract program, the agency places contracts and cost-free agreements with research centers, laboratories, universities, and other institutions in member states to conduct research projects supporting its scientific programs. As shown in figure 1, of the approximately $12 million for nuclear technical assistance projects that Cuba received from 1963 through 1996--about $8.7 million--or almost three-fourths--consisted of equipment, such as computer systems, and radiation-monitoring and laboratory equipment. (App. I provides information on all nuclear technical assistance projects that IAEA provided for Cuba, by program area, from 1980 through 1996. Most of this assistance was provided in the areas of general atomic energy development and in the application of isotopes and radiation in agriculture). While the costs of administration and related support for IAEA's technical cooperation program are funded through IAEA's regular budget, most of the funding for IAEA's nuclear technical assistance projects comes from voluntary contributions made by the member states to IAEA's technical cooperation fund. Some funding is also provided to IAEA from the United Nations Development Program (UNDP). Other sources of financial support include extrabudgetary income, which is in addition to the funds donated to the technical cooperation fund and is contributed by member states for specific projects, and assistance-in-kind, which is provided by member states that donate equipment, provide expert services, or arrange fellowships on a cost-free basis. As shown in figure 2, IAEA's technical cooperation fund was the primary source of funding for the nuclear technical assistance projects provided for Cuba, for equipment, expert services, fellowships, scientific visits, and subcontracts. In 1996, the United States voluntarily contributed $36 million to IAEA. Of this amount, the United States contributed over $16 million--about 30 percent--of the total $53 million in the technical cooperation fund. (Cuba contributed its share of $45,150--or 0.07 percent--to the fund in 1996.)From 1981 through 1993, the United States was required, under section 307(a) of the Foreign Assistance Act of 1961, as amended, to withhold a proportionate share of its voluntary contribution to the technical cooperation fund for Cuba, Libya, Iran, and the Palestine Liberation Organization because the fund provided assistance to these entities. The United States withheld about 25 percent of its voluntary contribution to the fund, which otherwise would have helped to fund projects for Cuba and the other proscribed entities. On April 30, 1994, the Foreign Assistance Act was amended, and Burma, Iraq, North Korea, and Syria were added to the list of entities from which U.S. funds for certain programs sponsored by international organizations were withheld. At the same time, IAEA and the United Nations Children's Fund (UNICEF) were exempted from the withholding requirement. Consequently, as of 1994, the United States was no longer required to withhold a portion of its voluntary contribution to IAEA's technical cooperation fund for any of these entities, including Cuba. However, State Department officials continued to withhold funds in 1994 and 1995. But beginning in 1996, the United States no longer withheld any of its voluntary contribution to the fund for these entities, including Cuba. Because IAEA's technical cooperation fund provides nuclear technical assistance for Cuba, from 1981 through 1995, the United States withheld a total of about $2 million that otherwise would have gone for nuclear technical assistance for Cuba. Of the total dollar value of all nuclear nuclear technical assistance projects that IAEA has provided for Cuba, about $680,000 has been approved for four nuclear technical assistance projects for Cuba's nuclear power reactors from 1991 through 1998. As of January 1997, $313,364 of this amount had been spent for two of these projects. State Department officials told us that they did not object to these projects because the United States generally supports nuclear safety assistance for IAEA member states. Following is a summary of each of these projects. (See app. II for more details.) Since 1991, IAEA has assisted Cuba in undertaking a safety assessment of the reactors' ability to respond to accidents and in conserving, or "mothballing," the nuclear power reactors while construction is suspended. The agency had spent almost three-fourths of the approximately $396,000 approved for the project, as of January 1997. Of this amount, Spain has agreed to provide about $159,000 in extrabudgetary funds. According to IAEA's information on the technical cooperation program for 1995 to 1996, this project is designed to develop proper safety and emergency systems and to preserve the plant's emergency work and infrastructure in order to facilitate the resumption of the nuclear power plant's activities. Seven reports were prepared by IAEA experts under this project that discuss the power plant's ability to cope with a nuclear accident. Our requests to review or to be provided with copies of these reports were denied by IAEA because information obtained by the agency under a technical cooperation project is regarded as belonging to the country receiving the project and cannot be divulged by IAEA without the formal consent of the country's government. At the time of our review, the government of Cuba had not given IAEA permission to release these reports. Since 1995, IAEA has assisted Cuba in designing and implementing a training program for personnel involved in the operational safety and maintenance of all nuclear installations, including the reactors, in Cuba. IAEA has spent about $31,000 of the about $74,000 approved for the project. Furthermore, according to IAEA's information on the technical cooperation program for 1995 to 1996, this project will develop and implement an adequate training program that will improve operational safety at all nuclear installations in Cuba and will promote a safety culture. For the 1997 to 1998 technical cooperation program, IAEA has approved two new projects to assist in licensing the reactors and establishing a quality assurance program for them. Funding of about $210,000 has been approved for these two projects. According to IAEA's information on the technical cooperation program for 1997 to 1998, the objective of the licensing project is to strengthen the ability of Cuba's nuclear regulatory body to carry out the process of licensing the reactors. According to IAEA's information, the quality assurance project will assist the nuclear power plant in developing an effective program that will improve safety and lower construction costs. In our September 1992 report and in our August 1995 testimony on the nuclear power reactors in Cuba, we reported that the United States preferred that the reactors not be completed and discouraged other countries from providing assistance, except for safety purposes, to Cuba's nuclear power program. In a statement made at the August 1995 hearing, the State Department's Director of the Office of Nuclear Energy Affairs agreed that the United States supported efforts by IAEA to improve safety and the quality of construction at the facility but that the administration strongly believed that sales or assistance to the Cuban nuclear program should not be provided until Cuba had undertaken a legally binding nonproliferation commitment. Cuba is not a party to the 1970 Treaty on Non-Proliferation of Nuclear Weapons, but as a member of IAEA, it is entitled to receive nuclear technical assistance from the agency. State Department officials responsible for IAEA's technical cooperation program and U.S. Mission officials at the United Nations System Organizations in Vienna, Austria, told us that they did not object to IAEA's providing nuclear safety assistance to Cuba's reactors because the United States generally supports nuclear safety assistance for IAEA member states that will promote the establishment of a safety culture and quality assurance programs. These U.S. officials also said that the United States has little control over other IAEA member states that choose to provide extrabudgetary funds for any of the agency's nuclear technical assistance projects, including those in Cuba. State Department and Arms Control and Disarmament Agency officials told us that the United States will not provide extrabudgetary funds for IAEA's nuclear technical assistance projects with Cuba or generally to other IAEA member states that are not parties to the Non-Proliferation Treaty, will not host Cuban nationals at training courses held by IAEA in the United States, or select Cuban nationals for training as IAEA fellows in the United States. However, according to the State Department, U.S. experts are allowed to work on IAEA's nuclear technical assistance projects in the areas of nuclear safety and physical protection for Cuba. We found that one U.S. expert had visited Cuba three times to help with an IAEA nuclear technical assistance project designed to eradicate agricultural pests. We provided copies of a draft of this report to the Department of State for its review and comment. The Department obtained and consolidated additional comments from the Arms Control and Disarmament Agency; the Department of Energy; the Nuclear Regulatory Commission; the U.S. Mission to the United Nations System Organizations and IAEA in Vienna, Austria. On March 5, 1997, we met with an official in the State Department's Bureau of International Organization Affairs to discuss the consolidated comments. In general, reviewing officials agreed with the facts and analysis presented. Additional clarifying information was provided, and we revised the text as appropriate. An IAEA official in the Department of Technical Cooperation noted that, in assessing the safety and planning for the conservation of Cuba's nuclear power reactors while their construction is suspended, IAEA's role in the area of nuclear power is to assist governments in taking actions that are consistent with the highest standards and best practices involving the design, performance, and safety of nuclear facilities. We discussed the United States' participation in IAEA's technical cooperation program with officials of and gathered data from the Departments of State and Energy; the Arms Control and Disarmament Agency; the Nuclear Regulatory Commission; Argonne National Laboratory; the National Academy of Sciences; and the National Research Council in Washington, D.C., and the U.S. Mission to the United Nations System Organizations and IAEA in Vienna, Austria. We gathered data from IAEA on its nuclear technical assistance for Cuba, during the period from 1958, when the technical cooperation program began, until 1996. In some cases, funding data for the entire period from 1958 through 1996 was not available from IAEA. Cuba started to receive nuclear technical assistance from IAEA in 1963. We also met with officials in IAEA's departments of Technical Cooperation and Nuclear Safety who are responsible for managing IAEA's nuclear nuclear technical assistance projects for Cuba's nuclear power reactors and with the Vice Minister, Ministry of the Russian Federation for Atomic Energy, to discuss Russia's plans to complete the Cuban reactors. As agreed with your offices, in a forthcoming report we plan to discuss, among other things, the United States' participation in IAEA's technical cooperation program and information on the dollar value and type of nuclear nuclear technical assistance provided to the agency's member states. We performed our work from November 1996 through March 1997 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretaries of State and Energy, the Chairman of the Nuclear Regulatory Commission, the Director of the Arms Control and Disarmament Agency, and other interested parties. We will also make copies available to others on request. Please call me at (202) 512-3600 if you or your staff have any questions. Major contributors to this report are listed in appendix III. As shown in figure I.1, almost half--about $5 million--of the $10.4 million that the International Atomic Energy Agency (IAEA) spent for nuclear nuclear technical assistance projects for Cuba from 1980 through 1996 was provided in the areas of general atomic energy development and in the application of isotopes and radiation in agriculture. Nuclear safety was the next largest program area; over 12 percent of the funds, or over $1.2 million, went for nuclear technical assistance projects in this area. Of the total dollar value of all nuclear nuclear technical assistance projects that IAEA has provided for Cuba, about $680,000 has been approved for four nuclear technical assistance projects for Cuba's nuclear power reactors from 1991 through 1998. As of January 1997, $313,364 of this amount had been spent for two of these projects. IAEA's four nuclear technical assistance projects for Cuba's nuclear power reactors include (1) a safety assessment and a plan for conserving the nuclear power plant during the suspension of its construction; (2) training in the safe operation of nuclear installations, including the power plant; (3) helping Cuba's regulatory body develop a process for licensing the power plant; and (4) developing a quality assurance program for the power plant. This ongoing project was originally approved in 1991 to develop the ability to undertake a safety assessment of Cuba's nuclear power plant program. In 1995, this project was expanded to, among other things, develop the ability to conduct a safety assessment of the nuclear power plant and to provide supervision and advice in the conservation, or "mothballing", of the nuclear power plant during the suspension of construction. According to IAEA's project summaries for the technical cooperation program for 1995 to 1996, this project is designed to develop proper safety and emergency systems and to preserve the plant's emergency work and infrastructure in order to facilitate the resumption of the nuclear power plant's activities. A Spanish firm that provides architectural and engineering services is assisting IAEA in providing supervision and advice for the implementation of a plan to suspend the program and is training the Cuban technical staff in conducting a probabilistic safety assessment of the plant. Activities undertaken by the Spanish firm at the plant include the conservation and protection of existing structures, equipment, and components, in order to keep them in the best possible state for future use when the project and the construction of the plant are restarted. Under this project, IAEA has provided experts on regulation, licensing, and emergency planning; equipment, such as personal computers, software, printers; and training in inspections and emergency planning. As of January 1997, IAEA had spent over $282,000 of the approved $395,837 budget, as shown in table II.1 below. Spain also provided extrabudgetary funds for this project. IAEA has spent about $113,000 of the approximately $159,000 that Spain has offered to provide for this project. According to IAEA's project summaries for the technical cooperation program for 1995 to 1996, this ongoing project is intended to design and implement a training program for personnel involved in the operational safety and maintenance of nuclear installations, including the nuclear power plant. Even though the construction of Cuba's nuclear power plant was suspended, according to IAEA's project summaries, Cuba requested assistance to train personnel involved in the operational safety of nuclear installations. IAEA is assisting in designing a training program that will include the development of computerized systems for instruction, simulation, evaluation, and certification of staff. As of January 1997, IAEA had spent about $31,000 of the approved $73,926 for the project, as shown in table II.2. According to IAEA's project summaries for the technical cooperation program for 1997 to 1998, the objective of this new project is to strengthen the ability of Cuba's nuclear regulatory body to carry out the process of licensing the nuclear power plant. IAEA's Board of Governors approved this project in December 1996 for a budget of $107,000 for 1997 through 1998. According to IAEA's project summaries, Cuba's nuclear regulatory body asked the agency to help it acquire the ability to review the safety of the nuclear power plant as a preliminary step in the licensing process. In addition, Cuba has asked IAEA to assist its nuclear regulatory body in adopting the best international practices on licensing for the latest design of the VVER 440 megawatt reactors. According to IAEA's project summaries, the project is designed to provide Cuba's nuclear regulatory body with the technology needed to be effective and self-sufficient and to promote the safe development of nuclear energy as a contribution to meeting Cuba's energy needs. According to IAEA's project summaries for the technical cooperation program for 1997 to 1998, the objective of this new project is to improve and revise the structure, integration, and efficiency of the quality assurance program for Cuba's nuclear power plant and to evaluate its effectiveness and propose corrective measures. Cuba requested IAEA's assistance to establish a quality assurance program to conform with IAEA's nuclear safety standards. IAEA's Board of Governors approved this project in December 1996 for a budget of $103,150 for 1997 through 1998. The aim of this project, as discussed in IAEA's project summaries, is to achieve adequate levels of reliability and efficiency in documentation, including the elaboration and preservation of quality assurance records; to provide practical experience for quality assurance and management personnel; and to improve the training of quality control and inspection staff, including training in nondestructive testing and other modern technologies. According to IAEA's project summaries, this project will provide the nuclear power plant with an effective quality assurance program that will improve the plant's safety and lower construction costs. Nuclear Safety: Uncertainties About the Implementation and Costs of the Nuclear Safety Convention (GAO/RCED-97-39, Jan. 2, 1997). Nuclear Safety: Status of U.S. Assistance to Improve the Safety of Soviet-Designed Reactors (GAO/RCED-97-5, Oct. 29, 1996). Nuclear Safety: Concerns With the Nuclear Power Reactors in Cuba (GAO/T-RCED-95-236, Aug. 1, 1995). Nuclear Safety: U.S. Assistance to Upgrade Soviet-Designed Nuclear Reactors in the Czech Republic (GAO/RCED-95-157, June 28, 1995). Nuclear Safety: International Assistance Efforts to Make Soviet-Designed Reactors Safer (GAO/RCED-94-234, Sept. 29, 1994). Nuclear Safety: Progress Toward Internatinal Agreement to Improve Reactor Safety (GAO/RCED-93-153, May 14, 1993). Nuclear Nonproliferation and Safety: Challenges Facing the International Atomic Energy Agency (GAO/NSIAD/RCED-93-284, Sept. 22, 1993). Nuclear Safety: Concerns About the Nuclear Power Reactors in Cuba (GAO/RCED-92-262, Sept. 24, 1992). Nuclear Power Safety: Chernobyl Accident Prompted Worldwide Actions but Further Efforts Needed (GAO/NSIAD-92-28, Nov. 4, 1991). Nuclear Power Safety: International Measures in Response to Chernobyl Accident (GAO/NSIAD-88-131BR, Apr. 8, 1988). Nuclear Safety: Comparison of DOE's Hanford N-Reactor With the Chernobyl Reactor (GAO/RCED-86-213BR, Aug. 5, 1986). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to congressional requests, GAO provided information on the International Atomic Energy Agency's (IAEA) nuclear technical assistance to Cuba, focusing on: (1) the dollar value and type of all nuclear technical assistance projects IAEA provided for Cuba; (2) the sources of funding for all nuclear technical assistance projects IAEA provided for Cuba; and (3) IAEA's nuclear technical assistance projects for the Cuban nuclear power reactors and U.S. officials' views on this assistance. GAO noted that: (1) IAEA spent about $12 million on nuclear technical assistance projects for Cuba from 1963 through 1996; (2) about three-fourths of the assistance Cuba received through these projects consisted of equipment; (3) IAEA's assistance for Cuba was given primarily in the areas of general atomic energy development and in the application of isotopes and radiation in agriculture; (4) IAEA recently approved an additional $1.7 million for nuclear technical assistance projects for Cuba for 1997 through 1999; (5) IAEA spent about $2.8 million on training for Cuban nationals and research contracts for Cuba that were not part of specific assistance projects; (6) most of IAEA's nuclear technical assistance projects for Cuba were funded through the agency's technical cooperation fund; (7) in 1996, the United States contributed over $16 million, about 30 percent, of the $53 million in the fund; (8) from 1981 through 1993, the United States was required, under the Foreign Assistance Act of 1961, to withhold a share of its voluntary contribution to the fund because the fund provided assistance for Cuba, Libya, Iran, and the Palestine Liberation Organization; (9) in 1994, the act was amended to exempt IAEA from the withholding requirement; (10) although the United States was no longer required to withhold the portion of its voluntary contribution that would have gone to proscribed entities, State Department officials continued to withhold funds in 1994 and 1995 but did not withhold any of the United States' voluntary contribution to IAEA's technical cooperation fund for 1996; (11) from 1981 through 1995, the United States withheld a total of about $2 million that otherwise would have gone for assistance for Cuba; (12) of the total value of all nuclear technical assistance projects that IAEA has provided for Cuba, about $680,000 was approved for nuclear safety assistance for Cuba's nuclear power reactors from 1991 through 1998, of which about $313,000 has been spent; (13) IAEA is assisting Cuba in developing the ability to conduct a safety assessment of the nuclear power reactors and in preserving the reactors while construction is suspended; (14) IAEA is also implementing a training program for personnel involved in the operational safety and maintenance of all nuclear installations in Cuba; and (15) State Department and U.S. Mission officials in Vienna, Austria, told GAO that they did not object to IAEA's providing nuclear safety assistance to Cuba's reactors because the United States generally supports nuclear safety assistance for IAEA member states that will promote the establishment of a safety culture and quality assurance programs.
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The DWWCF is intended to (1) generate sufficient resources to cover the full cost of its operations and (2) operate on a break-even basis over time--that is, neither make a gain nor incur a loss. Customers primarily use appropriated funds to finance orders placed with the DWWCF. Cash generated from the sale of goods and services, rather than annual appropriations, is the DWWCF's primary means of maintaining an adequate level of cash to sustain its operations. The ability to operate on a break-even basis and generate cash consistent with DOD's regulations depends on accurately (1) projecting workload, (2) estimating costs, and (3) setting prices to recover the full costs of producing goods and services. DOD policy requires the DWWCF to establish its sales prices prior to the start of each fiscal year and to apply these predetermined or "stabilized" prices to most orders received during the year--regardless of when the work is accomplished or what costs are incurred. Stabilized prices provide customers with protection during the year of execution from prices greater than those assumed in the budget and permit customers to execute their programs as authorized by Congress. Developing accurate prices is challenging because the process to determine the prices begins about 2 years in advance of when the DWWCF actually receives customers' orders and performs the work. In essence, the DWWCF's budget development has to coincide with the development of its customers' budgets so that they both use the same set of assumptions. To develop prices, the DWWCF estimates labor, material, and other costs based on anticipated demand for work as projected by customers. Higher-than-expected costs or lower-than- expected customer sales for goods and services can result in lower cash balances. Conversely, lower-than-expected costs or higher-than-expected customer sales for goods and services can result in higher cash balances. Because the DWWCF must base sales prices on assumptions made as long as 2 years before the prices go into effect, some variance between expected and actual costs and sales is inevitable. If projections of cash disbursements and collections indicate that cash balances will drop below the lower cash requirement, the DWWCF may need to generate additional cash. One way this may be done is to bill customers in advance for work not yet performed. Advance billing generates cash almost immediately by billing DWWCF customers for work that has not been completed. This method is a temporary solution and is used only when cash reaches critically low balances because it requires manual intervention in the normal billing and payment processes. During fiscal year 2016, DLA, DISA, and DFAS reported total revenue of $45.7 billion through the DWWCF. DLA: During fiscal year 2016, DLA reported total revenue of $37.5 billion. In addition to centrally managing DWWCF cash, DLA operates three activity groups: Supply Chain Management, Energy Management, and Document Services. The Supply Chain Management activity group manages material from initial purchase, to distribution and storage, and finally to disposal or reutilization. This activity group fills about 36.6 million customer orders annually and manages approximately 6.2 million consumable items, including (1) 2.6 million repair parts and operating supply items to support aviation, land, and maritime weapon system platforms; (2) dress and field uniforms, field gear, and personal chemical protective items to support military servicemembers and other federal agencies; (3) 1.3 million medical items for military servicemembers and their dependents; and (4) subsistence and construction items to support our troops both at home and abroad. The Energy Management activity group provides comprehensive worldwide energy solutions to DOD as well as other authorized customers. This activity group provides goods and services, including petroleum, aviation, and natural gas products; facility and equipment maintenance on fuel infrastructure; coordination of bulk petroleum transportation; and energy-related environmental assessments and cleanup. The Document Services activity group is responsible for DOD printing, duplicating, and document automation programs. DISA: During fiscal year 2016, DISA reported total revenue of $6.8 billion. DISA is a combat support agency responsible for planning, engineering, acquiring, fielding, and supporting global information technology solutions to serve the needs of the military services and defense agencies. It operates the Information Services activity group within the DWWCF. This activity group consists of two components: Computing Services and Telecommunications Services/Enterprise Acquisition Services. The Computing Services component operates eight Defense Enterprise Computing Centers, which provide mainframe and server processing operations, data storage, production support, technical services, and end-user assistance for command and control, combat support, and enterprise service applications across DOD. The computing centers support over 4 million users through 21 mainframes and almost 14,500 servers. Among other things, these services enable DOD components to (1) provide for the command and control of operating forces; (2) ensure weapons systems availability through management and control of maintenance and supply; and (3) provide operating forces with information on the location, movement, status, and identity of units and supplies. The Telecommunications Services/Enterprise Acquisition Services component provides telecommunications services to meet DOD's command and control requirements. One element of this component is the Defense Information System Network. The Defense Information System Network is a collection of telecommunication networks that provides secure and interoperable connectivity of voice, data, text, imagery, and bandwidth services for DOD, coalition partners, combatant commands, and other federal agencies. Another element of this component is the Enterprise Acquisition Services, which provides contracting services for information technology and telecommunications acquisitions from the commercial sector and provides contracting support to the Defense Information System Network programs as well as to other DISA, DOD, and authorized non-Defense customers. DFAS: During fiscal year 2016, DFAS reported total revenue of $1.4 billion. DFAS pays all DOD military and civilian personnel, military retirees and annuitants, and DOD contractors and vendors. In fiscal year 2016, DFAS processed about 122 million pay transactions, paid 12 million commercial invoices, accounted for 1,359 active DOD appropriations while maintaining 152 million general ledger accounts, and made $535 billion in disbursements to about 6.4 million customers. DOD requires each of its working capital funds to maintain a minimum cash balance sufficient to pay bills, which, for the DWWCF, includes payments for (1) consumable items (spare parts) and petroleum products from vendors; (2) employees' salaries to perform material management, information services, and finance and accounting functions; and (3) expenses associated with the maintenance and operations of DLA, DISA, and DFAS facilities. The provisions of the DOD Financial Management Regulation that provides guidance on the calculation of DOD working capital funds' upper and lower cash requirements, have changed several times over the past 10 years--the period covered by our audit--as discussed below. Prior to June 2010, DOD's Financial Management Regulation stated that "cash levels should be maintained at 7 to 10 days of operational cost and cash adequate to meet six months of capital disbursements." Thus, the minimum cash requirement consisted of 6 months of capital requirements plus 7 days of operational cost, and the maximum cash requirement consisted of 6 months of capital requirements plus 10 days of operational cost. The regulation further provided that a goal of DOD working capital funds was to minimize the use of advance billing of customers to maintain cash solvency, unless advance billing is required to avoid Antideficiency Act violations. The DOD Financial Management Regulation was amended in June 2010. As a result, from June 2010 through June 2015, DOD working capital funds were allowed--with the approval of the Office of the Under Secretary of Defense (Comptroller), Director of Revolving Funds--to incorporate three new adjustments into the formula for calculating the minimum and maximum cash requirements. These adjustments would increase the minimum and maximum cash requirements. First, a working capital fund could increase the cash requirements by the amount of accumulated profits planned for return to customer accounts. A working capital fund returns accumulated profits to its customers by reducing future prices so it can operate on a break-even basis over time. The second adjustment allowed by the revised DOD Financial Management Regulation was for funds appropriated to the working capital fund that were obligated in the year received but not fully spent until future years. The adjustment allowed the working capital fund to retain these amounts as an addition to their normal operational costs. Finally, a working capital fund could increase the minimum and maximum cash requirements by the marginal cash required to purchase goods and services from the commodity or business market at a higher price than that submitted in the President's Budget. The adjustment reflected the cash impact of the specified market fluctuation. Beginning in July 2015, DOD revised its cash management policy to maintain a positive cash balance throughout the year and an adequate ending balance to support continuing operations into the subsequent year. In setting the upper and lower cash requirements, DOD working capital funds are to consider the following four elements: Rate of disbursement. The rate of disbursement is the average amount disbursed between collection cycles. It is calculated by dividing the total amount of disbursements planned for the year by the number of collection cycles planned for the year. The rate describes the average amount of cash needed to cover disbursements from one collection cycle to the next. Range of operation. The range of operation is the difference between the highest and lowest expected cash levels based on budget assumptions and past experience. The DOD Financial Management Regulation noted that cash balances are not static and volatility can be expected because of annual, quarterly, and more frequent seasonal trends and significant onetime events. Risk mitigation. Some amount of cash is required, beyond the range of operation discussed above, to mitigate the inherent risk of unplanned and uncontrollable events. The risks may include budget estimation errors, commodity price fluctuations, and crisis response missions. Reserves. Cash reserves are funds held for known future requirements. This element provides for cash on hand to cover specific requirements that are not expected to disburse until subsequent fiscal years. Our analysis of DWWCF cash data showed that the DWWCF monthly cash balances fluctuated significantly from fiscal years 2007 through 2016 and were outside the upper and lower cash requirements for 87 of the 120 months--about 73 percent of the time for this period. Reasons why the monthly cash balances were outside the cash requirements included, among other things, (1) DLA charging its customers more or less than it cost to purchase, refine, transport and store fuel and (2) DOD transferring funds into or out of the DWWCF to pay for combat fuel losses or other higher priorities. During this 10-year period, DOD took actions to adjust the DWWCF cash balance, such as transferring funds to other appropriation accounts, but the actions did not always bring the balances within the requirements in a timely manner. As a result, the monthly cash balances were above or below the cash requirements for more than 12 consecutive months on three separate occasions from fiscal years 2007 through 2016. Figure 1 shows the DWWCF monthly cash balances compared to the upper and lower cash requirements from fiscal years 2007 through 2016. Further, for the 10-year period, the DWWCF's reported monthly cash balances were above the cash requirement 62 times, between the upper and lower cash requirements 33 times, and below the cash requirement 25 times. Table 1 shows the number of months the DWWCF monthly cash balances were above, between, or below the upper and lower cash requirements for each of the 10 years reviewed. The monthly cash balances were above or below the cash requirements more than 12 consecutive months on three separate occasions from fiscal years 2007 through 2016. Specifically, the monthly cash balances were (1) below the lower cash requirement for 13 consecutive months beginning in October 2007, (2) above the upper cash requirement for 29 consecutive months beginning in March 2010, and (3) above the upper cash requirement for 15 consecutive months beginning in April 2015. The draft DOD Financial Management Regulation currently being implemented by the DWWCF provides information on the management tools DOD cash managers can use to bring cash balances within the upper and lower cash requirements. The draft regulation states that these tools include, but are not limited to, changing the frequency of collections; controlling the timing of contract renewals and large obligations or disbursements; negotiating the timing of customer orders and subsequent work; and requesting policy waivers, when necessary. In addition, the draft DOD Financial Management Regulation also provides guidance on transfers of cash between DOD working capital fund activities or between DOD working capital fund activities and appropriation-funded activities. DOD has used transfers to increase or decrease cash balances in the past, under authorities provided in annual appropriations acts. We determined that DOD took actions during fiscal years 2007 through 2016 to increase or decrease cash balances in the DWWCF. An Office of the Under Secretary of Defense (OUSD) (Comptroller) official informed us that DLA provides the OUSD (Comptroller) monthly information on DWWCF cash balances compared to the upper and lower cash requirements. This information is used by the OUSD (Comptroller) and DWWCF officials to determine whether actions are needed to increase or decrease the DWWCF cash balance, such as transferring funds into or out of the DWWCF. Our analysis of accounting documentation and discussions with OUSD (Comptroller) and DLA officials showed that DOD used two types of actions to increase or decrease the monthly cash balances to help bring the cash balances within the cash requirements during the 10-year period of our review. First, DOD transferred a total of about $9 billion into and out of the DWWCF to adjust the cash balance during this period. For example, DOD transferred about $3 billion from the DWWCF to other DOD appropriation accounts throughout fiscal year 2016. This reduced the DWWCF cash balance to within the cash requirements after remaining above the upper cash requirement for 15 consecutive months from April 2015 to July 2016. Second, the OUSD (Comptroller), in coordination with DLA, adjusted the standard fuel prices upward or downward a total of 16 times outside of the normal budget process. For example, in fiscal year 2012, DOD lowered the standard fuel price three times from October 2011 through July 2012 to help offset cash increases by DLA Energy Management on the sale of fuel to its customers. These price changes helped offset further increases in the cash balances, but they did not reduce the monthly cash balances to within the cash requirements during this period. Although DOD managers used management tools such as transfers and price adjustments to help bring the DWWCF monthly cash balances within upper and lower cash requirements, such actions did not always bring the balances within the requirements in a timely manner. Specifically, as noted above, the DWWCF monthly cash balances were outside the upper and lower cash requirements for 12 consecutive months on three separate occasions during the 10-year period of our audit. We selected the 12-month period for comparing the monthly cash balances to the cash requirements because (1) DOD develops a budget every 12 months; (2) the DWWCF annual budget projects fiscal year-end cash balances and the upper and lower cash requirements based on 12- month cash plans that include information on projected monthly cash balances, and whether those projected monthly cash balances fall within the cash requirements; and (3) DOD revises the DWWCF stabilized prices that it charges customers for goods and services every 12 months during the budget process. Our analysis of both the current official DOD Financial Management Regulation and the provisions of the draft version that DOD has begun implementing determined that the regulations do not provide guidance on the timing of when DOD managers should use available management tools so that they would be effective in helping to ensure monthly cash balances are within the upper and lower cash requirements. Without this guidance, DOD risks not taking prompt action to bring the monthly cash balances within the cash requirements. When DWWCF monthly cash balances are below the lower cash requirements for long periods, the DWWCF is at greater risk of either (1) not paying its bills on time or (2) making a disbursement in excess of available cash, which would potentially constitute an Antideficiency Act violation. In cases of cash balances above the upper requirement, the DWWCF may be holding funds that could be used for higher priorities. The DWWCF monthly cash balances were below the lower cash requirement for 19 of the 36 months from fiscal years 2007 through 2009, as shown in table 1. During the 3-year period, the DWWCF reported that monthly cash balances were below the lower cash requirement for 13 consecutive months from October 2007 through October 2008, falling to their lowest point in December 2007 at $574 million--$890 million below the lower cash requirement. According to DLA and DISA officials and our analysis of financial documentation, the monthly cash balances were below the lower cash requirement for more than half of the 3-year period for four primary reasons. First, during the first 4 months of fiscal year 2007, DISA disbursed $340 million more than it collected because (1) DISA's customers received funding late in the first quarter of fiscal year 2007, which delayed certain support service contracts with DISA that in turn delayed DWWCF collections until the second quarter of fiscal year 2007, and (2) DISA reduced fiscal year 2007 prices to return prior year accumulated profits to its customers. Second, DOD transferred $262 million in November 2006 from the DWWCF to the Air Force Working Capital Fund to cover increased fiscal year 2006 Air Force fuel costs. Third, DLA monthly cash balances declined during the first 4 months of fiscal year 2007 because of financial systems issues affecting collections when certain DLA activities transitioned to another financial system. Fourth, in fiscal year 2008, DLA disbursed about $1.3 billion more for, among other things, the purchase, refinement, transportation, and storage of fuel than it collected for the sale of fuel to its customers because of higher fuel costs. When DWWCF monthly cash balances are below the lower cash requirements for long periods, the DWWCF is at greater risk of either (1) not paying its bills on time or (2) or making a disbursement in excess of available cash, which would potentially constitute an Antideficiency Act violation. The DWWCF reported monthly cash balances increased from about $1.5 billion at the beginning of fiscal year 2010 (October 1, 2009) to $3 billion at the end of fiscal year 2010--about $1.5 billion more than the beginning balance and $1.1 billion above the upper cash requirement. The reported monthly cash balance remained high for most of the next 2 fiscal years, with an average monthly cash balance of $3.1 billion. During the 3-year period, the monthly cash balances were above the upper cash requirement for 29 of the 36 months, as shown in table 1. All 29 months were consecutive. According to DLA officials and our analysis of financial documentation, the monthly cash balances were above the upper cash requirement for four primary reasons. First, DWWCF monthly cash balances increased when the DWWCF received $1.4 billion in appropriations from fiscal year 2010 through fiscal year 2012 to pay mostly for, among other things, combat fuel losses and fuel transportation charges associated with operations in Iraq and Afghanistan. Second, in fiscal year 2010, DLA Energy Management charged its customers more per barrel of fuel than it cost to purchase, refine, transport, and store the product (among other things), causing an increase in cash of approximately $659 million. Third, DLA Supply Chain Management collected more from the sale of inventory to its customers than it disbursed for the purchase of inventory from its suppliers in the second half of fiscal year 2010, resulting in a $296 million increase in cash. Fourth, in June 2012, DOD transferred $1 billion into the DWWCF from the Afghanistan Security Forces Fund (a onetime infusion of cash) to compensate for the reduced price that DLA Energy Management was charging its customers for fuel. DWWCF monthly cash balances were below the lower cash requirement three times in the beginning of fiscal year 2013 before ending the fiscal year at a level above the upper cash requirement. During fiscal year 2013, the DWWCF monthly cash balances were outside the cash requirements for 7 of 12 months, as shown in table 1. There was a wide range in the reported monthly cash balances, from a low of $929 million in January 2013 to a high of $2.8 billion in June 2013. According to DLA officials and our analysis of financial documentation, the monthly cash balances were below the cash requirements in November 2012, January 2013, and February 2013 for two primary reasons. First, in the first 5 months of fiscal year 2013, DLA Energy Management disbursed $588 million more to purchase, refine, transport, and store fuel than it was paid from its customers for the sale of fuel. Second, DLA Supply Chain Management disbursed $280 million more for the purchase of inventory than it collected from the sale of inventory to its customers in the first 5 months of fiscal year 2013. On the other hand, the monthly cash balances were above the cash requirement for the last 4 months of fiscal year 2013 because funds were transferred into the DWWCF in June and September 2013. Specifically, DOD transferred $1.4 billion into the DWWCF from various defense appropriations accounts to mitigate cash shortfalls that resulted from DLA Energy Management paying higher costs for refined fuel products. DWWCF monthly cash balances were above the upper cash requirements for 25 of 36 months from fiscal years 2014 through 2016. During the 3-year period, the reported monthly cash balances averaged $2.9 billion, reaching a high point of $4.7 billion in May 2016--about $1.9 billion above the upper cash requirement. Furthermore, the monthly cash balances remained above the upper cash requirement for 15 consecutive months, from April 2015 through June 2016. According to DLA officials and our analysis of financial documentation, the monthly cash balances were above the upper cash requirement for three primary reasons. First, the DWWCF cash balance at the beginning of fiscal year 2014 was above the upper cash requirement because of the $1.4 billion transferred into the fund during the last 4 months of fiscal year 2013. Second, in fiscal year 2015, DLA Energy Management's price for the sale of fuel to its customers was considerably more than the cost to purchase, refine, transport, and store fuel. As a result, DLA Energy Management collected about $3.7 billion more than it disbursed for fuel during the year. Third, in fiscal year 2016, DLA Energy Management continued to charge its customers more for fuel than it cost. Initially, the DWWCF monthly cash plan that supports the fiscal year 2017 President's Budget, dated February 2016, showed the monthly cash balances were projected to be above the upper cash requirement for most of fiscal year 2017. However, after the DWWCF revised its fiscal year 2017 cash plan in October 2016, cash balances were projected to be within the upper and lower cash requirement for all 12 months, in accordance with the DOD Financial Management Regulation. According to DOD officials, the DWWCF changed its plan after the President's Budget was issued because (1) DOD made unplanned cash transfers out of the DWWCF in the second half of fiscal year 2016 and (2) DOD reduced the fiscal year 2017 standard fuel price in September 2016, leading to lower projected cash balances. Figure 2 shows the DWWCF's initial cash plan under the President's Budget and the revised monthly cash plans compared to the upper and lower cash requirements for fiscal year 2017. As shown in figure 2, the DWWCF's revised cash plan for fiscal year 2017 shows that the cash balance at the end of fiscal year 2016 (September 2016) was about $1.1 billion lower than the President's Budget cash plan. According to DOD officials and our review of documentation on transfers, this decrease was largely due to DOD's transfer of about $2 billion out of the DWWCF in the second half of fiscal year 2016, which occurred after the fiscal year 2017 President's Budget cash plan was submitted in February 2016. The $2 billion of DWWCF cash was transferred to other DOD appropriations accounts to pay for, among other things, unforeseen military requirements to maintain a larger troop presence in Afghanistan than that planned for in the President's Budget and funding shortfalls in fuels, consumable inventory items, repair parts, and medical supplies and services. The DWWCF monthly cash balances under the revised cash plan are projected to remain within the upper and lower cash requirements for all 12 months in fiscal year 2017. This is a significant change from the President's Budget cash plan that showed the DWWCF monthly cash balances exceeding the upper cash requirement for 9 of the 12 months. Another factor that contributed to the improved results reflected in the revised plan is that the OUSD (Comptroller) lowered the standard fuel price in September 2016 from $105.00 per barrel to $94.92--a $10.08 difference. DOD lowered the standard fuel price for refined petroleum products because the fiscal year 2017 costs for those products were expected to remain lower than initially projected when the fiscal year 2017 President's Budget was developed. In connection with its decision to lower fuel prices, DOD stated that the lower refined product costs have had a positive impact on the DWWCF cash balance (i.e., higher cash balances), and the department anticipated an associated congressional reduction as a result of the positive cash balance. Thus, DOD reduced the fiscal year 2017 standard fuel price effective October 1, 2016. In November 2016, DLA officials informed us that several factors could nevertheless cause the DWWCF monthly cash balances to fall outside the upper and lower cash requirements in fiscal year 2017. These factors could include (1) higher or lower fuel product costs than expected, (2) higher or lower customer sales than expected, (3) the timing of vendor payments on a daily basis versus collections from customers on a weekly or monthly basis, and (4) nonpayment from customers for goods or services provided to them. While DWWCF officials stated that these factors could affect whether the DWWCF monthly cash balances are within the cash requirements for all 12 months in fiscal year 2017, the officials believe that the cash balances will remain within the cash requirements for the entire period. The DWWCF supports military readiness by providing energy solutions, inventory management, information system solutions, and financial services for DOD in times of peace and war. Maintaining the DWWCF cash balance within the upper and lower cash requirements as defined by DOD regulation is critical for the DWWCF to continue providing these services for its customers. During fiscal years 2007 through 2016, DOD transferred a total of $9 billion into and out of the DWWCF and adjusted fuel prices 16 times outside of the normal budget process to try to bring the cash balances within the cash requirements. However, the cash balances were outside the upper and lower cash requirements almost three quarters of that time and for more than a year on three separate occasions. Although the DOD Financial Management Regulation provides guidance on tools DOD managers can use to help bring the monthly cash balances within the upper and lower cash requirements, the regulation does not provide guidance on the timing of when DWWCF managers should use these tools to help ensure that the monthly cash balances are within the cash requirements. Without this guidance, DOD risks not taking prompt action in response to changes in fuel costs, inventory costs, appropriations, or other events to bring the monthly cash balances within the cash requirements. When DWWCF monthly cash balances are below the lower cash requirements for long periods of time, the DWWCF is at greater risk of either (1) not paying its bills on time or (2) making a disbursement in excess of available cash, which would potentially result in an Antideficiency Act violation. In cases of cash balances above the upper requirement, the DWWCF may restrict funds that could be used for other higher priorities. We recommend that the Secretary of Defense direct the Office of the Under Secretary of Defense (Comptroller) to provide guidance in the DOD Financial Management Regulation on the timing of when DOD managers should use available tools to help ensure that monthly cash balances are within the upper and lower cash requirements. We provided a draft of this report to DOD for comment. In its written comments, which are reprinted in appendix II, DOD concurred with our recommendation and stated that it plans to update the DOD Financial Management Regulation as we recommended to provide additional guidance on the timing of when DOD managers should use available tools to help ensure that monthly cash balances are within the upper and lower cash requirements. DOD also stated that this change will be incorporated for the fiscal year 2019 President's Budget submission and subsequent budgets. DOD also provided a technical comment, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Under Secretary of Defense (Comptroller), and the Directors of the Defense Logistics Agency, the Defense Finance and Accounting Service, and the Defense Information Systems Agency. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-9869 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. To determine to what extent the Defense-wide Working Capital Fund's (DWWCF) reported monthly cash balances were within the Department of Defense's (DOD) upper and lower cash requirements from fiscal years 2007 through 2016, we (1) obtained the DWWCF's reported monthly cash balances for fiscal years 2007 through 2016, (2) used the DOD Financial Management Regulation that was in effect at that time to determine the upper and lower cash requirements, and (3) compared the upper and lower cash requirements to the month-ending reported cash balances. If the cash balances were not within the upper and lower requirement amounts, we met with the Defense Logistics Agency (DLA), the Defense Information Systems Agency (DISA), and the Defense Finance and Accounting Service (DFAS) officials and reviewed DWWCF budgets and other documentation to ascertain the reasons. We also identified instances in which monthly cash balances were outside the upper and lower cash requirements for 12 consecutive months or more to assess the timeliness of DOD actions to bring them within the upper and lower cash requirements. We selected the 12-month period for comparing the monthly cash balances to the cash requirements because (1) DOD develops a budget every 12 months; (2) the DWWCF annual budget projects fiscal year-end cash balances and the upper and lower cash requirements based on 12-month cash plans that include information on projected monthly cash balances, and whether those projected monthly cash balances fall within the cash requirements; and (3) DOD revises the DWWCF stabilized prices that it charges customers for goods and services every 12 months during the budget process. In addition, we performed a walk-through of DFAS processes for reconciling the Department of the Treasury trial balance monthly cash amounts for the DWWCF to the balances reported on the DWWCF cash management reports. Further, to determine the extent cash transfers for fiscal years 2007 through 2016 contributed to the DWWCF cash balances being above or below the cash requirements, we (1) analyzed DOD budget and accounting reports to determine the dollar amount of transfers made for the period and (2) obtained journal vouchers from DFAS that documented the dollar amounts of the cash transfers. We analyzed cash transfers to determine if any of the transfers contributed to the cash balances falling outside the upper or lower cash requirements and, if so, the amount outside those requirements. We also obtained and analyzed documents that provide information on transfer of funds into and out of the DWWCF and interviewed key DLA, DISA, and DFAS officials to determine the reasons for the transfers. To determine to what extent the DWWCF's projected monthly cash balances were within the upper and lower cash requirements for fiscal year 2017, we obtained and analyzed DWWCF budget documents and cash management plans for fiscal year 2017. We compared the upper and lower cash requirements to the month-ending projected cash balances. If the projected monthly cash balances were above or below the cash requirement, we discussed these balances with DLA officials to ascertain the reasons. We obtained the DWWCF financial data in this report from budget documents and accounting reports. To assess the reliability of these data, we (1) obtained the DOD regulation on calculating the upper and lower cash requirements; (2) reviewed DLA's calculations of the cash requirements to determine if they were calculated in accordance with DOD regulations; (3) interviewed DLA, DISA, and DFAS officials knowledgeable about the cash data; (4) compared DWWCF cash balance information (including collections and disbursements) contained in different reports to ensure that the data reconciled; (5) obtained an understanding of the process DFAS used to reconcile DWWCF cash balances with the Department of the Treasury records; and (6) obtained and analyzed documentation supporting the amount of funds transferred in and out of the DWWCF. On the basis of these procedures, we have concluded that these data were sufficiently reliable for the purposes of this report. We performed our work at the headquarters of the Office of the Under Secretary of Defense (Comptroller), Washington, D.C.; DLA, Fort Belvoir, Virginia; DISA, Columbus, Ohio; and DFAS, Indianapolis, Indiana. We conducted this performance audit from June 2016 to June 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Greg Pugnetti (Assistant Director), John Craig, Steve Donahue, and Keith McDaniel made key contributions to this report.
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The Defense Finance and Accounting Service, the Defense Information Systems Agency, and DLA use the DWWCF to charge for goods and services provided to the military services and other customers. The DWWCF relies primarily on sales revenue rather than annual appropriations to finance its continuing operations. The DWWCF reported total revenue of $45.7 billion in fiscal year 2016 from (1) providing finance, accounting, information technology, and energy solution services to the military services and (2) managing inventory items for the military services. GAO was asked to review issues related to DWWCF cash management. GAO's objectives were to determine to what extent (1) the DWWCF's reported monthly cash balances were within DOD's upper and lower cash requirements from fiscal years 2007 through 2016 and (2) the DWWCF's projected monthly cash balances were within the upper and lower cash requirements for fiscal year 2017. To address these objectives, GAO reviewed relevant DOD cash management guidance, analyzed DWWCF actual reported and projected cash balances and related data, and interviewed DWWCF officials. The Defense-wide Working Capital Fund's (DWWCF) reported monthly cash balances were outside the upper and lower cash requirements as defined by the Department of Defense's (DOD) Financial Management Regulation (FMR) for 87 of 120 months, and more than 12 consecutive months on three separate occasions during fiscal years 2007 through 2016. Reasons why the balances were outside the requirements at selected periods of time include the following: The Defense Logistics Agency (DLA) disbursed about $1.3 billion more in fiscal year 2008 for, among other things, the purchase of fuel than it collected from the sale of fuel because of higher fuel costs. DOD transferred $1.4 billion to the DWWCF in fiscal year 2013 because of cash shortfalls that resulted from DLA paying higher costs for fuel. DLA collected about $3.7 billion more from the sale of fuel than it disbursed for fuel in fiscal year 2015 because of lower fuel costs. Although the DOD FMR contains guidance on tools DOD managers can use to help ensure that the monthly cash balances are within the requirements, the regulation does not provide guidance on when to use the tools. Without this guidance, DOD risks not taking prompt action to bring the monthly cash balances within requirements. When monthly cash balances are outside requirements for long periods of time, the DWWCF is at further risk of not paying its bills on time or holding funds that could be used for other higher priorities. Initially, the DWWCF's cash plan that supports the fiscal year 2017 President's Budget, dated February 2016, showed the monthly balances were projected to be above the upper cash requirement for most of fiscal year 2017. However, its October 2016 revised plan showed that the monthly cash balances were projected to be within the requirements for all 12 months. The plan changed because (1) DOD made unplanned cash transfers out of the DWWCF in the second half of fiscal year 2016 and (2) DOD reduced the standard fuel price in September 2016, leading to lower projected cash balances for fiscal year 2017. GAO recommends that DOD update the FMR to include guidance on the timing of when DOD managers should use available tools to help ensure that monthly cash balances are within the upper and lower cash requirements. DOD concurred with GAO's recommendation and cited related actions planned.
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FMCSA was established within DOT in January 2000 and was tasked with promoting safe commercial motor vehicle operations and preventing large truck and bus crashes, injuries, and fatalities. The commercial motor carrier industry is a vital part of the U.S. economy and, as of December 2015, FMCSA estimated that there were 551,150 active carriers and approximately 6 million commercial drivers operating in the United States. The domestic commercial motor carrier industry covers a range of businesses, including private and for-hire freight transportation, passenger carriers, and specialized transporters of hazardous materials. These carriers also range from small carriers with only one vehicle that is owned and operated by a single individual, to large corporations that own thousands of vehicles. In carrying out its mission, FMCSA is responsible for four key safety service areas. Registration Services: Motor carriers are required to register with FMCSA; have insurance; and attest that they are fit, willing, and able to follow safety standards. Vehicles must be properly registered and insured with the state of domicile and are subject to random and scheduled inspections by both state and FMCSA agents. Drivers must have a valid commercial driver's license issued by their state of residence and pass a physical examination as evidenced by a current valid medical card every 2 years. In calendar year 2015, there were 57,358 active interstate new entrant carriers that registered with FMCSA. Inspection Services: Conducting roadside inspections is central to FMCSA's mission. States and, to a lesser extent, FMCSA staff, perform roadside inspections of vehicles to check for driver and maintenance violations and then provide the data from those inspections to the agency for analysis and determinations about a carrier's safety performance. FMCSA also obtains data from the reports filed by state and local law enforcement officers when investigating commercial motor vehicle accidents or regulatory violations. The agency provides grants to states that may be used to offset the costs of conducting roadside inspections and improve the quality of the crash data the states report to it. In addition, the field offices in each state, known as divisions, have investigators who conduct compliance reviews of carriers identified by state inspection and other data as unsafe or at risk of being unsafe. FMCSA and its state partners conduct about 3.4 million inspections a year. Compliance Services: FMCSA monitors and ensures compliance with regulations governing both safety and commerce. The compliance review process is performed by safety auditors and investigators who collect safety compliance data by visiting a motor carrier's location to review safety and personnel records. In the instances of new carriers entering the commercial market, FMCSA audits these carriers within 12 months of service. In 2015, FMCSA conducted 14,656 investigations and 30,000 new entrant safety audits, and sent about 21,000 warning letters. FMCSA uses data collected from motor carriers, federal and state agencies, and other sources to monitor motor carrier compliance with the Federal Motor Carrier Safety Regulations and Hazardous Materials Regulations. These data are also used to evaluate the safety performance of motor carriers, drivers, and vehicle fleets. The agency uses the data to characterize and evaluate the safety experience of motor carrier operations to help federal safety investigators focus their enforcement resources by identifying the highest-risk carriers, drivers, and vehicles. Enforcement Services: FMCSA is responsible for bringing legal action against companies that are not in compliance with motor carrier safety policies. In fiscal year 2015, FMCSA closed 4,766 enforcement cases. FMCSA's estimated budget for fiscal year 2017 is approximately $794.2 million. The agency employs more than 1,000 staff members who are located in its Washington, D.C., headquarters, 4 regional service centers, and 52 division offices. FMCSA's Chief Information Officer (CIO) oversees the development, implementation, and maintenance of the IT systems and infrastructure that serve as the key enabler in executing FMCSA's mission. The CIO reports directly to the Chief Safety Officer within FMCSA's Office of Information Technology. This office supports a highly mobile workforce by operating the agency's field IT network of regional and state service centers, and ensuring that inspectors have the tools and mobile infrastructure necessary to perform their roadside duties. In addition, the office supports FMCSA headquarters, regional, and state service centers, which depend on the agency's IT infrastructure including servers, laptops, desktops, printers, and mobile devices. Currently, the Office of Information Technology is undergoing a reorganization to establish an Office of the CIO. While a revised structure has been proposed, it has not yet been approved. Of its total budget, in fiscal year 2017, FMCSA's expected IT budget is $58 million, of which approximately 60 percent ($34.4 million) is to be spent on the O&M of existing systems. In fiscal year 2013, the Office of Information Technology led an effort to establish a new IT portfolio that was intended to provide FMCSA with the ability to look across the investments in these portfolios and identify the linkages of business processes and strategic improvement opportunities to enhance mission effectiveness. To do so, the office implemented a product development team to integrate activities within and across the portfolio, interacting with business and program stakeholders. Specifically, it established four key safety process areas--registration, inspection, compliance, and enforcement--and two operations process areas--mission support systems and infrastructure. The registration portfolio includes systems that process and review applications for operating authority. The inspection portfolio includes systems that aid inspectors in conducting roadside inspections of large trucks and buses and ensure inspection data are available and useable. The compliance portfolio includes systems that help investigators to identify and investigate carriers for safe operations and maintain high safety standards to remain in the industry. The enforcement portfolio includes systems to assist the agency in ensuring that carriers and drivers are operating in compliance with regulations. The mission support portfolio includes systems and services that crosscut multiple portfolios. The infrastructure portfolio includes those systems that provide support services, hardware, software, licenses, and tools. As of August 2016, FMCSA had identified and categorized 40 investments in its IT portfolio, as described in table 1. According to the Acting CIO, by creating the IT portfolio, the agency determined that the functionality of these investments was not redundant, but that the aging legacy systems were in need of modernization. Further, the Acting CIO stated that the agency is planning to consolidate many of the systems that are in O&M, which, as of fiscal year 2016, had a combined cost of $2.9 million. FMCSA has acknowledged the need to upgrade its aging systems to improve data processing and data quality, and reduce system maintenance costs. Accordingly, in 2013, it began a modernization effort that includes both developing new systems and retiring legacy systems for each of its four key safety process areas--registration, inspection, compliance, and enforcement. To modernize its registration systems, in 2013, the agency began developing the URS system to streamline and strengthen the registration process. When fully implemented, URS is intended to replace the current registration systems with a single, online federal system. Program officials stated that the Licensing and Insurance system, Operations Authority Management system, and the registration function in MCMIS are to be retired upon URS's deployment. The Acting CIO stated that the agency has not determined when URS will be fully deployed. To modernize its inspection systems, FMCSA began planning efforts in 2014 to develop Integrated Inspection Management System (IIMS), which is intended to provide inspectors with a single system to perform checks. As of May 2017, the agency was still in the planning stage of this effort, as it was assessing the current state of its inspection processes and data management systems, and planning to issue a report detailing actions the agency needs to take. According to officials from the Office of Information Technology, subsequent to this report, a detailed analysis will be conducted, including development of acquisition and development plans. According to agency officials, its six operational inspection systems--Query Central, Safety and Fitness Electronic Records, SAFETYNET, Aspen, Inspection Selection System, and Commercial Driver's License Information System Access--are intended to be retired upon deployment of IIMS. To modernize its compliance systems, FMCSA began developing Sentri 2.1. According to the Acting CIO, the agency's three legacy compliance systems--ProVu, National Registry of Certified Medical Examiners, and Compliance Analysis and Performance Review Information--are to be retired upon deployment of Sentri 2.1. As of May 2017, agency officials from the Office of Information Technology stated they have stopped the development of Sentri 2.1. To modernize its enforcement systems, FMCSA intends to migrate the functionality of its current enforcement systems into an existing mission support system. Specifically, the functionality of FMCSA's three operational enforcement systems--CaseRite, Electronic Management Information System, and Uniform Fine Assessment--is to be migrated into its Portal system, which is a website that provides users a single sign-on to access applications. The agency did not provide a date for when this effort is expected to be completed. A federal agency's ability to effectively and efficiently maintain and modernize its existing IT environment depends, in large part, on how well it employs certain IT management controls, including strategic planning. Strategic planning is essential for an agency to define what it seeks to accomplish, identify strategies to efficiently achieve the desired results, and effectively guide modernization efforts. Key elements of IT strategic planning include establishing a plan with well-defined goals, strategies, measures, and timelines to guide these efforts. Our prior work stressed that an IT strategic plan should define the agency's vision and provide a road map to help align information resources with business strategies and investment decisions. Additionally, as we have previously reported, effective modernization planning is essential. Such planning includes defining the scope of the modernization effort, an implementation strategy, and a schedule, as well as establishing results-oriented goals and measures. However, FMCSA lacks complete plans to guide its systems modernization efforts. Specifically, the agency's IT strategic plan lacks key elements. While the agency has an IT strategic plan that describes the technical strategy, vision, mission, and direction for managing its IT modernization programs, and defines the strategic goals and objectives to support its mission, the plan lacks timelines to guide its goals and strategies related to integrated project planning and execution, IT security, and innovative IT business solutions, among others. For example, there were no identified milestones for achieving efficient, consolidated, and reliable IT solutions for IT modernization that meet the changing business needs of users and improve safety. The Acting CIO acknowledged that the strategic plan is not complete and that a date by which a revised plan will be completed has not been established. The official further acknowledged that updating the current strategic plan has not been a priority. However, until the agency establishes a complete strategic plan, it is likely to face challenges in aligning its information resources with its business strategies and investment decisions. In addition, FMCSA has not yet developed an effective modernization plan that defines the overall scope, implementation strategy, and schedule for its efforts. According to the Acting CIO, the agency has recognized the need for such a plan and has recently awarded a contract to develop one by June 2017. If FMSCA develops an effective modernization plan and uses it to guide its efforts, it should be better positioned to successfully modernize its aging legacy systems. GAO's IT investment management framework is comprised of five progressive stages of maturity that mark an agency's level of sophistication with regard to its IT investment management capabilities. Such capabilities are essential to the governance of an agency's IT investments. At the Stage 2 level of maturity, an agency lays the foundation for sound IT investment management to help it attain successful, predictable, and repeatable investment governance processes at the project level. These processes focus on the agency's ability to select, oversee, and review IT projects by defining and developing its IT governance board(s) and documented processes for directing the governance boards operations. According to the framework, Stage 2 includes the following three processes: Instituting the investment board: As part of this process, an agency is to establish an investment review board comprised of senior executives, including the agency's head or a designee, the CIO or other senior executive representing the CIO's interests, and heads of business units that are responsible for defining and implementing the department's IT investment governance process. The agency's IT investment process guidance should lay out the roles of investment review boards, working groups, and individuals involved in the agency's IT investment processes. Selecting investments that meet business needs: As part of the process for selecting and reselecting investments, an agency is to establish and implement policies and procedures made by senior executives that meet the agency's needs. This includes selecting projects by identifying and analyzing projects' risks and returns before committing any significant funds to them and selecting those that will best support the agency's mission needs. Providing investment oversight: This process includes establishing and implementing policies and procedures for overseeing IT projects by reviewing the performance of projects against expectations and taking corrective action when these expectations are not being met. FMCSA has partially addressed the three processes associated with having a sound governance structure to manage its modernization efforts. Table 2 provides a summary of the extent to which the agency's IT investment management structure implemented the key processes. With regard to establishing an IT investment review board, FMCSA recently restructured its governance boards. Specifically, in January 2017, FMCSA finalized its IT governance order to have three major governance boards that are to serve as the decision-making structure for how IT investment decisions are made and escalated--the Executive Management Team, the Technical Review Board, and the Change Control Board. At the highest level, the Executive Management Team is to provide strategic direction and decision making for major IT investments. The team, which is to meet at least quarterly, is chaired by the FMCSA Deputy Administrator. Below this team, the Technical Review Board is to provide oversight for all IT investments and is chaired by the Director of the Office of Information Technology Policy, Plans, and Oversight. According to the governance order, this team is to meet monthly. Further, underneath the Technical Review Board is the Change Control Board that has responsibility for reviewing and approving system change requests associated with a new system, a major release or modification to an existing system, a change in contract funding, or a change in contract scope. This board, which also is to meet monthly, is chaired by the Enterprise Architect of the Office of Information Technology Policy, Plans, and Oversight. Figure 1 depicts the agency's governance structure. Nevertheless, FMCSA has not yet clearly defined roles and responsibilities of all working groups and individuals involved in the agency's IT governance process. For example, FMCSA's governance order calls for the Office of Information Technology Policy, Plans, and Oversight to adopt specific IT performance measures, but does not define the manner in which these measures should be tracked. Moreover, in August 2016, the agency finalized an order that established 10 integrated functional areas of IT management and the development of an Office of the CIO. However, FMCSA has not yet finalized a new structure for the Office of the CIO or clearly defined how this office and the CIO will manage, direct, and oversee the implementation of these areas as it relates to the agency's IT governance process. Further, FMCSA officials have not identified time frames for doing so. Without clearly defined roles and responsibilities for the agency's working groups and individuals involved in the governance process, FMCSA has less assurance that its modernization investments will be reviewed by those with the appropriate authority and aligned with agency goals. With regard to selecting and reselecting IT investments, FMCSA's January 2017 governance order requires participation and collaboration of the IT system owner, business owner, IT planning staff, and governance boards during the select phases for all investments. However, the agency lacks procedures for selecting new modernization investments and for reselecting investments that are already operational (which makes up the majority of the agency's IT portfolio) for continued funding. For example, the order calls for the Executive Management Team, comprised of senior executives, to make decisions regarding the funding of the IT portfolio, among other things, and for the Technical Review Board to provide recommendations to the team on the prioritization of IT investments including the allocation of funds. However, the order does not specify the procedures for approving the movement of funds within the IT and capital planning and investment control portfolio. According to the Acting CIO, FMCSA is currently drafting procedures for selecting new investments and reselecting investments that are already operational and intends to finalize the procedures by the end of May 2017. Upon establishing and implementing such procedures, FMCSA's decision makers should have a common understanding of the process and the cost, benefit, schedule, and risk criteria that will be used to reselect IT projects. With regard to IT investment oversight, the agency's order established policies and procedures to ensure that governance bodies review investments and track corrective actions to closure. However, the policies and procedures for reviewing and tracking actions have not yet been fully implemented by the three governance bodies. For example, The boards have not met regularly to review the performance of IT investments, including those investments that are part of its modernization efforts, against expectations. In particular, in calendar year 2016, the Executive Management Team met once and the Technical Review Board met four times. The Change Control Board was not formally approved until January 2017 and, thus, has held no meetings. Also, while the Technical Review Board met four times in calendar year 2016, none of the meetings discussed the cost, schedule, performance, and risks for FMCSA's major IT modernization investment, systems in development, or existing systems. For example, in February 2016, the IT Director presented to the board members an overview of the statutory provisions commonly referred to as the Federal Information Technology Acquisition Reform Act and their implications for FMCSA. In April 2016, the board members were provided with an overview of OMB's regulatory guidance for the budget process. In addition, in August 2016, the Technical Review Board met to discuss the planned fiscal year 2017 budget for its IT investments and, in November 2016, the Director of the Office of Information Technology discussed with board members the status of the planning efforts for the IIMS project. The Acting CIO did not attend any of the four meetings. Further, neither the Executive Management Team nor the Technical Review Board discussed with its members the transition of FMCSA's investments into the cloud environment, to include identifying any key risks. For example, in November 2016, over 70 issues regarding the migration effort were identified by the contractor and a FMCSA official, but none were discussed at the Technical Review Board or Executive Management Team board meetings. As a result, program officials stated that there were delays to program's transition to the cloud environment because additional time was needed to securely migrate data from multiple legacy platforms into a new central database and conduct further testing. Action items have been noted in meeting minutes, but have not been fully addressed or updated to closure. For example, in August 2016, the Capital Planning and Investment Control Coordinator, within the Office of Information Technology, provided an overview of the fiscal year 2017 budget to the Technical Review board members. As part of this discussion, the Director of the Office of Information Technology stated that, during the next board meeting, additional details would be provided on the planned budget for fiscal year 2018. However, the meeting minutes from November 2016 did not include any evidence that this subject was discussed at the next meeting. These weaknesses were due, in part, to the agency not adhering to its IT orders and governance board charters, which establish FMCSA's governance structure, as described above. As a result, the agency lacks adequate visibility into and oversight of IT investment decisions and activities, and cannot ensure that its investments are meeting cost and schedule expectations and that appropriate actions are taken if these expectations are not being met. According to OMB guidance, the O&M phase is often the longest phase of an investment and can consume more than 80 percent of the total lifecycle costs. Thus, it is essential that agencies effectively manage this phase to ensure that the investments continue to meet agency needs. As such, OMB and DOT direct agencies to monitor all O&M investments through operational analyses, which should be performed annually. These analyses should include assessments of four key factors: costs, schedules, investment performance (i.e., structured assessments of performance goals), and customer and business needs (i.e., whether the investment is still meeting customer and business needs, and identifies any areas for innovation in the area of customer satisfaction). FMCSA had not fully ensured that the selected systems--Aspen, MCMIS, Sentri 2.0, and URS--were effectively meeting the needs of the agency. Specifically, none of the program offices conducted the required operational analyses for the four systems. The program offices stated that, in lieu of conducting these analyses, they assessed the key factors of costs, schedules, investment performance, and customer and business needs as part of the capital planning and investment control process. Nonetheless, only one program office (URS) partially met the four key factors. Table 3 provides a summary of the extent to which the four selected systems implemented the key operational analysis factors. Aspen: The Aspen program office had partially implemented one of the required operational analysis factors and had not implemented the three other factors. Specifically, as part of its plans to modernize this system, FMCSA had taken steps to assess customer and business needs. For example, it reached out to users and found that 33 states use Aspen and the remaining states use their own in-house developed programs or third-party vendor-based systems. However, while the agency collected feedback from users via phone calls and meetings, it had not yet assessed this feedback, including identifying any opportunities for innovation in the areas of customer satisfaction, strategic and business results, and financial performance. In addition, the program office did not assess current costs against life-cycle costs, perform a structured schedule assessment, or compare current performance against cost baseline and estimates developed when the investment was being planned. MCMIS: The MCMIS program office had not implemented any of the required operational analysis factors. Specifically, program officials did not assess current costs against life-cycle costs, perform structured assessments of schedule and performance goals, or identify whether the investment supports business and customer needs and is delivering the services it was designed to, including identifying whether the system overlaps with other systems. This is particularly concerning given that all seven users we interviewed stated that the system does not interact well with other systems and users have to access other systems to gather information that they cannot obtain in MCMIS. Sentri 2.0: Sentri's program office partially implemented one of the required operational analysis factors and did not implement the three other factors for the component that has been operational since May 2010, also known as Sentri 2.0. Specifically, the program had partially implemented assessments of customer and business needs by reviewing Sentri 2.0 user needs as it develops the business and user requirements for development of Sentri 2.1. However, while all five users we interviewed stated that their feedback regarding Sentri was provided to FMCSA, they were not sure whether the feedback was being implemented. Moreover, the program office had not identified whether the investment supports customer processes, as designed, and is delivering the goods and services it was intended to deliver. In addition, the program did not assess current costs against life-cycle costs or perform structured schedule and performance goal assessments. URS: The URS program office partially implemented four of the required operational analysis factors for functionality of the system that was delivered in December 2015. Specifically, the program office developed a business case that outlines costs, schedules, investment performance goals, and customer and business needs. Additionally, the program office communicated with stakeholders through meetings, conferences, webinars, and call centers. For example, it has hosted over 30 webinars to better understand how the system is working for the users. Nevertheless, the program office had not yet conducted an analysis to assess current costs against life-cycle costs, performed a structured assessment of the schedule or performance goals, or ensured the functionality delivered is operating as intended and is meeting user needs. The need for conducting an analysis is particularly pressing for this program since all four system users we interviewed stated that URS is difficult to use and does not work as intended: they stated that they are unable to complete filings, carrier registration, and request changes to DOT numbers. With regard to the deficiencies we identified, the Acting CIO stated that the agency does not yet have FMCSA-specific guidance to assist programs to conduct operational analyses on an annual basis. The Acting CIO stated that FMCSA has drafted guidance, including templates, to assist programs in conducting these analyses and officials in the Office of Information Technology stated that the agency planned to have the guidance finalized by end of June 2017. While finalizing this guidance is a positive step to assist programs in conducting operational analyses, FMCSA does not adequately ensure its systems are effective at meeting user needs. Until FMCSA fully reviews its O&M investments as part of its annual operational analyses, the agency will lack assurance that these systems meet mission needs, and the associated spending could be wasteful. While FMCSA has recognized the need to develop an effective modernization plan and has awarded a contract to do so, it has not completed an IT strategic plan needed for modernizing its existing legacy systems. In addition, while the agency has established governance boards for overseeing IT systems, these boards do not exhibit key processes of a sound governance approach, such as ensuring corrective actions are executed and tracked to closure. Further, FMCSA does not have the processes in place for ensuring that systems currently in use are meeting agency needs or for overseeing its IT portfolio. The four systems we reviewed did not have completed operational analyses that show if a system is, among other things, effective at meeting users' needs. Until the agency addresses shortcomings in strategic planning, IT governance, and oversight, its progress in modernizing its systems will likely be limited and the agency will be unable to ensure that the systems are working effectively. To help improve the modernization of FMCSA's IT systems, we are recommending that the Secretary of Transportation direct the FMCSA Administrator to take the following five actions: Update FMCSA's IT strategic plan to include well-defined goals, strategies, measures, and timelines for modernizing its systems. Ensure that the IT investment process guidance lays out the roles and responsibilities of all working groups and individuals involved in the agency's governance process. Finalize the restructure of the Office of Information Technology, including fully defining the roles and responsibilities of the CIO. Ensure that appropriate governance bodies review all IT investments and track corrective actions to closure. Ensure that required operational analyses are performed for Aspen, MCMIS, Sentri 2.0, and URS on an annual basis. We provided a draft of this report to the Department of Transportation for review and comment. In its written comments, reproduced in appendix II, the department concurred with our five recommendations. The department also described actions that FMCSA has completed or is finalizing to improve its IT strategic planning and investment governance processes. These actions include updating the FMCSA IT strategic plan and finalizing investment review board charters to better define all stakeholders roles and responsibilities. Effective implementation of these actions should help FMCSA improve the modernization of its IT systems. In addition to the written comments, the department provided technical comments on the draft report, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Transportation, the Administrator of FMCSA, 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 staff have any questions on information discussed in this report, please contact me at (202) 512-4456 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. The Fixing America's Surface Transportation Act included a provision for us to conduct a comprehensive analysis of the information technology (IT) and data collection management systems of the Federal Motor Carrier Safety Administration (FMCSA) by June 4, 2017. Our objectives were to (1) assess the extent to which the agency has plans to modernize its existing systems, (2) assess the extent to which FMCSA has implemented an IT governance structure, and (3) determine the extent to which FMCSA has ensured selected IT systems are effective. To address the first objective, we obtained and evaluated FMCSA IT systems modernization documentation that discuss future changes to ensure user needs are met, including its IT strategic plan for fiscal years 2014 to 2016 and systems modernization plans. We analyzed whether these plans complied with best practices that we have previously identified. These practices call for developing a strategic plan that includes defining the agency's vision and providing a road map to help align information resources with business strategies and investment decisions. We also interviewed agency officials including those from the Office of Information Technology; Enforcement and Compliance, Information Security, and Privacy divisions to discuss the agency's plans to modernize existing systems, including any actions the agency is taking to identify redundancies among the systems and explore the feasibility of consolidating data collection and processing systems. To corroborate this information, we reviewed the FMCSA's budgetary data (i.e., its fiscal year 2016 IT portfolio summary) submitted to the Office of Management and Budget (OMB) that identifies all of the agency's IT investments to identify whether it included any potentially redundant systems. Specifically, we reviewed the name and narrative description of each investment's purpose to identify any similarities among related investments and discussed any potential redundancies with the Acting Chief Information Officer (CIO). For the second objective, we compared agency documentation, including executive board meeting minutes and briefings from fiscal years 2015 and 2016, FMCSA IT governance orders, and charters, against critical processes associated with Stage 2 of GAO's IT investment management framework. In particular, Stage 2 of the framework includes the following key processes for effective governance: instituting the investment board; selecting and reselecting investments that meet business needs; and providing investment oversight. We also interviewed agency officials to better understand FMCSA's governance structure, which included identifying whether the agency is taking appropriate steps with respect to IT governance. To address the third objective, we selected four existing IT systems to review. In selecting these investments, we analyzed FMCSA's fiscal year 2016 IT portfolio summary submitted to OMB which included the agency's existing IT, data collection, processing systems, data correction procedures, and data management systems and programs. To assess the reliability of the OMB budget data, we reviewed related documentation, such as OMB guidance on budget preparation and capital planning. In addition, we corroborated with FMCSA that the data was accurate and reflected the data it had reported to OMB. We determined that the budget data was reliable for our purposes of selecting these systems. Specifically, we used the following criteria to select four systems to review: At least one investment must have been identified as a major IT investment, as defined by OMB. FMCSA had only identified one major IT investment in fiscal year 2016. The remaining non-major systems must have had planned operations and maintenance (O&M) spending in fiscal year 2017. The system is mission critical. The program must not have been included in a recent GAO or inspector general review that examined the program's effectiveness. Using the above criteria, we selected the following four systems: 1. Aspen: A non-major desktop application that collects commercial driver/vehicle inspection details, performs some immediate data analysis, creates and prints a vehicle inspection report, and transfers inspection data into the FMCSA information systems. 2. Motor Carrier Management Information System (MCMIS): A non- major information system that captures FMCSA inspection, crash, compliance review, safety audit, and registration data. It is FMCSA's authoritative source for the safety performance records for all commercial motor carriers and hazardous materials shippers. 3. Safety Enforcement Tracking and Investigation System (Sentri): A non-major application used to facilitate safety audits and interventions by FMCSA and state users. It is intended to combine roadside inspection, investigative, and enforcement functions into a single interface. 4. Unified Registration System (URS): A major system that is intended to replace the existing registration systems with a single comprehensive, online system and provide FMCSA-regulated entities a more efficient means of submission and management of data pertaining to registration applications. We then assessed the agency's efforts to determine the effectiveness of these systems in meeting the needs of the agency by reviewing documentation from the four selected systems and compared it to key factors identified in OMB's guidance on conducting annual operational analysis, which are a key method for examining the performance of investments with O&M funding. More specifically, we assessed whether FMCSA had conducted an operational analysis on each of the systems. For those systems that did not have an analysis performed, we reviewed FMCSA's IT documentation on the performance of these systems (i.e., business cases and performance management reviews) to determine whether key factors of an operational analysis were conducted. For example, we assessed whether the agency assessed cost, schedule, and investment performance, including its interaction with other systems; and customer and business needs, including adaptability of the system in order to make necessary future changes to ensure user needs are met and areas for innovation in the areas of customer satisfaction. We also conducted interviews with 22 selected system users to obtain insight into whether the identified systems are meeting their needs and any challenges users face in using these systems, including whether the systems are adaptable to future needs and methods to improve user interface. We selected these users based on recommendations from FMCSA program officials and industry stakeholder representatives. Based on these recommendations, we then selected users based on the type of users, including FMCSA users, state agencies, law enforcement officials, and private sector individuals involved in the motor carrier industry. While these user interviews are illustrative, they cannot be used to make generalizable statements about users' experience as a whole. Based on our work to determine selected programs' effectiveness, we made recommendations regarding deficiencies identified in the report. We did not make recommendations regarding methods to improve user interfaces since two of the selected systems (Aspen and MCMIS) are planned to be modernized and the remaining two systems (Sentri and URS) have components still under development, as discussed in our report. We conducted this performance audit from April 2016 to July 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact name above, the following staff also made key contributions to this report: Eric Winter (Assistant Director), Niti Tandon (Analyst in Charge), Rebecca Eyler, Lisa Maine, and Tyler Mountjoy.
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FMCSA, established within the Department of Transportation in January 2000, is charged with reducing crashes involving commercial motor carriers (i.e., large trucks and buses) and saving lives. IT systems and infrastructure serve as a key enabler for FMCSA to achieve its mission. The agency reported spending about $46 million for its IT investments in fiscal year 2016. In December 2015, the Fixing America's Surface Transportation Act was enacted and required GAO to review the agency's IT, data collection, and management systems. GAO's objectives were to (1) assess the extent to which the agency has plans to modernize its existing systems, (2) assess the extent to which FMCSA has implemented an IT governance structure, and (3) determine the extent to which FMCSA has ensured selected IT systems are effective. To do so, GAO analyzed FMCSA's strategic plan and modernization plans; compared governance documentation to best practices; selected four investments based on operations and maintenance spending for fiscal year 2016, among other factors, and compared assessments for the investments against OMB criteria; and interviewed officials. The Federal Motor Carrier Safety Administration (FMCSA) initiated a modernization effort in 2011 and developed an information technology (IT) strategic plan that describes the technical strategy, vision, mission, direction, and goals and objectives to support the agency's mission; however, the plan lacks timelines to guide FMCSA's goals and strategies. In addition, the agency has not completed a modernization plan for its existing IT systems that includes scope, an implementation strategy, schedule, results-oriented goals, and measures, although it has recently awarded a contract to develop such a plan. The Acting Chief Information Officer (CIO) said that updating FMCSA's IT strategic plan had not been a priority for the agency. However, without a complete IT strategic plan, FMCSA will be less likely to move toward its ultimate goal of modernizing its aging legacy systems. FMCSA has begun to address leading practices of IT governance, but its investment governance framework does not adequately establish an investment board, select and reselect investments, and provide investment oversight. Specifically, regarding the practice of establishing an IT investment review board, FMCSA has not yet clearly defined roles and responsibilities for key working groups and individuals, including the Office of the CIO. Regarding selecting and reselecting IT investments, FMCSA requires participation and collaboration during the select phases for all IT investments; however, it lacks procedures for selecting new investments and reselecting investments that are already operational for continued funding. According to the Acting CIO, the agency is currently drafting these procedures and intends to finalize them by the end of May 2017. Regarding the practice of IT investment oversight, the agency has policies and procedures to ensure that corrective actions and related efforts are executed and tracked, but they have not yet been fully implemented by the three boards. These weaknesses are due to the agency not adhering to its IT orders that establish its governance structure. As a result, FMCSA lacks adequate visibility into and oversight of IT investment decisions and activities, which could ultimately hinder its modernization efforts. FMCSA had not fully ensured that the four systems GAO selected to review are effectively meeting the needs of the agency because none of the program offices completed operational analyses as required by the Office of Management and Budget (OMB). However, as part of its capital planning and investment control process, FMCSA assessed the four key factors of an operational analysis--costs, schedules, investment performance, and customer and business needs. One of the selected programs had partially implemented all four of these factors; two programs had partially implemented one factor, and one program had not addressed any of these factors. This was due to FMCSA not having guidance for conducting operational analyses for investments in operations and maintenance. Until FMCSA fully reviews its operational investments, the agency will lack assurance that these systems meet mission needs. GAO is making five recommendations to FMCSA to improve its IT strategic planning, oversight, and operational analyses. The Department of Transportation concurred with all of the recommendations.
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In seeking to provide their hospital customers with medical-surgical products at favorable prices, GPOs engage with manufacturers in certain contracting processes and sometimes use certain strategies to obtain price discounts. Many manufacturers bid for GPO contracts because hospital purchases with these contracts may increase manufacturers' market share. GPOs are subject to federal antitrust laws. A statement developed by enforcement agencies helps GPOs determine whether their business practices are likely to be challenged under the antitrust laws. Many manufacturers use GPO contracts to sell their medical-surgical products. These products include two types--commodities and medical devices. Commodities such as cotton balls and bandages are examples of items for which physicians and other clinicians generally do not have strong preferences. Manufacturers commonly use GPO contracts to sell hospitals these non-preference products because hospitals purchase these items in large quantities. In contrast, medical devices can be "clinical preference" items--that is, those for which physicians and other practitioners are likely to express a preference. High-technology medical devices such as pacemakers and stents are examples of clinical preference items. Some manufacturers prefer to sell these items directly to hospitals. The GPO industry that purchases products for hospitals is large and moderately concentrated. Experts have not determined a precise number of GPOs currently in business, but some estimate that there are hundreds of GPOs. While some GPOs operate regionally, this study focused on seven national GPOs with purchasing volumes over $1 billion that account for more than 85 percent of all hospital purchases nationwide made through GPO contracts. In 2002, the combined purchasing volume of these GPOs totaled about $43 billion, excluding distribution dollars. (See table 1.) Among the GPOs in our study, the two largest GPOs account for about 66 percent of total GPO purchasing volume for all medical products (including, among other things, medical-surgical products, pharmaceuticals, capital equipment, and food). These two GPOs also account for 70 percent of the seven GPOs' total medical-surgical product volume. One of the two largest GPOs has as members 1,569 of the nation's approximately 6,900 hospitals; the other has 1,469 hospital members. One of the two largest GPOs permits its members to belong to other national GPOs, whereas the other largest GPO does not. A GPO's contracting process for manufacturers' medical-surgical products generally includes several phases--namely, product identification and selection, requests for proposals or invitations to bid, review of submitted proposals and applications, assessment of product quality, contract negotiation, and contract award. The contract negotiation phase may include the negotiation of a contract administrative fee. This fee is designed to cover a GPO's operating expenses and serves as its main source of revenue. Contract administrative fees are calculated as a percentage of each customer's purchases of the particular product included in a GPO contract. In negotiating contracts, GPOs use certain contracting strategies as incentives for manufacturers to provide deeper discounts and for hospital members to concentrate purchasing volume to obtain better prices. These strategies are not limited to use by GPOs, as some manufacturers also use them in negotiating contracts with GPOs to increase market share. Key contracting strategies include the following: Sole-source contracts give one of several manufacturers of comparable products an exclusive right to sell a particular product through a GPO. Commitment refers to a specified percentage of purchasing volume that, when met by the GPO's customer (such as a hospital), will result in a deeper price discount. Commitment levels can be set either by the GPO or the manufacturer. For example, a manufacturer might offer greater discounts to GPO customers that purchase at least 80 percent of a certain group of products from that manufacturer. Commitment requirements can also be tiered, resulting in the opportunity for the customer to commit to different percentages of purchasing volume: the higher the percentage, the lower the price. Bundling links price discounts to purchases of a specified group of products. GPOs award several types of bundling arrangements. One type bundles combinations of products from one manufacturer. A manufacturer may find this arrangement advantageous because it allows increased sales of products in the bundle that may not fare well as stand-alone products. Another type bundles products from two or more manufacturers. Also, contracts can be bundled for complementary products, such as protective hats and shoe coverings used in hospital operating rooms, while others bundle unrelated products such as patient gowns and intravenous solutions. Hospitals that purchase bundles of unrelated products receive a price discount on all products included in the bundle. Contracts of long duration--those in effect for 5 years or more--can direct business to manufacturers for an extended period. When used by GPOs with a large market share, these contracting strategies have the potential to reduce competition. For example, if a large GPO negotiates a sole-source contract with a manufacturer, the contract could cause an efficient, competing manufacturer to lose business and exit from the market and could discourage other manufacturers from entering the market. Certain aspects of GPOs' operations are specifically addressed by federal statute, regulation, and policy. While "anti-kickback" provisions of the Social Security Act prohibit payments in return for orders or purchases of items for which payment may be made under a federal health care program, the act also contains an exception for amounts paid by vendors of goods or services to a GPO. Therefore, GPOs are allowed to collect contract administrative fees from manufacturers and other vendors that could otherwise be considered unlawful. In addition, regulations issued by the Department of Health and Human Services establishing "safe harbors" for purposes of the "anti-kickback" provisions provide that GPOs are to have written agreements with their customers either stating that fees are to be 3 percent or less of the purchase price, or specifying the amount or maximum amount that each vendor will pay. The GPOs must also disclose in writing to each customer, at least annually, the amount received from each vendor with respect to purchases made by or on behalf of the customer. The Office of Inspector General in the Department of Health and Human Services is responsible for enforcing these regulations. Recognizing that GPO arrangements may promote competition among manufacturers and yield lower prices in some cases and may reduce competition in other cases, the U.S. Department of Justice and the Federal Trade Commission issued a statement in 1993 for joint purchasing arrangements. This statement sets forth an "antitrust safety zone" for GPOs that meet a two-part test, under which the agencies will not generally challenge GPO business practices under the antitrust laws. Essentially, the two-part test in the context of medical-surgical products is as follows: (1) purchases through the GPO account for less than 35 percent of the total sales of the product in the relevant market, and (2) the cost of the products purchased through the GPO accounts for less than 20 percent of the total revenues from all products sold by each GPO member. In recent years, some manufacturers of medical-surgical products have contended that GPOs employ a slow product selection process and set high administrative fees that have made it difficult for some firms to obtain GPO contracts. These firms tend to be small manufacturers that may have fewer financial resources available to successfully complete GPOs' contracting processes than large manufacturers. The GPOs we studied reported generally having contracting processes that can be modified for certain types of products. They also reported receiving from manufacturers administrative fees that were generally consistent with federal regulations established by HHS. In discussing GPOs' selection of products and negotiation of fees, several manufacturers we contacted pointed to the paperwork and duration of these processes as burdensome. Not all manufacturers shared the same perspective. One small manufacturer commented that the process could sometimes be relatively easy but that the selection process can be more difficult if the manufacturer is selling only one product. The GPOs we studied were able to alter the duration of their process for selecting products to place on contract, particularly when they considered these products to be innovative. Based on their reported information, GPOs' product selection processes generally took 6 months, and ranged from as short as 1 month to as long as 18 months. One GPO specifically reported expediting or modifying its formal selection process when it considered a product to be innovative and wanted to award a contract quickly. Most GPOs did not have a distinctly separate process for selecting innovative technology but reported that these products were generally selected in a shorter amount of time compared with other products. Figure 1 shows, across the seven GPOs, the average minimum, most frequent, and maximum times taken for product selection. The GPOs in our study reported consulting various sources before making a decision, including the GPO's customers requesting the product; published studies about the product; internal and external technology assessments; and different manufacturers of the product, both with and without a GPO contract. In all cases, the GPOs cited customer requests for products as the most important factor in identifying which products to place on contract. In selecting a manufacturer, six of the seven GPOs, including the two largest, solicit proposals publiclyeither through requests for proposals or requests for bids through their Web sites. The extent to which these processes are open to all manufacturers varies by GPO and by product. For example, one of the GPOs solicits proposals publicly for clinical preference products, but not for commodities. GPO-reported information on new contracts awarded in 2002 suggest that GPOs' solicitations were not limited to manufacturers already on contract. Nearly one-third of all the newly negotiated contracts awarded by the seven GPOs in 2002 were awarded to manufacturers with which the GPO had not previously contracted. The percentage of such contracts ranged from 16 percent to 55 percent for the GPOs in our study. For the two largest GPOs, this share was 29 percent and 55 percent. We could not determine, from the information provided, whether these first-time contract awardees were, for example, small manufacturers or companies new to the industry or whether the products purchased through these contracts were clinical preference items or commodities. Manufacturers have expressed concerns that contract administrative fees, which are typically calculated as a percentage of each customer's purchase of products under contract, can be too high for some manufacturers. These fees, combined with lower prices negotiated by the GPO, may decrease revenue for manufacturers and may make it more difficult to obtain a GPO contract for newer and smaller manufacturers with fewer financial resources than for larger, more established companies. Five out of seven GPOs reported that the maximum contract administrative fee received from manufacturers in 2002 did not exceed the 3-percent-of-purchase-price threshold contained in federal regulations established by HHS. The most frequent administrative fee level that 4 out of 7 GPOs received from manufacturers in 2002 was 2 percent; the lowest fee level received by each GPO was 1 percent or less. Except for one of the two largest GPOs, the GPOs reported that they have not negotiated any new or renewed contracts in 2003 that include administrative fees from medical-surgical product manufacturers that exceed 3 percent. In 2002, fee levels for private label products --products sold under a GPO's brand name--were an exception: The typical contract administrative fee paid by private label manufacturers was 5 percent. For one of the two GPOs in our study with private label products, the maximum administrative fee was nearly 18 percent. In addition to an administrative fee, the other GPO charged a separate "licensing" fee for private-label products. GPOs use certain contracting strategies--which include sole-source contracts, product bundling, and extended contract duration--to obtain discounts from manufacturers in exchange for providing the manufacturer with increased sales from an established customer base. Manufacturers and other industry observers have expressed concerns that use of these strategies by the two largest GPOs can reduce competition. For example, when GPOs with substantial market shares award long-term sole-source contracts to large, well-established manufacturers, some newer, single- product manufacturers--left to compete with other manufacturers for a significantly reduced share of the market--may lose business and be forced to exit the market altogether. The seven GPOs we studied, including two with the largest market shares, used these contracting strategies to varying degrees. For example, while all study GPOs reported using sole-source contracts, some GPOs, including one of the two largest GPOs, used it extensively, whereas others used it on a more limited basis. GPOs also varied in their approach to requiring commitment levels from their customers. With respect to bundling, most GPOs used some form of bundling, and the two largest GPOs used either contracts or programs that bundled multiple products for a notable portion of their business. With respect to contract duration, the two largest GPOs typically negotiated longer contract terms than the other five GPOs. The use of sole-source contracting by the study GPOs varied widely with respect to the relative amount of sole source contracting they did and the types of products included in the contracts. For five of the GPOs, sole- source contracts accounted for between 2 percent and 46 percent of their medical-surgical product dollar purchasing volume. For the rest--the two largest GPOs--the shares of dollar purchasing volume accounted for by sole-source contracts were 19 percent and 42 percent. Such levels of sole- sourcing are worth noting, given the sizeable market shares of these two GPOs. GPOs also varied in their use of sole-source contracts for commodity products as compared to medical devices for which providers may desire a choice of products. Six of the seven GPOs in our study reported their use of sole-source contracts for commodity products as compared to clinical preference product. For one of the two largest GPOs, clinical preference products accounted for the bulk--82 percent--of its sole-source dollar purchasing volume. Two GPOs reported cases in which manufacturers refused to contract with the GPO unless they were awarded a sole-source contract. In contrast, commodities accounted for the bulk--between 62 percent and 91 percent--of the dollar purchasing volume that the smaller of the seven GPOs purchased through sole-source contracts. GPO- reported data indicate that the proportion of contracts that were sole source, as a share of all contracts for medical-surgical products for the past 3 years, remained relatively consistent for GPOs. The seven GPOs in our study reported that hospital customers' commitment to purchase a certain percentage of their products through GPO contracts was an important factor in obtaining favorable prices with manufacturers, and all reported establishing commitment level requirements to some degree. Most of the smaller of the seven GPOs reported that customer adherence to commitment levels and contracts were the most important factor in obtaining favorable pricing with manufacturers. In principle, for GPOs with a smaller customer base, the assurance of customer commitment to purchasing helps enable them to achieve the higher volumes needed to leverage favorable prices from manufacturers. The two largest GPOs reported that volume was the most important factor for obtaining favorable prices and that customer compliance with commitment level and contracts was next in importance. For the two largest GPOs, a sizable customer base may provide the volume levels needed to obtain favorable prices. GPOs varied in their approach to requiring purchasing commitment levels. One GPO requires customers to commit to an overall average dollar purchasing level of 80 percent for those products available through the GPO, although the percentage could vary for individual products. The GPO reported terminating the membership of at least one customer that did not meet this target. Other GPOs reported establishing customer commitment levels in certain contracts in order to obtain a certain price level, but customers were not required to buy under the contract or buy at the commitment level in order to retain GPO membership. Some GPOs' contracts include multiple, or tiered commitment levels so that customers can choose from a range of commitment levels and obtain price discounts accordingly. All but one of the GPOs in our study reported using some form of bundling, including the bundling of complementary products, bundling several unrelated products from one manufacturer, and bundling several products for which there are commitment-level requirements. One bundling arrangement that GPOs reported using gave customers a discount when they purchased a bundle of complementary products, such as protective hats and shoe coverings. Four GPOs reported bundling complementary products. These bundles were included in a small percentage of the GPOs' contracts; each of the four GPOs reported having no more than three contracts that bundle complementary products. One GPO reported awarding only one bundling arrangement for two complementary products--the only bundling arrangement the GPO had in effect at the time it reported to us. A second type of bundling reported by three GPOs, including the two largest, gave customers a discount if they purchased a group of unrelated products from one manufacturer. We define this type of bundling as a corporate agreement. One of the two largest GPOs reported that corporate agreements for medical-surgical products accounted for about 40 percent of its dollar purchasing volume for medical-surgical products under contracts in effect on January 1, 2003. Four GPOs, including one of the two largest, used a third type of arrangement that typically bundled products from different manufacturers and required customers that chose this arrangement to purchase a certain minimum percentage from the product categories specified in the bundle in order to obtain the discount. We defined this type of bundling as a structured commitment program. A structured commitment program available through one GPO bundled brand name and GPO private label items for 12 product categories and had a 95 percent commitment-level requirement. In 2002, one of the two largest GPOs reported receiving about 20 percent of its medical-surgical dollar purchasing volume from its structured commitment programs. The use of bundling arrangements may be declining. For example, data reported by one GPO showed a decline in the percent of its contracts that were corporate agreements from 2001 to 2003. This trend was consistent with comments made by one manufacturer and two medical-surgical product distributors. The manufacturer told us that GPOs are less interested in bundling different manufacturers together. Two distributors' representatives told us that since the summer of 2002, GPOs have fewer bundling arrangements and that some bundles were "pulled apart." Our analysis of data reported by the study GPOs showed that, in 2002, the two largest GPOs typically awarded 5-year contracts, whereas the other five GPOs typically awarded 3-year contracts. For some of these contracts, potential renewal periods constitute a portion of the contract duration. Those contract terms remained fairly consistent between 2001 and 2003, although two of the five GPOs reported that their most frequent contract term declined by about 1 year. Some GPOs reported implementing policies that may lead to a future reduction in contract terms. One of the two largest GPOs began in the first quarter of 2003 to exclude from new contracts the option for two 1-year contract extensions, so that when a contract expires, this GPO will solicit proposals for a new contract. In response to congressional concerns raised in 2002 about GPOs' potentially anticompetitive business practices, the group purchasing industry's trade association established a code of conduct that directs member GPOs to, among other things, address their contracting processes. The conduct code also includes reporting and education responsibilities for the trade association. The seven GPOs we studied drafted or revised their own codes of conduct, but the conduct codes are not uniform in how they address GPO business practices. Moreover, some GPOs' conduct codes include exceptions and qualified language that can limit the potential of the conduct codes to effect change. It is too soon to evaluate the effectiveness of these codes of conduct in addressing concerns about potentially anticompetitive practices, as many conduct codes are recently adopted and sufficient time has not elapsed for GPOs to demonstrate results. On July 24, 2002, the Health Industry Group Purchasing Association (HIGPA) adopted a code of conduct providing principles for GPO business practices. HIGPA represents 28 U.S.-based GPOs--including five of the seven major GPOs that we studied. HIGPA members also include health care systems and alliances, manufacturers, and other vendors. The HIGPA code of conduct principles address GPO business practices and actual, potential, or perceived conflicts of interest. Among other things, the HIGPA code of conduct provides that GPOs allow hospital and other provider members to purchase clinical preference items directly from all vendors, regardless of whether the vendors have a GPO contract; implement an open contract solicitation process that allows any interested vendor to seek contracts with the GPO; participate in processes to evaluate and make available innovative address conflicts of interest, such as disallowing staff in positions of influence over contracting to hold equity interest in, or accept gifts or entertainment from, "participating vendors"; and establish accountability measures, such as appointing a compliance officer and certifying annually that the GPO is in compliance with the HIGPA code. The HIGPA code also includes several provisions regarding the trade association's education and reporting responsibilities, including assessing and updating the code of conduct to be consistent with new developments and best business practices; implementing industry wide educational programs on clinical innovations, contracting strategies, patient safety, public policy, legal requirements, and best practices; making available a Web-based directory that posts manufacturers' and other vendors' product information; and publishing an annual report listing GPOs that have certified their compliance for the year with the HIGPA code of conduct. As of May 19, 2003, HIGPA's 28 U.S.-based GPO members certified that they are in compliance with the HIGPA code of conduct principles. Although the HIGPA code of conduct laid the groundwork for many GPOs to change their business practices, its guidelines do not comprehensively address certain business practices. Specifically, the HIGPA code of conduct requires GPOs to address business practices associated with contracting, conflicts of interest, and accountability, and it grants GPOs discretion in using contracting strategies. It recommends that GPOs consider factors such as vendor market share, GPO size, and product innovation when using multiple contracting strategies. However, the HIGPA code of conduct does not directly address levels of contract administrative fees or the offering of private label products. Since August 2002, the seven GPOs we studied, even those that were not HIGPA members, drafted and adopted their own codes of conduct or revised their existing conduct codes. One GPO stated that its revised code, while consistent with the HIGPA code, was more specific than HIGPA's principles, particularly in the GPO's rules on stock ownership, travel, and entertainment. Another GPO reported expanding on HIGPA's code by including provisions to cap administrative fees and prohibit bundling. Similarly, GPOs who were not HIGPA members said they had revised their existing codes of conduct and that their conduct codes were in some respects stronger than HIGPA's. Nevertheless, GPOs' individual codes of conduct varied in the extent to which they addressed GPOs' business practices, such as contracting processes and strategies. Figure 2 provides an overview of the seven GPOs' conduct codes with respect to their business practices. The table indicates whether a business practice was identified in a code of conduct, but not how the practice was to be addressed. As figure 2 shows, the conduct codes of all the study GPOs explicitly mentioned conflict of interest issues such as those dealing with equity holdings and other conflicts such as receipt of gifts and entertainment and the need for internal accountability. In addition, the conduct codes of most GPOs, including the two largest, included provisions dealing with the contracting strategies, such as sole-source contracting and bundling. For GPOs that are HIGPA members, the lack of additional provisions in their individual conduct codes for certain business practices such as contracting processes may not be significant, as provisions covering these areas are included in the HIGPA code. However, for one of our study GPOs that is not a HIGPA member, the conduct code lacked any provisions pertaining to contracting processes, product selection, administrative fees, sole-source contracting, commitment level requirements, contract duration, and private labeling. The code of conduct provisions for the GPOs in our study were not uniform in how they addressed business practices. For example: Four GPOs, including one of the two largest, had unqualified provisions for capping administrative fees at the 3-percent threshold contained in federal regulations established by HHS. The other largest GPO had a provision for capping administrative fees at 3 percent only for clinical preference items and only for contracts awarded after the establishment of the GPO's conduct code. Four conduct codes had provisions limiting the use of sole-source contracts for clinical preference items specifically. Another conduct code limited the use of sole-sourcing to contracts meeting certain criteria, such as approval for use by a 75-percent majority of the GPO's contracting committee. The language of one of the remaining GPO's conduct codes was vague with respect to sole-sourcing, stating that the GPO will provide customers with choices for each product or service, without explicitly mentioning the use of sole-source contracts. In their conduct codes, two GPOs had provisions prohibiting the practice of bundling of unrelated products, two GPOs prohibited and two limited bundling for clinical preference items, and three GPOs prohibited the practice of bundling products from different manufacturers. One GPO's conduct code stated that the GPO would not obligate its customers to purchase bundles of unrelated products, allowing the possibility for bundles to be available to customers on a voluntary basis. Exceptions and qualified language in the provisions have the potential to weaken the codes of conduct. Table 2 shows examples of exceptions and qualified language that can limit the potential of the individual GPOs' conduct codes to effect change. Given the individual GPOs' relatively recent adoption of codes of conduct--since August 2002--sufficient time has not yet elapsed for GPOs to develop a history of compliance with certain conduct code provisions. Two of the manufacturers and two distributors we interviewed reported noticing improvements, stating that some GPOs are no longer using certain contracting strategies. This observation is consistent with the suggestion that the use of bundling may be declining. One manufacturer that had difficulty in obtaining a contract with a large national GPO prior to 2002 said it has since been awarded a contract for a clinical preference item. The manufacturer also noted that, since September 2002, it has been awarded several new contracts. However, two other manufacturers told us they are skeptical that improvements have been made with regard to business practices. Notwithstanding such anecdotal evidence, because of the recency of GPOs' actions taken, the ability to assess the impact of the conduct codes systematically remains limited. One year is not sufficient time for the codes of conduct to produce measurable trends that could demonstrate an impact on the industry. For more information regarding this statement, please contact Marjorie Kanof at (202) 512-7101. Hannah Fein, Mary Giffin, Kelly Klemstine, Emily Rowe, and Merrile Sing 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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Hospitals have increasingly relied on purchasing intermediaries--GPOs--to keep the cost of medical-surgical products in check. By pooling purchases for their hospital customers, GPOs'in awarding contracts to medical-surgical product manufacturers--may negotiate lower prices for these products. Some manufacturers contend that GPOs are slow to select products to place on contract and establish high administrative fees that make it difficult for some firms to obtain a GPO contract. The manufacturers also express concern that certain contracting strategies to obtain better prices have the potential to limit competition when practiced by GPOs with a large share of the market. GAO was asked to examine certain GPO business practices. It focused on seven large GPOs serving hospitals nationwide regarding (1) their processes to select manufacturers' products for their hospital customers and the level of administrative fees they receive from manufacturers, (2) their use of contracting strategies to obtain favorable prices from manufacturers, and (3) recent initiatives taken to respond to concerns about GPO business practices. The seven GPOs we studied varied in how they carried out their contracting processes. The GPOs were able to expedite their processes for selecting products to place on contract, particularly when they considered these products to be innovative. The GPOs also reported receiving from manufacturers administrative fees in 2002 that were generally consistent with the 3-percent-of-purchase-price threshold in regulations established by the Department of Health and Human Services. However, for certain products, they reported receiving higher fees--in one case, nearly 18 percent. The seven GPOs also varied in the extent to which they used certain contracting strategies as leverage to obtain better prices. For example, some GPOs, including one of the two largest, used sole-source contracting (giving one of several manufacturers of comparable products an exclusive right to sell a particular product through the GPO) extensively, whereas others used it on a more limited basis. Most GPOs used some form of product bundling (linking price discounts to purchases of a specified group of products), and the two largest GPOs used bundling for a notable portion of their business. In response to congressional concerns raised in 2002 about GPOs' potentially anticompetitive business practices, the Health Industry Group Purchasing Association (HIGPA) and GPOs individually established codes of conduct. The conduct codes are not uniform in how they address GPO business practices. In addition, some GPOs' conduct codes include exceptions and qualified language that could limit their potential to effect change.
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Between 1972 and 1990 the presence of foreign banks in the United States increased rapidly--from 105 offices and subsidiary banks with $95 billion in assets in 1972 (measured in 1995 dollars) to 737 offices and subsidiary banks with $933 billion in assets (measured in 1995 dollars) at the end of 1990. Since then their number has fallen and growth in the volume of their assets has slowed. At the end of 1995, there were 656 foreign bank offices and foreign-owned subsidiary banks with $974 billion in assets in the United States. Including an additional 247 representative offices, 371 foreign banks had a presence in the United States. Branches and agencies are the most common organizational forms--accounting for about 78 percent of foreign bank assets at the end of 1995. (See table 1.) Foreign-owned U.S. bank subsidiaries held over 21 percent of foreign bank assets. Commercial lending companies and Edge Act/Agreement Corporations accounted for less than 1 percent of foreign bank assets, and representative offices held no banking assets. U.S. branches and agencies are legal and operational extensions of their parent foreign banks and as such have no capital of their own. They may conduct a wide range of banking activities, including lending, money market services, trade financing, and other activities related to the service of foreign and U.S. clients. They can also access the U.S. payments system through the Federal Reserve and obtain other Federal Reserve services. Branches and agencies of foreign banks may be either state-licensed and therefore regulated and supervised by the respective state banking department, or federally licensed and regulated and supervised by the Office of the Comptroller of the Currency (OCC). As of December 1995, 473 branches and agencies were state-licensed and 72 were federally licensed. In addition, 41 of the branches were insured by the Federal Deposit Insurance Corporation (FDIC) and thus subject to additional supervision by FDIC. U.S. bank subsidiaries of foreign banks are U.S.-chartered banks that have all the powers of U.S.-owned banks. They are insured by FDIC and are subject to all the rules and regulations governing U.S.-owned banks. Their assets and liabilities are separate from those of their parent foreign banks, and they must maintain their own capital in accordance with U.S. laws and regulations. They may be either state or federally chartered. Branches and agencies of foreign banks were first subject to federal regulation with passage of the International Banking Act of 1978 (IBA). Adopting a policy of national treatment, IBA sought to allow foreign banks with branches and agencies to operate in the United States on an equal basis with U.S. banking organizations. Foreign banks were to receive neither significant advantages nor incur significant disadvantages. The act also gave the Federal Reserve responsibility for overseeing the combined U.S. operations of foreign banks. Although IBA substantially equalized the treatment of the U.S. operations of foreign and U.S. banks, it did not require prior federal review of foreign bank entry into the U.S. market nor did it permit a federal role in the termination of a state-licensed branch or agency. Cases of fraud and other criminal activity by some foreign banks in the 1980s and early 1990s convinced the Federal Reserve and Congress that both state and federal supervisors needed to increase the attention they paid to foreign banks operating in the United States. In particular, Federal Reserve officials believed that prior federal review of foreign bank entry and expansion in the U.S. market was necessary. They also believed that a federal role in terminating a state-licensed branch or agency for unsafe and unsound banking practices was desirable. In December 1991, Congress passed FBSEA. This act, which amended IBA, increased federal supervision of all foreign bank operations, giving the Federal Reserve authority to examine all foreign bank offices in the United States. FBSEA also mandated uniform standards for foreign banks establishing operations in the United States. Finally, it prohibited U.S. branches of foreign banks from obtaining deposit insurance and gave federal supervisors greater enforcement authority over the U.S. operations of foreign banks. FBSEA also directed the Federal Reserve to levy examination fees on foreign banks with a U.S. branch, agency, or representative office. However, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 imposed a 3-year moratorium on this provision. FBSEA increased the Federal Reserve's supervisory and regulatory power over foreign banks by requiring Federal Reserve approval for all foreign banks seeking to establish U.S. offices, whether licensed by state or federal authorities. This requirement was designed to give the Federal Reserve, as the agency responsible for overall supervision of foreign banks in the United States, a role in determining whether such institutions may establish a U.S. banking presence. FBSEA established uniform standards for foreign banks entering the United States, requiring them to meet financial, managerial, and operational standards similar to those of U.S. banking organizations. The act made the Federal Reserve responsible for ensuring that these standards are met. Under FBSEA, foreign banks must meet two standards in order to establish a branch or an agency, or to acquire ownership or control of a commercial lending company. First, the Federal Reserve must determine that the foreign bank applicant (and any parent foreign bank) engages directly in the business of banking outside the United States and is subject to comprehensive supervision or regulation on a consolidated basis by its home country supervisor. Second, the foreign bank must furnish to the Federal Reserve the information that the Federal Reserve requires in order to assess the application adequately. In addition to the two mandatory standards, the Federal Reserve also considers other factors. Among others, these include (1) whether the applicant's home country authorities have consented to the establishment of the proposed office, (2) the applicant's financial and managerial resources, including its capacity to engage in international banking, and (3) whether the applicant has provided adequate assurances that it will provide access to information sufficient to allow the Federal Reserve to determine its compliance with applicable U.S. laws. Before FBSEA, the states were responsible for licensing representative offices and, at the federal level, applicants only had to register their office with the U.S. Department of the Treasury. FBSEA gave the Federal Reserve authority to approve establishment of these offices as well. However, it did not require the Federal Reserve to apply the standards mandated to establish other banking offices to its decisions regarding applications for representative offices. The Federal Reserve is to take these standards into account in evaluating a foreign bank's application to establish a representative office, but it can approve applications where the parent foreign bank does not meet all of the standards required to establish a branch or agency. Before FBSEA, foreign banks wishing to establish a branch or agency in the United States were required to obtain approval from the appropriate banking regulator--OCC--for federal branches and agencies, or the state regulator for state branches and agencies. Since FBSEA, a foreign bank must also receive approval from the Federal Reserve. To receive approval from the Federal Reserve, a foreign bank must submit an application to the reserve bank located in the district where it plans to establish an office or to its already designated "responsible" reserve bank. A copy of its OCC or state application and any additional information necessary for the Federal Reserve to determine that the bank meets the standards set out in FBSEA are to be included in the application. The application is not to be accepted (i.e., deemed informationally complete) until these criteria are met. Once the application is accepted for processing, it is reviewed by staff and submitted to the Board for action. Before March 1993, applications were reviewed solely by the reserve bank before they were accepted. If an application lacked information, the reserve bank requested the applicant bank to provide the information. After the reserve bank determined that it had all necessary information to process the application, it was accepted and forwarded to the Board for review and disposition. At this point the Board could request additional information. This process often resulted in delays and multiple requests for additional information. In March 1993, the Federal Reserve issued guidelines changing its procedures for processing applications to establish U.S. offices of foreign banks. The changes were intended to expedite processing and reduce the burden on applicants of responding to multiple requests for additional information. The guidelines require the reserve bank to send copies of the application to the Board within one business day of receiving an application. Both the reserve bank and Board staffs are then to simultaneously review the application to ensure that the information is complete. If additional information is needed, coordinated requests are to be made to the applicant bank before the application is accepted. The guidelines also established time limits for Federal Reserve staff to review applications and ask for additional information. The reserve bank and Board staffs are to review an application and request additional information from the applicant bank within 15 business days of receipt of the application by the reserve bank. The applicant bank then has 20 business days to respond to these requests. If the applicant bank does not respond within that time, the application would normally be returned due to insufficient information. If the applicant responds within the time limit, the reserve bank and Board staffs have an additional 10 business days either to accept the application as complete or to request additional information. If additional information is requested, the applicant bank similarly has 10 business days to respond. The Federal Reserve encourages all foreign bank applicants to meet with reserve bank and/or Board staffs before filing applications. These meetings are intended to identify relevant issues, apprise applicants of required information, and enable Federal Reserve staffs to obtain necessary information at an early stage of the process. Once the reserve bank and Board staffs determine that the application is complete and it is accepted, the Federal Reserve has an internal guideline of 60 days to analyze it, have background checks completed, and make inquiries to home country authorities. After these tasks are completed, the application is to be presented to the Board for action. If the application cannot be presented for Board action within the 60-day period, the applicant is to be informed in writing of the reasons. As of January 29, 1996, the Federal Reserve had received 96 applications from foreign banks seeking to establish offices or bank subsidiaries under FBSEA. The Federal Reserve had approved 45 applications, had returned or applicant banks had withdrawn 23, and 28 were under review. Of the 45 applications approved by the Federal Reserve, 6 were for agencies, 15 for branches, 18 for representative offices, and 8 for bank acquisitions. The approved applications represented banks from 23 countries. Taiwan accounted for the most--7 of the 45 applications. In its decisions approving the applications for branches and agencies and subsidiary banks, the Federal Reserve found that the foreign banks had met the standards required under FBSEA and its implementing regulations. The Federal Reserve's decisions indicated that the applicants had provided the necessary information, had met all conditions concerning their intended operation, and were in compliance with the requirements for approval. The Federal Reserve's policy, as required by FBSEA, is to use the standards that apply to branches and agencies as guidance when considering an application to establish a representative office. Federal Reserve regulations do not require these standards to be met in every case because representative offices differ from branches and agencies in that representative offices cannot engage in a banking business and cannot take deposits or make loans. Federal Reserve staff told us that, in general, representative office applicants have not been required to meet the supervision standards required for branches and agencies. A review of the orders indicated that the Federal Reserve examined the home country supervision of the applicant bank in every representative office case, but a determination that the applicant bank or its parent foreign bank were subject to comprehensive consolidated supervision was not always made. Similarly, the Federal Reserve has not required foreign bank applicants wishing to establish representative offices to meet the same financial standards, including the standard related to capital, which are required for the establishment of branches and agencies. In our review of 17 orders approving representative offices, we found that in 13 cases the orders did not indicate whether the capital standards were being met by the parent foreign bank. Most of the 23 applications that had not been approved by the Federal Reserve and were no longer under review were withdrawn by the applicant bank for various reasons. (See table 2.) Of the 28 applications under review as of January 29, 1996, 3 were for agencies, 5 were for bank acquisitions, 8 were for branches, and 12 were requests to establish representative offices. Federal Reserve staff told us that they had not received any applications to establish a commercial lending company since FBSEA was passed. Processing foreign bank applications took more than a year on average, and this length of time concerned both the Federal Reserve and applicant foreign banks. Federal Reserve staff told us that the length of time it took to process applications can be attributed to the need for additional time to complete background checks and to review issues related to comprehensive supervision, bank operations, and internal controls. They also cited difficulties in obtaining translated information from some applicant banks, a lack of understanding by some applicants about the level of detail required to review comprehensive consolidated supervision, and some applicants' unfamiliarity with FBSEA requirements as causes of delays. After the Federal Reserve issued its March 1993 guidelines, there was a decrease in the amount of time taken to process branch, agency, and representative office applications. (See fig. 1.) On average, the total time it took to process such applications (from date of initial filing to disposition) dropped from 574 days to 293 days. Of this, the average time between the date that applications were initially filed and the date they were accepted decreased from 170 days to 130 days, and the average time between acceptance and approval decreased from 404 days to 163 days. Federal Reserve staff attributed this decline to a number of reasons, including commitment to meet the guidelines, experience with the process, and improvements in the name check process. FBSEA directed the Federal Reserve to coordinate the supervision of foreign banking organizations with federal and state bank supervisors to ensure an efficient and uniform approach in overseeing the operations of foreign banks in the United States. The act gave the Federal Reserve the responsibility for ensuring that branches and agencies of foreign banks are examined every 12 months and gave it the power to examine representative offices. It also broadened the enforcement powers of the Federal Reserve and OCC. Specifically, the act permitted the Federal Reserve to terminate the activities of a state-licensed branch, agency, commercial lending company, or representative office for violations of law or for unsafe or unsound banking practices. The Federal Reserve may recommend to OCC similar action for federally licensed offices. modified and broadened the Federal Reserve's and OCC's authorities to assess civil money penalties on specific grounds against any foreign bank or office or subsidiary of a foreign bank and certain individuals of up to $25,000 for each day during which a violation continues. To meet the requirements set out in FBSEA, Federal Reserve staff told us that each year they develop, in cooperation with OCC, FDIC, and state bank supervisors, an annual examination plan, to supervise the U.S. operations of foreign banking organizations. This plan includes branches, agencies, commercial lending companies, Edge Act/Agreement Corporations, and significant nonbank subsidiaries. They said the supervisors discuss the focus of the year's examinations and when they will be conducted. Their goal is to ensure that each branch and agency is examined every 12 months without undue burden imposed on the entity and that all supervisory issues are addressed in the examination process. To meet this goal, the Federal Reserve may conduct an independent examination, rely on the other agencies to conduct the examination, or participate in a joint examination. Federal Reserve staff told us that, in order to form a baseline understanding of foreign bank operations, in 1992, they examined either independently or jointly all foreign bank branches and agencies in the United States. In 1993, the Federal Reserve, OCC, FDIC, and state bank supervisors developed a joint examination manual for branches and agencies. The purpose of the manual is to ensure to the extent possible that each regulatory agency examines branches and agencies of foreign banks in a consistent manner. Federal Reserve staff told us that in the future they intend to examine fewer foreign branches and agencies and rely more on the examinations conducted by OCC and the states. Table 3 shows the number of independent and joint examinations conducted by each agency for 1993 through 1995. Federal Reserve examination data indicated that federal and state banking supervisors have substantially been meeting the requirement that all branches and agencies be examined annually. For 1993, 1994, and 1995, we found that, on average, 97 percent of branches and agencies had been examined at least annually. In 1995, 542 of the 549 branches and agencies operating in the United States at the beginning of the year were examined. Federal Reserve staff reported that enhanced monitoring tools have been developed to quickly identify cases where the mandate appears to have been missed. FBSEA did not establish a required frequency for examinations of representative offices. It is currently Federal Reserve policy to examine all representative offices at least once every 24 months. Examinations of representative offices differ from those of foreign branches and agencies in that they are intended primarily to verify that the type of business being conducted by an office is limited to that customarily viewed as a representative office function and to ensure that the office is operating in conformance with sound operating policies. The Federal Reserve conducted a survey in 1992 to determine the number of representative offices operating in the United States. Federal Reserve staff told us that between 1993 and 1994 examiners visited all representative offices in the United States to verify that they were engaging only in activities appropriate for representative offices. From our review of Federal Reserve data, we found that for 1993 through 1995, 93 percent of representative offices, net of closures and new entrants, were examined at least once. The examination rates were 87 percent, 54 percent, and 66 percent for 1993, 1994, and 1995, respectively. Examinations by federal and state supervisors are intended to determine the safety and soundness of foreign branches and agencies. They result in a composite examination rating for the entity. These ratings range from 1 (fundamentally sound) to 5 (unsatisfactory). As table 4 shows, of the foreign branches and agencies examined during 1995, 88 percent received a rating of 1 or 2 at year-end, indicating that their operations were at least satisfactory and required only normal supervisory attention. Nine percent were rated 3 (fair). Only 3 percent received a rating of 4 or 5, meaning that they were considered to have significant weaknesses or were identified as having so many severe weaknesses that they required urgent attention by their head offices. These results are similar to those in 1993 and 1994 in which 79 percent and 85 percent, respectively, were found to have sound operations. Federal and state banking supervisors may issue enforcement actions against foreign banks as well as their U.S. branches and agencies in cases where a branch, agency, or other U.S. office of the parent bank is determined to be operating in an unsafe or unsound manner in violation of applicable laws, regulations, or written conditions imposed during the applications process. These actions may be either formal or informal, depending upon the severity of the problem(s) and the bank's willingness to correct them. Although the Federal Reserve had authority to initiate enforcement actions against foreign banks and their U.S. branches and agencies under the IBA and the Federal Deposit Insurance Act, FBSEA enhanced its enforcement powers. Specifically, it gave the Federal Reserve the authority to order a foreign bank with a state-licensed branch, agency, commercial lending company, or representative office to terminate its activities in the United States and the authority to recommend such action to OCC for federally licensed branches and agencies. Federal Reserve staff stated that the Federal Reserve had the authority to levy civil money penalties for violation of IBA and for failure to make certain reports and FBSEA modified and broadened this authority for both the Federal Reserve and OCC. FDIC can issue formal enforcement actions against foreign banks by virtue of its authority under the Federal Deposit Insurance Act. Between 1993 and 1995, federal banking supervisors issued 40 formal enforcement actions against foreign banks operating in the United States.In the most serious case, the Federal Reserve, in conjunction with FDIC, the New York State Banking Department, and several other state bank supervisors, used its termination authority to order Daiwa Bank to cease its U.S. banking operations. During this period, the Federal Reserve also issued three civil money penalties for failures to file regulatory reports and one for inadequate Bank Secrecy Act policies and procedures. Neither OCC nor FDIC issued any civil money penalties during this time. The remaining 35 formal enforcement actions issued by the Federal Reserve, OCC, and FDIC included 16 cease-and-desist orders. In practice, OCC exercises primary enforcement authority over federal branches and agencies, and the Federal Reserve takes the lead in issuing formal enforcement actions against state-licensed branches and agencies. In addition to formal enforcement actions, each of the federal and state banking supervisors may take informal enforcement actions, such as memorandums of understanding and commitment letters, in which an institution agrees to remedy specific areas of supervisory concern. These actions are taken when supervisory concerns are identified that, while not overly serious, warrant some type of remedial action. In 1995, the Federal Reserve in conjunction with state bank supervisors issued 50 informal enforcement actions against foreign banks, OCC issued 9, and FDIC issued 5. To discuss the implementation of FBSEA, we reviewed the act and focused on those provisions that pertained specifically to the entry and examination of foreign banks in the United States. Although FBSEA contained provisions restricting some activities of foreign banks and set additional reporting and approval requirements, as agreed with the subcommittee, we did not do independent work to determine that these provisions have been followed. We focused our work on branches and agencies of foreign banks because this form of organization accounts for the largest concentration of foreign bank offices and assets in the United States. We did limited work on representative offices because their activities are limited and they hold no banking assets in the United States. FBSEA also applies to commercial lending companies. However, there are only three of these companies in the United States and there have been no applications for this form of entry since FBSEA was implemented. Finally, since subsidiary banks are U.S.-chartered, they are governed by all of the laws and regulations applicable to U.S. banks and are supervised and examined in the same way as U.S. banks. Accordingly, FBSEA should have had minimal effect on the regulation and supervision of these banks. To describe the Federal Reserve's applications process for foreign banks, we reviewed its implementing regulations and other banking correspondence and regulations. We also interviewed staff in the Federal Reserve's Division of Banking Supervision and Regulation and its Legal Division and officials and staff at the Federal Reserve Bank of New York, which is where most foreign banks operating in the United States are located. They gave us their views on the applications process and how it corresponds to the requirements set forth in FBSEA. We also reviewed all of the Federal Reserve's decisions approving foreign bank applications since 1992 to determine whether it addressed the statutory and regulatory requirements of FBSEA. In addition, we compared the length of time it took to process applications to the guidelines set forth by the Federal Reserve to determine whether the Federal Reserve was in compliance with its own policies. We did not attempt to subjectively evaluate the Federal Reserve's decisions on foreign bank applications. To do so, we would have had to analyze and judge the merits of the facts presented by the foreign bank applicants and the reasoning in each application. To describe the examination process and the results of examinations, we reviewed examination data for foreign branches, agencies, and representative offices provided by the Federal Reserve for 1993, 1994, and 1995. Because the Federal Reserve has overall responsibility for ensuring that foreign branches, agencies, and representative offices are examined in a timely manner, it maintains examination data for all such offices operating in the United States. The Federal Reserve did not maintain such data in a summary format prior to 1993. We also interviewed staff and officials from the Federal Reserve, OCC, and FDIC, in both Washington, D.C., and New York, and officials from the New York State Banking Department to determine how the Federal Reserve coordinates with other bank supervisors. To determine the extent to which federal supervisors have used enforcement actions against foreign banks operating in the United States, we collected data on enforcement actions from the Federal Reserve, OCC, and FDIC. Our work was done in Washington, D.C., and New York, NY, between January and May 1996 in accordance with generally accepted government auditing standards. We received both written and oral comments on a draft of this report from the Federal Reserve. In its letter, the Federal Reserve stated that the information provided in the report accurately describes the policies and processes with respect to applications and examinations of foreign banks. The oral comments were technical in nature and have been incorporated where appropriate. We are sending copies of this report to the Chairmen and Ranking Minority Members of the House Committee on Banking and Financial Services and the Senate Committee on Banking and Urban Affairs, the Chairman of the Federal Reserve Board, the Chairman of the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and other interested parties. We will also make copies available to others on request. Major contributors to this report are listed in appendix II. If you have any questions, please call me at (202) 512-8678. Rachel DeMarcus, Assistant General Counsel The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.
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Pursuant to a congressional request, GAO provided information on the Federal Reserve's implementation of the Foreign Bank Supervision Enhancement Act, focusing on: (1) the Reserve's examination process and process for approving foreign bank applications for U.S. entry and expansion; and (2) enforcement actions that the Federal Reserve has taken since 1993. GAO found that: (1) the act established minimum standards for foreign bank entry and expansion into the United States, strengthened federal bank supervision and regulation, and required that the Federal Reserve approve foreign banks' applications for acquiring bank subsidaries; (2) although the Federal Reserve approved 45 applications after determining that the applicant banks met the act's standards, Federal Reserve staff believed that the application process was too lengthy; (3) new guidelines, established in 1993, reduced application processing times; (4) between 1993 and 1995, the Federal Reserve met its mandate to coordinate with the other federal and state bank supervisors to examine foreign branches and agencies once every 12 months; (5) the Federal Reserve also examined over half of the representative offices of foreign banks operating in the United States even though it did not establish a time frame for such examinations; (6) the foreign banks examined were generally in satisfactory condition and only 3 percent of the foreign branches and agencies received low safety and soundness ratings in 1995; and (7) of the 40 formal enforcement actions the Federal Reserve issued against U.S. foreign banks between 1993 and 1995, 6 required voluntary terminations of deposit insurance, 4 required the use of civil money penalty authority, and one foreign bank was ordered to terminate its U.S. banking operations.
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In 1991, HRSA announced that it would fund 10 Healthy Start sites and issued guidance on how communities could obtain a grant. By July 1991, HRSA had received 40 applications, and in September of that year, it began funding 15 communities for a 5-year demonstration project. In 1996, funding for these communities was extended for a sixth year. In 1994, HRSA began funding seven new communities--called special projects--and funding for these was also extended in 1996 for an additional year. Forty-one additional communities have been awarded grants since 1997, and these now share funding with the 15 original sites and 5 of the special projects judged by HRSA to have been successful. To be eligible for the original grants, a community had to have an average annual infant mortality rate of at least 1.5 times the national average between 1984 and 1988--that is, 15.7 deaths per 1,000 live births--and at least 50 but no more than 200 infant deaths per year. Applicants had to be local or state health departments, other publicly supported provider organizations, tribal organizations, private nonprofit organizations, or consortia of these organizations. HRSA required only a few specific activities of all sites to provide grantees flexibility to make their projects relevant to local circumstances. Healthy Start's principal goal to reduce infant mortality has usually been stated as a 50-percent reduction in infant mortality, attributable to the program, over 5 years. Healthy Start also aims to achieve improvements in other outcomes--such as reductions in low birthweight, improved maternal health, and increased community awareness of threats to infant health--that are expected to help reduce infant mortality. In addition, Healthy Start was designed to demonstrate how a program based on innovation, community commitment and involvement, increased access to care, service integration, and personal responsibility could work in a variety of locations with high infant mortality. From fiscal year 1991 (a planning year that preceded the 5-year demonstration), through fiscal year 1998, program funding for Healthy Start has totaled more than $600 million. Healthy Start's fiscal year 1992 funding was less than half of what was initially proposed, and the number of grantees was greater. Instead of $171 million being spread over 10 sites, funding for the first year of the demonstration was $64 million spread over 15 sites. In 1997, HRSA concluded the demonstration phase of Healthy Start and began the "replication phase" in 40 (now 41) new sites. In addition to providing Healthy Start services in their own communities, the established Healthy Start communities--the original 15 sites and 5 of the special projects--are mentoring several of the new sites. While the new sites receive, on average, somewhat less funding than the established sites, funding is shared among all sites. In September 1993, HRSA contracted with MPR to conduct the national evaluation of the Healthy Start program. This is currently funded with about $4.8 million, paid from the 1-percent set-aside for evaluation of health programs. The original contract called for MPR to evaluate the first 4 years of the 5-year demonstration program and contained an option for HRSA to request evaluation of the fifth year. In 1995, HRSA exercised that option, and the contract now requires that the evaluation cover all 5 years of the originally planned demonstration. Although the demonstration was extended for a year, HRSA currently has no plans to request that MPR evaluate the sixth and final year of the demonstration phase. The national evaluation, focused only on the original 15 sites, is designed to determine whether Healthy Start changed the rate of infant mortality and related outcomes, what factors contributed to any effects the program may have had, and how successful approaches to lessening infant mortality can be replicated in other communities. Although each Healthy Start community is unique and the details of the delivery of any one service may differ across communities, many of the services are common to all sites: outreach and case management; support services, such as transportation and nutrition education; enhancements to clinical services; and public information campaigns. The national evaluation has two major components: an impact evaluation and a process evaluation. The impact evaluation is used to determine whether the infant mortality rates in Healthy Start communities have declined and whether related outcomes have improved. The process evaluation describes how the program actually operates. In its final evaluation report, MPR intends to synthesize these two components, linking outcomes with processes to determine why Healthy Start has or has not succeeded in communities and which strategies are likely to be successful elsewhere. In the fall of 1997, MPR reported some preliminary evaluation results, including a draft interim report on its impact evaluation, which led to press accounts suggesting a variety of interpretations about the success of the Healthy Start program. We believe these preliminary evaluation results were not conclusive. Although the impact evaluation suggested that Healthy Start has not reduced infant mortality, such conclusions about the program would be premature because the impact evaluation does not include data from all the program sites or data from all the years of the program. Moreover, the process evaluation indicates that program implementation in many communities was slow and, therefore, that the impact data analysis may not be representative of a mature Healthy Start program. The national evaluation's analysis of Healthy Start's effect on infant mortality and related outcomes is preliminary--MPR characterized its October 1997 report as a draft. Because of problems obtaining data from some of the states' departments of health, only 9 of the 15 program sites to be evaluated were represented in the analysis. In addition, the analysis is related to only the first 3 of the 6 years of program operation. Moreover, for illustrative purposes, MPR has limited its principal impact analysis to data from only the last of those 3 years, 1994. However, if, as HRSA believes, fiscal year 1995 was the first fully operational year, even 1994 data may not reflect the communities' mature programs. To determine program impact, MPR is conducting two types of analysis: availability and participation. The availability analysis compares a Healthy Start community and two similar communities without Healthy Start to determine if the presence of the program in a community has an effect on infant mortality and related outcomes. The participation analysis compares, within a Healthy Start community, mothers who were clients of the program and mothers who were not. Both analyses can be used to study infant mortality; however, the availability analysis directly addresses the issue of reducing infant mortality in entire communities, while the participation analysis is restricted to outcomes for program participants. The national evaluation's availability analysis found that for 1994, the overall infant mortality rate in Healthy Start communities was about the same as that in comparison communities. Applied to the individual sites, the analysis found that of the nine Healthy Start communities analyzed, only one experienced a significant reduction in infant mortality relative to its comparison sites. MPR similarly found that the neonatal and postneonatal mortality rates--two components of infant mortality--were not significantly reduced in the Healthy Start communities relative to the comparison sites. In its analysis of birth outcomes considered to be risk factors for infant mortality at eight of the Healthy Start communities, MPR found that in 1994, the low birthweight rate was reduced in only one community, the preterm birth rate was reduced in two other communities, and the rate at which women received adequate or better prenatal care was improved in five communities. None of the analyses of data pooled from all sites yielded significant differences between sites with and without Healthy Start. The national evaluation's participation analysis of Healthy Start's effect on infant mortality has not been completed because of problems of data availability. The participation analysis of related outcomes, like the availability analysis, yielded little evidence of program effect in the eight communities analyzed. Participation in Healthy Start was not associated with reductions in low or very low birthweight rates or preterm birth rates. In postpartum interviews with participants and nonparticipants, conducted in 1996, after all sites became fully operational, MPR found that participants were more likely to rate their prenatal care experience more highly and to be using birth control. However, no significant differences between participants and nonparticipants were reported for the receipt of services or health behaviors during pregnancy. The national evaluation's process evaluation is intended to provide a detailed picture of what happened over time when Healthy Start was implemented at the various sites and assess its success in meeting its process objectives, such as hiring and retaining staff and putting the planned program in place. The evaluation, which, according to HRSA's project officer for the evaluation, is to result in a series of reports, indicates thus far that the Healthy Start program was implemented largely as originally envisioned but more gradually than expected. MPR's implementation report, a major portion of the process evaluation, provides an overview of program implementation in 14 of the 15 original sites and draws conclusions about these projects. The report includes detailed information on the development of the projects, the barriers to successful implementation, and the gaps between what was planned and what resulted. In addition, the report presents perceptions of variations across projects with respect to a variety of criteria, such as staff stability and consumer participation in the process. It also contains timelines indicating for each site when specific program components became operative. These timelines demonstrate, for example, that only 4 of the 14 sites had all their planned services operational by October 1994. The implementation report concludes with lessons learned, which are organized into four categories: community context, organization and administration, community involvement, and service delivery. MPR has also completed a report on the infant mortality review process at the various Healthy Start sites. It indicates that, in general, the review programs are operational but with varying degrees of success in identifying the factors leading to infant mortality in their communities. Two detailed reports on specific interventions are available only in draft form. One describes, in greater detail than the implementation report, program participants, including comparisons of participants and nonparticipants with respect to the use of health and social services, satisfaction with services, and health-related behaviors, such as birth control and breast feeding. The other describes how outreach and case management were delivered, with consideration given to both similarities and differences across sites. Because the impact and process evaluations are not finished, their synthesis has not yet begun. MPR expects to be able to draw conclusions about the program characteristics that are most effective in improving maternal and child health outcomes and the circumstances under which they are most likely to succeed when it integrates the impact and process evaluations. The synthesis of the impact and process components of the evaluation to be presented in the final report will be based on impact data from years one through four of the demonstration. This synthesis may have to be revised when more impact data are available. The final report as currently planned will not be the final evaluation of Healthy Start. The final report will contain an analysis of outcomes through 1995 and a synthesis of this with the findings of the process evaluation reports. Thus, it will assess the program's impact on infant mortality through the fourth year of the demonstration, not the fifth year as planned. Further, these data will reflect the impact of only 1 or 2 years during which the program was fully operational. An addendum to the report, planned to follow a year later, will contain an updated analysis of outcomes through 1996. The addendum will assess impact on infant mortality through the fifth year of the demonstration and thus will reflect the impact of only 2 or 3 years during which the program was fully operational. However, by evaluating the sixth year of the demonstration, it would be possible to obtain an analysis of 3 or 4 years of impact data from the mature program. Evaluating the sixth year of the demonstration would likely enhance the value of the investment in MPR's evaluation for several reasons. First, including data from the sixth year of the demonstration would allow evaluation of the years in which all 15 sites have been fully operational. Second, additional data would represent the effects of a more mature and potentially more effective program, which would likely provide more definitive answers about Healthy Start's success. Third, having more years of data would increase the likelihood of detecting small but real effects of the program. Further, it is possible that data from the more mature years of the program will reflect program impact on the wider Healthy Start community, not just direct participants in program services and activities. In addition to hoped-for effects on the pregnant clients of Healthy Start, there may be effects of program services and education on those same women at other times, such as before or early in their next pregnancy; indirect effects on their social network, such as their male partners, friends, and sisters; and indirect effects on the community in general. HRSA's project officer for the national evaluation notes that the cost associated with analyzing results for an additional year would be about $100,000; this would be inexpensive relative to the total national evaluation cost of about $5 million. Since states collect vital records on births and deaths routinely, funds would be needed only to obtain, analyze, and report on the data and to revise the synthesis of these data with the process evaluation. Since the national evaluation of the Healthy Start program has yet to be completed, preliminary results should not be used to conclude that the program has or has not achieved its goals. HRSA and MPR plan for the "final" report of the national evaluation to include an extensive description of the program, indicate whether it has reduced infant mortality rates at Healthy Start sites, and provide an analysis of how program characteristics have influenced outcomes. However, the final report will analyze infant mortality data from only 4 years of the demonstration. Primarily because implementation of the projects was slower than anticipated, data from the first 4 years of the demonstration may be insufficient for judging the success of Healthy Start in lowering infant mortality. Thus, even the final report will be inconclusive. Analysis of the fifth year of the demonstration, as planned, will help strengthen the evaluation, but this analysis will not reflect as many years of mature program operation as possible. Thus, at a relatively modest cost, MPR's evaluation would be further strengthened by including data from the sixth and final year of the demonstration. To increase the value of the investment in the national evaluation of Healthy Start, we recommend that HRSA contract with MPR to expand the evaluation to include impact data from the sixth year. In commenting on a draft of this report, HRSA agreed with our findings and indicated that it intends to add funds to the MPR contract to include impact data from the sixth year of the demonstration. HRSA and MPR provided a number of technical comments that we incorporated as appropriate. As arranged with your office, unless you announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. We will then send copies to the Secretary of Health and Human Services, to the Administrator of HRSA, and to others who are interested. We will also make copies available to others on request. Please contact me at (202) 512-7119 if you or your staff have any questions. You may also contact Michele Orza, Assistant Director, at 512-9228, or Donald Keller, Senior Evaluator, at 512-2932. The availability analysis of infant mortality and related birth outcomes is part of Mathematica Policy Research's (MPR) attempt to determine if Healthy Start has, as intended, reduced infant mortality at program sites, looking at the vital statistics for entire program and comparison areas where, respectively, the program is or is not available. It does this without concern about the participation in the program of specific persons. It attempts to separate any change that may occur in outcomes at program sites that is attributable to Healthy Start from change in outcomes at those sites that would have occurred without the program--for example, changes stemming from the national trends not related to health and social interventions, such as the persisting decline in infant mortality experienced almost everywhere in the United States. It does this for each outcome of interest, obtained from the state health department's vital records of linked births and deaths for the sites of interest, by (1) comparing each program site with two comparison sites without Healthy Start, selected (matched) for similarity to the program site with respect to race and ethnicity, infant mortality rate, and trend in infant mortality over the pre-Healthy Start period and (2) statistically adjusting the data for differences between program and comparison site mothers on variables, also obtained from vital records, believed to affect the outcome. To the extent that, as a result of site selection and statistical adjustment, the program and comparison sites do not differ in expected infant mortality rate, then the comparison of the program and comparison site adjusted outcomes should be a valid indication of the effectiveness of the program. MPR's approach involves accepted statistical methods with known limitations. One limitation stems from the possibility that program and comparison site mothers will systematically differ in ways, such as poverty level, that affect outcomes but are not taken into account in the selection of comparison sites and are not available for use in statistically adjusting the data. Such a difference could bias the estimation of the difference between program and comparison sites in outcomes. Nevertheless, MPR appears to have taken reasonable precautions to minimize the likelihood of bias. MPR did this, for example, by using two comparison sites, not just one, for each program site and by avoiding the selection of comparison areas known to have interventions similar to Healthy Start. Further, MPR shared information on its site selections with each of the 15 sites and sought their comments and agreement on the choices. reductions when such differences, in fact, exist. Roughly speaking, power depends on the number of observations--in this case, live births--in the analysis, and it is therefore often a problem when that number is not controlled by the design of the study. In the case of Healthy Start, this implies that the ability to detect a real difference between program and comparison communities depends upon whether the comparison involves, for example, communities relatively small in population, large communities, or all communities pooled. With respect to infant mortality, MPR reports that, using all data from 1984 to 1994, the minimal detectable difference in infant mortality is computed to be 31 percent, 7 percent, and 6 percent for small, large, and all communities, respectively. This means that if there are real differences between Healthy Start and comparison communities, but these differences are smaller than we have the power to detect (that is, smaller than the percentages listed above), then we will mistakenly conclude that the program has no effect on infant mortality. Since power depends on the number of observations, increasing the number of years of data included in the analysis will increase the ability to detect any difference that may exist. A third potential limitation concerns the number of statistical tests performed in the complete impact analysis. If 15 sites and seven different birth-related outcome variables are considered, then at least 105 statistical tests will be done. With as large a number of tests as this being done, it is likely that a portion of them will yield statistically significant results by chance alone. This means that even if Healthy Start has no effect on infant mortality, we will mistakenly conclude that it does have one in a certain percentage of the statistical tests conducted. There are statistical methods of dealing with this problem. If they are not employed in the final analysis, then differences that are statistically significant by chance alone will occur more often than is considered acceptable by statistical convention. MPR's participation analysis of birth outcomes is part of MPR's attempt to determine the effect of participation in Healthy Start within program sites. It compares 1995 birth outcomes between participants and nonparticipants in each project area. Participants in the program's prenatal activities are identified from program files, the Minimum Data Set required of all Healthy Start sites, and their birth certificates are flagged. Their birth outcomes are then compared with those of nonparticipants or participants with limited prenatal program involvement. This kind of analysis is limited by possible preexisting differences between participants and nonparticipants and by the very definition of participant. Since participation in Healthy Start is voluntary, it is possible that participants systematically differ from nonparticipants. Program providers may, for example, tend to attract persons who are especially knowledgeable about services or already well connected to the health care system. Under these circumstances, program participants would be expected to have better outcomes even without Healthy Start. Alternatively, participants might be especially needy and at high risk for poor outcomes, in which case they would be expected to have relatively poor outcomes. MPR deals with this by statistically adjusting the data on the basis of information that may reflect these preexisting differences, background information from birth certificates, and any other available sources. Although it is difficult to be certain that outcomes have been adjusted for all possible systematic differences between the groups being compared, MPR has stated that participants tend to be at high risk for poor birth outcomes, thereby making any potential finding of better outcomes for them than for nonparticipants more convincing of the program's value. The question of who is a participant must be answered in order to conduct the participation analysis. It turns out not to be easily answered because (1) the Minimum Data Sets of many sites have been slow in developing into accurate record systems, (2) it is not always clear whether a participant's involvement has been intense enough to classify that person as a participant, and (3) when supplementary information has been sought from new mothers about their involvement in the program it is not always clear what criteria they use for judging whether or not to claim to be participants. Moreover, these problems vary somewhat from site to site, making it difficult to be sure that all participation analyses are comparable. meaningful to the extent that the preexisting differences between participants and nonparticipants can be taken into account. MPR's process evaluation is an effort to use both qualitative and quantitative information to assess the degree to which Healthy Start has implemented its program as conceived of, how it serves its target population, and how these processes developed over time. This description of Healthy Start can be considered the documentation of the program's second goal--to demonstrate what happens when this kind of effort is mounted. Its methods are varied, including making site visits with and telephone calls to project staff, examining the client records of the Minimum Data Set, the postpartum survey of participants and nonparticipants, running focus groups with service providers and with members of the communities, as well as using documents and vital records. Many aspects of the process evaluation are not complete and will not therefore be described further, but one major document--the implementation report--is complete. The implementation report is based mainly on site visits, expenditure reports from each project, and the client records of the Minimum Data Set. Further, two independent teams of site visitors rated certain dimensions of administrative success using a modified Delphi consensus reaching process. Although they may not be avoidable, the limitations of this report are those common to most process evaluations that are heavily qualitative. The methods employed provide a wealth of information suitable to inform those who would develop similar programs about what to expect if different options of organization, administration, and mode of service delivery are attempted. However, the essential subjectivity of interview methods makes it difficult to know how closely other evaluators would agree with the conclusions drawn. 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 preliminary results of a national evaluation of the Healthy Start program, focusing on: (1) the plan for national evaluation; (2) what Mathematica Policy Research, Inc.'s (MPR) preliminary evaluation results indicate; and (3) what is expected from the final evaluation. GAO noted that: (1) MPR's preliminary reports from the national evaluation of Healthy Start do not provide a complete assessment of the program and, therefore, should not be used to judge the program's success; (2) even the final report will not contain all the data expected to be analyzed for the national evaluation; (3) if the evaluation plan were expanded to include data from the sixth and final year of the demonstration, conclusions about whether the program has met its goals of reducing infant mortality could be strengthened; (4) the national evaluation of the Healthy Start program had two major components: (a) an impact evaluation, to determine whether the infant mortality rates in Healthy Start communities have declined; and (b) a process evaluation to describe how the program actually operates; (5) once these evaluations are completed, MPR plans to link outcomes with processes in its final report to determine why Healthy Start has or has not succeeded and what would be required for a similar intervention elsewhere; (6) while MPR's draft report on its impact evaluation suggests that Healthy Start has little effect in reducing infant morality in targeted communities, drawing such a conclusion at this time would be premature for several reasons; (7) the process evaluation is also incomplete; (8) only some of the reports that it comprises are available; (9) eventually, MPR plans to cover program implementation at all sites, the characteristics of program participants, and details about some of the most important strategies used by the program; (10) with these two major components of the evaluation in preliminary stages or incomplete, MPR cannot yet relate process to impact; (11) the final evaluation is expected to include an analysis of infant morality data from the original 5 years of the demonstration for all 15 sites; (12) however, the final report on the evaluation, now planned for early 1999, will include data from only the first 4 years; and (13) further, because implementation of the program was slower than anticipated, and the program was mature for fewer years of the original demonstration period than planned for in the evaluation, even results from the final report are likely to be inconclusive and should be considered preliminary.
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During the past decade, the overarching goal of the U.S. National Drug Control Strategy has been to reduce illegal drug use in the United States. A main priority of the strategy has been to disrupt illegal drug trade and production abroad in the transit zone and production countries by attacking the power structures and finances of international criminal organizations and aiding countries with eradication and interdiction efforts. This involves seizing large quantities of narcotics from transporters, disrupting major drug trafficking organizations, arresting their leaders, and seizing their assets. The strategy also called for the United States to support democratic institutions and the rule of law in allied nations both in the transit zone and in drug producing countries, strengthening of these nations' prosecutorial efforts, and the prosecution of foreign traffickers and producers. According to State's International Narcotics Control Strategy Report, the goal of U.S. counternarcotics assistance to other countries is to help their governments become full and self-sustaining partners in the fight against drugs. The updated U.S. National Drug Control Strategy, released in May 2010, endorses a balance of drug abuse prevention, drug treatment, and law enforcement. International efforts in the strategy include collaborating with international partners to disrupt the drug trade, supporting the drug control efforts of major drug source and transit countries, and attacking key vulnerabilities of drug-trafficking organizations. Our work in Afghanistan, Colombia, and the transit zone has shown that the United States and its partner nations have partially met established targets for reducing the supply of illicit drugs. Most programs designed to reduce cultivation, production, and trafficking of drugs have missed their performance targets. In Afghanistan, one of the original indicators of success of the U.S.-funded counternarcotics effort was the reduction of opium poppy cultivation in the country, and for each year from 2005 to 2008, State established a new cultivation reduction target. According to State, the targets were met for some but not all of these years. We recently reported that cultivation data show increases from 2005 to 2007 and decreases from 2007 to 2009 and that 20 of the 34 Afghan provinces are now poppy-free. However, the U.S. and Afghan opium poppy eradication strategy did not achieve its stated objectives, as the amounts of poppy eradicated consistently fell short of the annual targeted amounts. For example, based on the most recent data we analyzed-for 2008-2009-slightly more than one-quarter of the total eradication goal for that year was achieved: of the 20,000 hectares targeted, only 5,350 hectares were successfully eradicated. These eradication and cultivation goals were not met due to a number of factors, including lack of political will on the part of Afghan central and provincial governments. In 2009, the United States revamped its counternarcotics strategy in Afghanistan to deemphasize eradication efforts and shift to interdiction and increased agricultural assistance. In 2008, we reported that Plan Colombia's goal of reducing the cultivation and production of illegal drugs by 50 percent in 6 years was partially achieved. From 2001 to 2006, Colombian opium poppy cultivation and heroin production decreased by about 50 percent to meet established goals. However, estimated coca cultivation rose by 15 percent with an estimated 157,000 hectares cultivated in 2006 compared to 136,200 hectares in 2000. State officials noted that extensive aerial and manual eradication efforts during this period were not sufficient to overcome countermeasures taken by coca farmers. U.S. officials also noted the increase in estimated coca cultivation levels from 2005 through 2007 may have been due, at least in part, to the U.S. government's decision to increase the size of the coca cultivation survey areas in Colombia beginning in 2004. Furthermore, in 2008 we reported that estimated cocaine production was about 4 percent greater in 2006 than in 2000, with 550 metric tons produced in 2006 compared to 530 metric tons in 2000. Since our 2008 report, ONDCP has provided additional data that suggests significant reductions in the potential cocaine production in Colombia despite the rising cultivation and estimated production numbers we had cited. ONDCP officials have noted that U.S.-supported eradication efforts had degraded coca fields, so that less cocaine was being produced per hectare of cultivated coca. According to ONDCP data, potential cocaine production overall has dropped from 700 metric tons in 2001 to 295 metric tons in 2008--a 57 percent decrease. According to ONDCP officials, decreases in cocaine purity and in the amount of cocaine seized at the Southwest Border since 2006 tend to corroborate the lower potential cocaine production figures. In interpreting this additional ONDCP data, a number of facts and mitigating circumstances should be considered. First, increasing effectiveness of coca eradication efforts may not be the only explanation for the data that ONDCP provided. Other factors, such as dry weather conditions, may be contributing to these decreases in potential cocaine production. Also, other factors, such as increases in cocaine flow to West Africa and Europe could be contributing to decreased availability and purity of cocaine in U.S. markets. Additionally, ONDCP officials cautioned about the longer-term prospects for these apparent eradication achievements, because weakened economic conditions in both the U.S. and Colombia could hamper the Colombian government's sustainment of eradication programs and curtail the gains made. Moreover, as we noted in 2008, reductions in Colombia's estimated cocaine production have been partially offset by increases in cocaine production in Peru and, to a lesser extent, Bolivia. Although It remains to be seen whether cocaine production in Peru and Bolivia will continue to increase and these whether Peru will return to being the primary coca producing country that it was through the 1980's and into the 1990's. According to ONDCP data, the United States has fallen slightly short of its cocaine interdiction targets each year since the targets were established in 2007. The national interdiction goal calls for the removal of 40 percent of the cocaine moving through the transit zone annually by 2015. The goal included interim annual targets of 25 percent in 2008 and 27 percent in 2009. However, since 2006, cocaine removal rates have declined and have not reached any of the annual targets to date. The removal rate dropped to 23 percent in 2007 and 20 percent in 2008 (5 percentage points short of the target for that year) then rose to 25 percent in 2009 (2.5 percentage points short of the target for that year). ONDCP has cited aging interdiction assets, such as U.S. Coast Guard vessels, the redirection of interdiction capacity to wars overseas, and budget constraints, as contributing factors to these lower-than-desired success rates. Moreover, the increasing flow of illicit narcotics through Venezuela and the continuing flow through Mexico pose significant challenges to U.S. counternarcotics interdiction efforts. A number of factors to counternarcotics-related programs have limited the effectiveness of U.S. counternarcotic efforts. These factors include a lack of planning by U.S. agencies to sustain some U.S.-funded programs over the longer term, limited cooperation from partner nations, and the adaptability of drug producers and traffickers. U.S. agencies had not developed plans for how to sustain some programs, particularly those programs providing assets, such as boats, to partner nations to conduct interdiction efforts. Some counternarcotics initiatives we reviewed were hampered by a shortage of resources made available by partner nations to sustain these programs. We found that many partner nations in the transit zone had limited resources to devote to counternarcotics, and many initiatives depended on U.S. support. Programs aimed at building maritime interdiction capacity were particularly affected, as partner nations, including Haiti, Guatemala, Jamaica, Panama and the Dominican Republic, were unable to use U.S.- provided boats for patrol or interdiction operations due to a lack of funding for fuel and maintenance. Despite continued efforts by DOD and State to provide these countries with boats, these agencies had not developed plans to address long-term sustainability of these assets over their expected operating life. Also, we found in 2006 that the availability of some key U.S. assets for interdiction operations, such as maritime patrol aircraft, was declining, and the United States had not planned for how to replace them. According to JIATF-South and other cognizant officials, the declining availability of P-3 maritime patrol aircraft was the most critical challenge to the success of future interdiction operations. Since then, DOD has taken steps to address the issue of declining availability of ships and aircraft for transit zone interdiction operations by using other forms of aerial surveillance and extending the useful life of P-3 aircraft. Recently, DOD's Southern Command officials told us that they plan to rely increasingly upon U.S.- supported partner nations for detection and monitoring efforts as DOD capabilities in this area diminish. However, given the concerns we have reported about the ability of some partner nations to sustain counternarcotics-related assets, it remains to be seen whether this contingency is viable. Our work in Colombia, Mexico, and drug transit countries has shown that cooperative working relationships between U.S. officials and their foreign counterparts is essential to implementing effective counternarcotics programs. The United States has agreed-upon strategies with both Colombia and Mexico to achieve counternarcotics-related objectives and has worked extensively to strengthen those countries' capacity to combat illicit drug production and trafficking. For example, to detect and intercept illegal air traffic in Colombian air space the United States and Colombia collaborated to operate the Air Bridge Denial Program, which the Colombian Air Force now operates independently. Also, in Mexico, increased cooperation with the United States led to a rise in extraditions of high-level cartel members, demonstrating a stronger commitment by the Mexican government to work closely with U.S. agencies to combat drug trafficking problems. Similarly, in 2008 we reported that in most major drug transit countries, close and improving cooperation has yielded a variety of benefits for the counternarcotics effort. In particular, partner nations have shared information and intelligence leading to arrests and drug seizures, participated in counternarcotics operations both at sea and on land, and cooperated in the prosecution of drug traffickers. However, corruption within the governments of partner nations can seriously limit cooperation. For example, in 2002, the U.S. government suspended major joint operations in Guatemala when the antinarcotics police unit in that country was disbanded in response to reports of widespread corruption within the agency and its general lack of effectiveness in combating the country's drug problem. In the Bahamas, State reported in 2003 that it was reluctant to include Bahamian defense personnel in drug interdiction operations and to share sensitive law enforcement information with them due to corruption concerns. Corruption has also hampered Dominican Republic-based, money- laundering investigations, according to DEA. Afghan officials objected to aerial eradication efforts and the use of chemicals in Afghanistan, forcing eradication to be done with tractors, all- terrain vehicles, and manually with sticks, making the effort less efficient. Furthermore, Afghan governors had been slow to grant permission to eradicate poppy fields until the concept for the central government's eradication force was changed in 2008 so that this force could operate without governor permission in areas where governors either would not or could not launch eradication efforts themselves. Deteriorating relations with Venezuela have stalled the progress of several cooperative counternarcotics initiatives intended to slow drug trafficking through that country. In 2007, Venezuela began denying visas for U.S. officials to serve in Venezuela, which complicated efforts to cooperate. Additionally, the overall number of counternarcotics projects supported by both the United States in Venezuela has fallen since 2005. For example, the Government of Venezuela withdrew support from the Prosecutor's Drug Task Force in 2005 and a port security program in 2006. Drug trafficking organizations and associated criminal networks have been extremely adaptive and resourceful, shifting routes and operating methods quickly in response to pressure from law enforcement organizations or rival traffickers. In 2008, we reported that drug traffickers typically used go-fast boats and fishing vessels to smuggle cocaine from Colombia to Central America and Mexico en route to the United States. These boats, capable of traveling at speeds over 40 knots, were difficult to detect in open water and were often used at night or painted blue and used during the day, becoming virtually impossible to see. Traffickers have also used "mother ships" in concert with fishing vessels to transport illicit drugs into open waters and then distribute the load among smaller boats at sea. In addition, traffickers have used evasive maritime routes and changed them frequently. Some boats have traveled as far southwest as the Galapagos Islands in the Pacific Ocean before heading north toward Mexico, while others travel through Central America's littoral waters, close to shore, where they could hide among legitimate maritime traffic. Furthermore, the Joint Interagency Task Force-South (JIATF-South), under DOD's U.S. Southern Command, reported an increase in suspicious flights--particularly departing from Venezuela. Traffickers have flown loads of cocaine to remote, ungoverned spaces and abandoned the planes after landing. Traffickers have also used increasingly sophisticated concealment methods. For example, they have built fiberglass semisubmersible craft that could avoid both visual- and sonar-detection, hidden cocaine within the hulls of boats, and transported liquefied cocaine in fuel tanks. According to DOD officials, these shifts in drug trafficking patterns and methods have likely taken place largely in response to U.S. and international counternarcotics efforts in the Pacific Ocean and Caribbean, although measuring causes and effects is imprecise. In addition, according to DOD, drug trafficking organizations and associated criminal networks commonly enjoy greater financial and material resources (including weapons as well as communication, navigation, and other technologies) than do governments in the transit zone. In addition to maritime operations, drug trafficking organizations have adopted increasingly sophisticated smuggling techniques on the ground. For example, from 2000 to 2006, U.S. border officials found 45 tunnels-- several built primarily for narcotics smuggling. According to DEA and Defense Intelligence Agency officials, the tunnels found were longer, deeper, and more discrete than in prior years. One such tunnel found in 2006 was a half-mile long. It was the longest cross border tunnel discovered, reaching a depth of more than nine stories below ground and featuring ventilation and groundwater drainage systems, cement flooring, lighting, and a pulley system. In production countries, such as Colombia, drug producers also proved to be highly adaptive. In 2009 we reported that coca farmers adopted a number of effective countermeasures to U.S. supported eradication and aerial spray efforts. These measures included pruning coca plants after spraying; replanting with younger coca plants or plant grafts; decreasing the size of coca plots; interspersing coca with legitimate crops to avoid detection; moving coca cultivation to areas of the country off-limits to spray aircraft, such as the national parks and a 10 kilometer area along Colombia's border with Ecuador; and moving coca crops to more remote parts of the country--a development that created a "dispersal effect." While these measures allowed coca farmers to continue cultivation, they also increased the coca farmers and traffickers' cost of doing business. U.S. counternarcotics programs have been closely aligned with the achievement of other U.S. foreign policy goals. U.S. assistance under Plan Colombia is a key example where counternarcotic goals and foreign policy objectives intersect. While, as of 2007, Plan Colombia had not clearly attained its cocaine supply reduction goals, the country did improve its security climate through systematic military and police engagements with illegal armed groups and degradation of these group's finances. Colombia saw a significant drop in homicides and kidnappings and increased use of Colombian public roads during Plan Colombia's six years. In addition, insurgency groups such as the Revolutionary Armed Forces of Colombia (FARC) saw a decline in capabilities and finances. While these accomplishments have not necessarily led to a decrease in drug production and trafficking, they signaled an improved security climate, which is one of the pillars of Plan Colombia. In Afghanistan, we recently reported that the U.S. counternarcotics strategy has become more integrated with the broad counterinsurgency effort over time. Prior to 2008, counterinsurgency and counternarcotics policies were largely separated and officials noted that this division ignored a nexus between the narcotics trade and the insurgency. For example, DEA drug raids yielded weapons caches and explosives used by insurgents, as well as suspects listed on Defense military target lists, and military raids on insurgent compounds also yielded illicit narcotics and narcotics processing equipment. DOD changed its rules of engagement in November 2008 to permit the targeting of persons by the military (including drug traffickers) who provide material support to insurgent or terrorist groups. Additionally, in December 2008, DOD clarified its policy to allow the military to accompany and provide force protection to U.S. and host nation law enforcement personnel on counternarcotics field operations. DEA and DOD officials stated that these changes enabled higher levels of interdiction operations in areas previously inaccessible due to security problems. DEA conducted 82 interdiction operations in Afghanistan during fiscal year 2009 (compared with 42 in fiscal year 2008), often with support from U.S. military and other coalition forces. These operations include, among other things, raiding drug laboratories; destroying storage sites; arresting drug traffickers; conducting roadblock operations; and seizing chemicals and drugs. The U.S. military and International Security and Assistance Force are also targeting narcotics trafficking and processing as part of regular counterinsurgency operations. In addition, DEA efforts to build the Counternarcotics Police of Afghanistan (CNPA) has contributed to the goals of heightening security in Afghanistan. The DEA has worked with specialized units of the CNPA to conduct investigations, build cases, arrest drug traffickers, and conduct undercover drug purchases, while also working to build Afghan law enforcement capacity by mentoring CNPA specialized units. By putting pressure on drug traffickers, counternarcotics efforts can bring stabilization to areas subject to heavy drug activity. Many counternarcotics-related programs involve supporting democracy and the rule of law in partner nations, which is itself a U.S. foreign policy objective worldwide. In Colombia , assistance for rule of law and judicial reform have expanded access to the democratic process for Colombian citizens, including the consolidation of state authority and the established government institutions and public services in many areas reclaimed from illegal armed groups. Support for legal institutions, such as courts, attorneys general, and law enforcement organizations, in drug source and transit countries is not only an important part of the U.S. counternarcotic strategy but also advance State's strategic objectives relating to democracy and governance. In many of our reviews of international counternarcotic-related programs, we found that determining program effectiveness has been challenging. Performance measures and other information about program results were often not useful or comprehensive enough to assess progress in achieving program goals. The Government Performance and Results Act of 1993 requires federal agencies to develop performance measures to assess progress in achieving their goals and to communicate their results to the Congress. The act requires agencies to set multiyear strategic goals in their strategic plans and corresponding annual goals in their performance plans, measure performance toward the achievement of those goals, and report on their progress in their annual performance reports. These reports are intended to provide important information to agency managers, policymakers, and the public on what each agency accomplished with the resources it was given. Moreover, the act calls for agencies to develop performance goals that are objective, quantifiable, and measurable, and to establish performance measures that adequately indicate progress toward achieving those goals. Our previous work has noted that the lack of clear, measurable goals makes it difficult for program managers and staff to link their day-to-day efforts to achieving the agency's intended mission. In Afghanistan, we have reported that the use of poppy cultivation and eradication statistics as the principal measures of effectiveness does not capture all aspects of the counternarcotics effort in the country. For example, these measures overlook potential gains in security from the removal of drug operations from an area and do not take into account potential rises in other drug related activity such as trafficking and processing of opium. Some provinces that are now poppy-free may still contain high levels of drug trafficking or processing. Additionally, according to the Special Representative for Afghanistan and Pakistan, the use of opium poppy cultivation as a measure of overall success led to an over-emphasis on eradication activities, which, due to their focus on farmers, could undermine the larger counterinsurgency campaign. ONDCP officials also criticized using total opium poppy cultivation as the sole measure of success, stating that measures of success should relate to security, such as public safety and terrorist attacks. For Plan Colombia, several programs we reviewed were focused on root causes of the drug problem and their impact on drug activity was difficult to assess. In 2008 we reported that the United States provided nearly $1.3 billion for nonmilitary assistance in Colombia, focusing on economic and social progress and the rule of law, including judicial reform. The largest share of U.S. nonmilitary assistance went toward alternative development, which has been a key element of U.S. counternarcotics assistance and has reportedly improved the lives of hundreds of thousands of Colombians. Other social programs have assisted thousands of internally displaced persons and more than 30,000 former combatants. We reported that progress tracking of alternative development programs, in particular, needed improvement. USAID collected data on 15 indicators that measure progress on alternative development; however, none of these indicators measured progress toward USAID's goal of reducing illicit narcotics production through the creation of sustainable economic projects. Rather, USAID collected data on program indicators such as the number of families benefited and hectares of legal crops planted. While this information helps USAID track the progress of projects, it does not help with assessing USAID's progress in reducing illicit crop production or its ability to create sustainable projects. In 2008 we reported that U.S.-funded transit zone counternarcotics assistance encompasses a wide variety of initiatives across many countries, but State and other agencies have collected limited information on results. Records we obtained from State and DEA, including State's annual International Narcotics Control Strategy Reports and End Use Monitoring Reports, provide information on outcomes of some of these initiatives but do not do so comprehensively. For example, in our review of State's International Narcotics Control Strategy Reports for 2003 to 2007, we identified over 120 counternarcotics initiatives in the countries we reviewed, but for over half of these initiatives, the outcomes were unclear or not addressed at all in the reports. State has attempted to measure the outcomes of counternarcotics programs in its annual mission performance reports, which report on a set of performance indicators for each country. However, these indicators have not been consistent over time or among countries. In our review of mission performance reports for four major drug transit countries covering fiscal years 2002 through 2006, we identified 86 performance indicators directly and indirectly related to counternarcotics efforts; however, over 60 percent of these indicators were used in only one or two annual reporting cycles, making it difficult to discern performance trends over time. Moreover, nearly 80 percent of these performance indicators were used for only one country, making it difficult to compare program results among countries. Based on our report on DOD performance measures released today, we found that DOD has developed performance measures for its counternarcotics activities as well as a database to collect performance information, including measures, targets, and results. However, we have found that these performance measures lacked a number of the attributes that we consider key to being successful, such as being clearly stated and having measurable targets. It is also unclear to what extent DOD uses the performance information it collects through its database to manage its counternarcotics activities. In 2008, we reported that DEA's strategic planning and performance measurement framework, while improved over previous efforts, had not been updated and did not reflect some key new and ongoing efforts. While DEA had assisted in counterterrorism efforts through information collection and referrals to intelligence community partners, DEA's strategic plan had not been updated since 2003 to reflect these efforts. As such, the strategic plan did not fully reflect the intended purpose of providing a template for ensuring measurable results and operational accountability. The performance measures that were to be included in DEA's 2009 annual performance report did not provide a basis for assessing the results of DEA's counterterrorism efforts--efforts that include giving top priority to counternarcotics cases with links to terrorism and pursuing narcoterrorists. We have made many recommendations in past reports regarding counternarcotics programs. Several of our more recent recommendations were aimed at improving two key management challenges that I have discussed in my testimony today--planning for the sustainment of counternarcotics assets and assessing the effectiveness of counternarcotics-related programs. Improved planning for sustainment of counternarcotics assets. In our 2008 report on U.S. assistance to transit zone countries, we recommended that the Secretary of State, in consultation with the Secretary of Defense (1) develop a plan to ensure that partner nations in the transit zone could effectively operate and maintain all counternarcotics assets that the United States had provided, including boats and other vehicles and equipment, for their remaining useful life and (2) ensure that, before providing a counternarcotics asset to a partner nation, agencies determined the total operations and maintenance cost over its useful life and, with the recipient nation, develop a plan for funding this cost. More consistent results reporting. In our report on U.S. assistance to transit zone countries, we recommended that the Secretary of State, in consultation with the Director of ONDCP, the Secretaries of Defense and Homeland Security, the Attorney General, and the Administrator of USAID, report the results of U.S.-funded counternarcotics initiatives more comprehensively and consistently for each country in the annual International Narcotics Control Strategy Report. Improved performance measures. Several agencies we reviewed did not have sufficient performance measures in place to accurately assess the effectiveness of counternarcotics programs. In our DOD report released today, we recommend that the Secretary of Defense take steps to improve DOD's counternarcotics performance measurement system by (1) revising its performance measures, and (2) applying practices to better facilitate the use of performance data to manage its counternarcotics activities. For Colombia, we recommended that the Director of Foreign Assistance and Administrator of USAID develop performance measurements that will help USAID (1) assess whether alternative development assistance is reducing the production of illicit narcotics, and (2) determine to what extent the agency's alternative development projects are self-sustaining. The existence of such measures would allow for a greater comprehension of program effectiveness. For Afghanistan, we recommended that the Secretary of Defense develop performance targets to measure interim results of efforts to train the CNPA. We also recommended to the Secretary of the State that measures and interim targets be adopted to assess Afghan capacity to independently conduct public information activities. Lastly, we recommended that the Secretary of State, in consultation with the Administrator of DEA and the Attorney General, establish clear definitions for low-, mid-, and high-level traffickers that would improve the ability of the U.S. and Afghan governments to track the level of drug traffickers arrested and convicted. In most cases, the agencies involved have generally agreed with our recommendations and have either implemented them or have efforts underway to address them. Mr. Chairman and Members of the committee, this concludes my prepared statement. I will be happy to answer any questions you may have. Drug Control: Long-Standing Problems Hinder U.S. International Efforts. GAO/NSIAD-97-75 Washington, D.C. February 27, 1997. Drug Control: U.S.-Mexican Counternarcotics Efforts Face Difficult Challenges. GAO/NSIAD-98-154. Washington D.C., June 30, 1998. Drug Control: Narcotics Threat From Colombia Continues to Grow. GAO/NSIAD-99-136. Washington D.C., June 22, 1999. Drug Control: Assets DOD Contributes to Reducing the Illegal Drug Supply Have Declined. GAO/NSIAD-00-9. Washington D.C., December 21, 1999 Drug Control: U.S. Efforts in Latin America and the Caribbean. GAO/NSIAD-00-90R. Washington D.C., February 18, 2000. Drug Control: U.S. Assistance to Colombia Will Take Years to Produce Results. GAO-01-126. Washington D.C., October 17, 2000. International Counterdrug Sites Being Developed. GAO-01-63BR. Washington D.C., December 28, 2000. Drug Control: State Department Provides Required Aviation Program Oversight, but Safety and Security Should be Enhanced. GAO-01-1021. Washington D.C., September 14, 2001. Drug Control: Difficulties in Measuring Costs and Results of Transit Zone Interdiction Efforts. GAO-02-13. January 25, 2002. Drug Control: Efforts to Develop Alternatives to Cultivating Illicit Crops in Colombia Have Made Little Progress and Face Serious Obstacles. GAO-02-291. Washington D.C., February 8, 2002. Drug Control: Coca Cultivation and Eradication Estimates in Colombia. GAO-03-319R. Washington D.C., January 8, 2003. Drug Control: Specific Performance Measures and Long-Term Costs for U.S. Programs in Colombia Have Not Been Developed. GAO-03-783. Washington, D.C., June 16, 2003. Drug Control: Aviation Program Safety Concerns in Colombia Are Being Addressed, but State's Planning and Budgeting Process Can Be Improved. GAO-04-918. Washington D.C., July 29, 2004. Drug Control: Air Bridge Denial Program in Colombia Has Implemented New Safeguards, but Its Effect on Drug Trafficking Is Not Clear. GAO-05-970. Washington, D.C., September 6, 2005. Drug Control: Agencies Need to Plan for Likely Declines in Drug Interdiction Assets, and Develop Better Performance Measures for Transit Zone Operations. GAO-06-200. Washington, D.C., November 15, 2005. Afghanistan Drug Control: Despite Improved Efforts, Deteriorating Security Threatens Success of U.S. Goals. GAO-07-78. Washington D.C., November 15, 2006. State Department: State Has Initiated a More Systematic Approach for Managing Its Aviation Fleet. GAO-07-264. Washington D.C., February 2, 2007. Drug Control: U.S. Assistance Has Helped Mexican Counternarcotic Efforts, But Tons of Illicit Drugs Continue to Flow into the United States. GAO-07-1018. Washington D.C., August 17, 2007. Drug Control: U.S. Assistance Has Helped Mexican Counternarcotics Efforts, But the Flow of Illicit Drugs Into the United States Remains High. GAO-08-215T. Washington D.C., October 25, 2007. Drug Control: Cooperation with Many Major Drug Transit Countries Has Improved, but Better Performance Reporting and Sustainability Plans Are Needed. GAO-08-784. Washington D.C., July 15, 2008. Plan Colombia: Drug Reduction Goals Were Not Fully Met, but Security Has Improved; U.S. Agencies Need More Detailed Plans for Reducing Assistance. GAO-09-71. Washington D.C., October 6, 2008. Drug Control: Better Coordination with the Department of Homeland Security and An Updated Accountability Framework Can Further Enhance DEA's Efforts to Meet Post-9/11 Responsibilities. GAO-09-63. Washington D.C., March 20, 2009. Iraq and Afghanistan: Security, Economic, and Governance Challenges to Rebuilding Efforts Should be Addressed in U.S. Strategies. GAO-09-476T. Washington D.C., March 25, 2009. Drug Control: U.S. Counternarcotics Cooperation with Venezuela Has Declined. GAO-09-806. Washington D.C., July 20, 2009. Status of Funds for the Merida Initiative. GAO-10-235R. Washington D.C., December 3, 2009. Afghanistan Drug Control: Strategy Evolving and Progress Reported, but Interim Performance Targets and Evaluation of Justice Reform Efforts Needed. GAO-10-291. Washington D.C., March 9, 2010. Preliminary Observations on the Department of Defense's Counternarcotics Performance Measurement System. GAO-10-594R. Washington, D.C., April 30, 2010. Drug Control: DOD Needs to Improve Its Performance Measurement System to Better Manage and Oversee Its Counternarcotic Activities. GAO-10-835. Washington, D.C., July 21, 2010. 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 overall goal of the U.S. National Drug Control Strategy, prepared by the White House Office of National Drug Control Policy (ONDCP), is to reduce illicit drug use in the United States. GAO has issued more than 20 products since 2000 examining U.S.-funded international programs aimed at reducing the supply of drugs. These programs have been implemented primarily in drug source countries, such as Colombia and Afghanistan as well drug transit countries, such as Mexico, Guatemala, and Venezuela. They have included interdiction of maritime drug shipments on the high seas, support for foreign military and civilian institutions engaged in drug eradication, detection, and interdiction; and rule of law assistance aimed at helping foreign legal institutions investigate and prosecute drug trafficking, money laundering, and other drug-related crimes. GAO's work on U.S.-funded international counternarcotics-related programswork has centered on four major topics: (1) Counternarcotics-related programs have had mixed results. In Afghanistan, Colombia, and drug transit countries, the United States and partner nations have only partially met established targets for reducing the drug supply. In Afghanistan, opium poppy eradication efforts have consistently fallen short of targets. Plan Colombia has met its goals for reducing opium and heroin but not coca crops, although recent data suggest that U.S.-supported crop eradication efforts over time may have caused a significant decline in potential cocaine production. Data also indicate an increase in coca cultivation in Peru and Bolivia that may eventually offset these declines. Interdiction programs have missed their performance targets each year since goals were established in 2007. (2) Several factors have limited program effectiveness. Various factors have hindered these programs' ability to reduce the supply of illegal drugs. In some cases, we found that U.S. agencies had not planned for the sustainment of programs, particularly those providing interdiction boats in transit countries. External factors include limited cooperation from partner nations due to corruption or lack of political support, and the highly adaptive nature of drug producers and traffickers. (3) Counternarcotics-related programs often advance broader foreign policy objectives. The value of these programs cannot be assessed based only on their impact on the drug supply. Many have supported other U.S. foreign policy objectives relating to security and stabilization, counterinsurgency, and strengthening democracy and governance. For example, in Afghanistan, the United States has combined counternarcotics efforts with military operations to combat insurgents as well as drug traffickers. U.S. support for Plan Colombia has significantly strengthened Colombia's security environment, which may eventually make counterdrug programs, such as alternative agricultural development, more effective. In several cases, U.S. rule of law assistance, such as supporting courts, prosecutors, and law enforcement organizations, has furthered both democracy-building and counterdrug objectives. (4) Judging the effectiveness of some programs is difficult. U.S. agencies often lack reliable performance measurement and results reporting needed to assess all the impacts of counterdrug programs. In Afghanistan, opium eradication measures alone were insufficient for a comprehensive assessment of U.S. efforts. Also, the State Department has not regularly reported outcome-related information for over half of its programs in major drug transit countries. Furthermore, DOD's counternarcotics-related measures were generally not useful for assessing program effectiveness or making management decisions. GAO has made recommendations to the Departments of Defense (DOD) and State and other agencies to improve the effectiveness and efficiency of U.S. counternarcotics- related programs. In particular, GAO has recommended that these agencies develop plans to sustain these programs. GAO has also recommended that they improve performance measurement and results reporting to assess program impacts and to aid in decision making. Agencies have efforts under way to implement some of these recommendations.
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The AWACS aircraft first became operational in March 1977, and as of November 2004, the U.S. AWACS fleet was comprised of 33 aircraft. The aircraft provides surveillance, command, control, and communications of airborne aircraft to commanders of air defense forces. The onboard radar, combined with a friend-or-foe identification subsystem, can detect, identify, and track in all weather conditions enemy and friendly aircraft at lower altitudes and present broad and detailed battlefield information. The AWACS airplane is a modified Boeing 707 commercial airframe with a rotating radar dome (see fig. 1). The ailerons and cowlings are similar to commercial 707 parts but were modified for special requirements. The AWACS radome is the covering that provides housing for the airplane's radar and friend-or-foe (IFF) identification system. Half of the radome covers the radar and half covers the IFF system and each has a different make-up in its composition. The Air Force purchased only the IFF section of the radome in the two separate purchases. In the past, the Air Force has generally repaired, rather than purchased, the ailerons, cowlings, and radomes but recently had to purchase new parts to meet operational requirements. Prior to the recent spare parts purchases, the ailerons and cowlings had not been purchased since the mid-1980s, and the last radome unit had not been purchased since 1998. All of the spare parts were purchased as noncompetitive negotiated procurements. The Federal Acquisition Regulation (FAR) provides guidance for the analysis of negotiated procurements with the ultimate goal of establishing fair and reasonable prices for both the government and contractor. For a noncompetitive purchase, the contract price is negotiated between the contractor and government and price reasonableness is established based primarily on cost data submitted by the contractor. The ailerons were also purchased as a commercial item. For a commercial item, price reasonableness is established based on an analysis of prices and sales data for the same or similar commercial items. For the AWACS spare parts purchases we reviewed, DCMA provided technical assistance to the Air Force by analyzing labor hours, material and overhead costs, and contract prices. DCAA provided auditing and cost accounting services. DCMA and DCAA analyses were submitted to the Air Force prior to contract negotiations for the respective purchases. Since late 2001, the Air Force has negotiated and awarded contracts to Boeing for the purchase of outboard ailerons, cowlings, and radomes totaling over $23 million. Specifically, the Air Force purchased three ailerons for about $1.4 million, 12 right-hand cowlings and 12 left-hand cowlings for about $7.9 million, and three radomes for about $5.9 million. The Air Force paid an additional $8.1 million in costs as part of the initial radome contract to move equipment and establish manufacturing capabilities in a new location (see table 1). The most recent per unit cost of each part represents a substantial increase from prior purchases. The overall unit cost of the ailerons and cowlings increased by 442 percent and 354 percent, respectively, since they were last purchased in 1986. The unit price for the one radome purchased under the September 2001 contract increased by 38 percent since it was last purchased in 1998, and the unit price nearly doubled two years later under the September 2003 contract. Overall, only a small portion of the price increases could be attributed to inflation. Figure 2 shows the unit price increases, including adjustments for inflation, for ailerons, cowlings, and radomes. The Air Force and Boeing cited a number of additional factors that may have contributed to higher prices. For all the parts, the Air Force purchased limited quantities, which generally results in higher unit prices. For the ailerons, which had not been purchased since 1986, Boeing officials told us that some of the price increase was attributable to production inefficiencies that would result from working with older technical drawings, developing prototype manufacturing methods, and using different materials in the manufacturing process. The unit price of the cowlings included costs for the purchase of new tools required to manufacture the cowlings in-house--which Boeing decided to do rather than have vendors manufacture the cowlings, as had been done in the past. The new tools included items such as large production jigs, used to shape and fabricate sheet metal. Regarding radomes, the Air Force paid Boeing to relocate tooling and equipment from Seattle, Washington, to Tulsa, Oklahoma, and develop manufacturing capabilities at the Tulsa facility to produce and repair radomes. Boeing had initially decided to discontinue radome production and repair at its Seattle location due to low demand for these parts but, after further consideration of the Air Force's requirements, decided to relocate the capability in Tulsa. The first radome contract the Air Force awarded Boeing included over $8.1 million to relocate the tooling and equipment and set up the manufacturing process. The remaining $1.2 million was the estimated production cost of the one radome. In negotiating contracts for the outboard ailerons, cowlings, and radomes, the Air Force did not obtain and evaluate information needed to knowledgeably assess Boeing's proposals and ensure that the spare parts prices were fair and reasonable. In general, the Air Force did not obtain sufficient pricing information for a part designated a commercial item, adequately consider DCAA and DCMA analyses of aspects of contractor proposals, or seek other pricing information that would allow it to not only determine the fairness and reasonableness of the prices but improve its position for negotiating the price. Boeing asserted that the aileron assembly was a commercial item. Under such circumstances, fair and reasonable prices should be established through a price analysis, which compares the contractor's proposed price with commercial sales prices for the same or similar items. However, when purchasing the ailerons, the Air Force did not seek commercial sales information to justify the proposed price. Instead, the Air Force relied on a judgmental analysis prepared by Boeing, which was not based on the commercial sales of the same or similar aileron. In reviewing the contractor's submissions of data to the government, both DCMA and DCAA found Boeing's proposal inadequate for the Air Force to negotiate a fair and reasonable price. DCMA performed a series of analyses on the purchase of the aileron assembly, each of which indicated that Boeing's proposed unit price was too high. Boeing proposed in November 2002 to sell three aileron assemblies for $514,472 each. Subsequently, DCMA performed three separate price analyses, which indicated that Boeing's price should be in the $200,000 to $233,000 range. However, the Air Force negotiation team did not discuss these analyses with Boeing during negotiations or include them as part of the Air Force's price negotiation documentation. In January 2003, DCAA reported that the proposed price was "unsupported" and that Boeing did not comply with the Boeing Estimating System Manual, which requires support for commercial item prices. Further, the report said that Boeing must submit cost information and supporting documentation. The Air Force never addressed DCAA's concerns. Instead, the Air Force relied on the analysis prepared by Boeing and paid $464,133 per unit. The price analyst involved with the negotiation said that, in retrospect, the Air Force should have sought commercial sales information from Boeing, citing this purchase as his first experience with a commercial item. We asked Boeing to provide historical sales information of the same or commercial equivalent item to use as a general benchmark on price reasonableness of the ailerons purchased by the Air Force. According to Boeing representatives, the requested data were not available because the military version of the ailerons had not been produced for over 20 years. Boeing representatives agreed that the Boeing analysis was subjective, but they said the analysis represented the best estimate based on their assumptions and limitations. When negotiating the purchase price for the cowlings, the Air Force again did not use information provided by DCMA or address DCMA's recommendation that it determine the availability and potential use of existing tools to manufacture the cowlings. Included in the $7.9 million contract for cowlings, Boeing proposed and the Air Force awarded about $1.1 million for the purchase of new tools, such as large production jigs, associated with the manufacture of the cowlings. However, DCMA had recommended in its initial evaluation of Boeing's proposal that the Air Force give qualified offerors an opportunity to inspect the condition of cowling tools used in prior manufacturing for their applicability and use in fabricating the cowlings. DCMA pointed out that the tools were located at Davis-Monthan Air Force Base in Arizona, where government-owned tooling is often stored when no longer needed for production. However, the Air Force did not accurately determine the existence and condition of the tools. Subsequent to the contract award, Boeing--not the Air Force-- determined that extensive government-owned tooling was available at Davis-Monthan and got approval, in May 2004, to use the tools in manufacturing the cowlings. As a result, the cowlings contract included unnecessary tool purchase costs when it was awarded. Air Force and Boeing officials anticipated a contract modification would be submitted to reduce the price as a result of using the existing tools. A significant portion of the September 2001 cost-plus-fixed fee contract that the Air Force awarded to Boeing to purchase one radome unit involved relocating tools and equipment and establishing a manufacturing process at Tulsa. Specifically, over $8.1 million of the contract, which was valued at about $9.3 million, was spent to move equipment and establish a manufacturing process at the Tulsa facility; the price of producing the one radome unit was about $1.2 million. About 19 months later, in April 2003, at the Air Force's request, Boeing provided a proposal to produce two additional radomes at the Tulsa facility, and in September 2003, the Air Force awarded a contract to Boeing to produce the two radomes at over $2.3 million per unit--almost twice the 2001 unit price. Based on our analysis, the Air Force did not obtain adequate data to negotiate a fair and reasonable price for the second radome contract. First, the Air Force requested a DCMA analysis of Boeing's proposal, but, in late June 2003, DCMA told the Air Force price analyst that, for an unexplained reason, DCMA did not receive the request for assistance; the price analyst then determined that he would waive the technical evaluation, which would forego the benefit of DCMA's technical expertise. Second, and most importantly, the Air Force did not consider Boeing's costs under the September 2001 contract, which would have provided important information to help the Air Force determine if it was obtaining a fair and reasonable price for the radomes. In addition to encouraging innovation, competition among contractors can enable agencies to compare offers and thereby establish fair and reasonable prices and maximize the use of available funds. The Air Force determined that Boeing was the sole source for the parts and did not seek competition. However, a DCMA analysis had determined that Boeing's proposed price for the engine cowlings was not fair and reasonable and, because a subcontractor provided the part in support of the original production contracts, recommended that the cowlings be competed among contractors. From the outset of the cowlings purchase, Air Force documents said that the Air Force did not have access to information needed to compete the part. However, the Air Force has a contract with Boeing that could allow the Air Force to order drawings and technical data for the AWACS and other programs for the purpose of competitively purchasing replenishment spare parts. Nevertheless, Boeing has not always delivered AWACS data based on uncertainties over the Air Force's rights to the data. Based on discussions with Air Force representatives, Boeing has been reluctant to provide data and drawings in the past, making it difficult for the Air Force to obtain them. Moreover, Boeing maintains that it owns the rights to the technical data and drawings and the Air Force could not use the drawings to compete the buy without Boeing's approval. It is unclear if the AWACS program office had placed a priority on fostering competition for the cowlings and other spare parts. Representatives of the AWACS spare parts program office at Tinker Air Force Base cited a number of concerns in purchasing the spare parts from vendors other than Boeing. First, they said that the need for these spare parts had become urgent and noted that other vendors would have to pass certain testing requirements, which could be a lengthy process, and that, even with this testing, performance risks and delivery delays were more likely to occur. An overriding concern was that the Air Force establish a good relationship with reliable parts providers, such as Boeing. Program office officials told us that the Air Force would likely be better served in the long run by staying with a reliable supplier rather than competing the parts. In contrast, senior contracting officials at Tinker--who have oversight responsibilities for the contracting activities that support the AWACS program--have a different point of view. These officials were concerned about the large price increases on AWACS spare parts and the lack of competition. They stated that the Air Force is a "captured customer" of Boeing because the company is the only source for many of the parts needed to support aircraft manufactured by Boeing, such as the AWACS. According to these senior contracting officials, during the last several years Boeing has become more aggressive in seeking higher profits regardless of the risk involved with the purchase. For example, they told us that, even when the risk to the company is very low, the company is seeking at least a 3- to 5-percent higher fee than in the past. As a result, contracting officers have had to elevate some negotiations to higher management levels within the Air Force. They also said that, without the ability to compete spare parts purchases, the Air Force is in a vulnerable position in pricing such contracts. Earlier in 2004, Boeing and the senior Air Force contracting officials involved with the aircraft programs managed at Tinker began a joint initiative to work on various contracting issues. Concerning data rights, these contracting officials told us that in future weapon systems buys, the Air Force must ensure that it obtains data rights so that it can protect the capability to later compete procurements of spare parts. The Air Force needs to be more vigilant in its purchases of spare parts. The AWACS parts purchases we reviewed illustrate the difficulty of buying parts for aircraft that are no longer being produced as well as buying them under non-competitive conditions. A key problem was that the Air Force did not take appropriate steps to ensure that the prices paid were fair and reasonable. It did not obtain and evaluate information that either should have been available or was available to improve its negotiating position. It did not attempt to develop other sources to purchase the spare parts and promote competition. And, it did not have a clear understanding of its rights to technical data and drawings, which are necessary to carry out competitive procurements. As the AWACS aircraft--like other Air Force weapon systems--continue to age, additional spare parts will likely be needed to keep them operational. Given the significant price increases for the ailerons, cowlings, and radomes, the Air Force needs to look for opportunities to strengthen its negotiating position and minimize price increases. Clearly, competition is one way to do this. Unless the Air Force obtains and evaluates pricing or cost information and/or maximizes the use of competition, it will be at risk of paying more than fair and reasonable prices for future purchases of spare parts. To improve purchasing of AWACS spare parts, we recommend that the Secretary of Defense direct the Secretary of the Air Force to ensure that contracting officers obtain and evaluate available information, including analyses provided by DCAA and DCMA, and other data needed to negotiate fair and reasonable prices; develop a strategy that promotes competition, where practicable, in the purchase of AWACS spare parts; and clarify the Air Force's access to AWACS drawings and technical data including the Air Force's and Boeing's rights to the data. We received written comments on a draft of this report from DOD and The Boeing Company. In its comments, DOD concurred with GAO's recommendations and identified actions it plans to take to implement the recommendations. DOD's comments are included in appendix II. DOD also provided technical comments, which we incorporated into the report as appropriate. In its comments The Boeing Company provided information that augments the information in the report and provides the company's perspective on the AWACS purchases. With respect to the prices the Air Force paid for the spare parts, Boeing provided more detailed information to explain the costs associated with each part. However, the information Boeing provided did not change our conclusion that the Air Force did not obtain and evaluate sufficient information to establish fair and reasonable prices. The company also noted that it has worked with Air Force representatives to address issues associated with higher profits and, as of January 2005, was working with the Air Force to address issues associated with access to AWACS technical drawings and data. The Boeing Company's comments are included in appendix III. We are sending copies of this report to the Secretaries of the Air Force, the Army, and the Navy; appropriate congressional committees; and other interested parties. We will also provide copies to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff has questions concerning this report, please contact me at (202) 512-4841 or by e-mail at [email protected], or James Fuquay at (937) 258-7963. Key contributors to this report were Ken Graffam, Karen Sloan, Paul Williams, and Marie Ahearn. To identify price increases associated with the ailerons, cowlings, and radomes, we reviewed Air Force contracting files and we held discussions with members of the Air Force involved in each purchase, which included contracting officers, negotiators, and price analysts. These officials were located at Tinker Air Force Base, Oklahoma, the location of the Airborne Warning and Control System (AWACS) spare parts program office--the E3 Systems Support Management Office. To account for the impact of inflation, we used published escalation factors for aircraft parts and auxiliary equipment to escalate prices previously paid for the parts to a price that would have been expected to be paid if the prices considered the effects of inflation. To determine whether the Air Force contracting officers obtained and evaluated sufficient information to ensure that Boeing's prices were fair and reasonable, we held discussions with the Defense Contract Management Agency (DCMA) representatives and obtained copies of reports and analyses prepared by DCMA and Defense Contract Audit Agency (DCAA). We reviewed Air Force contracting files and held discussions with Air Force officials that negotiated the respective purchases, which included contracting officers, negotiators, and price analysts. We also held discussions with representatives of Boeing and visited Boeing production facilities in Tulsa, Oklahoma. The Boeing officials represented several Boeing divisions involved in the purchases including Boeing's military division (Boeing Aircraft and Missiles, Large Aircraft Spares and Repairs), which had responsibility for negotiating all of the spare parts purchases. Boeing Aerospace Operations, Midwest City, Oklahoma, had contract management responsibility for the purchases. To determine the extent that competition was used to purchase the parts, we reviewed Air Force contracting files and held discussions with members of the Air Force involved in each purchase, which included contracting officers, negotiators, and price analysts. We also held discussions with representatives of the AWACS spare parts program office and senior contracting officials responsible for overseeing contracting activities at Tinker Air Force Base, Oklahoma. We conducted our review from August 2003 to November 2004 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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Over the past several years, the Air Force has negotiated and awarded more than $23 million in contracts to the Boeing Corporation for the purchase of certain spare parts for its Airborne Warning and Control System (AWACS) aircraft. Since they first became operational in March 1977, AWACS aircraft have provided U.S. and allied defense forces with the ability to detect, identify, and track airborne threats. In March 2003, GAO received allegations that the Air Force was overpaying Boeing for AWACS spare parts. This report provides the findings of GAO's review into these allegations. Specifically, GAO identified spare parts price increases and determined whether the Air Force obtained and evaluated sufficient information to ensure the prices were fair and reasonable. GAO also determined the extent to which competition was used to purchase the spare parts. Since late 2001, the Air Force has spent about $1.4 million to purchase three ailerons (wing components that stabilize the aircraft during flight), $7.9 million for 24 cowlings (metal engine coverings), and about $5.9 million for 3 radomes (protective coverings for the radar antennae). The unit prices for the ailerons and cowlings increased by 442 percent and 354 percent, respectively, since they were last purchased in 1986. The unit price of the radomes, purchased under two contracts, nearly doubled from September 2001 to September 2003. Although some of the price increases can be attributed to inflation, other factors, such as re-establishing production processes and procuring limited quantities of the parts, contributed more significantly to the increases. In addition, the 2001 radome contract included about $8.1 million for Boeing to relocate equipment and establish a manufacturing capability at a new location. The Federal Acquisition Regulation (FAR) requires contracting officers to evaluate certain information when purchasing supplies and services to ensure fair and reasonable prices. However, Air Force contracting officers did not evaluate pricing information that would have provided a sound basis for negotiating fair and reasonable prices for the spare parts. Moreover, the Air Force did not adequately consider Defense Contract Audit Agency (DCAA) and DCMA analyses of these purchases, which would have allowed the Air Force to better assess the contractor's proposals. For example, when purchasing ailerons, the Air Force did not obtain sales information for the aileron or similar items to justify Boeing's proposed price and did not consider DCMA analyses that showed a much lower price was warranted. Instead, the contracting officer relied on a Boeing analysis. None of the spare parts contracts cited in the allegations were competitively awarded--despite a DCMA recommendation that the cowlings be competed to help establish fair and reasonable prices. The Air Force did not develop alternate sources for competing the purchase of the cowlings because it believed it lacked access to technical drawings and data that would allow it to compete the purchase. Yet the Air Force has a contract with Boeing that could allow the Air Force to order technical drawings and data specifically for the purpose of purchasing replenishment spare parts.
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China became the 143rd member of the WTO on December 11, 2001, after almost 15 years of negotiations. These negotiations resulted in China's commitments to open and liberalize its economy and offer a more predictable environment for trade and foreign investment in accordance with WTO rules. The United States and other WTO members have stated that China's membership in the WTO provides increased opportunities for foreign companies seeking access to China's market. The United States is one of the largest sources of foreign investment in China, and total merchandise trade between China and the United States exceeded $145 billion in 2002, according to U.S. trade data. However, the United States still maintains a trade deficit with China: Imports from China totaled $124.8 billion, while exports totaled $20.6 billion in 2002. Through the first half of 2003, exports to and imports from China grew about 25 percent compared to same period in the previous year. The U.S. government's efforts to ensure China's compliance with its WTO commitments are part of an overall U.S. structure to monitor and enforce foreign governments' compliance with existing trade agreements. At least 17 federal agencies, led by the Office of the U.S. Trade Representative (USTR), are involved in these overall monitoring and enforcement activities. USTR and the departments of Agriculture (USDA), Commerce, and State have relatively broad roles and primary responsibilities with respect to trade agreement monitoring and enforcement. Other agencies, such as the departments of the Treasury and Labor, play more specialized roles. Federal monitoring and enforcement efforts are coordinated through an interagency mechanism comprising several management- and staff-level committees and subcommittees. The congressional structure for funding and overseeing federal monitoring and enforcement activities is similarly complex, because it involves multiple committees of jurisdiction. Congressional agencies, including GAO, and commissions also support Congress's oversight on China-WTO trade issues. In addition to the executive branch and congressional structures, multiple private sector advisory committees exist to provide federal agencies with policy and technical advice on trade matters, including trade agreement monitoring and enforcement. China's accession agreement is the most comprehensive of any WTO member's to date, and, as such, verifying China's WTO compliance is a challenging undertaking for two main reasons. The first reason is the scope of the agreement: The more than 800-page document spans eight broad areas and sets forth hundreds of individual commitments on how China's trade regime will adhere to the organization's agreements, principles, and rules and allow greater market access for foreign goods and services. The second reason is the complexity of the agreement: Interrelated parts of the agreement will be phased in at different times, and some commitments are so general in nature that it will not be immediately clear whether China has fully complied with its obligations in some cases. The comprehensive scope of China's WTO accession agreement represents a challenge for the U.S. government's compliance efforts. The commitments cover eight broad areas of China's trade regime, including import regulations, agriculture, services, and intellectual property rights. Within these eight broad areas, we identified nearly 700 individual commitments that China must implement to comply with its WTO obligations. China has also committed to lower a variety of market access barriers to foreign goods. These obligations include commitments to reduce or eliminate tariffs on more than 7,000 products and eliminate nontariff barriers on about 600 of these products. Additionally, China made commitments to allow greater market access in 9 of 12 general services sectors, including banking, insurance, and telecommunications. The scope of compliance problems raised in the first year of China's membership reflects the scope of the agreement itself. Although the executive branch's first-year assessment of China's implementation of its WTO commitments acknowledged China's effort and progress in some areas, the assessment also noted compliance problems in all eight broad areas of China's trade regime. In particular, the executive branch emphasized problems in agriculture, services, and intellectual property rights, as well as a crosscutting concern about transparency. Some preliminary assessments of China's second-year implementation from the private sector suggest that many of those problems persist and that concern about the number and scope of compliance issues continues to increase. While many of China's commitments were due to be phased in upon China's accession to the WTO in 2001, a number of interrelated commitments are scheduled to be implemented over extended time frames. For example, commitments on trading rights and distribution are not scheduled to be fully phased in until the end of 2004 and 2006, respectively. As a result, foreign businesses will be unable to fully integrate import, export, and distribution systems until that time. Additionally, although market access for most goods and services will be phased in by 2007, some tariffs will not be fully liberalized until 2010. (See fig. 1.) The varying nature of China's commitments also complicates U.S. government compliance efforts. On the one hand, some of China's WTO obligations require specific actions from China, such as reporting particular information to the WTO, or lowering a tariff on a product. Assessing compliance with these specific types of commitments is relatively easy. On the other hand, a significant number of commitments are more general in nature and relate to systemic changes in China's trade regime. For example, some commitments of this type require China to adhere to general WTO principles of nondiscrimination and transparency. Determining compliance with these more general types of commitments is more difficult and can complicate the dialogue over achieving compliance. It is useful to note that many private sector representatives told us that implementing these general types of commitments, such as those that relate to the rule of law, was relatively more important than carrying out specific commitments to increase market access and liberalize foreign investment in China. Specifically, China's commitments in the areas of transparency of laws, regulations, and practices; intellectual property rights; and consistent application of laws, regulations, and practices emerged as the most important areas of China's accession agreement in our September 2002 survey of and interviews with U.S. companies operating in China. However, private sector representatives also indicated that they thought these rule-of-law-related commitments would be the most difficult for China to implement. Because China is such an important trading partner, ensuring China's compliance with it s commitments is essential and requires a sustained effort on the part of the executive branch, Congress, the private sector, and the WTO and its other members. (See fig. 2.) For example, the executive branch has extensive involvement in monitoring and enforcing China's commitments, and additional resources and new structures have been applied to these tasks. However, the U.S.'s first-year experience showed that it takes time to organize these structures to effectively carry out their functions and that progress on the issues can be slow. In addition to the executive branch's efforts, Congress has enacted legislation, provided resources, and established new entities to increase oversight of China's compliance. The private sector also has undertaken a wide range of efforts that provide on-the-ground information on the status of China's compliance efforts and input to the executive branch and to Congress on priorities for compliance efforts. Finally, the WTO has existing mechanisms as well as a new, China-specific mechanism created as a means for WTO members to annually review China's implementation of its commitments. Nonetheless, despite the involvement of all of these players in the first year, the United States will need a sustained--and cohesive-- approach to successfully carry out this endeavor. China's accession to the WTO has led to increased monitoring and enforcement responsibilities and challenges for the U.S. government. In response to these increased responsibilities, USTR and the departments of Commerce, Agriculture, and State have undertaken various efforts to enhance their ability to monitor China's compliance with its WTO commitments. Agencies have reorganized or established intra-agency teams to improve coordination of their monitoring and enforcement efforts. Additionally, the agencies have added staff in Washington, D.C., and overseas in China to carry out these efforts. For example, estimated full-time equivalent staff in key units that are involved in China monitoring and enforcement activities across the four agencies increased from about 28 to 53 from fiscal years 2000 to 2002, with the largest increases at the Department of Commerce. On a broader level, USTR has established an interagency group to coordinate U.S. government compliance activities. The interagency group, which utilizes the private sector to support its efforts, was very active in monitoring and responding to issues during the first year of China's membership. Nevertheless, it took some time for agencies to work out their respective roles and responsibilities in the interagency group. Monitoring and enforcing compliance with WTO requirements is a complex and challenging task, as shown by our 2002 assessment of the U.S. government's efforts to ensure China's compliance with commitments regarding administration of tariff-rate quotas (TRQ) for certain bulk agricultural commodities. TRQ implementation problems in 2002 included concerns about Chinese authorities missing deadlines for issuing TRQs on certain bulk agricultural commodities; disagreement over whether China's interpretation of its commitments met WTO requirements; and questions about whether China's administrative practices were in keeping with its obligations. The United States has undertaken both bilateral and multilateral efforts to settle these complex issues. The large number of U.S. government activities on these issues alone, which still are not fully resolved, included at least monthly engagements with China and illustrates the extensive effort agencies must undertake to identify problems, gather and analyze information, and respond to some issues. Congress has had an active role in overseeing trade relations between the United States and China and in setting expectations for vigilant monitoring and enforcement of China's WTO commitments. In the U.S.-China Relations Act of 2000, Congress found that for the trade benefits with China to be fully realized, the U.S. government must effectively monitor and enforce its rights under China's WTO agreements. To accomplish this, Congress authorized additional resources at USTR and the departments of called for an annual review of China's compliance in the WTO; established the Congressional-Executive Commission on the People's Republic of China to monitor China's compliance with human rights and the development of the rule of law in China; established a Task Force on the Prohibition of Importation of Products of Forced Prison Labor from China; authorized a program to conduct rule of law training and technical assistance in China; and enacted legislation implementing China's WTO commitment allowing WTO members to apply a product-specific safeguard when increases in Chinese imports threaten or cause injury to domestic industry. Congress also required that the executive branch issue several China trade-related reports to assist its continuing oversight. These requirements included USTR's annual report on China's compliance, which is based in part on input from the general public. In addition, this Committee, together with the Senate Finance Committee (on a bipartisan basis), requested that we continue our work on China-WTO issues and report on China's compliance, executive branch efforts, and U.S. business views over 4 years. Finally, congressional committees and commissions have held at least 35 China-focused hearings since 2001--a further indication of congressional involvement in U.S.-China issues. U.S. businesses operating in China provide valuable assistance in monitoring the status of China's implementation of its WTO commitments, and, as such, effective coordination between the U.S. government and the private sector is essential. For example, industry-specific expertise and input from within the private sector are indispensable components for determining whether the scores of highly technical laws and regulations that the Chinese government issues are WTO compliant and being implemented. Further, private sector industry and business associations are active in conducting their own analyses and issuing reports on China's WTO compliance, providing input to congressional committees and commissions, engaging the Chinese on specific WTO issues, and representing their members' interests to the U.S. government in order to inform the U.S.'s compliance priorities. The WTO's framework of more than 20 multilateral agreements covers various aspects of international trade and sets forth the rules by which China and other members must abide. Notably, the WTO's dispute settlement mechanism is intended to give all WTO members access to a formal mechanism for pursuing and resolving WTO-related compliance issues with other members, including China. Thus far, no WTO member has initiated a dispute settlement case against China, although some Members of Congress and private sector groups have urged the U.S. government to initiate a case related to China's administration of TRQs. Another WTO mechanism relates specifically to China. China's accession commitments created a Transitional Review Mechanism (TRM), as a means for WTO members to annually review China's implementation of its commitments for 8 years, with a final review in the 10th year following China's accession. Just as establishing the TRM was one of the more challenging issues to negotiate with China, implementing the TRM process during the first year (2002) also proved challenging. Disagreement among WTO members, including China, over the form, timing, and thoroughness of the TRM led to a limited initial review of China's trade practices. The review did not meet U.S. expectations and illustrated the challenges of gaining consensus with China and other members within this multilateral forum over implementation issues. Although U.S. officials cited benefits from participating in the initial review, they expressed disappointment over the first-year results. U.S. officials are hopeful that future reviews will be more comprehensive. The second-year TRM is under way, but it is still too early to determine if the current review will meet U.S. and other WTO members' expectations. In assessing China's first-year implementation efforts, the executive branch, other WTO member government officials, and many private sector representatives observed that, despite several first-year compliance problems, China had demonstrated a willingness to implement its WTO commitments. For example, the executive branch noted China's progress in revising the framework of laws and regulations governing various aspects of China's trade regime. In the second year of China's membership, however, concerns about the number of compliance problems have grown, as well as the number of events that have potentially interfered with China's implementation of its commitments. Specifically, some observers have noted events such as changes in China's central government leadership, reconfigurations of key ministries, a growing concern about unemployment and labor unrest, and the SARS outbreak as possibly temporarily interrupting progress on implementation. In closing, Mr. Chairman, the theme of my testimony is that a cohesive and sustained approach is necessary to monitor and enforce China's commitments to the WTO. I believe that this hearing that focuses on the key elements of the U.S.-China economic relationship and brings together three of the key players is exactly the kind of oversight that is necessary to ensure that a cohesive and sustained approach is actually carried out. Mr. Chairman and Members of the Committee, this concludes my prepared statement. I would be happy to answer any questions on my testimony that you may have. For further information regarding this testimony, please contact Adam Cowles at (202) 512-9637. Matthew Helm, Rona Mendelsohn, Richard Seldin, and Kim Siegal also made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
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China's accession to the World Trade Organization (WTO) in December 2001 created substantial opportunities for U.S. companies seeking to expand into China's market. In joining the WTO, China agreed to liberalize its trade regime and open its markets to foreign goods and services. However, the U.S. government has become concerned about ensuring that China honors its commitments to offer a more predictable environment for trade. GAO was asked to describe (1) the monitoring of compliance challenges associated with the scope and complexity of China's WTO commitments and (2) the efforts to date of the key players involved in ensuring China's compliance: the executive branch, Congress, the private sector, the WTO and its other members. GAO's observations are based on its prior analysis of China's WTO commitments, its previous survey of and interviews with private sector representatives, and its examination of first-year efforts to ensure China's WTO compliance. The scope and complexity of China's WTO commitments present two main challenges to verifying China's compliance with its WTO accession agreement. First, the agreement is very broad: It encompasses more than 800 pages, spans eight broad areas, and sets forth hundreds of individual commitments on how China's trade regime will adhere to the WTO's agreements, principles, and rules and allow greater market access. Second, the agreement is complicated: Interrelated parts will be phased in at different times, and some commitments are so general in nature that it may not be immediately clear whether China has fully complied with its obligations. Each of the key players involved in ensuring China's compliance--the executive branch, Congress, the private sector, and the WTO and its members--has made efforts to ensure China's compliance. However, the first-year experience in this regard has demonstrated that these efforts will need to be sustained over a long period. The executive branch has applied additional resources and new intra-agency teams to these efforts, but it takes time to organize these activities. Congress has enacted legislation and established new entities to increase oversight of China's compliance. The private sector also has provided information to the executive branch and to Congress on the status of China's compliance efforts. And, within the WTO, a China-specific mechanism was established as a means for WTO members to annually review China's implementation of its commitments. Nonetheless, GAO's analysis indicates that a sustained approach is needed to ensure China's compliance.
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